Medtronic plc (MDT) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to the Barclays Global Healthcare Virtual Conference. This is Kristen Stewart coming to you virtually over the webcast live from New York City. And with us, we have Medtronic's Executive Vice President and Chief Financial Officer, Karen Parkhill. She is coming from Minnesota. So Karen, thank you so much for joining us this morning for our first virtual webcast, which I hope is going to be, hopefully, the last, thanks to COVID-19.

And on that topic, I think it's only right that we kick off with the question on COVID-19. I know you guys had talked a little bit about this on the last quarterly call and said that you weren't quite ready to size the situation and would provide an update at a later date. You haven't yet done so. But I was hoping that maybe for today's audience, you could perhaps indulge us on the latest thinking at Medtronic on what any impact could perhaps be or maybe just help us understand what sort of exposure might be either from a China situation or obviously, now COVID-19 has spread pretty much globally in the Northern Hemisphere. So Karen, thanks again for joining us this morning.

Thank you, Kristen. Appreciate it. And on the topic of COVID-19, obviously, as you all very well know, the situation remains fluid. And we are only partway through our quarter. As you know, our quarter doesn't end until the end of April. And so the duration and magnitude for us is still too early to quantify. What I would say is we're focused on our own business resiliency. We're focused on the health and well-being of our employees. We're focused on continuing to serve patients. And our crisis response teams are fully in place. They were in place immediately and have been up and running around the globe now as the virus has spread around the globe. Our manufacturing is up and running. We are working with our suppliers to minimize disruption. We are also working to supply some of the things that are in greater need right now, like our ventilators, our pulse oximetries, our intubation equipment or products, ECMO machines, so we're focused on that, too. It's -- I would say, China where it started and has seen the largest impact so far is about 7% of our overall business. So we've talked about that. We've seen disruption happen in other hot beds, though, including Korea, Japan, Italy, Iran, and obviously, the situation is evolving in other places around the globe, other spots in EMEA and North America. And so it is -- it does remain fluid. We continue to expect, as we said on our quarter call, that it will have a financial impact to us. The magnitude of that is still very fluid. And so we intend to let investors know closer to the end of our quarter when the picture is more clear. And so you can expect probably an 8-K issuance from us around that time.

Okay. Thanks, Karen, for that. And just a reminder for people on the webcast, if you do want to ask a question to Karen, you can e-mail that to me or chat me on Bloomberg. With that, I'll just kind of go into the next question. Karen, obviously, Geoff will be stepping into his CEO seat next month. And with that, it seems like he'll be bringing in a bit of change. He talked about making some changes to really try to, I think, smooth out some of the sales misses. I know last quarter was a bit of a disappointment as we look from the investment side. I know that the management team has also been obviously expressing some frustration as well. And Geoff mentioned that the team is going to take some actions to fix some of this, too. And you work on a track record of delivering, too, so I'm sure everyone was a bit disappointed. Can you maybe talk about some of the changes that you and Geoff and the team are going to be making to resolve some of these issues for us?

Sure. Sure. So we clearly did talk about on the last quarter call that our revenue is not as smooth throughout the quarter as we would like. We see much of it in the last month of the quarter. And so Geoff did talk about the fact that we intend to use the extra week in the first quarter to help drive some of the things that we want to do to help incent revenue earlier in the quarter. So we are looking at changing our -- some of our operating mechanisms, the internal metrics that we track around revenue and honestly, some incentives to incent both our sales force and our customers to spread orders a bit more evenly throughout the quarter. It will make our business easier to manage, honestly, and more predictable. That said, there are clearly some entrenched market behaviors. There are clearly customers that choose to place large orders when they choose to place it. So we recognize we can't eliminate this dynamic completely. But we are focused on making meaningful improvements on it.

Okay. Perfect. And in terms of just how we think about the outlook for Medtronic going forward, on the last quarter call, you had talked about -- we should think about this year, 2020, let's put COVID-19 aside, as a baseline to grow off of. How should we just think about, I guess, this year as a baseline? Should we think about it as the roughly 4% and see acceleration from there? Is that -- am I thinking about this year correctly in terms of the top line trajectory of Medtronic?

Yes. Thanks for the question, Kristen. We are really excited about our pipeline. We've stated many times that we believe we have the most exciting pipeline that we've ever had in the history of our company. And so we do expect revenue growth acceleration off of this pipeline, and we do expect it to be a multiyear acceleration. So we expect FY '21 to be better than FY '20 and FY '22 to be better than FY '21. And so as you think about that acceleration, I would think about it from an annual base. So FY '20 as a baseline and then acceleration into FY '21. We're facing -- in FY '20 though, we had a tough third quarter on the top line, and we're facing coronavirus. So I would think about it, first of all, absent coronavirus because that's too difficult to quantify and predict not only for this quarter but for next year. But absent coronavirus and the fact that our third quarter wasn't as strong as we wanted it to be, I would think about the base being FY '20 our initial guidance of around 4% growth in FY '20. So expect an acceleration next year off of that base.

Okay. Perfect. And then maybe we can walk through, we've got a number of new products within the portfolio. And I look across them, and they're all pretty exciting. You've got renal denervation. You've got the Hugo Robotic-Assist Surgery system. You've got a number of things with transcatheter valves. You've got leadless pacemakers. You've got some AF products, which I know Mike's excited about, and the list kind of goes on. Maybe we could just start with renal denervation just simply because that's one where it's supposed to be presented at ACC. ACC has been canceled. How should we just think about that program now? Should we still expect that to be released? In what manner? And what excites you, I guess, kind of most about renal denervation?

Yes. Thanks, Kristen, for the comment. I am really excited about renal denervation. We've talked about this before. And I'm really excited about it because as long as the data plays out as we expect, this is a multibillion-dollar opportunity for us. And it will truly revolutionize the way that we and the world treats hypertension. So I'm super excited. We do still anticipate the OFF-MED data to be released this month. Yes, ACC has been canceled, but we had intended all along to simultaneously publish that data in the Lancet, and that won't change. And we're still working with ACC and how they'll do their conference virtually, but we still anticipate that we'll be able to talk about this OFF-MED data virtually despite the fact that the conference has been canceled. We'll also begin our FDA submission process with the OFF-MED data that we will have, and we'll then get a first look at our ON MED data, hopefully, later this calendar year. So you could expect potentially that data to be presented about a year from now. I would keep in mind that we've got a Bayesian trial design for this. And if we have not yet reached statistical significance at the first look, we will continue to enroll patients. That's just how it works. So we're excited, and more to come here.

Great. And that is already approved in Europe, and so that'll be another, I guess, opportunity for you to -- with reasonable good data with OFF-MED and that allows you to start to push the needle internationally as well, too.

You're correct, Kristen. And when we have all that data, it helps us to push the needle, too, with the payer community, which, once we get approval, we'll be focused on getting payer approval.

Okay. Great. And then the robotic program, everything is still on track there? Maybe just provide us some updates with how that's progressing.

Yes. So we're also excited about robotics. Everything is on track. We're expecting to have first-in-human soon. And how we laid it out at the conference in September for investors, that is all on track and has not changed. Keep in mind, we've said all along that we expect for FY '21 the revenue impact to not be too material. We expect less than 50 basis points of impact from it but expect more as we accelerate into FY '22 and '23 and beyond. We also recently purchased Digital Surgery. This was a meaningful transaction for us. It offers capabilities and solutions in the data and analytics space that plays an important role in our continued focus on advancing minimally invasive surgery, which includes robotics. It will help with education and training, decision support, reducing cost and unwanted variability. So we're really excited about that acquisition that we've made that is part and parcel with both our minimally invasive and our robotic focus.

Perfect. I thought just to kind of shift gears a little bit, talk more about the financial side of the equation. One of the things that I think you've done a great job on has really been kind of on the cash generation side. Two years ago at your investor conference, you talked about moving the free cash flow conversion up to targeting more of that 80%. I think fiscal '18 was below that at 55%. And last year, you achieved 83%. And year-to-date, you're around 90%. So clearly doing a good job there, Karen. How should we just think about the sustainability of cash flow and just the outlook going forward and just kind of capital deployment in general?

Yes. No, thank you for the question, Kristen. We have been laser-focused on cash flow and have made it a priority across the company. I would say almost every employee at Medtronic now understands what cash flow is and understands the role that they can play to help drive cash flow. Our incentives have been aligned around it. And I think it really shows what the company can do when we do focus on something. And so the sustainability of cash flows, we are focused on ensuring we do sustain what we have achieved. Cash flows can be lumpy, and you noted that we've got a 90% conversion year-to-date. But because cash flows can be lumpy, I wouldn't necessarily expect us to finish the year at 90%. But we remain focused on the 80% level and intend to maintain that and have cash flows grow roughly in line with earnings from here.

Okay. Perfect. And then just one of the comments that Geoff made, I think it was on the November earnings call, was that he's going to be laser-focused on getting organic revenue growth up, getting more aggressive with tuck-in M&A, being decisive with capital allocation to the highest-growth segments. Can you maybe help me understand kind of what he meant behind that and kind of what's really changing at Medtronic? Because I was intrigued by his comments on getting more aggressive and obviously, allocating to the highest-growth segments. It really sounds good. And I like it there, but I want to really get a better sense. I think it's important for the investment community here to really get an understanding of if things are really changing because I think that could be really interesting.

Yes. No, thank you for the question, Kristen. Clearly, Geoff has made those statements, and we all firmly believe them. This is the right time for Medtronic to get more aggressive. If you think about the last decade for us, we had merged with Covidien. We were very focused on integrating that company well. We had taken on a fairly substantial debt load, and we're focused on paying down that debt. Post with that acquisition, we ended up divesting a very sizable piece of that, and we're focused on ensuring that went smoothly. And then in the midst of all of that, we also had investors skeptical on our ability to deliver on things like operating margin expansion and free cash flow. And so we needed to laser focus on addressing that skepticism and proving that we could deliver on those things. And so we have done that. And the time frame is now right for us to be more aggressive. Our balance sheet is very strong. Our leader is very focused on it. We are not distracted with other things that we need to laser focus on. And we -- we're focused on taking our top line growth up. And as we do that, we're going to be very focused on capital allocation, both on an inorganic and an organic perspective on capital allocation that drives our WAMGR up. And Geoff is very focused now on measuring our company and our leaders and our business unit general managers. Focusing on measuring them not just on, "Are they hitting their plan numbers?", but "Are they driving market share?", "Are they growing at least with their market?", and better yet, "Are they growing above their market?" And we are driving great visibility to that, tracking incentives around it. And so we are getting more aggressive. On the M&A front, in particular, as we look at M&A, we will clearly be focused on acquisitions that can help us drive that WAMGR up.

And it does sound like there's a preference towards tuck-in M&A. And maybe can you share with us just the process towards M&A? Is it still going to be more driven from the general manager level? Or will it come more from a top-down approach?

Yes. Thanks for the question. So we recognize that -- from a top-down approach, we're not going to know all the opportunities out there. So it is distributed to find and understand the opportunities and make sure that we've got the ability to manage and integrate them. But that said, every M&A opportunity that we have does come through a central business development and strategy at committee and process. We do remain disciplined around our acquisitions from a financial perspective. And we are -- yes, you said it, Kristen, we are focused mainly on tuck-in acquisitions at this point.

And does the organization feel that there's the capacity to systematically do multiple tuck-in M&A and that Medtronic is capable of being truly successful in a lot of these deals and looking more for more product-type deals versus -- in that basis? Because a lot of the successful M&A that I've seen across companies within med tech, you do tend to see greater success at products coming in and being able to leverage the bag and kind of amplify across existing sales and service lines versus trying to add a brand-new service line into the portfolio.

Yes. So you're right. Clearly, product tuck-ins are easier to add and then you get greater synergies, obviously, by putting more products to your existing sales channel. So we are focused on that. If there are areas that can bring our WAMGR up where we have to acquire more than just a product, we're open to doing that as well. And keep in mind that every day, we are making minority investments in things, early-stage things. As we do M&A, sometimes the purchase prices aren't necessarily disclosed, but they're more meaningful to us because we've done structured deals where we've taken small investments. We've had call rights. So we are -- I would say we're doing M&A smartly, and you could see more of those early-stage things that we have invested in come to fruition, too.

Okay. Perfect. And then in our last few minutes, I guess, the one area that continues to be a little bit of a drag is Diabetes. I just wanted to touch on that. How confident are you and Geoff and the rest of the management team that Medtronic can turn this around? I know you've put Sean in place, and he's a very capable leader. And so I guess, how are you guys feeling about that? And I'm sure we'll get more details on that at the June 2 Analyst Day. But just what's kind of current thinking there?

Yes. So we -- turning Diabetes around is one of our top priorities, no question about it. And it's a priority for Geoff. It's a priority for the entire executive team. We're really excited about Sean leading that business. He's a proven leader. And we specifically put a very strong proven leader in charge of that business because we are confident that we can turn it around. Sean has now put in place his leadership team around him. They are -- Sean is quickly coming up to speed and addressing the gaps that we've got. We recognize that we have product gaps, too, that we are focused on closing. We'll start to close that with the 780G, and we -- then we'll focus on closing it even more when we can launch greater continuous glucose monitors in the form of both Zeus and then ultimately, Synergy. So in the meantime, our international business, which is now half of our business, is continuing to grow consistently in the double digits. We're focused on driving that, on increasing our installed base as a result of it and on competing where we can smartly in the United States. And we recently rolled out an upgrade program where when you take on our pump system now, you'll have an automatic upgrade to our next gen, which is one of the ways that we are focused on more effectively competing today. So we're focused on turning that business around. It is a top priority for us.

And the other kind of, I guess, area was TAVR. That was another area where you had lost a little share in the U.S. Are you starting to see a little bit -- more improvement there, too, with adding some salespeople? Or is that still a little bit too soon to see improvement?

Yes. So TAVR is something we had some misses in the third quarter on that, and we're embarrassed that we had to talk about those misses externally. We have seen our competitor, particularly Edwards, have a greater uptick in the U.S. growth following the U.S. low-risk approval. And we do attribute some of that to their larger account base in the U.S., including the early expansion to new TAVR accounts that were affiliated with some of their larger existing customers. But we made the decision to move some reps from high volume, high share counts to opening new NTD centers, which are naturally low -- lower volume. And we overestimated the stickiness of our share in those large accounts and saw our share impacted. As we noted on our third quarter call, we have course corrected, and we're seeing acceleration in February as a result of that course correction. We are also continuing to aggressively expand our U.S. field coverage to open up both new-to-TAVR and new-to-Medtronic accounts, and we expect to have additional 70 sales reps certified and deployed by the end of our fiscal year. So we're focused on this. We believe our valve is uniquely positioned, particularly for low-risk patients because it has superior hemodynamics, and we're focused on ensuring that, that marketing message gets out, too.

All right. Perfect. I think we're pretty much done on time. So it sounds like we should get a little excited for the June 2 Analyst Day. Any last save-the-date messages or final thoughts on just what we should expect there?

Yes. Thanks for reminding everybody what the date is. It is June 2. We're excited about it, particularly because it will be Geoff's first Investor Day as CEO. So it will be his chance to really roll out his strong messages. You'll also get a chance to meet a number of our general managers. We're really focused on showing the depth of talent that we've got at Medtronic and not just highlighting our group leaders but really focusing on the general managers underneath those group leaders that do run our businesses. We'll also have an innovation fair where you'll get to see some of our great new products. And we'll obviously update you on our growth objectives and our multiyear acceleration that we've already talked about as part of that story.

Perfect. Well, Karen, I want to thank you for spending time with us this morning. I appreciate the understanding and working with us to make this virtual here. And I want to thank everybody for joining us on the webcast as well. So I hope you have a great rest of the day, everybody. Stay safe out there.

Thank you, Kristen. Take care.

All right. Take care. And we'll see everybody on June 2 at the Analyst Day.

Sounds great.

All right. Take care. Bye-bye.