Medtronic plc (MDT) Earnings Call Transcript & Summary

Good morning, and thanks for joining us this morning. I'm Ryan Weispfenning, Head of Medtronic Investor Relations. Joining me today are Geoff Martha, Medtronic Chairman and Chief Executive Officer; Karen Parkhill, Medtronic Chief Financial Officer; Bob White, President of the Medtronic Medical-Surgical portfolio; and Bob Hopkins, Head of Medtronic's strategy. Geoff will provide prepared remarks discussing our press release this morning, which announced our intent to separate our combined Patient Monitoring and Respiratory Interventions business. After Goeff's comments, we'll take questions from the sell-side analysts that cover the company. During this program, many of the statements we make may be considered forward-looking statements, and actual results may differ materially from those projected in any forward-looking statement. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports and other filings that we make with the SEC, and we do not undertake to update any forward-looking statement. Finally, we are still in our second fiscal quarter, so we won't be discussing or answering questions on the quarter, including the current state of our businesses and markets. We intend to cover those topics on our second quarter call. With that, I'll turn the call over to Geoff. Geoff?

Thanks, Ryan. Hello, everyone, and thank you for joining us today. So this morning, we're excited to announce the next step in our ongoing portfolio management strategy. And by now, I'm sure you've seen our press release that we intend to separate our combined Patient Monitoring and our Respiratory Interventions businesses, which we're referring to as NewCo, and we expect to pursue this through a tax-free spin. We believe the separation, it really better positions Medtronic and NewCo for long-term success as well as, we'll create value for our shareholders and other stakeholders. This separation benefits Medtronic and our shareholders, customers and associates in several ways. For one, we'll be left with a more streamlined portfolio of Medtronic. And this is going to allow us to focus our investments and the opportunities that are really most aligned with our long-term growth strategies. And post separation, we'll continue to execute our leadership strategy in attractive medtech markets that are best aligned to our strengths, while maintaining a strong balance sheet. And at the same time, we're creating NewCo. NewCo will be a formidable connected care company with a compelling product offering well aligned with some of the most important trends in healthcare. NewCo will have solutions across respiratory therapies and monitoring, blood oxygen management and anesthesia perfusion monitoring. These technologies reduced acute care complications. They manage respiratory failure and deliver actual insights which lead to improved patient safety and prevent costly complications. And Newco's best-in-class brands include Puritan Bennett Ventilators, Nellcor, Pulse Oximetry and Microstream Capnography. Taken together, this makes NewCo an ideal partner for acute care customers around the world as they manage patients and patient information in the hospital and over time, remotely. Regarding NewCo's road map, the company will be ideally situated to accelerate growth and unlock value as a connected care industry leader. NewCo will have global scale, broad commercial reach, a durable organic growth profile as well. And it will also have a very attractive margin profile, enabling it to innovate and invest creating additional value. It's also worth doing that NewCo will be relatively easy to separate from Medtronic, it's R&D, supply chain, manufacturing and commercial contracts are, for the most part, self-contained. And while we're limited on the financials that we can share at this point, here are a few things to keep in mind as you think about the value created by the separation. NewCo had approximately $2.2 billion in revenue in our last fiscal year, making it about 7% of total Medtronic. And NewCo's constant currency revenue growth profile and gross margin profile are slightly below overall Medtronic. We expect the separation to be completed in the next 12 to 18 months. So this means that we expect these businesses will continue to be part of Medtronic through at least the current fiscal year. The announcement does not impact our FY '23 guidance, and we plan to deploy any net proceeds consistent with our capital allocation priorities, and we do not expect the separation to impact our dividend policy. To close, as you know, we've been highlighting portfolio management as an important driver of growth acceleration and shareholder value creation. And today's announcement is the next step in this journey. We continue to make progress on separating our Renal Care solutions business as well as integrating the recent acquisitions of both Affera and Intersect ENT. And as we look ahead, we remain focused on the ongoing portfolio, the ongoing portfolio management process and evaluating potential additions and subtractions to our portfolio. We remain laser focused on our goal of further accelerating our growth and making it more durable over the long term. So with these transactions, we remain deeply committed to creating long-term and sustainable value. So let's move to Q&A, so we can get to your questions on this announcement. So I'll turn it back to you, Ryan.

Great. Thanks, Geoff. We're going to try to get to as many analysts as possible in the next 25 minutes or so. So please limit yourself to just 1 question and only if needed, a related follow-up. If you have additional questions, you can reach out to me and my team after the call. Brett, can you give the instructions?

[Operator Instructions] Lastly, please be advised that this Q&A session is being recorded. We'll pause for a moment to assemble the queue. We'll take the first question from Robbie Marcus at JPMorgan.

Congrats on the announcement. Maybe just one from me, if you don't mind. Geoff, I'd love to hear the rationale and the thoughts behind this business. It looks like it's a little lower growth but pretty profitable. Just wondering how you're thinking about this one, why it doesn't fit Medtronic? How we should think about the need to stand this up? And does this stop your desire to keep evaluating the other businesses? Or is this just one of many we should be thinking about?

Thanks for the question, Robbie. I'll start with that last question. I just -- I don't want to say it's -- the process continues. This is a next step. So this isn't necessarily the last step and -- you said one of many, but I don't know about that, but it's an ongoing process here that we're going to continue to look at the portfolio. Like I said, it's -- I'll call it our next step -- in that process. And then we've been looking at this for quite some time, the overall portfolio in this particular divestiture. And following this, it's very comprehensive and disciplined review. Our Board and management team believe that the creation of the 2 companies, the new Patient Monitoring and Respiratory company which we called NewCo and the new Medtronic, which is up here at Metro, gives the best way to accelerate efforts to serve patients and our customers and employees and drive the profitable growth -- accelerated growth, the durable growth. We're streamlining our business and focus on the portfolio at Medtronic. And this is going to allow us to focus our investments on the opportunities that, that are really most aligned with our long-term strategies. These businesses, Medtronic and NewCo are not in -- the NewCo businesses aren't really part of a broader therapeutic ecosystem that we're most focused on, and they don't have the same synergies as our other businesses do. These NewCo have different criteria for future success, operating models, sales channels, capital investment requirements and even talent. And the plant separation roll out each organization to more narrowly focus on and deploy capital against and achieve its their distinct objectives. Remaining Medtronic is expected to grow modestly faster and benefited from, like I said, in hand, focused on our portfolio and capital allocation strategies after this. But expect NewCo to accelerate with increased investment as well. I think it can increase investment and focus on maintaining it is -- although the margin profile is a little bit below Medtronic, it's still -- we're not feeling the exact number, but it's still a strong margin profile.

The next question comes from Vijay Kumar at Evercore ISI.

Geoff, maybe 2 from my side. I think the first one is from a numbers perspective, organic here for stand-alone Medtronic, it's probably up by 5, 10 basis points. It doesn't seem like that big of a number. So I'm just curious on timing, why now? And I think you did mention that focus on areas of higher strategic priorities. So maybe just talk about what's changed here and why now?

Well, Vijay thanks for the question, first of all. And as you know, we've been looking at the portfolio for some time. And the process, like I mentioned to Robbie, the process we've undertaken has been thorough, and we've come to the conclusion that this separation is an additional move that's going to create value for our shareholders and help put Medtronic in a better position to deliver the durable growth. So this is about executing on a long-term strategy. We have a solid team in place to execute, and we see significant opportunities from both -- with both NewCo and Medtronic. And so like I said earlier, this is -- this is something we've been working on for a while. It was a very thorough process, and we came to the conclusion. We felt like now is the time to get this out. There's a lot of people in Medtronic over the last couple of months that are under the tent, and we wanted to be able to get this out there so we can continue to work. There is a lot of work to do here to separate these things. And look, like I said before, yes, you mentioned that there's a slight pickup in Medtronic growth. But I do think that's the initial math, but more strategically, I do think this is going to further allow Medtronic to focus on the areas that are most strategic to us. And the areas where we have synergies, growth synergies across the company, whether those be customer synergies or technology synergies. And we're really focused on building these ecosystems around our products and the ecosystems we're most focused on did not include the one in NewCo. And then conversely, we think NewCo could use a little bit more focus as well as some incremental investment that will get as a stand-alone entity. So that's why. The now is just -- we've been working on this for a while. Nothing could say, triggered today. It's just that we've been working on it, and it's time to get it out there. We have a lot of people under the tent at this point. And there's -- we have to bring in more to get this -- they get the work going start to continue to work.

Understood. And just maybe one quick follow-up. Any supply chain or free cash impact -- how is the working cap metrics for the NewCo compared to stand-alone Medtronic and I'm just curious on supply chain. Any relevance here from a spend perspective?

I'll let Karen answer the working -- the financial question and the capital question and Bob White is on, you can talk about any supply chain implications.

So on the cash question, Vijay, we're going to have more details to help you think about that metric when we've done the transaction and do a public filing. So we'll have more details. Stay tuned.

Yes. Thanks, Karen. And Vijay, good question. No real impact on supply chain. As Geoff said nice in his remarks upfront. We've got best-in-class brands here in NewCo with leading positions in the marketplace. It's really a cornerstone of hospital-based connected care systems. And we view this as multiple opportunities for growth for NewCo and allowed for continued focus on our strategic investment priorities with inside of Medtronic.

The next question comes from Travis Steed at Bank of America.

Congrats on the transaction. Geoff, I guess, bigger picture, how do you think this transaction helps Medtronic allocate capital differently? Moving forward with the RemainCo. Like what areas do you see most aligned with your long-term growth strategy and thinking about it both from like an internal investment perspective as well as like a use of capital from external? And my follow-up would also be about synergies for the transaction. Any help on how to think about dis-synergies of the spin.

Synergies of the spin. I'll come back to that one. On the allocation of capital, look, we're going to continue to be very disciplined with our allocation of capital and stay consistent to the capital allocation priorities that we've talked about. And that basically is balancing our return to shareholders with long-term durable growth. And that's the framework of our capital allocation. And we've spent and that's not changing. We're going to stay consistent and disciplined. And like we have talked about before, we've spent a lot of time as a leadership team and a Board of Directors at Medtronic, really looking at how we're allocating our capital within the company among the different opportunities, prioritizing growth, and we're going to continue to do that. And in that process, we had a lot of different analysis that we did and simulations that we did going forward. And we just came to the conclusion this was the best path forward for the reasons I said earlier, to separate the 2 businesses. In terms of your second part of the question, maybe you could repeat that in terms of you were talking about synergies of the separation? I just want to make sure I understood the question. Travis, we can't hear you if you are talking. I don't know if we lost Travis.

Sorry. I was on mute, sorry. The question was on dis-synergies, not synergies. So in terms of -- it sounds like a lot of dis-synergies.

Yes, I don't know. Bob, do you want to take that question or Karen, I don't really know dis-synergies necessarily come to mind. Like I said, I talked about earlier, this is one that's a little easier.

Yes. Clearly, when we separate something, Travis, we will have some stranded costs, which we expect to deal with and take out over time. So we are going to be disciplined about that and we're focused already on it.

Thanks, Travis. Just a reminder, too, that the transaction is expected to complete in the next 12 to 18 months. So we announced the intent to separate, but the separation hasn't occurred yet. We'll take the next question, Brett.

Just before that on the dis-synergy piece, I didn't -- I thought you'd talk more strategic. On the cost side, the stranded costs. We do have a team. We've talked about this publicly a few times that a dedicated team that we stood up a number of months ago to work on integrations and separations. And so they've got a head start on looking at these stranded costs. And as Karen said, we're all over that. And we have time here as Ryan just said, to get those out as we're prior to the separation. So sorry, go ahead, Brett.

The next question comes from Larry Biegelsen at Wells Fargo.

Just 2 for me here. So you're spinning 2 businesses out of MedSurg. Can you talk about your commitment to the rest of that business, including Hugo. And just the second piece, I think it's more for Karen. Could you give us some more color on how you define slightly below and above for the gross and operating margins for our modeling purposes today, should we assume about 100 basis points kind of for each, Karen?

I'll take the first one. Yes, I know, look, MedSurg, we still have our Surgical Innovations business, which is our largest business. We still have our Surgical Robotics business or you call it Hugo, which is definitely a high-growth area and GI. You specifically called out Hugo. I mean -- we're excited where we are with Hugo and we can talk more about it on the earnings call, an update there, but we continue to make progress there and are really excited about where we stand with Hugo. And I was just actually in our Chicago training center, not last week but the week before with a number of surgeons and who have been training other surgeons and the feedback is continues to be strong. And so we're feeling good about that and committed to these other businesses. I mean, the lion's share of the revenue from MedSurg is in those other businesses, particularly SI and a lot of the growth or surgical innovations start for the acronyms. And a lot of the growth is going to be coming from Surgical Robotics. So very committed to that. Nothing changed there. Karen, do you want to take the second part?

Sure. On your financial question, Larry, we're not quantifying right now slightly. I would keep in mind that the total revenue profile at $2.2 billion is smaller against total Medtronic. In terms of the growth in the margin, we're not quantifying, but keep in mind that the growth in the ventilator business, particularly this fiscal year has been lower coming off very significant highs during the COVID time frame.

The next question comes from Matt Taylor at Jefferies.