Medtronic plc (MDT) Earnings Call Transcript & Summary

Good morning, thank you so much for joining us. My name is Matt Miksic. I'm U.S. medical device analyst here at Barclays, and we are very pleased to have with us today, Medtronic, specifically CFO, Karen Parkhill. So thanks again so much for joining us.

Thank you, Matt. Great to be here.

Thank you. Yes, we're pleased to have you. I wanted to give Karen a couple of minutes here to make some opening remarks and then we'll get into some Q&A. And, of course, welcome audience participation. If anyone has a particular topic or question they want get into, please let us know, but Karen, take it away.

Yes. Thank you, Matt. Listen, thrilled to be here and thrilled to be talking about Medtronic because we are on a really great trajectory. You've seen us deliver over the last year, 5 quarters in a row actually, mid-single-digit top line growth. And last quarter, delivered that mid-single-digit top line against a comparable of mid-single digits. And our guidance implies that again for Q4. So clear turnaround on driving the durability of our top line, and we're really excited about that durability continuing. When you look at our really strong pipeline, this is the best pipeline we've ever had across the company. Just a few products to name. We've got extravascular ICD. We've got a couple of really great products and pulse field ablations to treat AFib, between PulseSelect, between Affera, we've got great products right now in spinal cord stim and deep brain stimulation. We're on a turnround amazing trajectory in diabetes with our 780G pump, and now paired with our new sensor Simplera Sync in Europe. And then on a long-going trajectory, we've got renal denervation coming and just super, super excited about our pipeline. We've also been driving a really strong performance-driven culture, focused on execution, focused on doing and delivering what we say we're going to do. And you're seeing that happen on the top line, and we're driving the earnings power and transformation down the bottom line. And it starts with stabilizing and improving our gross margin, which we are incredibly focused on, ultimately delivering pricing and cost down ahead of inflation and then leverage down the P&L and SG&A to ultimately draw a strong and growing bottom line, which when paired with a really strong and growing dividend delivers a double-digit total shareholder return.

Well, thanks so much for that intro. So on the topic of growth and some of the products driving that today and kind of expected to drive in the next few quarters, I wanted to maybe touch first on diabetes. So improving momentum throughout fiscal '24 so far, expectations of continued momentum into Q4. Maybe talk a little bit about where that can go this year and maybe some of the products, even though you're not giving time lines, some of the products that you expect to see reaching the U.S. and driving that further in '25.

Yes. Thanks for that question on diabetes. We have been driving a significant turnaround in that business. And we are super pleased with the performance and the trajectory from here. We've delivered really strong growth with the 780G over in Europe. We moved that growth into United States. Last quarter was a really strong quarter for diabetes where we returned to growth in the United States and, ultimately, globally for the business, delivered more than 10% growth in the quarter. And we're just starting from here. So we've got a new very competitive sensor coming to market right now in limited release in Europe. It's the Simplera Sync. It is 50% smaller than our current sensor. It's 7-day wear. It's easy insertion. It's no tape, no finger sticks, it's just highly competitive. And we're really excited to bring that to the United States. We're going to be submitting to the FDA in the first half of this calendar year for our 780G and Simplera Sync. And so the diabetes franchise is back and just improving from here.

On the Sensor and forgive me, but I think it's fair to say that investors have been skeptical about the turnaround. It's been a -- it's been -- there was a long wait to get the 780G to the U.S. I think there's been some disappointment in the community, and this is going back, say, 5 years as to when we're going to see innovation and new products coming out of Medtronic. We're seeing those. I think we hear it from educators on the ground at meetings that notice the algorithm, they noticed the 7-day infusion set. Even though it's not Simplera, they've noticed even the improvement in the sort of Guardian Sensor platform. But maybe talk a little bit about what's limited launch in Europe is -- what's the capacity build out look like for that platform? And then what's your priority to reach the U.S. in terms of stand-alone CGM and integrated Simplera?

So a lot in that question. But no, we're on a tear in diabetes. We changed leadership. We've been focused on driving innovation continually year after year. We've got this 7-day [ insertion ] set that you mentioned, Matt, that is highly differentiated, and we've gotten great feedback on that. And now we're coming out with a really competitive smaller CGM that I talked about. And we're focused on ramping the manufacturing of that. That's what we're focused on right now. Our algorithm is the best in [ market ] and it's got the highest time and range out there. It's highly differentiated, and we're not finished innovating. We are going to be focused on next-gen algorithms, next-gen sensors, patch pumps, smaller durable pump, all of that in our pipeline. And ultimately, we're not going to rest until we've got the true artificial pancreas, which we're further ahead than anybody else on that algorithm.

Yes, that's what we hear as well. But I think folks are looking for the numbers to back that up, and I think we'll be looking for more color on the pipeline on smaller form factor and potentially patch pump if you're willing to share an [ ADA ].

Yes. And again, we're just getting started, and there's a lot more great things to come in diabetes.

So another exciting area that a lot of folks in [indiscernible] to focus on is Pulsed field ablation and AF ablation or cardiac ablation as you refer to the business at Medtronic. PulseSelect margin in the U.S., competitive product also launching in the U.S. But importantly, kind of second-gen or Affera, which is considered to be kind of a much more versatile and a system backup by mapping launching in Europe, maybe help us understand what investors can expect from the cadence of those 2 launches over the next 3, 6, 12 months?

Yes. So cardiac ablation is another area that's going to be a really good long-term growth driver for the company for many years to come. We are super excited about what we've got in our pipeline there. You mentioned it, first, I'll start with PulseSelect which is our single shot catheter that we now have on limited market release, and we're excited to get that to full market release flow. That's going to be an important growth driver for us. But that plays in a certain segment of the market. And we're super excited about Affera that we've got coming, which plays in the broader market, 85% of the market. This is our focal catheter and our mapping technology. We are getting amazing feedback both on PulseSelect a single shot and on our Affera. Physicians are really excited about the mapping technology, the fact that with Affera, we've got dual energy, both RF and PF in the Sync system. The fact that you can do mapping, ablation and validation all with 1 catheter. There is nothing like it on the market, and we are getting amazing feedback on it. So we're super excited to take that to the market very soon. With PulseSelect, we're going to be announcing our 12-month Sphere-9 data in the U.S. from our pivotal trial in the first half of this calendar year. We've also on reimbursement applied for NTAP. While most of ablation is done outside of the hospital setting, we decided that we didn't want anything holding it back. So we've applied for NTAP, and we should hear from that segment soon. Assuming we get it and we'll have that in the fall.

Okay. And I mean the current status is that, that business was in the U.S. was down in fiscal Q3. Maybe talking about expectations for improvement in trends? And when, what are the catalysts that get that back to sort of market growth in the coming quarters?

Yes, the catalysts for this innovation is coming. And we fully expect growth here in the fourth quarter and sequentially every quarter.

Great.

We've had strong growth outside the U.S., and we're expecting that in the U.S. and globally.

Okay. And so growth in the U.S. in Q4 would be great, a nice bounce back because there was a little bit of a pause, but exciting times in [indiscernible] ablation. Any -- I thought I saw maybe a hand go up in the audience. But if -- another topic that's come up in the last several quarters has been VBP in China. So I'd be remiss not to talk about what that impact looks like on the top line while we're talking about the top line. There's been a delay in some of those VBP programs. Does that pick up here in Q4? Does it pick up over the next few quarters in terms of pressure, maybe talk a little bit about that?

Yes. I'd start with saying that from VBP, the vast majority of that is behind us. By the time we end this fiscal year, we said that we expect 80% from the products that we think will go through VBP to be done. So that's going to be far less of a headwind as we look ahead. That said, there are some minor delays that we've had in parts of neurovascular and parts of aortic where some tenders have moved from provincial tenders to national tenders, and that's just a little bit of a delay. So there can be quarter-to-quarter fluctuation in our expectations of when that will hit, which can have some minor impact on us. But overall, we expect the vast majority of VBP to be behind us.

So back to good stuff, I guess, in EV-ICD. So just beginning to launch. When we get to full launch, maybe if you could give some color as to what kind of impact or when that starts to be visible in the sort of CRM lines?

Yes. Again, EV-ICD is another great product in our pipeline that we expect to be a really long-term growth driver for us to come, just like Micro was with our cardiac rhythm management business, where we had breakthrough innovation in that business and it's been a really strong driver for us, and a way for us to continue to capture market share. Same with EV-ICD. The market for EV-ICD is already a $300 million market, and we expect it to grow substantially from here. So it's going to be a long-term growth driver for us now.

Okay. And premium product, premium to ICDs, obviously, transvenous, but premium to the competition. Maybe talk about what differentiates EV-ICD.

Yes. So our size is a big differentiator to the 1 competitor out there, so much smaller size. And if you see in our earnings calls, we've demonstrated the big difference in size. But just being extravascular is a big difference to the current product offering out there. And so again, we expect this to be taking share and driving growth for many years to come.

Okay. Another topic, I think I'd be remiss not to mention, even though I don't know how much you'll tell us about it. But small trial data coming up at ACC in about 3 weeks. We picked up a fair amount of feedback from CRT this past weekend on expectations. I guess, maybe talk about the impact that you expect or the business hopes to gain from that data readout, and some of the other things that you're doing, just try to move growth at or above market with fair back in your favor [indiscernible].

Yes. So Structural Heart is a highly competitive market, and we are fiercely competitive in that market. And we wouldn't be doing a head-to-head trial if we weren't really confident about the results of it. We'll see. I don't know the data. It's coming out soon to a theater near you, and -- but we expect good results, and we expect it to help us drive market share. Our Evolut FX, especially in the small annulus space, is highly differentiated. And we're not stopping with that. We've got Evolut FX Plus coming out soon, too. And so we expect to compete very well in that space.

Okay. So validation of Evolut strength in the small annulus potentially, which is already kind of an area of strength. And then Evolut Plus maybe going after one of the drawbacks or precede drawbacks of this stented valve that we hear about, which is difficulty in reaching coronaries. So larger cell design, potentially going to chip away at that and that sort of competitive disadvantage, if you could call it that.

You got it.

And then finally, on the growth side, I guess, it would be Hugo has come up again and again. Maybe any kind of updates that you can experience that you gleaned overseas, that competitive environment in the U.S. has changed quite a bit, even though there's one incumbent competitor. When I say changed, I think, it shifted much more to a flexible financing purchasing contracting environment than it was 5 years ago. And so maybe thoughts on what you've learned overseas. And given the new market or new engagement with customers in the U.S., what's your commercial strategy to the extent you want to talk about at this point in the U.S.?

Yes. So with our surgical robot, Hugo, we're in 4 continents right now. We are doing, not just Uro and Gyn and hernia surgeries outside the United States, we're doing also general surgeries outside of the United States. The feedback that we get continues to be super strong. Surgeons love the open console. They love our mapping and navigation technology. The health systems really like the modular design and the ability to move our robot into various OR suites. So feedback continues to be really strong. In the United States, we are working now on our IDEs, not just for Uro and Gyn, but we now have an IDE for hernia as well. And in terms of the go-to-market strategy, we're going to make customers where they are. We can offer those an ability to place systems with upfront capital and ability to lease systems and ability to pay for time. So we're going to meet where they are, but we're not going to compete on price. We've got a really strong system and it's not our goal to compete on price.

Okay. And also a fairly broad book of business with many of those same customers already, advanced surgery...

Absolutely. We're marketing to both, new to robotic surgery, still systems and doctors and surgeons and systems who already have the da Vinci system.

So these are all terrific [ elements ] that we're trying to support this kind of mid-single-digit growth that you've been delivering. I think, for folks that have been following the story, it's clear that what investors really are trying to figure out is fiscal '25 earnings and margins. So you haven't yet endorsed fiscal '25 earnings. I'll take the requisite outside, equip and say you're perfectly welcome to be here, but not expecting that you will. But maybe run through for us what you have said, what you're willing to share about the puts and takes to '25 from the top line to the bottom line?

Yes. So look, we're going to get out our guidance for next year on our earnings call in May, like we always do. That's been our practice. That's what we're going to do. And the key reason for that is we're still finishing this year, still in our planning process. And there are puts and takes as always. We've given those puts and takes. Nothing has changed on those puts and takes from what we talked about on our second call -- in quarterly call last quarter. But at the end of the day, that doesn't change the bullishness that we feel right now. We're really bullish about our durable mid-single-digit top line. We're laser-focused on driving that earnings power down the P&L. You began to see that, a bit in the third quarter. And ultimately, we're going to be focused on driving that strong bottom line paired with our strong and growing dividend, at least to a double-digit total shareholder return. That's what we're focusing on.

Okay. And so just to take through those headwinds, inflation FX, tax, stable gross margins, which is -- we have to kind of read through that as to stable -- adjusted for FX or stable operational year, planning that goes into your gross margin line and then continued spending in R&D, but continued aggressive control of SG&A. Is that a fair way to sum up?

Yes, you listened well. So clearly on our puts and takes, currency has been a headwind for us. If we look at rates recently at the time of our earnings call, it's likely to still be a headwind for us. But a headwind that's come down because the biggest headwind we faced was [indiscernible] on the top line. And that takes time to go through the bottom line as we have our hedging in place. So currency is still a headwind. Global tax reform is likely to be a headwind, too. But every time we have tax reform, we're very focused on offsetting that as best we can. So that's what we've been driving. And then inflation. We still have inflation. It's higher than what it was pre-COVID. But, we -- that inflation has stabilized. It's not at the lower levels that we saw pre-COVID, but it's at least stabilized. And we're focused on driving cost down and our cost of goods and strong pricing as well as to work to offset that. And on the pricing side, this is a muscle we've been building over the last couple of years. And what we've done is we've driven what typically been continual perennial pricing headwinds to being more neutralized. And that's a big difference, and we expect to continue that trajectory. And then we're going to be focused on driving -- leveraging our SG&A, and we've had really strong disciplined headcount management across the company to headcount -- indirect headcount down in the beginning of last year. We've been focused on making that fixed and we've been focused on every time we have attrition and not backfilling that attrition. And so really strong investment to help drive that leverage.

Okay. And then -- so that kind of covers the -- covers all the puts and takes on to the operating line and the tax line, a little bit less, not inactive on the M&A front, but a little more focused on commercial businesses of late, businesses that are closer to revenues. Maybe talk a little bit about the recent increase in your share repurchase authorization and the balance between M&A and use of cash.

Yes. Our Board just approved our dividend for the quarter. And along with that, we refreshed our share repurchase authorization, which is something we do every 3 years. As it relates to returning to shareholders, our policy has been very -- where we focus on balancing out -- from the shareholders with continuing to invest in the company. And we've had a strong and growing dividend for many, many years, over 40 years. We're proud to be dividend aristocrat. That's something that we cherish, and we supplement that strong growing dividend with share repurchases when we're -- when we don't have the right disciplined tuck-in M&A to do. And you've seen that be something that we turn on and off over time. We'll continue to do that because we don't intend to hoard cash on the balance sheet.

So we're just under a minute. I wanted to turn it back to you if you have any closing remarks to wrap up the session.

Yes. Thank you, Matt. I'm hoping that you're taking away our really strong confidence in our future, our strong confidence in driving that durable mid-single-digit top line and ultimately, that leveraged P&L and double-digit total shareholder return. Medtronic has been on a strong turnaround trajectory, and this is just the beginning. So super excited about our great future.

Thanks so much.

Thank you.

Thanks, everyone, for joining us.