Medtronic plc (MDT) Earnings Call Transcript & Summary

Good morning, everybody. I want to welcome everyone here to the 45th Annual Global Healthcare Conference and Geoff Martha here, Chairman and Chief Executive Officer of Medtronic. Well, I have a series of prepared questions here and obviously happy to open it up to those in the audience as well. For reference, Medtronic was one of the most requested companies among investor one-on-ones for this conference. And that includes the likes of Lilly and all the obesity names as well. So obviously, a lot of interest and looking forward to going into some of the detail here.

So there are really kind of 3 areas I was hoping to cover in our kind of conversation this morning around kind of strategy and culture, how the business is doing and then capital allocation. So maybe just kind of reflecting a little bit on your time here as CEO, talk to us about kind of your priorities, how you've seen them evolve over the past several years, where are we in kind of recognizing and achieving some of your key objectives?

Sure. Well, thanks for having me, David. I'd say on the key priorities, I'll just keep it high level, and we can drill down on them. Coming into my -- I started right at the beginning of COVID, but had time to think about it before then because I was named in the fall of 2019 and work with the leadership team. And our goals are really simple. One was to accelerate innovation, in particular, bring new and novel technologies to high-growth areas. So we're a little more top-down directive capital allocation, shifting investments to these high-growth areas. And we've got a number of products, which we'll talk about, that are in these areas. We're in the early stages of these product launches in high-growth areas like AFib, hypertension, et cetera, and I can go on diabetes. So more of that. And the second, I'd categorize it, the environment is changing globally. There's more volatility, geopolitics, supply chain is more fragile. And how do we just become better operators. And I mean broader than global operations supply chain, but that's a big one. And so we -- there, we made a lot of some structural changes. We made -- we brought in some new people to get some capabilities. We made investment in new tools, software, demand planning software, supply planning, all these different things. So -- and that extends to other functions. So become better operators. And then the third theme would be keeping that mission-driven culture and adding a performance-driven culture, mission and margin and being an and company. So those would be the big 3 categories. And that all -- the changes specifically, some are more tangible like targeted investments, new tools, new people, and some of it's more cultural as well. But that would be the -- directing investment, accelerating new and novel technology in high-growth areas, better operators and this performance-driven culture on top of the mission.

And just from a strategy perspective, I've been around Medtronic in some way, shape or form for like 20 years as an analyst, as the industry peer, as an unsuccessful competitor in one area. But the company has gone through a series of different evolutions under different leadership. And there is sort of the diversification strategy at one point that kind of Bill Hawkins led and [indiscernible] led. Then you had the size and scale strategy under Omar. And you brought sort of an innovation-led sort of forward-leaning strategy back to the company. How do we kind of think about the evolution of Medtronic and where we are in that, and how we should think about the sustainability of this approach going forward?

Look, I think -- look, I'm biased because it's a strategy that me and my team put in place on the innovation. But I think the innovation is a winning strategy here. And I've gotten a lot of questions even this morning from investors on the market on med tech. Like is the growth that we're seeing in the healthy end markets, is that pent-up? Is that real? Or is that pent-up demand from COVID? Look, it's real. It's what you're seeing. And I'm talking about the med tech markets. You're seeing better technology, better solutions in high-growth segments. So like AFib is a good one. An aging population, people are getting AFib. It's almost a fait accompli. You live long enough, you like wine, you're going to get AFib. It's that simple. And no one likes taking the drugs, but the ablation techniques were good. But there are some barriers to these ablation techniques, whether it be RF or cryo and incomes PFA, where it's just faster, you don't sacrifice any efficacy or safety, and it's easier for docs. And so it's taking off. And I can go to structural heart TAVR, robotics, diabetes. We're getting so close in the insulin and the automated insulin delivery to mimicking a pancreas. It's these things that are pulling patients in plus the demographic. So it's real. And so innovation in that context is, in my opinion, the strategy.

And so maybe taking that, the comments on overall markets one step further, would you sort of say like, okay, we've had the sort of fluctuations with COVID. But right now, we're in the sort of period of very stable strong utilization, but the real sort of juice is on the innovation side. That's how you get outsized performance. And your underlying markets are good, stable. And then there's -- you named some of them, just a number of new markets being developed and new products coming that help drive higher performance?

Demographics is a tailwind, okay? But innovation is what's the driver because we're not competing with other -- the med tech is -- so Medtronic, we're competing within med tech, but med tech's competing with other solutions. Biopharma, just like the other thing. You've got to have good solutions. You've got to have evidence. Evidence matters to payers. It's -- payers can't just -- we can't keep in the U.S., for example, as a percent of GDP. I mean health care is nearing 20%. It can't go to infinity. It can't go to 100%, right? So payers are -- we're competing against other solutions. And right now, we're gaining ground a bit.

And I feel like you have to ask the GLP-1 question in any of these settings when you talk about competing with other solutions. You've talked about the impact in bariatric surgery as is J&J as is Intuitive. Can you maybe just sort of talk more broadly about the interplay between your portfolio and some of those other solutions and what you're seeing today? And how we should think about it going forward?

Look, we've done a lot of analysis on this, and it's kind of hard to predict. These drugs are still new. First of all, it's an important new class of drugs. It's -- they are getting the weight loss, for sure. And what we're seeing right now is impact on bariatric surgery, and that's a relatively small part of our business. And you have bariatric surgeons saying that, "Hey, look, this is going to come back." You're getting more of the obese patients to be less obese and make them safer for surgery. I mean don't quote me on the numbers, but like it's something along the lines of the GLP-1s will get 15% to 20% of weight loss, and then bariatric is higher and permanent. And so we'll see how that plays out. Will bariatric pop back to its historic growth rates? But for now, it's less than it was, a small part of our company. But other than that, we've seen no impact. Diabetes, we get questions, especially given that we're automated insulin delivery. These are type 1s, intensively managed insulin-dependent type 2s. We've seen zero impact. The market continues to grow even faster because the technology gets better.

So I guess given some of these factors as we think about your revenue outlook for this year, the 4% to 5% you've talked about coming off a 5-plus quarter in Q4. And I appreciate that things can vary quarter-to-quarter. But it would sound like based on stable end markets plus the depth of innovation you have that 4% to 5% is a conservative outlook for the year. Maybe help contextualize the revenue outlook with some of the things that you just...

Well, we want to -- on the guide -- on the top line guide, we want to set ourselves up for success. I'll leave it at that. But to your point, we have 6 quarters in a row now mid-single-digit growth last fiscal year, and we're coming off of tough comps, too. So mid-single-digit growth on top of comps that are mid-single-digit growth. And we have this -- we're at the beginning stages of these -- a lot of these new products, I mean, in these high-growth markets, new and novel technology and high-growth markets. So we feel good about the guide on the top line for those reasons.

And maybe we could go into some of these high-growth categories in a little bit more detail. But before we do that, I thought one of the things that stood out is the performance in some of your core businesses are more established areas, whether that's Spine or parts of CRM. Maybe just before we go into sort of higher-growth areas, you could talk about some of the dynamics you're seeing in the established business and how you continue to gain share as a market leader?

Yes. So we've segmented our businesses in these 3 categories. The established market leaders, which is Spine, it's Cardiac Rhythm and surgery, right? And that's 50% of our revenue. It's more a disproportionate share of our income and our cash flow. And so as we want to invest more in the high-growth areas, these businesses need to be healthy if we're going to drive top line growth but also leverage down the P&L and high single-digit earnings growth and cash flow. They need to be healthy, and they are. In the case of Cardiac Rhythm, we continue to see growth and leadless pacing as it gets more indications and global expansion. And we have a really solid lead there. I mean other competitors have entered, but our lead is really solid. We've got conduction system pacing. Pacing, this is another example of med -- the example we thought we opened with. I remember when I first started at Medtronic in 2011. Pacing was like left for dead. It was like low single digits. That's one of the reasons that we had to diversify because we had so much exposure to cardiac rhythm. Pacing is now growing like high single digits because of leadless, because of conduction system pacing. It's just better. Without getting all the clinical details, traditional pacing, which is standard of care, does have, over time, some negative side effects. But with conduction system pacing, you don't have that. And that's new, and that's why it's growing. So more patients are getting pacing than before. Doctors have lowered the bar to put a patient on a pacemaker. Plus you have a leadless. So that business is really healthy and growing. And then Spine is the one that's really accelerated for us. And this is why it gives us -- Spine is more of a surgical business, and the strategy has been simple. It's taken some time to do this, but shift it from an implant driven to -- in terms of the competitive dynamics to enabling technology, technology driven. So robotics, navigation, interoperative imaging, powered instruments, AI-based surgical plans, all integrated together to take a spine surgery from an art to a science, take variable outcomes to make them less variable, take average surgeons, make them good surgeons. And from a financial standpoint, it builds one hell of a moat around our business. We have 10,000 installed base -- a 10,000-unit installed base globally of this large capital, whether it be robots, imaging, navigation. That's 4x our biggest competitor, Globus, 4x. And that is the basis of competition. So that business, healthy surgery, still a lot of growth. Surgeries are one business that's most closely tied to population growth. The surgeries everywhere around the world. And it's our biggest business in almost all of our emerging markets, and there's still a ton of growth going from open to laparoscopic and we'll talk -- I'm sure we'll talk robotics.

But that's a good segue to talk about robotics. It's been -- I think you're getting closer to the U.S. launch of Hugo. I know you haven't provided specific timelines but maybe just kind of talk a little -- talk to us a little bit about where we are in the product development and regulatory status, and how we should think about the commercialization strategy once you do gain your first indication?

Sure. So we're -- just to start with the specifics. We're getting close to wrapping up our pivotal trial here in the U.S. for the urology indication. And we'll be submitting that to the FDA shortly with -- and then it's a de novo 510(k). So the timing of how long it will take for them to approve that is a little bit hard to predict, and we're not getting in the business of predicting that. But the trial has gone well. We continue to get great feedback on the platform outside the U.S., in the U.S. and the trial sites. And what we need to do to put this at -- I know we haven't provided a ton of detail on this. What we need to do to get it to an inflection point here is get it in the U.S. That is still the biggest market, and we've got to add more instrumentation. So the good news is we've got a great platform. That was the big question. Now we got to add more instruments to it, especially our energy and stapling. And that will -- that's where you'll start to really feel it in our financials.

Okay. And do you think we're seeing any contribution as we look at your OUS surgery numbers now? Is it big enough to have an impact...

A little bit, not really.

And how should we think about the commercialization? You get approval at day 1, what happens?

In the U.S., look, we've got -- the way surgery has worked historically is these big centers have a contract with the big surgery providers. It's historically been us and J&J. One of us is 80%, the other is 20%. I mean I'm simplifying it, but it's basically like that. And...

Is that on sutures or...

On everything.

On everything.

Sutures is an important thing for us. Sutures is a real growth driver. We can't -- we sell all we make and we keep expanding, and it's a high margin for us, which is probably something you didn't suspect. These are the barbed sutures. But that's part of the package. And I see us bundling all this together for these big contracts. So where it was -- if you think about it historically, intuitive selling robots that historically weren't doing a ton of procedures, it's more market expansion capital. A lot of the procedures being done by J&J and Medtronic at least all of them. Now Intuitive's doing more procedures because there what's gotten more functionality. And here comes Medtronic with the robot. And I still think centers are going to contract with 2 players, by and large. And so I like where we are. We'll put that together as part of our contract with all of our open or laparoscopic and now Hugo. And Hugo works with our laparoscopic technology. You don't have to dedicate a room like you do with the competition for a robot.

And I think in terms of where you are, obviously, Intuitive have been out there some time. You'll be second. What's your best assessment on where the next closest competitor would be after you?

It's hard to say because we haven't seen anything. We're not hearing anything. We haven't seen anything. So I think it's going to be a while.

And you've talked either -- Intuitive talked about like 7 million procedures of line of sight. You've given some bigger numbers on soft tissue, but maybe just conceptually, is this a market expansion opportunity with robotics? Is the share gain opportunity? How should we frame it?

I think it's market expansion. We expect to gain some share here. Again, we're competing against both players, right? So cumulatively, we expect to gain some share, but I think it's market expansion because we're getting more as we -- from open to laparoscopic to robotic, the pricing is better, higher as you go down like across that continuum. And so as robotics takes on more, you're going to get market expansion just from pricing.

Okay. And speaking of market expansion is probably EP is very top of mind right now. HRS was extraordinary, the enthusiasm, I think, for PFA. Maybe you could just talk about kind of what you're seeing in the overall landscape from a market growth and modality perspective? And then how you see things unfolding with cryo over PFA and...

Sure. Like I said earlier, I kind of hit on this. I think this is because of demographics, because of the lack of -- it's not that they're not efficacious, the lack of uptake on the drug solution. People are looking for an ablation solution, and now they have it. PFA, we haven't seen this type of conversion in med tech. I'm told I have to talk to some historians. I'm not that old. But we went from bare metal stents to drug-eluting stents. That was like a really fast conversion. We haven't seen anything like that until now. People are moving pretty fast because we got good clinical evidence, it's [indiscernible] you've got some strong companies rolling this out, big, hefty companies versus maybe a start-up and then other resources. So you're seeing it convert. Obviously, us and Boston, Medtronic and Boston Scientific have a good position here with our products. And I think as we ramp up, you saw us, our PulseSelect outstripped our -- last quarter outstripped the growth in our PFA, our PulseSelect product outstripped the growth or the decline of cryo. And I think we're going to grow from here. One surprising statistic that I think people -- caught people off guard is in addition to how quickly it's pivoting is it half of that -- those procedures coming from RF, so not just cryos. Yes, cryos get -- taking a hit, so is RF, moving to PFA. Our PFA product is ramping. We'll grow from here. And what I'm really excited about, I'm excited about that. And then beyond that, so we've got the next gen that I think will be the market leader. The next gen is coming down the pipe. That's Affera product. And it's an all-in-one catheter and mapping. I do think that will be the industry leader. So we've got a nice competitive product now. We've got even an industry-leading product coming.

And just on the timing perspective for Affera is it fair to think like later this calendar year, early next calendar year?

That's what we're seeing. It's about that for -- what you're talking about, FDA approval. Kind of hard to predict. They've been moving -- it's sometimes faster approval on these things. So -- but somewhere in that time frame is fair.

And what's been the uptake like in Europe for Affera since you've had CE Mark, I think, for some time. How is that...

Great. I mean I wish we had more of it. We're refining the manufacturing process. It is a complicated product to make. And we're putting a lot more of our effort right now also into our existing PFA product, PulseSelect. But it's been phenomenal. It's an all-in-one catheter. So it's got -- because even with PFA, some parts of the procedure but docs want to use RF. And today, they got to grab different catheters. That's very cost prohibitive. If you have PFA and RF and mapping on one catheter, we think that's a winner.

So -- and if you achieve the regulatory timelines we just talked about, will you be launch ready from a safety stock perspective?

Really it depends on the launch timing of the FDA approval. And there's a lot of dynamics going on now for us with PulseSelect and ramping that. So it's hard for me. We'll be ready. Will we be able to satisfy the whole market? I'm not sure.

It depends where the market is.

It depends where the market is. You're asking like depends where the market is. If you see a change from the Gen 1 like PulseSelect -- I'm sorry, Gen 1 PFA products to what I think Affera's call that Gen 2. If that happens as fast as we're seeing from RF and cryo to PFA, maybe we won't be able to, I don't know.

Okay. I want to make sure we get into the P&L, but -- because it's another important thing you brought up earlier, but just 2 more product questions around [indiscernible]. What's the latest? And when do you think we'll get our next update?

I think the big one is there's update underneath this umbrella, but the big one is CMS, broad-based CMS reimbursement. We're in -- I get a lot of questions on that. The product rollout, despite not having the certainty of reimbursement today, it's -- we're getting great results out there. Physicians love it, patients love it, double-digit drops in blood pressure. So there's no question there. Hospital systems are talking about setting up hypertension centers now versus managing this out on the edge with primary care docs pulling it to hypertension center now that you have a medical procedure that they believe is going to be profitable. So all that's good. I think the key for the global acceleration of this is various things in CMS reimbursement. And that add up to broad coverage, and that's happening over the next -- it's hard to pick, but a couple of quarters.

Is there an established process for that?

Yes. Well, there's established processes, and there's new processes because of the breakthrough device designation. So this thing, this could -- we could get reimbursement like in a couple of weeks, couple -- and it could be a couple of months, it could be a couple of quarters. But it's -- we're deep in discussions, and I think the U.S. government wants to see this technology out there.

And I want to be mindful of trying to read into every timing comment you make, but it sounds like you're characterizing this as a FY '25 event where we'd have clarity.

We'll get -- we'll make progress on the reimbursement in FY '25.

Okay. Maybe just rounding out on TAVR. Edwards has been talking about price competition outside the U.S. They have not specifically mentioned any competitor when they talk about the pricing dynamics ex U.S., but what are you seeing in some of the markets outside the United States? Is that Medtronic cutting price? Is it somebody else? What are you seeing?

It's not us, I -- for sure. I'd say like the rollout of TAVR has been a really beautiful thing over the last couple of years. Us and our primary competitor here, Edwards, going from high risk to moderate risk to low risk clinical data bolstering the efficacy of it. Now I think we have much superior data, which we'll get to in a second. And then from an investor standpoint, holding price because of the value of it. So I think it's not us on lowering price. And in the smaller players or big companies but smaller TAVR players in Europe, their share has been pretty stable over the years despite new product launches is that -- despite price declines that they've offered. I don't think it's a price-sensitive market. And when you have the technology that the 2 leaders have, I don't see the incentives to lower price.

Okay. That's helpful. And then let's talk about the SMART trial. Obviously, yes, the first head-to-head study in this space. But can you maybe help us think about is this actually a market -- another market expanding trial? Or is this a market share trial? How do you think about it?

First of all, it's -- we call it the SMART trial, but it's also New England Journal of Medicine published this, so that's in -- this is the first -- we dramatically raised the bar on clinical data with this trial. New England Journal of Medicine published instantly simultaneously head-to-head. And we went head-to-head against Edwards' best-performing valves. I think the 2 surprises, I think there's been multiple surprises, I think, to investors, all positive for us. One is that we went head-to-head against their 20- and 23-millimeter valve. 23 is the best-performing valve. So we didn't cherry-pick. The second surprise, I think, which is how big this market is. We're saying it's a small annulus patients is 40%. It should theoretically be half because if you tie women to small annulus, but 40% is much larger. And then just the sheer -- just the gap between us and them on performance and how much better it has performed, I think, was surprising. So I know there's a lot of resistance to change out there. And at first, a little shock and awe. But as the dust has settled on this data, and we out there and be able to explain to physicians, we are seeing leading indicators on referral pattern changes, which is a big deal. Our competition has really good relationships out there. There's a lot of faith in both companies and pros and cons of both companies. And we're shifting that dynamic, I think, to some degree with this. It's -- so we're seeing that.

That was going to be my follow-up question, but recognizing that you only had 6 weeks-ish remaining in your quarter subsequent to the data and then hasn't been that much time since then. Like how long do you think it's -- are you seeing an impact already? And you sort of talked about referral channels, but how long does it take do you think before practice change...

I think it will take a couple of quarters. You got contracting and then you've got the -- you got to changed some contracting because there's these commitments that systems have to us or them. And you got to ship those contracts and the referral patterns are -- but we're seeing it. We're seeing the leading indicators of it. So I think it's going to play out over the next couple of quarters.

Okay.

And I do think it's market expanding. I underestimated -- the trial had like 80-plus percent women. I can't remember. It was almost 90% maybe, almost 90% women. I didn't recognize, especially in the area of cardiology. And I've heard this now for several female cardiologists, male cardiologists as well and female patients that in the world of cardiology, women feel like their symptoms are dismissed. And it's a male thing. It's really not in this case or [indiscernible], it's both. And so we think the word is getting out, and we think this is going to expand the market.

And I want to make sure we have some time to talk a little bit about P&L. You talk about performance-driven culture. I think everyone understands the dynamics with foreign exchange. But up until FY '25, you had 3 years of declining reported earnings per share. Maybe talk about how we should think about the earnings profile going forward?

A couple of things. I'd say the last couple of years have been tough on an earnings perspective. I was just thinking about it this morning, just some of the things we've had to overcome. We had to shut down our [ LVAD ] business. We shut down our events business, our [ aortic ] valve Navion, we had to pull it off the market. We got out of renal care. We had the diabetes warning letter. We had a bunch of supply issues coming out of COVID. And then we had China VBP, right? So that's a lot to eat. And I think a lot of that -- that is behind us now. VBP's almost 100% behind. I mean there's still a little bit to go in -- the bulk of it is behind us. It's all in our guidance now. And so one, the changes that we've made into the company make the company better operators, more resilient. And I feel as we go forward, it's implicit in our guide, we're learning how to be more resilient, things like changes to the global operations and supply chain, changes to quality and quality leadership here and learning how to leverage our scale a bit so we can grow the top line without growing our G&A as much as we used to. You're starting to get more leverage there. And that's -- and we implicit in our guide is mid-single digit for the year, actual EPS growth, which is different than the past, as you pointed out, despite some FX headwinds. And then -- but we're exiting the year at high single digits. So you're seeing it accelerate. And it is the culmination of a lot of the changes that you asked about that we put in place in terms of culture and performance and capabilities. And it's just a commitment to restore the earnings power of the company.

And as I take that, as I think about maybe some of the components here, you guided to flat gross margins on an FX-neutral basis for this year. Is this a stabilization year and a lot of those initiatives that you put in place around global supply chain? Look, it just takes time. I appreciate gross margin is the hardest line to move. But is that the right way to think about it? This is the year of stabilization and FY '26 plus is when we see gross margins start to expand, of course, all else being equal?

Yes, our goal is to expand it from here.

And then down the rest of the P&L, I think you mentioned that the dinner we had last night that this is a year when you are benefiting from a lot of the G&A initiatives that you've put in place. So you might -- I don't know exactly the words used, sort of a honeymoon period where you get a lot of the benefit of G&A this year. But as you think about OpEx in the outer years, you need that to grow, what, 4% on a sustainable basis once you kind of anniversary some of the G&A savings? I mean what...

[indiscernible] high as 4, but maybe 3. I mean it's -- we're going to get decent leverage. Last year, we benefited from the G&A programs last year and this year. Last year was completely masked by inflation in FX. But we're getting benefits of the programs last year and even more so this year. And so look to our G&A growing meaningfully slower than revenue growth and being into -- but that isn't enough. I mean in my opinion, I'd like to see the gross margin expansion. Like to your point, it's a harder one to move. And we've got some 1 or 2 mix dynamics that are negative. Like as diabetes becomes -- it keeps growing, that is a lower margin, and the robots a little lower margin. So we've got to offset that. We've got a number of programs to do that. There will be cost of goods sold reductions, pricing and other things like we did with events where we're looking through the portfolio and getting out of certain products and enlightening our exposure to certain countries to help improve the mix dynamic.

And so maybe at a broad level, I'm not asking you for long-term guidance, maybe just conceptually, you take the 4% to 5% top line growth gross margin -- gross profit grows a little faster than that over time. OpEx grows a little slower. You have sort of operating earnings growing high single digits, maybe buy back a little stock to keep the share count flat, and the dividend gets you to the high single-digit total return. Is that [indiscernible]?

I think [indiscernible] on the buyback. We did a buyback this quarter for a number of reasons to offset some short-term FX headwinds and because we think the share price is low. But my 4 years as a CEO, that's the first time we've done that. It's always been -- this replaces the share count. So I think in terms of buyback, that's where our head is on that. But yes, we're committed to this mid-single-digit top line and getting to that high single-digit EPS growth. But you can get that -- look, with these products, there's a couple of levers that we can pull. It could be higher organic growth with some of the product cycles we're in. That would help a lot, some help on the gross margin line and that sustained discipline on G&A. We're leveraging AI, leveraging technology, leveraging centers of excellence to keep the G&A growth minimal. But you need to have some. But that's what we're doing.

Okay. And maybe just to close, hard not to ask an M&A question. I mean you are -- you have bought back stock. You do -- you have this commitment around the dividend. You still generated $6 billion of free cash flow next -- last year. You have very high EBITDA margins. You generated a lot of cash. How do you put this to work in sort of the play offense type of way from an M&A standpoint?

Yes. So like I said, we're not -- the buyback was, I think, more of a onetime thing. I wouldn't kind of consider that going forward other than replace shares. I mean unless some big opportunity comes like we thought we had this quarter. We're committed to the dividend, and it still leaves a lot of cash. Look, we're -- where I see, I see still a good opportunities in our existing businesses to invest inorganically or near adjacencies and these tuck-in deals. I see some -- like the affairs of the world, with this ENT deal a couple of years ago, that's panned out really well. So I do see that is where we're going to use our money.

Excellent. Well, I think with that, we're out of time, but thank you for participating in the conference this year. And I think we all look forward to August and get the next update on Q1.

All right. Thank you.