Medtronic plc (MDT) Earnings Call Transcript & Summary

All right. Very good. Well, thanks so much, guys. We're -- I'm Lee Hambright, medtech analyst at Bernstein. We're very happy to host Medtronic today. We have CEO, Geoff Martha; and CFO, Thierry Pieton. Just a reminder that investors can submit questions at any time through pigeonhole. We'll try to work in as many as possible. Geoff is going to kick us off with a few opening remarks. So Geoff, please take it away.

All right. Thanks, everybody. Its working? Okay. Thanks, everybody, for being here today. I just thought I'd kick off first couple of minutes here, which just a quick overview here. I think these slides are available online, and Ryan has got a QR code if you want them. These are our disclaimers or forward-looking statements. So please check these out. Look, I'd start with just an overview of Medtronic. You can see here that, look, we're organized around these 3 portfolios of businesses that are really -- and then, of course, we have our diabetes business that we just made the announcement last week that we'll be separating from and we'll talk about -- I'll talk about that in a second. But these 3 categories of business are defined, I'd say, think of it in 3 ways. One is scale, they're all pretty big, $10 billion or so on average. But also they're defined by -- so they've got scale, but they're also defined by category leadership. We've got lots of category leaders and franchises within those portfolios and technology differentiation. That's what it's all about, innovation-driven growth. We got a lot of technology differentiation in these areas. And this slide, I think, captures a lot of it here. This is really all about our growth drivers. In med tech, innovation-driven growth, like I said, is the name of the game. And we're at a really good time in the company's history where we're stacking these growth drivers on top of each other. You see there -- or you've got neuromodulation with its sensing technology, which I'll talk about. Cardiac our Afib technology, hypertension. And then these are in the moment. I'll call -- and then as you go out and time, you've got our tibial launch and soft tissue robotics and more in structural heart mitral and tricuspid. So these are a multiyear cadence of differentiated technology in high-growth areas of med tech. Just to double-click on a few I'm sure we'll get a lot of questions from Lee on this area and cardiac ablation, which is having a kind of a generational growth moment here as we shift from one energy source to the other, as we're shifting over to PFA, which and I've spent a lot of time on this in the last couple of months, in particular, as it's out there now talking to physicians here in New York City and around the world. And look, this is just really increased the supply chain -- the industry supply chain to -- because the demand is high. With the aging demographics and people more aware of Afib, there's a huge need for this. And this energy source is faster and safer and easier for physicians. So you got this $10 billion market growing 20%. We have a 10% share, and that's rapidly growing. And we've talked about -- we ended our fiscal year here in April with this business around $1 billion. We talked about doubling that in the near-term here. So lots of excitement around PFA. And another one that's right around the corner for us is hypertension. Another huge unmet need, huge market. The TAM is like very big. It's almost hard to model for many of our investors and analysts. We see -- based on where we see reimbursement coming out and the indication for this hypertension therapy of ours, again, another energy source that ablates the arteries around the renal nerve to bring down your hypertension. We've got data going out as far as 10 years to show so permanent or it's definitely indefinite and gets better over time with a really strong safety profile. No real side effects here. It's a very compelling therapy. And we see just in the U.S., 18 million patients that could benefit from this. And every 1% penetration of that 18 million is $2 billion to $3 billion in revenue. We've got some real big inflection points coming up. This is already FDA approved, and everyone is waiting for the reimbursement that come into place. The payments are already set. Hospitals will do well, make money on this. Now the question is how many patients will be covered. CMS will set the market on that. We'll know in July. They've already told us we're getting -- they've already opened this national coverage analysis, which is a precursor to a national coverage decision. That would be about half of those 18 million patients just in the U.S. And we'll get the definition of how broad this reimbursement is going to be on or before July 13. And then that reimbursement will take effect on October 11. So a big inflection point for us in this area. So that's another one I'm sure we'll talk about. But then if you just take a step back on med tech and what's the state of the state. Our end markets are healthy, in large part because of demographics, but also in large part because of the innovation. And it's just a good time to be in med tech. There's -- innovation is changing the game. These are some categories of innovation that cut across. I'd say, instead of looking at it -- we tend to look at things therapy by therapy or product by product. But when you take a step back, some of the technology that kind of cuts across horizontally -- horizontally would be AI, robotics and sensing, particularly implantable devices. Look at AI, there's -- we're talking about AI in our products here and our offerings. We're getting really compelling impact from AI. And it's allowing us -- what it's allowing us to do is personalized therapies and procedures at scale and make them better. So we've talked about our GI -- a very simple example using AI in colonoscopies, we're finding 50% more polyps than surgeons on their own. Where in surgery, we're using AI to come up with predefined surgical plans, to guide the surgeon through the procedure, whether we're using robotics or not. So -- and then these digital platforms like our Touch Surgery platform is really enabling that in surgery. And then, of course, you've got robotics technology. And look, don't -- robotics for Medtronic, we do 2 basic things. We do devices. Most of them are in the body, some on the body like diabetes, and we do surgery. And I think robotics is going to cut across all of that. Obviously, surgery is first, and you're seeing in orthopedics, for us, that's in spine. You're seeing it in soft tissue. But we're also seeing it in other areas like cranial surgery and ENT. But you're also going to see it over time in the delivery systems for things like TAVR and structural heart. So cardiovascular delivery systems, you're going to start to see more robotically driven. So robotics is a big one. And then, of course, sensing. We've been sensing in the heart for a long time. That's why that's an enabled like our pacing business, for example. Pacing is theoretically the oldest medical device category. One of our founder, Earl Bakken have been in the pacemaker in 1957, that began med tech. And here we are. Pacing market is still growing high single digits. Why? Because we know so much about the heart. Why? Because we can sense in the heart. We've been sensing in the heart, listening and understanding what's going on and designing therapies around that. In the brain and the central nervous system, that is brand new. And so sensing in DBS for us, for Parkinson's patients, sensing in the spinal cord for chronic pain, brand new. We just launched these products in the last year. We're going the ones that have the sensing there's one other company in pain, but that's allowing us to customize our therapies in these areas over time. And like Parkinson's, it helps us to automatically adjust the therapy over time automatically so you're getting better outcomes with less of a burden for the health care system before we get to go in and reprogram these devices with the neurologist. So lots of exciting stuff. Let me switch to earnings power. That was all on the top line. Top line, very healthy markets innovation. And now let's talk about earnings power. We'll start with last quarter. We had a -- we just reported our quarterly results last week, and you saw a good top line result of 5.4% revenue growth, but you also saw good operating profit growth, an operating margin of 27.8% and then our EPS grew 11%. You're starting to see at Medtronic, us be able to accelerate our earnings power. And it's driven by 3 things. We're getting synergies across our go-to market. Other than our diabetes business, we sell to hospitals. And those -- that distribution we're starting to get deeper partnerships with hospitals and synergies across that. Our global operations and manufacturing also as we centralize that over the years. We're getting synergies around that and driving costs down. And finally, platforming, technology platforms, much of which I just showed you, these areas, AI, robotic, sensing, cutting those across multiple product lines we're getting platform synergies that are allowing us to grow our top line while still growing our bottom line. I'm sure we'll get into that with Lee here as well. And then finally, I want to talk about capital allocation. We've really focused in the last couple of years on decisive capital allocation to these higher-growth markets. We invest about almost $3 billion a year in R&D. And then you add our tuck-in M&A, the way I look at it is another source of R&D on top of that, so a couple of billion on top. And that is our primary focus is tuck-in M&A and increasing that R&D. We've -- in our -- we have announced that on our earnings call last week that our FY -- our next fiscal year, we're increasing R&D faster than revenue. That's the first time we've done that in the last 4 years. And then finally, we have a healthy return to shareholder last year returning $6 billion to our shareholders. On the diabetes announcement, a lot of questions on that because it's a unique situation. We're separating from a high-growth asset in a high-growth market. The reason for that, it starts with legacy Medtronic. We have those growth drivers I just showed you in cardiovascular and neuroscience. We believe that over time, we're going to grow faster without diabetes and with it. We're going to put more focus, more investment, in those other areas. And the legacy Medtronic, our growth will accelerate even with diabetes gone and those markets do happen to be higher profit, which will allow us to increase our margins and then continue to reinvest. Second, our diabetes business has gone a dramatic turnaround over the last several years. We've had 6 quarters in a row double-digit growth, and our pipeline is super strong. And so that we believe that growth is going to continue. Diabetes is ready to stand alone. And I think with the increased focus there and matching that business with like-minded investors, we do think the business will get more focus and more capital outside of Medtronic than in, and will continue to grow. And altogether, this creates -- this is going to unlock shareholder value near- and long-term and we'll get into that as well. And then finally, just taking a step back on the last several years. With this diabetes announcement, you're seeing the transformation in our quarterly results, and we wrapped up a pretty strong year, too, 10 quarters in a row of mid-single-digit growth. Back half of the year, we grew our EPS 9%. So you're seeing that momentum. And it's the culmination of a number of different things. Like you said, we believe we're in healthy markets, but we've made changes to our operating model, to really focus on this innovation-driven growth, help us with capital allocation as well. We've changed our incentive programs over the years to make much more -- going on from a profit-sharing plan to performance-driven or long-term -- tied to the market growth or performance incentives are tied to equity. So myself and the management team on [ down ] and the organization are extremely tied to Medtronic shareholder returns. And then we brought in outside leadership. Thierry sitting on the stage is in month 3, I believe. It feels longer for him, I'm sure. It's been a lot going on with tariffs and everything. But over the years, especially in our functional areas, to bring operating rigor into our operations, into our quality, into our finance organization. It's really helped us improve those capabilities. And also be part of that cultural change to a performance-driven and a mission-driven -- we call it an and company. Mission-driven, what Medtronic is known for, but and performance-driven at the same time an and company. I talked about increasing R&D investment on top of that, accelerating our tuck-in acquisition appetite around those high-growth markets. And I talked about a global operations supply chain. We've centralized that. That's helped us stabilize our supply chain that was really -- had been -- it had issues coming out of COVID and also drive sort of improve the resiliency, improve our product quality in the manufacturing and drive our cost down. And then finally, here, we've talked about portfolio moves. And we've made a number of smaller moves over the years in terms of divestitures or exiting certain areas. Diabetes is a bigger one. But also the additive piece. Affera is our -- is one of our -- we have 2 platforms in Afib space. One organic, one inorganic, Affera being our inorganic one. Doing more deals like that, that will drive growth and shareholder value, both near term and long-term. So just kind of wrapping it up and getting to the Q&A here, I'd like to say, look, we're -- it all starts with the top line in med tech, and we're in a moment in these high growth -- these growth drivers in these high-growth segments. We've improved the foundation of the company from operations and quality and the -- we have a strong foundation. The business fundamentals are the strongest that it's been in 15 or 14 years I've been at the company. And we're using portfolio management, both additions and subtractions to better position the company in the markets that are higher growth, where we have -- we believe the right ingredients to win. So with that, I will wrap it up and move on to the fireside chat here. Thank you.

All right. Very good. Thanks for that, Geoff. Lots of topics to dig in on there. We've already got a lot of questions from the audience. We had oversubscribed dinner last night, but nice to see lots of engagement here on Medtronic. Okay. Before we dig into those topics, Thierry, maybe you've been in the role for 12 weeks now. On the earnings call, you shared some reasons you joined Medtronic. It's a return to health care, chance to use your background to fix operations and some really exciting growth drivers. Maybe you can just share some first impressions?

Yes. Look, it's been a busy 12 weeks. Lots of things going on. I've had a fantastic time honestly. It's -- well, first of all, it's great to be back in health care. I spent my time discovering the product. I'd love to get into the technology and the therapies and the outcomes for the patients, et cetera. And the team has done a great job of organizing that onboarding, starting with the most important product for the coming years. The ones that -- some of the ones that Geoff just mentioned will come back to, such as CAS, RDN, et cetera. So actually spending time with some of the engineering resources and the commercial resources understanding the business. I'm amazed by the technology. I'm surprised by the commonality that exist between the technologies in different parts of the business. I'm also very impressed with the depth of the customer relationships that Medtronic has. I mean it's obviously relationships that have been built over decades and through really strong interactions. But most importantly, I've been -- I knew it would be like this coming in, but not to this extent, sort of the mission element of the motivation of the teams, and really all out great welcome into the environment. So I've had a blast. At the same time, we had some shorter-term deliverables with Q4 and the guidance for '26, which I'm sure will come back on and the tariffs and the deal on diabetes, et cetera. So it's been a busy few weeks, but it's been fantastic. I really enjoyed it.

Excellent. Excellent. Welcome. Okay. Geoff, maybe we start with portfolio management. When you became CEO 5 years ago, you got questions about spinning diabetes. And the view at the time kind of paraphrasing was that you don't sell your house when the roof is leaking. Performance is better, 6 straight quarters of double-digit growth, which added 50 bps to your FY '25 growth rate. Why is now the right time?

Yes. So 5 years ago, the business was -- had fallen behind and was struggling, but still a big market share player for diabetes patients. We are type 1 and insulin-dependent type 2. And despite falling behind, we had a lot of loyal patients that are counting on us. And if we were to spun it out at that time, I don't know that the business would have survived. It needed a lot of work, and it has been a top priority for me, the board and the management team to get it where it is today. It's very healthy. Like I've talked about the -- I talked about the financial aspects of it, like double-digit growth for 6 quarters in a row and a great pipeline, but I should have mentioned that the impact we're having on patients is pretty dramatic. It's really reduced -- the patients are getting the highest time in range of anything in the market, by a meaningful amount, meaning that they're in a healthy glucose range and they're not having to do a whole lot. The technology doesn't for them versus counting carbs and all this stuff. So it's a pretty compelling value prop, and it's -- and the business is ready to stand on its own. But the biggest thing, why now is, one, the business is ready to stand on its own. We've been working on this for multiple years. We had this hypothesis thesis maybe 5 years ago that we eventually spin it. 3 years ago, I really started to hone in on that. But we wanted to time it when it was healthy, but also in Medtronic can make up for that growth. And right now, like I said, I believe we'll grow faster without the diabetes business because we can focus more on these other growth drivers that are adding more. Like for example, just our ablation business, just last quarter, added 70 basis points of growth to Medtronic, and it's just getting started. That's more than diabetes who had a huge quarter, 12% growth, and we've been building. So I think our other businesses have an opportunity financially to add more to Medtronic shareholders to the bottom line and diabetes is ready. And this deal structure, I don't know if we'll get into that or not, it allows -- enables us to be an accretive deal.

Yes. Great. Why don't we get into that, Thierry, you bring some prior experience with divestitures. You've highlighted the benefits of this preferred approach. It's IPO of up to 20% within 12 months and then a subsequent split off about 6 months later. Maybe could you just talk a little bit about what do you have to believe to make this a successful deal for Medtronic?

Yes. So first, I just want to -- as a preamble, I'd like to say that the preferred path that we've chosen is beneficial in the short-term. But it shouldn't detract from what Geoff said, which is we're doing the separation for strategic long-term reasons, right. But coming back to the structure of the deal. Look, I think it's a fantastic franchise, but it is different compared to the rest of the portfolio. Diabetes has lower margins because it's a consumer business. The R&D spend as a proportion of sales is a lot higher than for the rest of the business. The SG&A is a lot higher. So overall, profitability tends to be on the lower side compared to the rest of the portfolio quite significantly. And it's also a business that potentially attracts a different type of investor than Medtronic, right? So the first thing that you have to believe and I think it's pretty intuitive is that by creating an environment where you can attract a different set of investors that will be specifically attracted by that business profile. That business will be worth more outside of the portfolio of Medtronic than inside the portfolio, right? So that's the first thing. So the way we're going to do it, as you said, is, first, we'll do an IPO of up to 20% of that business, and we'll use the proceeds to capitalize it, to pay for the cost of the transaction. And also a portion of the proceeds will come back to the RemainCo, so to Medtronic, and we'll use those proceeds and like we use them usually in our capital allocation policy. And then as we do that, we will say that there will be a second phase where we will do the split. And so some investors will come into Medtronic shares with a view of potentially exchanging afterwards. And after a 6-month lockup period, we will offer the option for investors or holders of the shares, either to keep Medtronic shares or to swap them for diabetes company shares. And as they do that, we will retire the Medtronic shares, reduce the share count, which will have an accretive impact on the earnings per share level. I think as we looked at the precedents in this type of deal, it's very clear that typically the split is massively oversubscribed. So we have good confidence that this is going to be a good value generation business. And look, I think it's a great franchise and a business that's -- a sector that's attractive. And the transaction will have -- it will be very unique on the market. So I think if you're an investor in med tech, it's going to be hard not to think about that deal. So high potential for some short-term benefits financially, but more importantly, sets us up to redeploy that capital to places where we're going to get better payback and better margins.

Very good. Okay. You've got a great operator here in queue leading the business. I know you're eager to get out to the road show and start to tell the story. Not ready to talk about valuation yet, but tandem trades around 1.5x sales. You don't plan to play in the stand-alone CGM market in the near future, and you don't have a patch pump yet. Why wouldn't Tandem be a better valuation comp than Dexcom or Pod?

Well, one, I think -- I think our business is broader than there. We've got the complete ecosystem and we've got a pipeline for growth. I mean -- so I think we've got a very unique value prop that's proven, right? I mean, think about that ecosystem anchored by our 780G algorithm, like I talked about before the value that it has, it's even supported like a sensor that was behind the competition. We're now launching a new sensor. We've got this partnership with Abbott. So we've closed that gap. And we've got this very rich pipeline. Some that's here, like our pen will now be paired with these new sensors and create a whole new category. It's called SMART MDI. And then we've got a new pump coming, which is a big step forward over our current pump. It's not a new version of the existing pump. It's a whole new pump platform, and we've got a patch coming. So there's a lot -- this is a super robust pipeline. You even get to the underlying software and how your data ports among all those different things. You can go from the patch to the pen for a couple of weeks, whatever you want to do, your data stays. So it's a value prop that's unique and proven that like no one else has, nobody. We're very focused on this insulin-dependent market. And it's lower margin than the rest of Medtronic, but it makes money. And it will be well capitalized going out. And I think it's a completely different and more robust and more durable business than Tandem.

Yes. Very good. Okay. Excellent. Okay. So the diabetes move kind of leads to bigger questions about the portfolio. After the split, you're still a $30 billion-plus revenue company. How do you think about where Medtronic has the right to win? And what's the framework for future portfolio decisions?

Well, the areas that we play in, we've got scale. Like I talked about the very first slide there. We've got cardiovascular neuroscience in surgery. And look, cardiovascular is a juggernaut for us, right? And there's lots of high-growth areas. We understand the clinical side of it. We understand the technology side of it. We've got great relationships with the FDA and other regulators around the world. We've got deep, deep customer. So anything in that area, we feel really good about. And there is the benefit of scale that's very strong in cardiology at the customer level where they contract across those products. The cardiac service line is a very real contracting organization in the hospital where physicians and administrators work together to optimize, getting the latest and greatest technology for patients, but at a good fair price and the ability to contract across that credit service line is a real driver us and a few competitors have that opportunity. So scale really matters. Neuroscience, that's coming. Neuroscience, we have, by far, the most robust neuroscience portfolio in med tech, when you look at it all everywhere from the leading spine franchise, the leading neuromodulation franchise, to the #1 -- by far #1 ENT franchise. I could keep going. And that neuroscience is maybe 15 years behind cardiology and contracting, but they're starting to do it as well. So we're seeing real synergies there. And then we've got -- and there's technology synergies back between those 2 areas with the implantable devices. And then again, surgery is another one where scale mass. Historically, in surgery, scale has been everything. Contracts, hospitals have contracted, it's been us and our leading competitor over the years, J&J, it tends to be 80% Medtronic, 20% J&J or vice versa in any given account. And now Intuitive's coming in there. They're expanding their portfolio, but they came in with the robot was their entry into that game. And now they're expanding their end effectors. Vice versa, Medtronic, we're building a robot out. And so we believe it's important for us to be the second robot player out there. I think timing matters. And we've got a multiyear head start over the other competitor. And we believe that, that portfolio approach the hospitals take is going to help us. So we have a right to win on all those areas, and we're continuing to learn how to leverage our scale better.

Yes. Excellent. Excellent. Okay. Let's turn to FY '26 guidance. We'll talk about the 5% organic growth in a second with a bunch of drivers. But on gross margin, a couple of questions from the crowd on gross margin. You're guiding to flat gross margin, excluding tariffs. FY '25 gross margin was still 65.7%. That was still about 4.5 or 5 points lower than pre-COVID levels. You've got some work to do to offset some mix headwinds from diabetes and CAS this year. Can you just tell us how you're thinking about gross margin improvement in fiscal '26 and beyond?

Sure. So the first thing I want to say is this has to be for me sort of in the top priorities, right, given my background and -- and so I come from an industry where every penny counts. So I'm definitely going to spend more time on gross margin. If you look at the things that are -- the different factors in our gross margin evolution recently, you've got some good news and some things that are working against us. I'll start with the good news. We were a company that was losing about 2 points of price on a yearly basis. And now we're a company that recently has gained a point of price, right? And so that's come through better governance. It's come through better management of FX in some of the emerging markets, but it's come mostly out of getting good price from innovation, right? And -- and so that's going to continue. And in fact, we measure the proportion of our products that have been launched for less than 3 years. And that proportion is going to continue to increase, right? And so we're going to go from a few years ago, we were in the teens to being roughly 22% now to being 1/3. So that's a tailwind that will help us improve margins with pricing. Then on the cost side, for a couple of years now, the team has been able to deliver cost out that exceeds inflation. So net-net positive, right? And so I think manufacturing productivity is improving. Supply chain efficiency is improving. Negotiations with suppliers are getting better. And so I think it's definitely moving in the right direction. And so pricing and cost out together is now a net -- almost a point of positive effect on a yearly basis. Trying to get us back to pre-COVID levels. And I'm going to be focused on what I -- focused on what I can do, especially to help on the cost side. Then we've got a couple of headwinds and they're mostly mix. And the 2 elements of mix are really the growth of CAS and the growth of Diabetes. Diabetes, we just talked about how we will address that. That's not the reason we're doing the separation, but it will be an added benefit. And on cardiac ablation, the growth of it has come first through capital equipment. And as that phase gradually gets replaced by selling more of the catheters that go with the capital equipment, that headwind will disappear as well. And CAS is actually already accretive at the operating margin level. So look, I think our mix will get better and we'll accelerate the initiative on cost out. And the key target for us is going to be to get back to higher levels in gross margin, definitely.

One quick follow-up on the CAS headwind. The capital headwind, is it right to think about that as a bigger headwind in Q1 and then starting to ease up kind of gradually through the year?

Yes, I think that's right, yes. As we grow towards the end of the year and get to what we feel the business should be in terms of size, we'll see gradually that mix getting better.

Got it. Okay, cool. So when you put all that together, consensus still has you at under 66% gross margin in FY '30. How much upside do you see to that? Is it possible to get back to that pre-COVID 70% level?

All right. Look, I think it's too early for me after 3 months in the company to quantify the upside. I think we've got to aim towards getting back to pre-COVID levels of margin. In my view, there's opportunity. And there are things that I've seen in the automotive industry around platform sharing, around design to cost, et cetera, which I think can bring material benefit to Medtronic, and that's what I'm going to be working on with the team.

Very good. Okay. So you're guiding to 7% operating profit growth for '26. So that's 200 bps of operating leverage despite those flat gross margins. You're taking cost out of G&A and investing in R&D and sales to support those launches. Where do you see those opportunities to pull cost out of G&A?

Look, I think we just have to look at the benefits of digitization and AI, and we've got to look at the org structure and how we can make it more simple and flatter, and how we can shorten the cycle on some of the key G&A processes, right? And -- and again, that's kind of my DNA, I would say, with after 10 years of automotive. And I think there's just opportunity to continue to work on the structure of the business to make it leaner and more efficient.

Great. On that topic, there was a question from the group. How much does Medtronic spend on AI? And is that primarily outsourced spending?

I don't know the number on top of my head. I don't know if you do, Geoff, but I think there's a couple of areas. I think there's -- if you think about AI, there's almost 3 categories. One is the AI investment in the product. And Geoff talked about the benefits that that's bringing and it's very differentiating and it's a structural improvement for our products with clear output for the patients. Then I think there's benefits in AI around supply chain, logistics, management, et cetera, on which we're significantly investing. And then there's all the back office stuff. So how you can optimize what I mentioned previously around G&A through just eliminating some of the transactional work and we're advancing on all 3 fronts. I don't have the number on the top of my head, but they will make a significant impact in all 3 categories.

It's a meaningful investment, though, and it's been a multiyear. But are we outsourcing it? And the answer is no. Data science is a capability that we want at the center of the company and at the edge of the company. So some of -- we are -- for our products, for example, we have certain AI platforms that will cut across multiple businesses that are being developed at the center. But also, we have to have that data science capability within the businesses as well. So at the center, at the edge, data science core competency -- and no, we're not outsourcing it. Do we talk -- do we leverage some of these hyperscaler platforms a bit? And are we partnered with NVIDIA and Microsoft? Yes, but not outsourcing.

Got it. Below the line, interest and tax add up to a 300 basis point headwind to EPS growth in fiscal '26. Any interest in tax -- or our interest and tax still bad guys in 2027? Or do they start to flatten out after this year?

Yes. So it's a good question. So on the interest side, what's happening is we're refinancing the debt, right, as you have debt repayment and you resubscribe and as interest rates have gone up. We're replacing debt that was at 0.6% to 1% interest rate. With debt, that's at the current rate. So it's going to have an impact, and that's going to continue into '27. From a tax perspective, the headwind is mostly driven by Pillar 2. And so if you look at what we've embedded in the '26 guidance, we've embedded the tax rate to go from 16.5% to 18%. And we see that sort of stabilizing around 18.5%. So we're getting close to sort of a stable tax rate. And those headwinds that we're going to continue to have in '27, we've embedded that in the guidance. So we know it's coming, and we're going to work, by the way, to try to minimize those impacts, obviously, as we've always done. But it's embedded in the guidance we've given for '27.

Great. Okay. Speaking of '27, you said on the Q4 call that you expect to return to high single-digit EPS growth upon the diabetes separation in fiscal '27, which you expect that deal to happen mid fiscal '27. Can you just clarify, are you saying that you expect full year FY '27 reported EPS to grow high single digits over '26?

That's correct, yes.

Okay. And so consensus has landed around like $6 for fiscal '27. That's like 8.5% above the midpoint of your fiscal '26 guide. Is that like a decent starting point?

Seems like a good starting point, I would say.

Okay. Great. Great. Cool. All right. Let's get into the fun stuff on the businesses. So cardiac ablation solutions. Okay. Lots of excitement about PFA, obviously. There's a huge opportunity in the cardiac ablation space now. It's a $10 billion market growing like you said, 20% plus. Your CAS business reached $1 billion revenue in fiscal '25. You talked about this path, this line of sight to $2 billion. How soon can we get to that $2 billion run rate? Is that by the end of fiscal '26? Is that '27? When do we get there?

It's in that ballpark. I mean, we didn't quantify it, but it's in a couple of quarters. The businesses is ramping quickly. I mean we're selling these capital as Thierry mentioned, that the mix headwind is a good guy in many respects because we're selling these capital equipment, a lot of it. And as that capital equipment gets installed, they're being used, like 100% utilization. I mean, so -- it's being used as long as the electrophysiologists are in the hospital, whatever their day is, it's being used, and that's pulling through all these catheters. And so we have -- we don't see the line of sight for that leveling off anytime soon. So -- and then we've got a nice product pipeline behind our current -- like this is -- I'm talking about Affera. We've got this product pipeline behind our current catheter, which is the Sphere-9 catheter, which plays in this kind of point-to-point segment of the EP ablation. And when we get Sphere-360, we've started in that clinical trial. It's usually about a year. So that's about the timing. That gets us into this other segment point, the single shot, which goes right at our competition. So we feel really good. And then we have a whole another platform called Pulse Select that is highly effective. It's very safe. And that gives us flexibility to tier these products. Affera, if you do your checks, I mean, it is coming back from the physician feedback we were getting as the premier platform in the space. And so we -- and we've got, like I said, this road map going forward. So we see that continuing.

Got it. You've been working through several constraints to Affera growth catheter supply generator supply, mapping personnel to support the cases, but you're making progress on all of those. What's the key gating item right now? And how long until you're completely unconstrained?

Yes, specifically to be the capital systems, right? I think -- I mean, like these are all different because the growth is so fast. You mentioned the capital systems, you have the catheters. There's some ancillary supplies around that, and then you got mappers. But I'd say right now, in the moment -- and that's for each platform. The Pulse Select platform, we've had it out there, that's an organic platform. We built it for scale in mind. And so there's no constraints there. And that's helpful, especially for outside the U.S. Within Affera, the constraint would be the capital equipment right now. That is something we understand. We understand how to make these things. This is an acquisition. It took after buying the company, it took us almost about a year to figure out the code to manufacture this at scale. We've cracked that code. And so now we're adding lines in our factories around the world to keep up with demand. And so you ask when will that being a constraint, I'd say in the next couple of quarters. And that's all in our guidance.

Excellent. Your PFA has taken off so quickly. You're a key competitor in the space sees a world where the whole market could move to PFA over time. Do you agree with that? Or do you see a continued role for RF or cryo?

Look, I'm just going off what our physicians are telling us. And you do have a camp that is saying, look, I'm just moving all to PFA. But there is another camp that says we're -- we want PFA, but we also like some of the features of RF, and we like an integrated system. So we're providing them that with Affera. So that we give them that flexibility. And I think that's a competitive advantage for us. But everybody has their outlook, but the reality of it is the fact of the matter, not the opinion, is there a number of physicians out there very tangibly want both.

Great. You mentioned Sphere-360, which is your single shot Affera device coming soon. The market has been 80% point by point and 20% -- sorry, 20% single shot historically. But that mix is obviously changing rapidly. How do you see that mix evolving over time?

Yes. Look, the mix is changing in large part because whether you prefer a point-to-point, or you prefer a single shot, the better technology -- the PFA is right now in single shot. So I think that's driving a lot of the -- a lot of it. And as we -- I think that mix, the single shot is going to continue, especially when we have Sphere-360.

Okay. Great. Obviously, we could talk about this all day, but you have lots of exciting businesses we have to hit. So let's hit renal denervation. Obviously, a huge addressable market here, over 1 billion people worldwide with hypertension, 1% penetration equals $1 billion of revenue. We're getting closer to some important coverage decisions, draft NCD on or before July 13, final on or before October 11. How are you thinking about the opportunity here?

Look, the -- it's a huge unmet need. You saw the slide. Just in the U.S., when you take out all these exclusions and you really narrow things down, we see 18 million patients that can benefit from this therapy, just in the United States. It's a massive opportunity. And I just look at it based on the -- just taking a step back, you've got a -- if you got a huge patient pool with the current standard of care by all accounts, just isn't working. People don't like the side effects of the medication, they don't take it. Their blood pressure remains uncontrolled. So that 1 in 4 people with hypertension is -- don't have it in control. So that's a big number and you get to this 18 million. If you look at this therapy, it's coming into an established infrastructure. Interventional cardiologists and cath labs. Lots of interventional cardiologists, lots of cath labs. The training for them is not that hard to do this procedure. They have the skills. For the patient, a little bit of mild anesthesia. It's a hospital outpatient setting. They wake up and within weeks, their blood pressure is down meaningfully. And there's a pristine safety profile of this procedure over a decade of data. So where is the downside? Where is the downside? And now you have the last missing piece of that puzzle. They have reimbursement coming in. And like I said in my prepared remarks here, CMS have already told us about this national coverage analysis that's public, a precursor national coverage decision. That's half the patients. And we'll see what comes out on July 11. But the payments are there. It's a matter of the coverage. How broad.

Once the coverage comes into play, what is the -- what do the economics look like for the hospital?

They're going to -- they're strong economics. Like the payments I said, are already established. So what's coming out on or before July 13, whatever that day is, July 13 is a Sunday. So in my head, I keep going on July 11. So -- but the payments are not the question. The dollars per case that's out there in different reimbursement and the hospitals will make money there. And so will the physicians. This will be -- unlike some other breakthrough therapies that have launched where hospitals have to lose money, we don't think that's going to happen here. We think they're going to make money out of the gate, which helps.

Got it. So what's the pushback -- the pushback on RDN is about whether the blood pressure reduction is enough to be clinically meaningful. But if it's safe and easy and outpatient for the patient, if the hospitals can make money, there's clearly a lot of patients out there. It seems like it could ramp?

Yes. No, even in your pushback, I mean the clinical trial with randomized controlled trial, a therapy ARM with RDN and another ARM, RDN plus medication and then the other arm, just medication. Those are tough clinical trials to get through, but we did show a clinically meaningful differentiation in the eyes of the FDA. But in the real world, that's not what's happening. We're not comparing to people that are taking their medicine. The baseline is people that have hypertension that aren't taking their medicine for a variety of reasons and have uncontrolled hypertension with massive side effects. And so -- that's why we're so bullish on it.

That's great. How fast can it ramp? On the Q4 call, you pointed out that RDN is different from PFA. It's a little bit longer ramp but a long annuity -- is WATCHMAN a good analog?

I think -- that's one of the curves we've looked at. And because for our investment thesis and everything, that's one of the curves we've looked at, and we think that's very doable.

Very good. Okay. Great. Let's touch on Hugo just for a second. Your surgery business has been under pressure, driven by GLP-1 impact on bariatric surgery and procedures shifting to robotics. Just first, is bariatric surgery, is that a headwind to growth in fiscal '26? Or is that kind of behind us now?

It's not 100% behind us, but it's leveling off, right? I mean we're getting to the bottom basically. And it's honestly just -- it's taken -- it's gone down more than we would have thought. If you asked us this 18 months ago, 2 years ago, we thought it would have leveled off earlier, but GLP-1s have been more widespread than we anticipated, like many. But it's not completely leveled off, but it's getting to that point. We can -- so that answers that.

Question from the audience. How much of the MedSurg business is losing share to robotics? Is it mostly U.S. stapling? Or is it broader than that?

Well, the stapling is -- the hit is bariatric. The stapling is more bariatric. We're just -- it's just losing cases to robotics. Laparoscopic cases to robotics, and it's kind of hitting multiple of our product areas.

When you put that all together, Hugo is now in 30 countries you filed for the FDA for the urology indication. As you think about just the MedSurg growth outlook over the next couple of years, can that go negative until Hugo kicks in? Or how should we think about that?

No, we're not thinking negative. Where it is right now, we would grow from here, right? It did take a dip in our Q3, which we explained and it popped back up in Q4 to low single digits. And our anticipation is to grow from here. We think Hugo will have an impact at the surgical business level in FY '26? And then FY '27, you'll feel it at the Medtronic level.

Yes. Great. Big picture, Hugo is a big investment for Medtronic, maybe still the largest single investment across the company. How do you think about the return on investment for that?

We're looking at the return on investment and the impact of that surgical business for us. That's a $6 billion business. We're not looking -- we look at the return on the robot itself, but the -- we think it's going to be a very healthy return on the business. So like a good predicate for us is our Spine business. If you go back 10 years, we were -- it was a lower growth market, and we were actually losing share. We ended up buying this Mazor robot, integrated into our enabling technology platform. And fast forward 7 or 8 years later, and the business is taking share from virtually everyone. And the market is growing faster. We're growing. We're taking share, and we're more profitable than we've ever been. If you look at the robot P&L, it doesn't look all that pretty. The Mazor. But when you look at what it's done for the broader spine business, that $4.5 billion business, it's raised the whole boat. It's a rising tide. And we see the same thing for the surgical business. We think it's going to get it back to at least mid-single-digit growth, that's $6 billion, and with a healthy return for that business, good margins in that business.

We had a question from the audience on Spine, believe it or not, which is close to my heart. Obviously, a business I used to work in. I remember writing those surgical synergy slides.

Yes. So Lee, it's all your -- we have you to thank for that.

The question is lots of competitors working to replicate this approach. What's being done to innovate and stay ahead?

So we're very excited about the Spine business. Reason #1, we think we're going to change outcomes here. This -- going from an art to a science in this therapy area, driven by this enabling technology. That, plus we're getting in the economics. So we're continually evolving our spine enabling technology. We just added a partnership with Siemens, to add an innovative kind of x-ray device on the front end of the ecosystem. And we're about to enter towards the end of FY '26, a pretty meaningful upgrade of various parts of that ecosystem. When you upgrade one part of the ecosystem, you're upgrading to the whole ecosystem. So we're investing quite a bit, and you'll start to see the benefits of that at the end of FY '26 when some of this new technology comes out.

Okay. Great. Time flies here. But maybe just a final closing thought. You took the CEO role in April of 2020, and you jumped right into COVID crisis management. Not the easiest time to kick off a turnaround plan. As you just reflect on your tenure, where are we? And what are you prioritizing going forward?

I feel we're at a good inflection point here between the growth drivers are in place, the operational foundation of the business is in a good place. And I really like the team we've assembled here. Thierry has just been a phenomenal add. We've got a really strong team and the markets are healthy. So I really believe you add this all up, strong markets driven by innovation. We have great innovation in the high-growth segments. Our operational metrics are really strong, as strong as they've been, the foundation of the company. And the team is very strong with diverse backgrounds. Bringing to the table, we've got some real med tech veterans. We've got, particularly in the functional area -- functional expertise that we sorely needed, and need, coming from other industries. Thierry is a great example, seeing what they've done in the automotive space and applying those best practices. It's going to help us a lot. So -- and the Board has been on this journey with us. So I think we're at a good inflection point.

Great. Great. Thanks so much, Geoff, Thierry, Ryan. Thanks so much for being here.

Thank you.