Medtronic plc (MDT) Earnings Call Transcript & Summary

I think we'll kick things off. Thanks so much, everybody. Day 1 Morgan Stanley Global Healthcare Conference. Thanks, everybody, for coming. Patrick Wood, obviously, I run the U.S. MedTech team here. Exciting, thrilling disclosures, morganstanley.com/research disclosures. I'm sure you'll all be going there right after this meeting. But what is exciting is to have Thierry here as CFO of Medtronic, which is an exciting one. So thanks for joining us.

Thanks for having me. Pleasure to be here.

I got to start with just kind of the obvious one because you joined the business from a different industry, and I'm probably going to want to dive into this a bit. But how have you found the transition? What surprised you, just everything about that?

Yes. So I've worked for many different industries over my career with GE and with automotive, et cetera. So I'm used to kind of changing industries pretty quickly. I would say the transition to Medtronic has been really good. It's a very sort of welcoming culture open to new ideas, and they wanted someone with my background. So they're obviously -- there's high expectations, I guess. But it's been easy to kind of get access to everyone in the business. Look, there's a lot of surprises on a day-to-day basis in terms of the technology, the products, et cetera. It's easy to forget how amazing some of the products are and the difference that they make. The culture for me, I knew it would be sort of mission-oriented, but it's really is a strong driving force in the business. But yes, it's been great. So I've been spending my time learning about the customers, learning about the products, learning about how they're made and getting access to as much information as possible, focusing my efforts really sort of; one, on just delivering the short term, obviously; two, on starting to identify how I can help with margin expansion; and three, on the growth side. So how I can support acceleration of growth. So it's been an interesting few months.

Yes. I mean your previous role -- your more immediate previous role, automotive, capital-intense business, raises in margin. It's just a very different [ content ] to health care. When you were doing the interview process and thinking about things, were they -- do you think the team was looking for someone who has that eye for efficiency to help drive the productive side? Like what was their pitch to you for how you would fit into Medtronic?

Yes. I think there was a combination of 2 things. One is indeed, automotive is very, very tough from a cost perspective and operations have to be very, very smooth. So you can't afford any surprises. So I think clearly, there was an expectation that I would bring some of that discipline to the table and how to help continue to improve that. The second part, though, is there are similitudes in the sense that it's -- automotive is also very heavily innovation-driven. Capital allocation has become very, very important. So making sure that you're decisive and where you're going to be successful and how you allocate resources is a common theme between the 2 industries. And so in my previous job, I worked a lot on freeing up capital from one area to be able to capitalize on the ones where we're going to be successful. And I think that applies to Medtronic to a large extent as well.

When you joined, I guess you would have -- I mean Medtronic is a massive company with a lot of different end markets. You both would have wanted to pick up a lot of the information of what's going on in each of them. I suspect at the same time, those divisional heads would want to be pitching you why they should get allocated opportunities in capital. How do you find that process? And is that not challenge internally, but how does that opportunity cost, if you like, allocation? How does that work?

Yes. Look, I'm a data-driven person, right? So for me, going into these discussions, it's all about understanding the numbers, the size of the opportunity, the probability that we're going to be successful, the size of the price, so to speak, and looking at that with data. So what's the opportunity from a growth rate perspective, what's the opportunity from a margin standpoint? I'm pretty big on return on invested capital as well. So the -- my approach has been to just look at the data, right? And it's -- you pretty quickly come to a first sort of set of conclusions on what the growth drivers, the macro level growth drivers are going to be, and we might speak about some of those with cardiac ablation, RDN and Hugo and you get comfortable with the big stones, right? Then you look at the large franchises like for us, cardiac rhythm management, Spine, Surgical and you look at how you can fund those so that they remain successful and continue to have a moat around them. And then you get to the smaller businesses, right, and see how you allocate the businesses -- the capital between them based on what the competition is doing and how you evaluate your chances to succeed. And it's been very data-intensive and very discussion-intensive discovery process, I would say, but great fun at the same time.

I remember when we did actually by Wall Street with that first meeting. And quite unusually because you were fairly new in the role, you were very clear that the first guidance would be one that you would own and that was yours. I mean, I guess, on the one hand, that also requires trust for you and the internal team and the information they're giving you on that side. But maybe the flip side of it could be there's an incentive to set a target and a structure that you feel very comfortable with, especially earlier on in the role. How -- what's the interplay there? Or another way, is the guidance conservative?

Well, look, I mean, I want to set the business up for success and obviously, myself, so I wouldn't give a guidance that I'm not comfortable with. As it happens, it was not necessarily an easy one because we had the impact of tariffs, and we had the separation of the diabetes business to communicate at the same time. But look, we went through a pretty deep roll-up process as you do in these cases, and the team took me through risks and opportunities. And we came to the guidance that we issued. And yes, I'm comfortable with the guidance and after 1 quarter of performance, I think we're encouraged. And we feel strongly that we're going to deliver that, yes.

I'm sure there's only so much you can say on things like that, but latest thoughts on the time lines of the Diabetes spin, how progress is working on that?

Sure. So there are really 2 things, right, in diabetes. One is the operational separation of that business. So it needs to become stand-alone so that when we do the IPO, it can run itself, so to speak. And then there's the transaction work itself. On both fronts, the work is progressing very well. So the business -- the management team is in place. We're doing the separation from a systems perspective towards the end of this calendar year. So it will be ready. It will be ready by end of this calendar year to be run as a separate business. And I can tell you, the team there is fully engaged and can't wait to control their destiny and run their own business. And then there's the transaction side, and it's progressing nicely. So we're in the process of forming the bank syndicate that's going to help us with the IPO process. And so when we announced the separation, we said it would take 18 months, right? That was back in May. So now 3 or 4 months later, we're looking at 14 to 15 months. So we're right on track. So we're talking the first phase, so the IPO phase of the transaction towards sort of the end of the first quarter calendar year of '26. And then the split parts to happen roughly 6 months after that. So all on track. And positive reaction from stakeholders, from investors that we've been meeting so far.

Yes. It's a fast innovation area so being independent.

Yes. And look, it's a fully scaled business. It has its own manufacturing, its own logistics. It's got an exciting pipeline of products. We have 2 sensors now between the instinct sensor that comes from Abbott that got approved last week and Simplera, which is our own sensor that's ramping up. And we've got a patch pump coming up. We've got a pen coming up in the pipeline as well. So it's an exciting business in a market that's growing. And yes, from a transaction perspective, it's going to have scarcity, right? It's going to be a large transaction that is going to be hard for investors not to look into. So yes, we're excited about that, excited about launching that business into its own future and candidly, to be able to focus the rest of the business on the other 3 franchises where we have a lot of things -- a lot of positive things going on.

From your perspective, diabetes assuming that will go successfully. RemainCo is still a very large business. Do you feel it's the right kind of size, a bit of a loaded question, but is it manageable of that size? Would there be further things that you think from a slowing down or a focusing perspective? Or do you think it's probably nicely situated is how you would view it?

Look, I think it's not a size question as much as it is a -- what processes do you have in place to control it and make sure you're on top of things. I think eliminating or taking diabetes out of the portfolio will give 20% to 25% more time to some of the senior leadership, whereas it was only sort of 7% of revenue and 1%, 2% of profit. So that's good. It will give us more time to take a look at the rest of the portfolio. I think coming from the outside, there are significant synergies between the different franchises. If you take Tibial in Pelvic Health, Neuromodulation, cardiac rhythm management, it's all the same basic technology. If you look at some of the software that we're developing with AiBLE in spine and in Hugo, there are lots of consistencies, et cetera. So I think there are synergies between the different parts of the business, number one. Number two, I think the operating framework that Jeff put in place with the operating units, but having centralized function for the nonnegotiables such as supply chain quality, et cetera, is working well. It's driving a lot of benefits for the organization that we're starting to see from an execution standpoint and from a margin standpoint. So I think size is not an issue.

You mentioned supply chain. I know Greg is in town. I don't think anyone who hasn't worked in industry knows how critical that component is internally in the business. How do you feel that is at the moment? I know there's a number of supply chain companies have been brought down and the whole thing have been rationalized. But does it feel to you, stepping in now like we're in a good spot from like a forecasting and a management side of the supply chain?

I think so. I think Greg did a ton of work from a consolidation perspective. As you said, we went from 4 manufacturing teams to only 1. We went from 9 purchasing teams to only 1. It's all centralized. That makes the data much more forthcoming. It makes all the forecasting a lot easier to do. Predictability is actually good now. So execution is strong. And we're starting to gain efficiency from that sort of centralization of things. Between technology, commercial and cost, those are the 3 areas where we benefit from the size of Medtronic. And I think what Greg and the team have put in place is really starting to pay off. I do think that there's still a lot of opportunity ahead of us, though, that I'm happy to discuss.

A couple of unanswerable questions, so I apologize. But how have the discussions with Elliott been? That was obviously relatively new news. They added a little bit of infrastructure, might be worth flagging to the group what's going on there, but they added a little bit of infrastructure in terms of the Board composition. How are you finding things there? And how has the discussion been?

So look, Elliott contacted us in a very constructive fashion. So they -- contrary to some other engagements that they've had where there's a public letter, et cetera, it was a private discussion first through e-mail with Jeff and then they came and they expose to us their thesis on Medtronic. And the first thing they said is, look, we think you're in a great place. We've analyzed the company for a decade, and we think you've never been in such a good position from a portfolio perspective. You're about to have an inflection in performance. And we want you to do 2 things. We want you to capitalize on that opportunity. So make sure that you capture cardiac ablation, RDN, Hugo in the most -- in the optimum fashion, I would say, number one. And number two, we want you to take those opportunities and use them as an opportunity to accelerate growth, right? And go back in offense in funding organic R&D and also maybe going a little bit more in offense on the M&A side, right? And so one of the things that they said as to how to make that happen is, first, they said we feel that you would benefit from more MedTech representation on the Board, which we fully agree with that we used to have in the Board and through just retirement, et cetera, that was no longer the case. And we were already looking at bringing some Board members from the MedTech industry on to the Board. So we were happy with that recommendation. They said, one is good, maybe consider 2. So we swapped list, and we converged on the choice of the 2 new Board members, one of whom we were already speaking to in the past. So I think that worked out well. And then the second thing is they said we think you should have a committee to oversee growth and operations. And so ultimately, we decided on 2 committees. So one on growth that is going to be focused on capturing those opportunities, continuing to sharpen the portfolio to make it evolve towards higher WAMGR through M&A and potentially through further pruning of the portfolio. And the second one is around operations. So it's all about margin improvement, right? And how do we create the fuel to be able to reinvest in R&D internally to create the next generation of products and to build a flywheel. And so we looked at the committees that we've got at the Board level today or that we had at the Board level. And we decided to simplify a little bit the committees that we had. So we merged 2 financially oriented committees into one. We eliminated one that was focused on science and technology that we thought was maybe less impactful. And so we removed 2 and built 2 new ones. And the 2 new ones are growth and operations, in fact, it works well because they're well aligned to the way we run the company from an executive perspective, right? So if we look at the operating mechanisms that we've got internally, we've got an M&A committee, a business development committee. So that fits well with the growth committee. And then we've got the monthly business reviews and the margin improvement committee, et cetera, which fit well with operations. So in a way, it creates a good interface between the way the business is run on a day-to-day basis and the way the Board is going to be organized. So I think it's a good thing.

Yes. That's really interesting. And maybe it's interesting the idea of incremental M&A. That's been a big topic, obviously, within the MedTech industry in general, helping to drive growth. You're also a return on capital guy. And MedTech M&A sometimes requires a bit of a leap of faith because it's often early stage for the biggest payoffs like maybe an unanswerable question again, but like how do you think about that interplay? Do you just kind of probability risk adjusted it? Like how do you think about...

Yes. So there's multiple -- there are multiple parts to that answer. First, when we look at the targets, there has to be a few characteristics. First, the market the target needs to be in needs to be attractive from a revenue growth perspective and ultimately from a profit pool standpoint. Two, Medtronic has to have the right to win in those sectors. So there has to be synergies either from a tech perspective where we can bring things to the table and I don't know, battery technology or materials technology or things like that or there needs to be commercial synergies. So for example, if it's a product that one of our existing sales forces can carry in their portfolio in addition to existing products, then we get benefits from a commercial standpoint. So we will look at those 2 things. And then we will assess sort of the financial profile. So what's the horizon for the deal to be accretive from a growth perspective and from a profit perspective. We have to get comfortable that it's not going to get in the way of delivering what our commitment is, which is high single-digit EPS growth. So to be clear, it's not M&A or high single-digit EPS. Both have to go together, right? And so we assess against that angle. And then we look at where the company stands in its development process. And the sweet spot for us is basically companies that are either just before commercialization or just after so that the risk level is more acceptable and the path to financial return is better, right? And so that's for, I would say, core M&A, and that's the typical approach. For things that are more risky or sort of more upstream in the development stage, we have a very good venture arm that is based out of Boston with a dedicated team. And what they do there is they talk to companies that are earlier stage, but never with a view of making money on the venture, always with a view of at one point, is that going to bring something to the portfolio of Medtronic. So sometimes we will just take a position. Sometimes we will do a structured deal where we have a call option if the company hits certain milestones, for example. And we try to enter at an early stage if we perceive that the risk is too high. So that's kind of how we approach it. And I guess the focus now is the sweet spot, which is kind of, I would say, deals like Affera right now for us, which has been obviously a long journey, but a great venture for us in terms of the payback that it brings to the table today.

You mentioned CAS a few times, and I can understand why. Again, you did these internal meetings. You had all the different division heads sort of picture. I'm guessing, tell me if I'm wrong, but like CAS, RDN and Hugo were the ones that stood out to you. Maybe if that's correct, maybe if you could sort of start on with CAS, like how you felt about it, how the discussions have gone and how you feel about the opportunity...

Look, I mean, I think CAS is -- we're in a fantastic position. I think we're the only company with the full set of catheters today. We've got -- this is one case where we took 2 shots on goal and both paid off with PulseSelect on one side and Sphere-9 on the other. Both are in high demand. I think Sphere-9 is even more in high demand than the others. The numbers are already very attractive, and we can tell that it's going to continue. Growth was in the 30% range in Q4. It was 50% in Q1. It will be higher than that in Q2, and it will continue to ramp up. It requires capital from a first building the capacity, secondly, hiring the mappers perspective. So for me, it quickly became a nonnegotiable, right? So that was a part of funds that we kind of segregated and said, it has to happen. In the past, there has been opportunities where Medtronic has been in a good position and hasn't fully captured that opportunity. And this is not going to happen for CAS. We're putting the resources that are required and the ramp-up is working well. Capital equipment is increasing. We're creating the installed base that's going to pay off with the catheters going forward. We're hiring mappers at a rapid rate. And so yes, I'm very excited about that opportunity. We passed the $1 billion milestone at the end of last year. We're relatively shortly past the $2 billion milestone, but that's only a step in a market where we think we have a clear path to being the leading player. And it's an $11 billion market today growing 20% a year. So it's an exciting opportunity. And we're working on the next generation, right? We're working on Sphere-360. It will start pivotal trials soon. And so it's -- the future is really positive for that franchise. Very excited about it.

Interesting to hear the tonality of how you're talking about nonnegotiable. Would you say like Medtronic has become a little more aggressive in terms of selecting which areas it's going to invest in and then just aggressively doubling down on that? Is that a fair?

Yes. I think the company has become more decisive. I think there has been some sort of changes in the way we approach it. So it's more data-driven, a little bit more top-down from an investment perspective. We're making plan -- changes in the way we do the [ strat plan ] to be more decisive, et cetera. So I think that's helped. And I think another thing that's helping is that the execution is more consistent, right? So we've done 11 quarters of mid-single-digit growth, which means that it's easier to get comfortable with the funding of projects like that.

Maybe also touching on RDN, which has been a hilarious topic because the buy side went from thinking it's terrible and a 0 to now really quite exciting. It's been quite a journey. Again, how do you think about the discussion in the market?

So first, the size of the market, right? You're talking 18 million potential patients in the U.S. with a catheter that will be priced $16,000. So you do the math, 1% of $18 million times $16,000. The size of the price is massive, number one. Number two, from a margin perspective, it's a great product for us. So financially speaking, it's very attractive. Most importantly, from a therapy standpoint, it's just a game changer for the patients. You're talking people who are sometimes on 4 or 5 meds that have uncontrolled hypertension. Their life is impacted on a day-to-day basis. Instead of struggling with the meds and potential side effects, et cetera, they go to an outpatient procedure in and out. And in one shot, they get an improvement in their hypertension. And our clinical data indicates that it actually continues to get better over time. So you're talking a product that makes a material really tangible difference to the life of patients. And when we did the clinical trials, 80% of the people that were in the clinical trials were self-applied, right? So there's a real demand from the market. So on one side, you put a big population, great therapy and natural demand. And it's -- again, it's probably one of, if not the biggest opportunity we've had in the portfolio for a long time. It's a long time coming. It's been 15 years. But the advantage of the 15 years is that we're significantly ahead of the competition today from the amount of data that we've got at our disposal. So we've got an opportunity to capture this very, very large market. So today, we're focused on 3 things: making sure that we create the centers that are going to do the procedure at the physicians' locations, right? And so training the physicians and helping them with the coding of the reimbursement, et cetera. On the other side, raising awareness of the consumers. So we'll probably do some direct-to-consumer marketing to continue to raise awareness and then building the referral pathway. So to put the 2 together, right? So building a process so that the consumers that want to undergo the procedure know where to go and that there's a process in place to get them in touch with the centers that are going to carry out the procedure. So that's what we're working on today. And again, it requires some investment, but not to the same extent as cardiac ablation, but still some direct marketing investment, et cetera, but for a really, really transformational growth opportunity.

I guess one of the differences [ was ] CAS is here, you're building a completely new market.

Yes.

And so how much do you have the teams coming to you and saying, can we ring-fence this much spend? And how would you characterize the amount of time, energy and money that's going behind RDN relative to CAS just qualitatively?

Yes. Look, I think it's -- they come with the demand, right? And we look at it together. And again, it's data-driven. So what are you going to do with the spend? So in CAS, it's the mappers and it's things like that, it's capital equipment. In RDN, it's some of the direct-to-consumer stuff. It's investing in some of the clinical specialists that are going to help with the development. And we ask them for sort of forward-looking KPIs that we can track to make sure that it's on track and that we're comfortable that we're going to get the payback that we expect. And so we have reviews on a weekly basis with those businesses today to make sure that they're delivering on the path that's going to make us successful. And so far, it's the case. So we keep funding them. And then the work is where can we go and squeeze costs in other places to make sure that we have the capacity to fund those businesses in the way that they require.

Maybe we could also just talk a little bit about Hugo because that's another large pillar that's a remarkable market, still growing very quickly, one very entrenched competitor. How are you thinking about like the investment and the energy behind competing in the U.S. with Hugo as the number of indications expand?

Yes. So first, again, it's a massive opportunity. I mean in the U.S., now 30% of surgeries are done with robotic assistance, right? So when you're a big medical surgical franchise like us, it's -- you have to look at it, and it's a big opportunity going forward. So first, it's -- we're committed to Hugo and moving forward. So for us, we feel like we've got a product that is differentiated from a form factor perspective because of its modularity. We think the visualization attributes that we've got are good. Physicians like the end factor, so the instruments that we've got that we can put at the end of the arm because they trust those instruments. So an instrument like LigaSure for vessel sealing, for example, has been used in 35 million procedures. So they like the fact that they're comfortable with the instrumentation. And so there are areas that where Hugo is really differentiated, where we think we have a large opportunity. And candidly, I think there is just room for 2 players and a lot of our clients actually like the idea of being able to have 2 different players to speak to. So we're in that phase now. Hugo is going to be approved in the U.S. towards the end of this year. It will be first urology and then following that hernia and benign GYN. And as we do those different approvals, we will do the instruments that go with them. But we'll take it in a -- it's a controlled launch, right? So for us, the most important thing is to have successful customers and customers that get from Hugo the service that they expect, right? So we've started selling Hugo outside of the U.S. for the last 4 years, and we've taken that approach, and we've learned a lot in terms of where Hugo is going to be successful. We've made changes in the software in the arm, et cetera, as we were moving forward, and we're ready to start taking that to the U.S. market, which is by far the biggest opportunity.

I think of scale, on the one hand, you've got RDN, HUGO, CAS, Inceptiv, AiBLE, all the things happening over here. On the other side, in bariatrics is a little tough. But like there's not -- looking forward, it doesn't feel like there's something particularly negative. And to your point, you've been growing mid-singles already fairly consistently. So I guess the question is, if you're us, what is the blue sky situation in terms of growth? And if the organic growth ends up inflecting up a bit, what are you going to do with the extra money? Because it's a margin versus reinvestment into play?

Well, I think it's about -- so it's all about creating a flywheel, right? So on one side, we feel comfortable that the growth is going to pick up for the opportunities that you just mentioned. And -- and that alone will give us an opportunity to invest more in R&D and in M&A. But there's a second part of the flywheel, which is around margin expansion, right? And so it can't be just growth. It has to come with margin expansion. And I talked about some of the improvement that have been made by Greg and by Scott Cundy in R&D more recently, et cetera, to become more efficient from a supply chain perspective and an R&D standpoint. But I feel like we still -- coming from a different industry, I feel like we still have opportunities in front of us. To name a couple of things, I think manufacturing footprint is still an opportunity for us. It's harder to do in MedTech than it is from where I come from because of the regulatory approvals and all that. But I think it's an opportunity for us, and we're looking at it aggressively. It will take a while, but it will drive significant benefits. The other thing is design to cost. So it's working on engineering for cost upstream in the development cycle of the product, which is a transformation I've seen in my previous industry that is starting in MedTech as well. And so today, we're working on products like Sphere-360 to launch it at a much better cost position than the product it replaces. And so I think very meaningful benefits will come from that. That will help gross margin go up, and we'll use a portion of that improvement to reinvest in R&D. But long story short, I think the objective for us is to get back to gross margin levels that are closer to where we were prior to COVID, right? So we're talking 3.5 to 4 points of gross margin incrementally over time. So this is -- again, this is not next quarter or by the end of the year, but it's opportunities that we're building for the years to come. So continue to fund innovation. So I think the path is there, and I'm excited about it.

Last one. We're at a global health care conference. So that is a correct answer. What's more fun, autos or MedTech?

I'll tell you, financially speaking, MedTech is a lot more fun than auto. Auto will still -- will always be a sector close to my heart, but I continue to enjoy the products without having to work in that sector. And having the financials of MedTech and being able to enjoy automotive on the side is probably a better choice. But look, I think I come in at Medtronic at a moment where there's very significant growth opportunities that are right there, right? And so it's one of the reasons I joined it because they were pretty clear to me when I met the management team. And I'm excited to see that they're even better and more transformative than what I expected. At the same time, I feel like we still have opportunity for significant margin improvement. And I think the combination of those 2 things will generate leverage EPS growth and shareholder value. So I'm excited about the journey ahead of us.

Love to hear. Thanks so much. Thanks, everyone.

Thank you. Thanks for having me. Thank you.