Medtronic plc (MDT) Earnings Call Transcript & Summary

All right. Good afternoon. Thanks, everyone, for joining us today for the Healthcare Summit DB. If everyone doesn't know me, my name is Pito Chickering, one of the med tech analysts here at DB. We are very excited to have Greg Smith, Executive VP of Enterprise Operations for Medtronic today, which I believe may be your first public sell-side call.

That's correct.

So excited to have you here. So I guess just to start off with a little background, you started at Medtronic in 2021. Can you just walk us through what the supply channel was before you start -- when you got to Medtronic in 2021, kind of what you did to stabilize it?

Sure. No, thank you. Well, good afternoon, everyone. Pleasure to be here. So I joined Medtronic, as you said, about 4.5 years ago, right in the middle of the pandemic. And you can recall those days where it was a challenge to get materials. It was a challenge to be able to supply -- to stock our supply base. But I would say where we found ourselves in the supply chain and operations organization is really it came from a decentralized base and having 4 different manufacturing teams, 9 different supply chain organizations. We had very disparate supply base so the ability to be able to -- our procurement organization. And so we're doing things in a lot of different directions in a lot of different ways. So first and foremost, we had to do was really come up with kind of our approach going forward. So it was setting the strategy, it was setting the structure. It was going from 4 organizations to 1, going from 9 organizations down to 1 in supply chain and really setting ourselves up for basically taking on the task ahead.

So how long did it take you to sort of to stabilize just to stabilize out that supply chain because it was a period of disruption, you were sort of making a lot of changes. I mean, how long did it take you to sort of stabilize again out before you started focusing on sort of improving the COGS?

Well, I would say we started instantaneously on trying to improve the COGS, but we had a lot of transitional base work to do on foundation. It's -- I would tell you, it took us a better part of 2.5 years to really get to a position where we felt like we had stability around the base. We started with a very, very large supply base, some that were very, very good preferred suppliers, but a very smaller base than what we had liked. So it's putting the foundations in place and making sure we enter it. At one point in time, during the worst of times, we had over 250 people deployed to our suppliers to try to help them actually resolve some of the problems that we had. So a lot of foundational work to do, but knowing we needed to do the work to get service better to continue to focus on quality, drive cost out, working capital, we started immediately on trying to develop programs and putting them in place to address the long-term needs.

Okay. So looking at your universe just for all the areas that you touch, as you think about for COGS, kind of what are the big buckets to make sure I don't miss anything here, materials, manufacturing, labor, logistics, contract manufacturing, kind of what are the big buckets that we should be focused on?

Yes. I'd say there's kind of 3 verticals that I think about. One is your LBM, the labor, the burden and the materials, which is what makes up the majority of the cost of goods sold. And the highest of that is materials, about 60% of the cost structure and then about 1/3 of the balance is in labor and the other 2/3 is in burden. There's a second vertical, which is really around logistics and it's really around how we move the products. It's the transportation aspect of it. It's the warehousing aspect, it's customer care. And then there's the third piece, which is more of the SG&A, the structural overhead that supports the businesses, which covers all the different functions. And between the 2, some go to gross margin, some go to operating margin. But those are kind of the pools, I would say, I would -- the way that I think about it.

Okay. So material is about 60% of COGS. So what was Medtronic doing for material purchasing in 2021? What are you instituted over time? Kind of where are we today? And kind of what the savings we can get. How should we thinking about just on the term?

So if you go prior to 2021, basically, the majority of the cost savings were coming out of negotiations with suppliers. So I would say that base was being leveraged to the degree that we were benefiting savings coming out of the company. It wasn't a lot that was coming out of logistics and there wasn't a lot coming out of the factory. So it was more around continue to support top line, make sure we have service, make sure that we're providing to the customer and the patient. So I'd say since then, if you look at all of those buckets of costs, labor, the burden materials as well as logistics supply chain components, a lot of focus now on specific programs to be able to drive more productivity and more benefit out. So I'll give you an example. Materials, for instance, right? At the time, we had direct material supply base of about 4,500 suppliers. And about 40% of that would be what I'd consider preferred suppliers, meaning that the other 60% weren't preferred, which meant there was something about the way they do business that we needed to improve. So we went in and not only focused on negotiations, but also how do you go after other areas of materials? How do we take waste and yield loss out of our factories? How do we look at the engineering ability? We repointed our supply chain -- I mean, our supply organization and through R&D to basically be on the technical front end of supply. So when we had new product development coming through, we pointed them toward the suppliers that we wanted to have better service, better cost, better quality, better continuous improvement that they can drive. So we had structured programs that we're playing out now that we're driving to enhance our ability to get more out in materials, but also go after burden to go after labor and then to make demonstrative improvements as well on transportation, warehousing and logistics, the way we move our products across the globe.

Okay. And then from a -- so from a materials, I guess, states perspective, kind of where are we today, kind of what are the next steps that you guys can take to keep driving that kind of what inning you are you see us as games or optimal purchasing of materials.

Let me open it up and go to total. But I would tell you where we were in 2021 is about 2.5% of our overall savings is what we would basically were accomplishing. Now that's a gross savings. If you put inflation against that, and remember what happened in 2021 with labor costs going up, material costs going up, we basically found ourselves negative margin contribution because the actual benefit or the actual benefits weren't offsetting the impact of the inflation. So that hit us hard. What -- as we have built those programs, what we have seen now, our ability at 2.5% of gross savings is now more than double and sustained and growing across materials, across labor, across burn and supply chain. Now we've also had the benefit of inflation abating, right? So we look at inflation, we've seen it come down demonstrably from where we are. So now we're in a position where we're contributing contribution to margins as it relates to our programmatic savings benefits outsetting and overcoming the cost of inflation and then contributing to that expansion.

So then just to sort of be super clear, we talk about right now on an overall basis, all the things you're driving about 5% sort of gross savings, inflation is running 3%. It means your net savings should be 2%, so sort of 200 basis points sort of where we should be. So I guess looking at the 5%, which buckets is that kind of where you guys -- as you go from 2.5% to 5%, where are you seeing the biggest -- the biggest savings come from?

So net biggest savings, obviously, comes from supply because of the magnitude. But as far as percentages come from the labor out of the factories. We've been able to drive the last couple of years, almost double-digit productivity improvement out of our factories. and being able to run our lines more efficiently, take labor out. Now that's the smallest percentage of our overall spend, but it's a big impact. So we have those programs, I talk a little bit more about them that are impacting labor and impacting yield. Those are the fastest to yield. But the one that we are doubling down on is in materials because it's such a large component of the total cost structure.

So you're looking into your fiscal sort of to say looking for fiscal '27, '28, what areas of materials or do you see the biggest savings? Is it from using preferred, better negotiations, but I mean kind of where are the biggest savings, right? You do it initially if you're a number of suppliers, it makes sense. But as you think sort of 3 years down the road, where do you savings keep coming from on the materials side?

Yes. So we've been able to move over the last couple of years, we've been able to move from about 40% preferred to about 68% preferred. So we've made a dramatic improvement there by getting the products on the front end of the innovation cycle with the preferred supplier base. It's now given us the ability to get leverage our scale. So we're getting better scale leverage. We're getting better contracting. We're getting better continuation and programs with improvements me with them as we gave them more volume. We also -- we have stood up a group called supplier transfer office, whereas one of our challenges before is we would go out to bid, we really didn't have the leverage because we would never move from one supplier to another. So now we've added about 100 people to a team, but all they do is move product. and given us the leverage there. We've also gone back and said, look, a lot of projects, programs, products that haven't necessarily been engineered on platforms that were real efficient. So how do we go retrospectively and how do we address some of those products, specifically ones that may have low yields, ones that have idiosyncrasies associated that are not necessarily -- they're expensive, but don't necessarily add value to the customer or to the patient. So we have a team, we call it VAV, value-added value engineering that allows us to go back in and we're addressing some of those programs and products. And then we put a big focus on ensuring that through our development process that we are designing and putting in place a design for value. So when we make choices around how we build products, we don't ever deviate from what the outcome is to be, but we make sure the inputs are efficient and we're leveraging -- think about an automotive platform, right, where you use more on multiple cars than you do just strictly one. And so it gives us the ability to leverage and leverage that scale.

Is your new CFO an ex-car manufacturers?

As a matter of fact, he is, yes.

That's what we heard about. It's just like one for -- a quick question on materials. I mean, as you move from 40% to 68% preferred kind of things, how much savings do you guys get to move into a preferred supplier versus nonpreferred?

It depends. I mean we have examples where we have single digit, low single digit. We have others where we have high double digit. So a lot of it is making sure that we are just picking the suppliers that actually have the capabilities that we need. For us, it's critical, especially as you guys know in this industry, you got to have the right product at the right place at the right time. If you don't have a customer that can service your supplier that can service you consistently, problem. If you have issues of quality that we have to catch internally because they haven't produced the product right, problem. But we also want people that understand the best-in-class approach is how do you automate? How do you drive continuous improvement on your end, you're not coming to us asking for pricing. So in addition to that, a lot of the ideas that we have for taking materials out, they don't come from us. They come from our suppliers because they're doing something for a competitor, they're doing something else in the space, and they may have better knowledge base than we do. So therefore, it's suppliers that are willing to work with us and to be able to have a win-win scenario where they get more volume and they actually give us better price structure along the way.

Okay. And then on -- so is 60% materials third labor and through burden. So let's just go to labor for a second. How much of the labor improvements have been more of a onetime, your ability to run more efficiently to maybe shut down facilities kind of looking through your labor productivity, how much of that is just sort of adjusting or catching but where it should be and how do you think about that from a durability perspective, continue to keep finding those stronger labor improvements?

Yes. I would say part of it is that. But what we have driven is a lean manufacturing process. We call it Medtronic Performance System that we are replicating across all our factories. When I first started, we had 67 manufacturing facilities. And if you go visit them, every one of them was manufacturing and doing things differently. They have different operating approaches, they have different ways of doing things. So we've taken a standard approach. that we have deployed across all. It starts with what our key objectives are and we sequence them all the way through the manufacturing facility. Then as part of that lane, we brought to make processes, zero loss, a lot of tools that are not new to the world. their implementations that you'll see best-in-class companies have been used, and we've been pushing those across our facilities. The advantage of that, it helps enable our 54,000 people to be able to be part of the problem solving identify the issues, problem solved. And so we are seeing more and more productivity coming off our production floor where we're actually seeing the creativity and the thought processes generated from the bottom up that we have process in place to be able to exploit. So it's very durable. And if you look at a lot of companies out there, best-in-class companies that use lean manufacturing, you'll see that sustained approach over time.

So looking at your labor inflation is running sort of typical 3% to 4% somewhere in there. So as you look at your 3-year plan here, looking at the sort of that gross 5% savings, you still get a big chunk of savings by simply continual improvement within that. So just offsetting [indiscernible] that labor...

Labor is probably one of the ones that we would say from an inflation standpoint, we feel it's probably more of a risk. I feel better about materials. I feel a little worse about labor. A lot of that is other countries that we do business in, where we'll have -- they'll have statutory increases, things like Mexico, where we're seeing higher wage rates, if you will, in the U.S. But generally, yes, we will be in a position to have net productivity coming from our labor pools because our productivity will exceed the inflation.

Okay. And then the other third is burden. I guess, what is burden?

Burden is the overhead. It's the individuals, the engineers, the infrastructure, the depreciation, the elements of running of the manufacturers.

So how do you get leverage? I mean, besides simply manufacturing 5% or more pipes or more how do you get leverage from burden?

Big element of it, we're finding is -- it's actually using AI and machine learning. A lot of the folks that we have in those facilities are actually there, in some cases, for inspection and improvement and dealing with problem solving. We have put in place a lot of systems, manufacturing execution systems overall equipment digital factory, a number of things that are taking and basically automating the work has to be done. Probably one of the biggest opportunities that we have found is a lot of inspections that take place in the facilities. And so we've basically gone to automated visual inspection system, and we're starting to deploy those rapidly across the enterprise to be able to address where we got manual intervention and manual labor and tie those into the overall digital initiatives that we have.

So what's the FDA's view, I guess, as you go through the FDA approval process, there's a certain set of areas, we typically just see the approvals. But from a manufacturing perspective, is when you go through that, I guess what's the -- what are the regulations around AI for visual inspection versus using Mark One Eyeball.

Yes. I mean our regulatory teams are working on that actively now. But definitely, it has to go through the FDA and be approved and we have to validate but so far, we're seeing some really good problems.

So is that actually up and running live? Or is it something which woiuld -- and then you have to validate it for each product that you go through? Or how does that work?

We do. A lot of places that we have been able to find the most helpful so far is in packaging. Those things aren't quite as product sensitive that when we use the proof cases, we can replicate and horizontally deploy across the enterprise, but also take those lines against other things upstream.

Fair enough. And then logistics. You guys have an enormous number of manufacturing facilities, and we'll talk about tariffs in a bit. So let's separate the pure logistics how are products being delivered, whether manufacturing to warehouses to customers, I guess, in 2021? Where are we today? And kind of what's your sort of vision of where this moves to?

So today -- well, in this last year, we took over our distribution network. So historically, it's been a third-party run network. We acquired and we closed, I think, 5 distribution networks over the last couple of years or distribution centers and stood up a brand-new large facility in New Jersey and then also another one in Memphis. So for us, as we think about the strategy associated with logistics, we want to minimize touches, so the more that we can do things directly, touches include inefficiencies and costs. We want to take miles out. We want to maximize the cube. Example would be I visited a facility in the Minnesota area, Minneapolis area, where we had 19 boxes of products that arrived from the same location the same day, right? So basically, how do we realize that all of it would sit in 2 boxes and be in a position and we start working to be able to cube out that shipment as much as we possibly can. So from a logistics standpoint, a lot of it has been the blocking and tackling starting to now move into -- we just -- I was visiting a customer the other day that's probably one more advanced on supply chain, and we've cut their orders down by 90% working together where we're sending products now to their central distribution center. And we are having a lot less processing, a lot less FedEx shipments, a lot less work. And so there's a number of opportunities that exist in the supply chain space in those kind of areas that we are starting to exploit.

From a total cost because logistics to point is both in COGS as well as SG&A. But can you sort of size to sort of what's the total dollars around ballpark logistics for the whole company? And what's the split between COGS and SG&A?

I would say it's in the 2% to 3% range of sales is in that space, total cost. The majority of that is in cost of goods. So probably 60% of what I would say, and 40% of it is SG&A its operating margin versus gross margin.

Okay. And then from -- I guess, taking over the distributors and start taking them on yourselves, there's obviously investments you guys have had to make.

Not distributors, the distribution centers.

Distribution centers. Yes. With those investments that were made, I mean, those cost savings you can walk us through when you decide to do that to sort of day 1, year 1, year 2, year 3, I guess, how does that cost savings flow through on that 3% of sales?

So there was investment that was required for us to buy out those facilities and buy out and take them over ourselves. But it was based on the trajectory of the benefits. First and foremost, you get the fees back that you're paying and the party running so immediately. And then second of all, as we look at our lean processes that our manufacturing facilities and we look at the success that we've had there and our ability to be able to deploy those, we didn't have a situation where we had as much productivity that could be generated from our third parties as we could internally. So it's part of our benefit that we received on day 1, and then it's a continuation of our multiyear plan to be able to drive productivity down across those networks.

So miles, touches and queues, those are the 3 cube rates.

Miles, touches, cube rate. So we negotiated the rate, those are the big ones.

So I mean just, for example, can you sort of quantify in my -- I guess, each of these miles touches and queues and then rate, I guess, 2 years ago, where we are today and kind of where it can get to, your way of quantifying just the improvements that you can make by being more efficient with your logistics?

Logistics has been one of the areas that when you look at the breakdown between cost structure, it's been one of the ones we've gotten the most success out of the last couple of years. The way it has been accretive to us and what we've been able to do for margin. It's been a higher percentage, I would say, than the average over the period of time. A lot of that is because of the factors. Also, we've had the benefit of freight rates have been down a little bit because of the demand. So that's been a tailwind to us as well.

So can you cut miles by like 3%, 5%, 2%, 1%, kind of what's the target from areas of miles?

Yes. I would say that when we look at a macro basis around logistics supply chain, we're in that mid-single-digit target for benefits on a year-over-year basis. I won't get into the specifics around miles because I couldn't tell you about, right? But examples of simple things that you can identify that are just opportunistic and this is one-off is products that are produced in Mexico, for instance, that we would ship to the U.S., go to a distribution center that would ultimately be distributed to Europe, right? So as we get smarter and we get better with intelligence, digitalization, then we can just -- it's how do you take that intermediate step out and go direct. And those kind of opportunities are ones that we're working to exploit now.

Which I think is a nice sort of segue into as you think about the tariffs and how tariffs change almost logistics as much as manufacturing. I guess how do you -- do you guys have enough information at this point to sort of playing out over the next 3 years tariffs? -- you still sort of waiting to see? I mean how much do you guys think of changing logistics first, manufacturing second around volatility tariffs?

Yes. For us, looking at country origin has been a big deal, right? And it's not just because of where you move products, but it's also to how you label products. So Puerto Rico, for instance, is in the U.S. trade zone. So it's designated as a U.S. product, right? When in reality, it's Puerto Rico. And so it's different than how other countries would view that, right? So we've taken a real strong approach in our revenue protocol, USMCA, country origin bypassing borders. So if we make something in Tijuana, Mexico and have it sterilized in the U.S., Southern Callon and shipped over to Europe, and we bypassed that now, skip the border, if you can and try to run through that. So we've been very successful with those. You've heard recently what we set our target implications are for this year and for next year. So we're not completely out of the woods, but it factors into our decision-making, specifically really quickly around supply chain, manufacturing, not as much. I mean this is a very complicated industry, as you know, when you stand up a new manufacturing and duplicate manufacturing process is a commitment. And so we got to think about that in the context of all the other things that we think about geopolitical and everything else that could arise and our risk profile.

It's also -- to your point if you're bypassing the U.S. or bypassing countries from manufacturing sterilization to even warehousing as long as it's basically -- so your shipping has changed structurally to avoid bypass basically essentially certain countries. Yes. Okay. Fair enough. So I guess, looking forward, as you look at sort of those areas, so materials, labor and burden, kind of where do you see like the overall inflation going sort of within those 3 segments kind of as you think about sort of that 5% gross offset, kind of how should we think about it a 3-year view?

Yes.

And then from a, I guess, labor perspective -- from a blended labor perspective, is that more like 4%, 5% kind of because of the secretory increases? And do you see that the increases changing at all as the global economy sort of moves around? Or is that just -- are those just fixed costs within those countries that is?

Yes. I think probably the biggest thing of fluctuation we've seen in the last few years is Mexico. Mexico has taken about 20% increases over the last 4 years as they've changed their assumptions. So that's kind of something that's weighted is a little bit. We say U.S. is probably don't see quite as much impact in Europe, and we don't see as much even in Puerto Rico anymore. And those are the 4 areas that are biggest for us. But I would say that we probably anticipate labor to be 4% to 5% in that risk.

Okay. One quick question actually going back to the tariffs. I guess as you have to adjust your logistics to deal with sort of origin, like how much cost systems? Is that a real cost to optimize tariffs? Or is it's beneficial because it offsets tariffs. But how much of additional cost burden is it going to be on the all system?

It hasn't tended to be one. In some cases, it's probably caused us to revisit our whole structure and how we move products, but we haven't seen it being a burden at all. And to your point, when you look at the benefit from the tariffs, the offset, the impact is positive.

Okay. And then from a manufacturing optimization, I guess how many facilities have you guys consolidated and kind of how do you view that, I guess, going forward? Is it still an area of opportunity to help increase our labor? Is it all from a tax perspective, I guess, how do you view -- I guess, what you've done so far from the manufacturing facility basis on how we do that going forward?

So if you look at the last few years, we've had a few facilities that we've added as a result of acquisition. We had 5 facilities that we divested as part of the divestiture. We shut down 7 manufacturing facilities, 1 in the U.K., 1 in Germany, 4 in California and 1 in Massachusetts. We'll be -- obviously, our footprint changes to diabetes. We'll have a couple of additional facilities that we'll exit. And network optimization is one of the transformational programs we're very focused on. So we see that as an opportunity. However, it's also not a quick payback. And as you highlighted earlier, the implications associated with FDA and ISO and everything else of moving products is a choice that we have to make. So as we think about the deployment of our resources and we think about deployment of capital, it enters into it. It's also, in many cases, it's better off the plan network changes as part of our PLM. So our product life cycle management as we have a new launch that's going to cause a base to change dramatically will cause us to think about the implications of that.

Okay. How much leeway does senior management -- you are senior management, so basically CEO and CFO, give you to do the things that you see fit. I mean you came in from the outside with a fresh perspective, you've been in the business a while. There's a lot to be done to be stabilized and then work on improvements. How much of a free hand do you have to get all the things done that you want to do?

I would say nothing but support would be what I would describe. Now can we do everything and does everything make sense? No. Industries are different. There are certain things like network optimization, a great example coming from CPG or from automotive. It's a different model, if you will, around how you move things around. So some of the things that opportunities like that, it hasn't made the most sense to prioritize at the highest level. But I've been very supported, I would say, through this. What we try to do is make sure there's a leadership team, we collectively review the strategies and make sure that we're aligned with where we're taking the organization and make sure that not only the people understand, they understand and have input into decisions as well. So it's more of a -- I wouldn't call this as an operations plan. A lot of this work is an overall business plan. So we review with the Board when the Board meetings on facilities or where we [indiscernible].

Going back to sort of this sort of 5% sort of gross savings number as we sort of look back at fiscal sort of '25 and sort of fiscal '26 with inflation sort of coming down, how should we think about sort of when do you guys get -- when you ramp up to that 5% number? -- kind of as we look at the numbers from outsiders, obviously, in fiscal '25, you had FX for fiscal '26, you have diabetes investments plus PFA investments. But how should we be looking at the 5% gross savings number versus the CPI inflation? And then how kind of as we're looking at the gross margin line, kind of how we should be thinking about it for the last 2 years and how should you look at the next 2 years?

Yes. I think we had a little discussion about this earlier, but I would say the way to think about it is our inflation exceeded -- 4 years ago, inflation exceeded the benefit. I'd say we were neutral to next year. In the last few years, we have -- the model has played out that we've seen the 5% top line. And we're seeing accretion to the gross margin basis point contribution. So look at last year, we saw accretion coming from the work that we're doing around programmatic savings exceeding inflation, and we will see the same as we go forward. So we are seeing our ability to move from the lower percentage of savings up to that level of achievement. We've got a robust pipeline and a lot of different programs and projects to get us there. So I'd say we saw the results in fiscal '25 contribution basis points. We anticipate that will continue.

Yes. I mean, obviously, you have to pull out FX as we sit there and look at the analysis, you have to pull out FX to figure out.

And pricing and a number of other aspects which is difficult. But Terry, I think, was -- has addressed that recently around the contribution factors as it relates to what was attributed to us on pricing actions we took last year, what kind of contribution we're seeing from the net benefit. I'll leave it to him to explain in more detail.

Yes. I mean like it's pricing, it's not -- that's not your world, so we're not going to -- you're just cost, cost. So I mean, I guess looking at the buckets again, whether it's materials, labor or burden and logistics, logistics seems that you guys are able to ramp up on that pretty quickly pretty early. Labor, you guys ramped up pretty quickly pretty early. Can you sort of walk through sort of how long it takes on material side. So reformulating products getting to FDA, is that sort of the next 3-year horizon that we're looking at that we should be looking at some biggest leverage there?

So the labor side -- I mean, excuse me, the material side, we started ramping up with the stop program coming on, the VAB program coming on with the negotiations work, the work that we're doing around development side, I would say we're building muscle in all those areas. So what used to be our laggard as a percentage, we're seeing it pick up as we move along. So I anticipate we'll be at a run rate on material savings in the next few years that will be an average of what we seek to achieve across the board.

Okay. And then so going to some specific examples, Affera, obviously, you guys acquired ramping up aggressively. Can you sort of walk us through just the process of sort of how it is that you optimize this process, when the leverage begins to get there, when it goes from a margin headwind into a margin tailwind? And just details are actually around just literally how you guys ramped up in Affera because it went from 0 to a lot in a very short time period.

So let me give you a contrast. So Pulse Select is a product that also operates in that field. It's something that we developed internally and part of our process is designed for manufacturability. So at the conception of the idea of the product, the engineers, the operations teams, the R&D teams work together to make sure that we produce a product that meets the need that has the right margin structure that's repeatable, we can manufacture it, it's reliable and it's got a good cost structure. That was not how Affera was designed. So we acquired Affera. We purchased it. It has not gone through a similar process. And at the time that we purchased it, it was -- we were making 5 products a week of the catheters. And the clean room in that facility in Bedford, Massachusetts is half the size of this room. So basically, what we needed to do to get Affera there, we believe in the product, we knew its capability. We knew the market potential was really basically we stood up a brand-new factory. We have multiple lines in there. We sought to get FDA approval. We had to do all the work to basically retrospectively do y for manufacturability through all the engineers and R&D and the quality teams and operations teams and basically got to a position where we overcame those issues and now are producing the product at a significant rate, and we're doing it at yields that are almost comparable to what we're doing with Pulse. So I would say, which is really solid work from all the multiple teams with a very clear intention of what we need to accomplish to the team work together to achieve. The cost structure has improved dramatically. We are seeing very good margins off the product. The exception being right now is obviously, as we launched the capital units. Capital units are a little bit of a drag, but the good news of capital units is they're what compel the people to buy the catheters. So it's a good thing. But our team between mappers and between capital units is ramping up as aggressively as we can. And the catheter supply is not only enabled by the new facility that we stood up in Massachusetts to produce this, but we've also taken our one of our premier facilities in Gale, Ireland, which is one of our shining star, and we have put multiple lines in place there as well to produce the product. So we are feeling very good about the foreseeable next 3 to 5 years on capacity for the product.

Which is sort of a nice segue as you prepare for these launches. So RDM, we have coming up, obviously, potentially, it's a big launch, a lot of excitement building around it. Reimbursement, CBD, a lot of uncertainty at this point sort of in terms of how it will be rolled out. But across the board, you talk to hospital systems and physicians, there's a lot of excitement here. How do you balance the scale of these potentially large product launches without sort of crushing your margins in the near term? How do you balance that out?

Well, I think it depends on what's involved, right? Ardian is a great example of where we have the capacity online now for 2 years, and we've got ample ability to be able to meet the high side scenarios in that. And we basically have negotiated with our suppliers that we have the flexibility on their side to be able to give us instantaneous capacity that we need. So we built the safety stock, if you will, to be able to prepare for the launches. But at the same time, we can react quickly versus in some situations, have we not planned for that. It may be a slow reaction and it takes a while to be able to react to that. So on these product launches, we're trying to make sure that we have instantaneous capacity internally, we have the right supply contracts, and we're in a position that we have the flexibility of our suppliers, assuming that the business is on that side.

So you have great contracts with suppliers, but you still need the manufacturing lines, you still need the staff. I guess how do you plan for that? Because at some point, you have the suppliers that can give you what you need, but you still have to have the fixed cost investments. So how do you balance the fixed cost investments with potential demand if you Affera love the example about when demand goes off, it's almost going to throw everything you have added as you are planning this launch, I guess, how do you balance suppliers just your own fixed cost investments, whether it's labor and/or manufacturing lines?

I'd say from a -- when we have the for instance, like Ardian that we've had in the pipeline for years, and we know what's involved in that. It's a lot easier to do than to acquire a business like Affera and not really understand what has to be true from -- with the growth that comes from that. But with our base of Ardian, for instance, in our Galway facility, it's a relatively small footprint. There's a flexibility of labor there that we're able to move in and out. So it gets back to that flexibility again it's not just our supply base, it's also with what we have internally.

Okay. So shifting kind of more macro, I have to ask the AI question. We talked about how you're using AI for visual inspection, which is for packaging, eventually, we need visual inspection, assuming FDA approval on the products. What other areas do you see AI from a perspective? Like if you rank it from the biggest things that you're focused on right now using AI?

Yes. So for us in the last few years, we have put in place an advanced planning system. So before, we had multiple planning systems. And so from initiation of our IBP process, all the way through to where we deploy products. So that's a big area of opportunity for us. We now have a system, we have a foundation, and the team is working aggressively to find ways to be able to digitize that so that we have less manual intervention through the process. We have better signals deep into our supply base, and we have the ability to be able to get early warning signals, if you will, be able to manage things across our coparties, if you will. That's a big area. We also put MES systems, our manufacturing execution systems and now we're installing across our facilities. We put overall equipment effectiveness tools in place. So we're basically connecting all the equipment on the lines so that we have the ability to be able to see how effective is it operating and not only how effective is it operating, but when does it deviate? So we go into the planning process that we can basically change the standard deviation, and it gives us a lot more productivity and it gives us a lot less waste. So we're starting to get into the factories and then look at the big work streams that we have around how we deploy machine learning and AI. So the 2 big ones for us that we're focused on right now is perfect order. So from the time an order comes in, have zero touch and that includes how we go through the contracts, goes through pricing, goes to any kind of credit holes, goes to any kind of credit blocks, anything that can deviate from everything coming out. So that's one that we stood up. And we think there's tremendous value in that, that we can extract. But the other one, the bigger one is really from the demand all the way through demand signal all the way through deployment and then how do you leverage and connect systems. And so I have the advantage of having global IT in my team as well. And so we're really deploying and using a lot of that but doing it across the enterprise as well. So we're trying to find those areas that we can really leverage it. Human resources has been a big one for us, not necessarily in my space, but human resources transaction has been a big one. Finance and some of the things we're able to do on AP and AR and be able to really get efficient in those areas. Early indications of where we can go bigger. And so we're making the investment in time and resources now to do that.

Okay. From a -- I guess, sort of 4 minutes left here, so as sort of go more macro question. I mean you're looking at sort of the biggest opportunities 3 to 5 years for cost savings as for specific details that we should be looking for, talking to you about in the future and are asking Ryan about as we look at gross margins for Medtronic.

Yes. I just -- I think that it's going to be a balanced approach, right? It's not going to be a one-size silver bullet. There's not -- you don't walk in and close this or open this. It's going to be the continuous improvement and transformational programs that we have to do around driving material costs out, continue to get more productive and efficient in our facilities, driving out our distribution network. And then I think the other part that will emerge and is emerging to some degree is how we work together across the value streams and how do we bring those handoffs together so that we're much more efficient through the process.

Okay. And then so with sort of this durable target of sort of 5% gross savings, if 1 year you miss that again, we're not talking about pricing. We're not talking about volume. talking about your target of 5% gross savings. What are the biggest risks there? Kind of what are the things that keep you awake at night? Where is it that you have to deploy your time that could be in the areas that pressures that?

I think the biggest thing that worries me is what happens around the world. The day that Ukraine was bomb, we found -- you realize the supply lines go up, you realize that the borders closed. You realize that there's a geopolitical aspect of it, right? Those are the elements to us. I feel like we have a very good understanding of where our supply base resides, what those risk profiles look like. But we also depend on Tier 2, Tier 3 and Tier 4 suppliers as well, very diverse across the globe. So those are probably the ones to me that are the most concern is how we get the right contingency in place and continuity to make sure we protect supply when it's such a volatile world right now.

Which is a nice segue into as you think about sort of the volatility that we're seeing, whether it's -- do you plan to gold tariffs, et cetera. How do you think about inventory levels, right? So how do you balance working capital with inventory levels as you think about managing like the shocks of the system that we sort of somehow keep seeing year after year?

There is certainly a role for safety stock that exists. I think also what -- an area that we're really focusing on is trying to get cycle times down so we get better reaction from our suppliers. So we don't have the latency, if you will, when something does occur. So part of what we're doing is we're getting on these preferred suppliers is getting a much better understanding of what their capacity models are, what kind of capacity is available to us and then how we deal with that risk profile is further upstream. So that is, to us, going to be really important as well, make sure we get better reaction times from the suppliers, understand their system, their supply chain better. And that's where digital and AI is going to help us as well because with that many suppliers, it's sometimes challenging, but the systems are designed to be able to help us infiltrate and understand a little bit better than we do.

And then last question is that, again, looking at us for 3 or 5 years, the inflation harbors around 3% level. target of a gross savings by 5. So these sort of 200 basis points potential gross margin savings kind of coming out of Medtronic in the next several years. Are there any other areas that need the investment that will offset sort of that net savings that you have that you see at this point? Or as we start seeing this continual gross margin improvements over the next 3 to 5 years?

Yes. Probably best to have Terry walk you through the componentry of it all because as you know, mix plays in their FX plays and there's a number of components that are positive years negatives over years, right? But I can tell you that from a standpoint of breaking out the programmatic savings versus inflation aspect of it. We're seeing the benefits come through. We -- they'll come through this year, and we've got a robust pipeline for the future. And it's not -- we're not creating the Adam, we're not splitting the item. It's not what others have never done before. A lot of it is tried and true capabilities. It just didn't exist in this industry and didn't exists within Medtronic.

That's why you brought in. Guys, thank you so much for joining us. Greg, thank you very much.

I appreciate it. Thanks, everyone.