Medtronic plc ($MDT)

Good morning. Thanks, everybody, for joining us. I'm very pleased to have with us this year, Medtronic and in particular, Thierry Pieton and who's CFO and EVP. My name is Matt Miksic. I cover U.S. medical devices. So thanks, Thierry.

Thanks for having me.

Yes, of course. Our pleasure. So I wanted to start with question that we're starting a lot of the sessions, not every session with is just the events of the last week. So maybe the 2 key questions are exposure to Middle East, to the extent you can put some shape or size around that and then potential implications, not so much of what we've seen in the last week, but if price of oil were to remain higher for longer and maybe drawing on the experience that you had in 2022 and how this might be similar or different?

Yes. So look, the Middle East region for us is kind of 2% to 3% of our overall revenue for the year. So it's a relatively minor portion. And I would say within that 2% to 3%, there's a large portion that's kind of health care necessary products. So we don't anticipate a large impact. What could have caused an impact would be logistics issues. So if you're unable to ship. But it feels like today, we've got a good grip on how to fix those. So I would say, short term, we don't see a very large impact coming from the conflict from that perspective. On the price of oil, it's the sort of petroleum derivative content in terms of raw materials and our products is less than 1% of our cost base. So -- and we've got sort of contracts that are in place for the year to come, generally speaking, with productivity commitments, et cetera. So again, we don't foresee that as a strong negative. We did launch the IPO of the MiniMed business just before the conflict erupted, I want to say. And so the result is that there was some pressure on the pricing of the IPO. That being said, we made a commitment from a strategic perspective to separate that business because we think strategically, both MiniMed and Medtronic are better off living their life separately and having their own investor base and having their own capital allocation, et cetera. So we had committed to getting the overall separation done by the end of calendar year '26. And so we decided to move forward with the IPO within that context. And we're happy we did it. At the end, we got a good valuation for that business, and we're very confident in the way forward. And so we've set the first steps or path to completing that separation, and I think it's a very positive one.

Okay. That's helpful. So -- and back, just to clarify on the percent of your cost base, you're talking about the percent of your P&L or your percent of your COGS?

Percent of the cost.

Of COGS manufacturing. Got it.

Small portion.

Sure. No, that's helpful. And then shipping and logistics, any -- there were some rising shipping costs, much different situation in '22 because there was also componentry shortages and all kinds of other things that were making it more difficult to get parts globally to where they need to be. Any sense that extended period of time where shipping costs are more expensive?

No. Look, and again, shipping would be, again, a relatively minor portion of our cost base. But I think back in '22, the issue was accessing certain raw materials, and there's not really that problem in this case other than, again, petroleum-derived products, which is small for us. So no, we don't anticipate a major impact from that. In the regions, there are several countries where we work for distributors. So we're able to make sure that they have the right level of inventory to be able to cope with some fluctuation in access from a logistics perspective. But at this stage, we're able to ship in the region.

Okay. And then finally, the timing, like things have to work their way through work in process and cost of goods and inventory. Is that if there were an effect now, would this be a '27 event?

It would be. I mean, typically, our inventory cycle is about 35 weeks, right? So it would take 7 or 8 months before we would see the impact in the income statement.

Got it. Okay. Well, we -- there's a limit to how much I can dig into the MiniMed transaction, given our involvement in that transaction. But I would ask from a Medtronic perspective, this wasn't sort of just to put that -- underscore the fact this wasn't a one-and-done event, right? So it priced at lower than was expected. But your -- the time frame for your divestiture, if you could talk about the second stage and the benefits that you expect to.

Yes. So look, so first, again, the main rationale behind the deal is, first and foremost, a strategic one, right? It's about focused capital allocation, and it's about making sure that these 2 businesses are going to be as successful as possible on their own. And I think clearly, MiniMed is B2C. Most of the rest of Medtronic is B2B. The margin levels are pretty significantly different. So MiniMed represented about or represents about 7% of our revenue, but kind of 3% of our EBIT. So it's less profitable than the rest of the business. The R&D intensity in MiniMed is a lot higher than in the rest of Medtronic. As a percentage of revenue, it's about twice the spend of the rest of the portfolio. So it's a relatively minor part of our business that took a significant portion of our capital and of management attention. And so the decision was made to separate and all those criteria remain obviously completely the same. So the path going forward is -- so we just did an IPO on 10% of the capital. If we were to exercise or if the underwriters were to exercise the green shoots, that would go up to something north of 11%. The big part of the deal is the second part, which is the split of about 90%. So what's going to happen there is we will offer the option for Medtronic shareholders to either keep their Medtronic shares or opt for a conversion into MiniMed shares with a discount to incentivize them. And so the intent is to do this. I would say, I would target roughly 6 months from the IPO from an ideal timing perspective. The result of that will be that we'll have a share count reduction as people convert from Medtronic stock to MiniMed stock. It will mechanically reduce the number of shares that Medtronic has, which will mechanically increase the EPS. And so net-net, we view this as an accretive deal for Medtronic shareholders. And again, it gives access to MiniMed to its own capital, to its own shareholder base and investors, et cetera, and enables us to redeploy a portion of the investment and a portion of the capital towards elements of the portfolio where we have an even stronger right to win and better economics, candidly.

Okay. And obviously, it's a slightly -- it's growing a little faster than corporate average at the moment. So maybe talk about some of the commitments that you've made, preliminary commitments for 2027 in terms of driving leverage to the operating line, leverage to the bottom line and how we can get into and then maybe the first part of the question because there's a lot. And then we'll get into how the composition of your other growth programs can kind of get you to where you want to be on the top line. But first in the leverage part.

So look, first, the impact of the deconsolidation of MiniMed. So MiniMed will be deconsolidated once we complete the second stage, right? So the split. When we made the announcement of the deal, the calculation that we had made was that MiniMed was contributing about 40 basis points of growth for Medtronic, which is less than CAS and less than what we expect from a number of the other growth drivers, which we'll talk about later. Since then, the growth has accelerated for Medtronic. So you've seen the growth profile get better and better. We were at about 5.5% in the second quarter. We did 6% growth in the fourth quarter. In the third quarter, fourth quarter seems similar. And so we're on an acceleration path. So if you look at the algorithm going into '27, growth is going to continue to accelerate. So I made this comment in the 3Q earnings call. We expect the organic growth in fiscal year '27 to be higher than the organic growth in fiscal year '26. And that's even excluding the effect of the 53rd week because I know I've had a lot of questions. So on an apples-to-apples basis, you will see an acceleration of growth. We expect the gross margin profile to improve. The things that are hiding the operational improvements that we're making in gross margin today are basically the negative mix coming from MiniMed, and that will solve itself with the split. And we're seeing mix pressure coming from the growth in the cardiac ablation systems part of the business, which will get better towards the second half of fiscal year '27 with the mix between capital equipment and the catheters starting to go more towards the catheters. So a lot of the improvements that we've made in net cost out in pricing, et cetera, will start showing up in the gross margin. Then if you keep going down the P&L, we've said that we will continue to increase R&D as a percentage of sales. And we'll keep doing that in '27, but we will reinvest only a portion of the leverage that we're getting from the volume growth into the R&D spend, right? And then on the SG&A line, we'll continue to fund the growth areas. So we'll fund CAS and we'll fund Ardian and we'll fund Altviva and Hugo, et cetera, to capitalize on these big opportunities. But net-net, the leverage that we can get on the G&A line, which is really the functional cost will more than offset the resources that we're putting on the sales and marketing side. So net-net, we expect SG&A to provide some leverage going into fiscal year '27. So op profit should look better. Below the line, tax will be more or less the same, slightly worse, but we're kind of stabilizing the tax line. On the interest side, we've got a bit of pressure like a lot of the peers coming from the fact that we're refinancing debt that was almost at 0% with debt that's at 3% to 4%. But all things being equal, that puts us in a position to have some EPS leverage going into '27. And then we've got a number of moving parts, right, which I alluded to in the 3Q call. So we will have carryover from tariffs. So this year, tariffs were about $185 million. We forecast about $300 million going into fiscal year '27, so $100 million to $120 million of carryover. We will have some dilution coming from the M&A activity that we're doing. You probably saw this morning the announcement on Scientia. We've embedded some pressure coming from the period between the IPO and the split on the diabetes deal because a lot of the benefit from the split of diabetes comes from the share count reduction, and that's calculated on a 13-week rolling average. So we will see that benefit and the deal will be accretive, but it will come gradually after the split. And on the flip side, we'll have a benefit from the 53rd week that we have, which is something that happens every 7 years for Medtronic. Net-net, including all of this, we're committed to high single-digit EPS growth. So that's kind of the algorithm for us.

Okay. Well, then there's a lot in there. And one of the things I think that surprised folks was given the strength in CAS, and of course, you have Altaviva, you've got Ardian, which continues to ramp. You've got other growth programs. But just given the strength in CAS and the comps that folks are anticipating for next year, the concern was, well, how can you grow faster? So maybe there's a few things that are different about the way CAS is growing for Medtronic than, for example, the way CAS grew for Boston. And I think it has to do with the sort of account wins on the mapping side as well as on the catheter side. So maybe talk about like how has that been, how has that maybe tempered your growth as strong as it's been? And how does that sort of help you drive more sustainable high growth over the next 12, 18 months?

Look, we're -- so first of all, we're the fastest-growing franchise in this incredibly attractive market. And so we're thrilled with that. It's a fantastic franchise. It's dilutive at gross margin, but it's super accretive at the operating margin level. So we're happy with it. I think what puts us in a different spot is kind of the product portfolio that we've got. We've got PulseSelect single shot, very competitive product. Then we've got Sphere-9. The big advantage of Sphere-9 is that it's dual energy. So it's RF and PFA, and it includes the mapping. So for a physician, you don't know how all of the procedure is going to go when you started. So having a catheter that enables you to do the mapping, to do the PFA, but also to do some RF if you need to in the procedure is a big differentiator. The alternative is to do the mapping with one catheter, pull it out, do a PFA ablation. And then if that's not sufficient, put it out again and put a third catheter. So it's not great, it's not as good for the patient. It's not as good for the hospital economics because it's more expensive. It's not as good from a procedure time perspective. And our data says that in the case of Sphere 9, 50% to 60% of the cases that are being done are dual energy. So the physician is having to use both PFA and RF. So it's just a massive differentiator. And originally, we got some comments on, is this a niche product for high-end procedures. And clearly, the experience of the physicians is that it's not. It's a workhorse that you use when you don't know what the outcome of the procedure is going to be. And then on top of that, we're about to -- we've just received CE Mark for Sphere-360, which is the next-generation single shot. It reduces significantly the procedure time even versus Sphere-9. We started the clinical trials in the U.S. So we should be able to commercialize that product in about 18 months from now. We're continuing to expand the usage of Sphere-9. We're launching it in Japan. We're looking at expanding indications to VT. So we're in absolute sort of growth mode for this business. And we're really -- we really feel like we're at the beginning of the growth for this franchise. So we're super excited about the perspective. And clearly, our ambition is to take the lead in this market. And in the third quarter alone, we took 4 points of market share. So we're super excited about the franchise.

Okay. No, it's been a huge, huge win and -- but still constrained. So maybe talk a little bit about some of -- what are the -- not to make a big sort of negative point about it, but the reality is there are some hoops and hurdles that you need to go through to get a new center up and running, let's say, just using another catheter on a biosensor and Abbott system don't face. So maybe talk a little bit about.

Yes. So first, at the beginning, the bottleneck was supply chain and was the production of the catheters. It's 100% fixed. We have ample capacity to respond to the demand. The second, I would say, topic that you need to address is the mappers because you have a mapper that's physically present during the procedures. And since we're growing very, very fast, we're having to hire a lot of mappers. And a large number of those mappers require training. Typically, it takes a few months before they're fully operational on our products. But again, there, we're on track. So we've hired hundreds of mappers since -- over the last couple of years, I would say, but most importantly, in fiscal year '26, and we'll continue to do that. And so we're in a position to continue to grow the franchise. Now if you look at the market, today, about 70% of our revenue is coming from 30% of the centers, which are the big established centers. And we feel like we still have a large opportunity to grow in these large centers. Because typically, they have one piece of equipment today, and they're looking to add the second one and the third one. So there's still significant opportunity to grow with the large centers. But now we're starting to look at smaller accounts as well. And so again, large opportunity to continue to grow from a commercial perspective. And even in the ASCs, which it will take time, but it will, I think, become a larger portion of the market over time. We've got a perfect catheter for them, which is PulseSelect with great economics. So I think that the product range that we've got with Sphere-9 and PulseSelect today and shortly with 360 really puts us in a position where we can address the different parts of the market.

So we could spend another hour talking about cast, but we don't have another hour. But just lastly, on mappers. I think investors and we sometimes think about this as, okay, so it's hard to hire experienced mappers. Some of your competitors are doing their best to lock down those resources and retain them. But I would imagine and what we've gathered is like the ability to hire isn't a constant. It's changed, right, over time, just as Medtronic has gotten recognition for the success and the adoption and the growth in Affera has recognized in the community. So maybe talk a little bit about is the ability to -- for people looking to join this team improving?

Yes. Look, if you're a mapper, you want to go where there's business. So your salary is going to depend on the number of procedures that you're able to carry out on a weekly basis, et cetera. So right now, the mappers to want to come to Medtronic. And we know the competition is trying to do retention, et cetera. But look, we're on track. For sure, the mix between experienced mappers and less experienced mappers is gradually going to shift. And we've incorporated that in the way we do the training and the way we do the onboarding. So we pair the less experienced mappers with the more experienced ones, et cetera. But whereas it's an important topic and the team is very focused on it, we don't see this as a roadblock going forward.

Okay. Just a quick one on really important programs, Hugo and RDN in a couple of minutes we have left. So there's different opinions on both. Maybe talk about maybe most importantly, when and how will investors begin to see the sort of the positive benefits either to growth or to size or however you're going to be able to communicate about those businesses? Is that in calendar '27, we'll be talking about those? Maybe color on when we start to see them moving.

Yes. So Ardian, short answer is yes, there will be impact on '27. I think it's relatively limited still for Q4. So we're not reliant on a large pickup for Ardian in the fourth quarter of this year, but it will start having an impact in fiscal year '27. Look, it's a huge opportunity. Even yesterday at CRT, I think a lot of you might have seen the comments from the physicians everyone is super optimistic about the number of cases building. But it's a new franchise. So you need to set up the hypertension centers. You need to sort of build the referral pathways between the consumers that want to undergo the procedures and where the physicians actually are. One of the hurdles is getting through the first reimbursement. So what we're seeing is when a physician has done successfully a case and gotten the reimbursement, then the second one and the third one tend to come quicker. And we're going through that buildup. And look, it's -- again, it's an 18 million patient pool. So 1% of that multiplied by the price of the catheter, which is around $15,000 or $16,000 is a very significant opportunity for us. It's a good margin business. So it's a great franchise. And again, you'll start seeing the impact going into fiscal year '27. Hugo, look, we just got the FDA approval in the U.S. last -- at the end of last quarter. The U.S. is 90% of the global market. So it's a massive open door for us now. We did the first procedures at Cleveland just before the earnings and the way the product is received is very positive. There's someone else in that market now.

Noticed.

If someone has approval and can start selling an alternative. So we're looking forward to it. I will say, though, that it's a huge opportunity for us. So we want to get it right. So the first -- the approach is really to select the right customers, do the installation and the setup of the system in an optimal fashion so that there's perfect sort of customer satisfaction. Our goal is to be the only OEM that can do open surgery, laparoscopic and robotic surgery. It's super important for our customers because they want to have that full solution. And now we're able to do it. And so we're in setup mode and starting to do the first installations. We'll take our time, but it's a big opportunity.

Okay. And the compulsion is, of course, to count boxes and talk about systems and things like that. But is the right way to think about this as entering a segment, entering an indication, if you will, within surgery that's going to show up as improvements in the overall Advanced Surgery business. Is that the right way?

It will help for sure, especially as we expand the indications. So today, it's mostly urology. We'll go to gyne and then we'll go to hernia and then general surgery. And our goal is to improve the coverage with these key accounts. And as this happens, you'll start seeing the effect in the financials.

Exciting times.

It is. Yes.

Well, thanks so much for taking the time.

Thank you. Appreciate it.

I'll leave it there.

Thanks very much.

Thank you.