Medtronic plc (MDT) Earnings Call Transcript & Summary

The clock started ticking down. So I think that means this time, too. I get started. Thank you very much for joining us with Medtronic today, the CFO, Thierry Pieton, I appreciate the time. This is Peter Harrison from Morgan Stanley's Investor Banking Group. Maybe real quickly, why don't you -- you've been with the firm a little over a year, I guess, now maybe real quickly a little bit of your background and what attracted you to Medtronic and let's jump straight in.

Sure. First, thanks for having me, and thanks, everyone, for being there. Yes, so I've been with Medtronic for 1.5 years, attracted by many things. First of all, the sector. So I had begin my career with GE Healthcare. So I've always kind of wanted to come back to med tech at one point, not the mission that Medtronic drives. I thought I could bring something from my automotive background as well to help improve the business. And as usual, when you're picking a new company to work for, a lot of it was just the interactions with the people with the CEO, Jeff, with some of the presidents of our other portfolios, et cetera. So felt like a great fit. And it's been 1.5 years, and it's been an absolute honor and privilege.

Great. And it's been a bit of a volatile year for med tech. And so one thing that came across in the second quarter earnings were ACA subsidies, impact of procedures, capital equipment, cuts and spending. How are you thinking about that impact? And what are you seeing at Medtronic.

Yes, we get that question at all. I think our portfolio is maybe a little different from some other meter companies in the sense that we tend to focus on acute procedures. So typically, if you have a stroke or if you have arrhythmia with your heart or you need a [ valve ] replacement, you have to get it done, right? It's not an elective procedure. So what we're seeing is the strength of the procedure volume has actually been really good. And you could see it in the numbers in the first quarter. Our biggest franchises, cardiac rhythm management, surgical, spine, they've all been performing very well. If you look at our sort of revenue mix, about 2/3 of it is Medicare. Another 1/4 is sort of private payers and Medicaid is -- Medicaid is about 10%. And ACA for us is less than 1% of our global revenue. So it kind of shows you the mix that we've got. Look, overall procedure strength has been good. And I would say one thing that is interesting, our free cash flow performance was really good in Q1. And part of it was accounts receivable. So we're actually going to -- we're getting paid well, both in the U.S., even in some typically challenging geographies in Southern Europe, et cetera, where it's always hard to collect the cash. Q1 was very strong. So I think we see a lot of underlying strength generally speaking.

Great. That's good to hear. And the other macro trend, obviously, a word we're hearing a lot of AI. How -- that's on everyone's mind right now, and it's transforming many industries. How is it impacting Medtronic and med tech or hospital spending or whatever it might be in your view?

Yes. So for us, there's really 2 big things. One is in the product part of our business and one is sort of efficiency early. If you take the product part, AI just gives us an opportunity to improve the procedure workflow, make the results better for the physicians, provide a better service for the hospital, improve the outcomes. I'll give you an example, right? We've got AI attached to one of our endoscopes GI Genius. And the result is that through a typical endoscopy procedure, the AI detects 50% more polyps than a trained physician would with an naked eye. So it's great for the patient because you get a better outcome. It's also great for the hospital because maybe you can have a slightly less skilled physician doing that operation, right, because the system is going to help. Another example would be, in some of our spine procedures, the AI can help you do pre-op planning. So map how you're going to do the procedure, help you through the navigation during the procedure. And at the end of the procedure, give you feedback on what you did differently, better, what took more time and so keep [indiscernible] improving the way you actually do it. So if you think from the patient, from the physicians, from the hospital, there's a lot of benefit. So for us, we're in a great position to kind of integrate the new capabilities into the products. And then there's obviously the internal efficiency part of AI. The obvious stuff is for back office, like I run finance, and we have more and more operations that are being digitized such as accounts receivable collections, et cetera. In R&D, we're increasing the amount of software development that's done through AI directly. So it just speeds up the way the company works and we get efficiency out of it.

On the product side of the ledger for AI, are you able to get -- to monetize that? Or is it just kind of bell to whistle to sell the product?

Yes. So if you take the spine example that I was giving you, right? So the basic product used to be implant, right? So you'd have a problem, you'd go in, you'd have an operation, you get an implant. So a very competitive I don't want to say low tech, but almost low tech type of product. Now with the fact that we've got the full stealth access solution, preop, intraop, post-op with the navigation, the imaging, the robotics during the procedure, et cetera. It's made the implants a lot more sticky with the customers, right? They want to get stuff access because they know they're going to get a better outcome. The physician knows his mental load is going to be reduced by the AI. He knows he's going to get the assistance from a robotics perspective. So that can be monetized, right? It's maybe in [ Plantic ] here, and it's enabled us to protect the pricing.

Great. And look, we've seen -- in my mind, you've seen Medtronic really pivot its growth right and that was just demonstrated pretty robustly in the strong fiscal year Q1 results. What do you think has driven this strength? And do you think the new kind of growth rate you guys are at is sustainable into the near medium term?

Yes. So look, I mean, I think it's always a combination of things, and it's not overnight. So you've seen our growth rate sort of steadily increase from 4.5% to sort of 7%, excluding the impact of the extra week that we had in Q1, and it's a combination of things. A lot of them is around obviously innovation, right? And so we've got these 4 big generational growth areas that are driving a significant portion of the top line, project [ ablation ] with Affera simplicity, our renal renovation hypertension procedure, Hugo in robotics and Altaviva in Pelvic Health. These are all at different stages of development that I'm sure we'll talk about them. So they're driving a portion of the growth. But the teams have been driven driving innovation in sort of the more, I would call, traditional or historical parts of our portfolio. So if you look at cardiac rhythm management, which is basically what was at the start of Medtronic, right, with a pacemaker, that business had 15% growth in the first quarter. And it's really through innovation. It's CSP with high power and low power with products like OmniaSecure and our 3830 lead. It's been EV-ICDs. It's been leadless pacemakers like micro. Micro is almost a decade old now, but it's still growing high double digits. And so it's really continuing to transform a franchise that has been around for a long time, but through innovation. A lot of our competitors have seen cardiac rhythm management as sort of a low single-digit growth type of franchise. And we don't see it that way. We've continued to innovate there, and it's driving the penetration. In the neuroscience portfolio, I talked about spine and the impact of Stealth Access. In the other franchise, we've got meaningful innovation in every single one of the subdivisions like in Neurovascular, we've got RTs, we've got Onyx, which is an MMAe product. We've got Scientia that is a recent acquisition, in our E&E business, we've got Stealth Access, so the full solution applied to the ENT business. In Pelvic Health, we've got Altaviva. So every single key operations that we've got has meaningful sort of innovation going on for it. We measure what we call the vitality index, which is the proportion of our revenue that's generated by products that were launched in the last 3 years, and we used to be in the teens. And now we're kind of in the low to mid-20s, right? And that's going to continue to go up, and that's really key because that's where the growth comes from. And it's also obviously good news from a pricing perspective as innovation come out in [indiscernible].

And how do you get conviction this innovation cycle that you're taking advantage of now continues into the future? Because you do have general products right now. How do you ensure you have a generational product in 3, 4 years?

Yes. So the first thing is the base franchise is right, our bread and butter business, so CRM, Project Rhythm Management, Cranial & Spinal Technologies and surgical are [ humming the well ]. So those are stable. They're continuing to grow with innovation. On top of that, we've got these 4 big drivers, and they're all at different stages. So cardiac ablation is the most advanced one. It just lapped $2 billion trailing 12 months revenue in the first quarter, ahead of our expectations. And we know that's going to continue to grow in the coming years for several reasons. Behind that, we've got the hypertension procedure, which is really still at its infancy, right? But it's a 15 million patient pool with a $16,000 procedure. So sort of 1% of that pool is north of $1 billion. And it's really in its infancy, it lapped $100 million of of turnover in Q4 of last year. Altaviva is probably just behind it. So Altaviva is the urinary incontinence procedure. It's a small implant in the ankle, and it -- it treats people who have overactive bladder. And so they can do that instead of getting BOTOX injections and more heavy procedures. And it's, again, the 15 million potential patients, 5 million of which are actively seeking treatment. At another sort of $15,000 to $16,000 procedure. So you can see how much that represents. And then we've got Hugo in robotic surgery, which is a massively growing franchise for us. And so the good news is the base is strong and accelerating. And these 4 generational growth drivers are kind of in rapid succession. And each one, very material.

Okay. Great. And look, you talked a little bit about it, but CAS continues to be a bright spot in the portfolio. Is this level of growth you're seeing sustainable? I mean we talked about the technology innovation, but other factors that will continue to drive this growth?

Yes. So look, first of all, it's a growing market, right? So it's a market that grew 14%, 15% in the first quarter. It's an under penetrated therapy. So the good news is the pie is expanding. But we're taking leadership there. So we grew 88% in the first quarter and that franchise. Obviously, the comps are going to get more and more difficult, but we see the growth continuing for many reasons. One, commercially, we're still only targeting the large accounts in the U.S., so they're kind of accounts that account for 70% of the revenue. We're only at about half of them. And even in that half, they want more mapping systems. So we're really at the beginning. We're expanding geographically. So we launched our key products per 9 in Japan at the end of last year. So it's starting to grow there. We're expanding in new indications. So we expanded ventricular tachycardia in Q4, that's another $1 billion opportunity for us, and it's growing quickly. We've invested in ICE catheters for imaging. That's another $1 billion opportunity. And we've got a new catheter called Sphere-360, very efficient catheter for simple procedures coming in the U.S. that's going through the approval process. So commercial products, ecosystem and sort of our indications, we still have a lot of runway ahead of us. So look, it's -- we feel like it's got opportunity for growth. Our ambition there is take leadership. And to give you maybe one stat, the installed base of mapping systems grew 40% in Q4 and 35% in Q1 sequentially and that's future pull-through of catheters, right? So it's a great indication of of where the business is going in the midterm.

Great. Obviously, you just announced a major investment in a soft tissue robot in China. You talked to Hugo as one of those 4 growth drivers. How do you think about the tie-in with Hugo, how Cornerstone Robotics ties into Hugo and why this company?

So look, first, if you take a step back from a macro perspective, the surgical business is our biggest business in the portfolio. And we're one of the leaders of open surgery and laparoscopic surgery. Typically, if you're a hospital today, you really have 1 or 2 partners. It's either J&J or Medtronic, right? So we have a big surgical portfolio. Within surgery, the part that's growing the most is robotically-assisted surgery. So it's vastly underpenetrated, 5% globally today. It's growing very, very quickly. So for us, we want to take leadership in that area, too, right? And so for us, it's -- we have a successful robot now with Hugo. It's been successful outside of the U.S., got approval from the FDA end of last year in the U.S. and it's ramping up. But what we've discovered is customers in this vastly growing field, they want choices. Some of them want modular form factor. Some of them want a boom design. Some of them want an open visualization, some others want [indiscernible]. So it's become clear to us that you need to offer choice and access to customers. So the investment in cornerstone is about finding a partner who can accelerate being able to provide that choice to our customers, right? And so we went out and we considered doing it organically, and we looked at potential partners out there. And with Cornerstone, we found someone who has great tech, so great visualization, great instruments. So they have and 8- and 5-millimeter rifted instruments on the arms of the robot, which is quite rare actually in the sector today. They have a very vertically integrated offering. They have approval in China, [ CE Mark ] and in Singapore, so they can commercialize in 50 countries. They have a great leadership team. All people trained in the U.S., Hopkins and MIT doctors and et cetera. And so a great fit with Medtronic. We have the capability to help them with the distribution. They have the capability to offer this choice to our customers. So we're super excited. This is about us going on offense in this high-growth sector and just being on top of it. So we made a large investment. It gives us optionality for the future, right? We like making investment first and then learning how the company works and seeing if we can do more. So potentially, we'll do more in the future. But yes, it's a great development and we're exciting to see how that moves forward.

Great. That's very exciting. If I think back the last couple of years sitting here with you or Jeff or whomever, Structural Heart was always one of the products featured in this innovation cycle of Medtronic, and that's kind of stepped away a bit. What is the plan for this business? And what does the path forward look like for spinal heart now?

Okay. I mean it's -- first of all, it's a segment that's growing, right, as a market, and it's a highly profitable one. And it's one where Medtronic has a strong sort of second position. And so it's an important franchise for us, and we want to invest in it. And so -- you saw us invest in a tariff, which is our [ balloon expandable valve ] a few months ago. We just announced an investment in a company called Pi-Cardia that does leaflet modification that can be very useful in kind of TAVR/TAVI type of procedures. So we're going to fence on the inorganic side. We're also investing in mitral and tricuspid programs organically. So we're in no fines. So it's probably going to take a couple of years before we get back to the type of growth rates that we're aiming for, but we're going back in defense in this segment for sure.

Before we pivot away from financial results, one last question. Neuroscience was, I guess, I'd say, a laggard in the last quarter with 3% growth. What do you think that looks like in the future? And where does it go from here?

Yes. I think, as I said, we've had a lot of product releases in every segment of neuroscience. Spine did very well with Stealth Access. Some of the other segments were a little bit slower in the first quarter. I think you're going to see acceleration in particular, in the second half of this year. Neurovascular has a fantastic product pipeline. We've made a couple of acquisitions. These will be inorganic for 12 months, and then they'll kick into the organic growth after 12 months, and we look forward to that. All of these acquisitions that we've made, we've made them in areas where the CAGR is sort of north of 20%. So they will accelerate our [ WAMGR ]. And so look, again, intra secular device RTs and neurovascular, Onyx, which is MMA, new regard for carotid Scientia acquisition. In the neuromodulation portfolio we made the acquisition of SPR and made an acquisition in [ BDNA ] and peripheral nerve stimulation. So -- and then in Pelvic Health, you already for the acceleration of the first quarter Pelvic Health, thanks to Altaviva was up 15%. So that's headed in the right direction. So we see that business accelerating in particular, towards the second half of the year.

Okay. Great. Yes. One theme we've continued to see in med tech is separations or portfolio rationalization. I'd say in contrast to many of the companies I cover, you actually spun out or separated one of your fastest-growing businesses. How do you think about separating that versus slower growth? And why did you choose menu med for that transaction?