Medtronic plc

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Medtronic third quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the conference over to Ryan Weisfenning. Sir, you may begin.

Thank you. Good morning and welcome to Medtronic's third quarter conference call and webcast. During the next hour, Omar Ishraq, Medtronic Chairman and Chief Executive Officer, and Karen Parkhill, Medtronic Chief Financial Officer, will provide comments on the results of our third quarter, which ended on January 25, 2019. After our prepared remarks, we will be happy to take your questions. First, a few logistical comments. Earlier this morning, we issued a press release containing our financial statements and a revenue by division summary. We also issued an earnings presentation that provides additional details on our performance and outlook. During today's earnings call, many of the statements made may be considered forward-looking statements, and actual results may differ materially from those projected in any forward-looking statement. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports and other filings that we make with the SEC, and we do not undertake to update any forward-looking statement. In addition, the reconciliations of any non-GAAP financial measures are available on our website, investorrelations.medtronic.com. Unless we say otherwise, references to quarterly revenue growth rates and ranges are given on an organic basis. which exclude the impact of any material acquisitions, divestitures, and foreign currency, and are in comparison to the third quarter of fiscal year 2018. All of these adjustment details can be found in the reconciliation tables included in our earnings press release. Finally, our EPS guidance does not include any charges or gains that would be reported as non-GAAP adjustments to earnings during the fiscal year. With that, I am now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Omar Ishraq.

Thank you, Ryan, and thank you to everyone for joining us. This morning, we reported another quarter of solid top and bottom line performance. Revenue grew 4.4% organic, reflecting the benefits of our diversified model. We leveraged our top line to grow adjusted operating profits 7.7% and adjusted diluted EPS 10.3%, or 8.5% at constant currency. Execution is our top priority, and in Q3 we executed on multiple fronts to deliver a strong quarter, despite difficult comparisons we were facing in the back half of our fiscal year. Revenue outperformance in MITG and RTG, driven by a number of recent product launches, offset the challenges in CVG that we talked about in January. The other big driver was emerging markets, which grew 14%, reflecting a strong quarter across all businesses and geographies. Down the P&L, we saw the benefits this quarter from our focus throughout the organization on margin improvement, resulting in 140 basis points of operating margin expansion, including a benefit from currency. We continue to execute on free cash flow, working to improve our cash conversion and ultimately drive greater shareholder value. Through the first three quarters of the year, we generated over $4.1 billion of free cash flow, compared to $2.9 billion in the prior year. We've made significant progress on this front, and I really appreciate the engagement of the entire Medtronic team. Overall, it was another good quarter for Medtronic. But what continues to be even more exciting than our results is the progress we're making in our pipeline. As I commented last quarter, We believe we have more opportunities for growth than at any time in our company's history. I'll come back to the pipeline shortly, but first let's review our performance this quarter in a little more detail. I'll start with our minimally invasive therapies group. MITG had an outstanding quarter, growing 6.6% with outperformance in both SI and RGR divisions. Our surgical innovations division grew 6.4%. with strong growth in both advanced energy and advanced stapling. Advanced energy products grew in the low double digits, driven by the adoption of enhanced ligature vessel sealing instruments and the Valley Lab FT10 energy platform. In advanced stapling, we grew in the high single digits as our tri-staple 2.0 endo-stapling reloads and Signia surgical stapling system continue to perform well in the minimally invasive surgery market. Our respiratory, GI, and renal division grew 7%, with strong results across all businesses. GI grew mid-single digits, led by strength in beacon endoscopic ultrasound products and Bravo reflux testing systems. Respiratory had high single-digit growth, driven by Puritan Bennett 980 ventilators and Nelcor pulse oximetry products. Renal care grew in the mid-teens, with solid sales of Belco and Renal Access products. Next, our restorative therapies group had another strong quarter, growing 5.5%, driven by sustained momentum in the brain therapies division. Brain grew 13.2%, with high teens growth in both neurovascular and neurosurgery. In neurovascular, we're seeing broad strength across our stroke franchise, with double-digit growth in stent retrievers, flow diverters, neuroaccess, and embolic products. In neurosurgery, we delivered high 30s growth in capital equipment driven by our stealth station navigation, ORM imaging, Mesora Robotics, and Midas Rex powered surgical systems. We launched our Mesora X Stealth Edition robotic guidance platform last month, and we've received early enthusiastic feedback for this combination of best-in-class robotics and navigation capabilities. We believe our strong capital equipment sales supporting our brain therapies growth are a leading indicator for future growth in our spine business as customers choose to link future spine implant purchases with the capital equipment that they're acquiring. As we execute more of these contracts, we would expect our core spine implant sales to grow over the coming quarters. In our spine division, while results were flat this quarter, when combined with sales of our capital equipment used in spine surgery, which is the way many of our competitors report their results. Our spine division grew 4.6%, including 5.4% growth in U.S. core spine. In pain therapies, our performance was driven by high single-digit growth in spinal cord stim. As the market continues to appreciate the differentiation of INTELLIS with its evolved workflow algorithm and snapshot reporting. Our diabetes group grew 6.5% this quarter. As expected, this group is facing difficult year-over-year comparisons in U.S. pump sales in the back half of this fiscal year. Despite this, we grew 5% sequentially from Q2, including high single-digit sequential growth in insulin pumps specifically. Our performance outside the U.S. was especially in Europe, Latin America, and China, growing 25%, 17%, and 16% respectively. CGM as a category grew over 30% this quarter, with over 60% growth in Western Europe. Our recently launched standalone CGM system, the Guardian Connect, posted its third consecutive quarter of triple-digit growth. Our cardiac and vascular group grew 1.6% this quarter, in line with the revised forecast we provided in early January, with mid-single-digit growth in both CSH and APV divisions. Coronary and structural heart had another strong quarter in transcatheter valves, with 16% TAVR growth in the U.S. and 15% in international markets. We're seeing solid momentum in share gains in the U.S. and in other global markets because of the clinical performance characteristics of our Evolute Pro valve, and we're the market leader in many regions around the world, including Western Europe. In aortic, peripheral, and venous, growth was driven by the continued launch of the valiant Navion thoracic stem graft system, as well as mid-teens growth in both venous seal vein closure systems and impact admiral drug-coated balloons. In cardiac rhythm and heart failure, we had mid-single digit growth in pacemakers and the strength of our microtranscatheter pacing system and Azure wireless pacemaker. This was offset by mid-teens declines in heart failure, primarily due to a mid-40s decline in LVADs as a result of market share loss and heart transplant guideline changes. AF Solutions grew in the mid-teens, driven by continued growth in cryo balloons. We also announced the acquisition of Epix Therapeutics. Epix is developing what we believe is a highly differentiated technology for the over $3 billion focal catheter segment of the ablation market. When combined with our leading cryo balloon technology, Epix provides us with a complete portfolio of best-in-class AS ablation catheter technology. It's worth noting that CVG services and solutions faced a number of comparison headwinds, including a revenue recognition change that started in the second quarter, a large order from the U.S. Department of Veterans Affairs in the Q3 of last year, and the exit of a product line in Q1 this fiscal year. Excluding services and solutions, CVG's growth would have been 110 basis points higher, and CRHS growth would have been 180 basis points higher. Now, turning to emerging markets. Our performance continues to be strong, growing 14% this quarter, and now representing 16% of Medtronic revenue. Our strength has diversified across multiple geographies, with China growing 13%, South Asia by 23%, and the Middle East and Africa by 20%. In addition, Eastern Europe grew 12%, Southeast Asia 11%, and Latin America 9%. Our differentiated strategies of public and private partnerships and optimizing the distribution channel are paying off and making a real difference in emerging markets around the world. In addition to our solid performance in the quarter, I remain excited about the unprecedented opportunities for growth that our pipeline presents. We're building upon leadership positions in several of the fastest growing markets in medtech by intentionally allocating our capital to high growth markets and new opportunities. As we invest in these opportunities, we're doing much more than simply improving today's products and therapies. We're disrupting existing markets and inventing new ones. And when we do this, When we successfully disrupt and invent markets, we distance ourselves from the competition and raise our weighted average market growth rate. All of this creates significant value for patients, for physicians, for healthcare systems, and for our shareholders. It's worth highlighting some of the most exciting elements of our pipeline that we expect to bring to market in the near future. In RTG, as I mentioned earlier, we're just launching the Mazor X Stealth, our integrated robotics and navigation platform, which we expect to drive growth in our neurosurgery business, along with creating demand for our core spine implants. In neurovascular, we're now in limited market release of our 071 React catheter and continuing the launch of our Riptide Aspiration System. We expect to launch our next-generation solitaire stent for ischemic stroke by the end of FY19. In FY20, We intend to launch our DBS primary cell device with unique sensing capabilities, the first of a series of disruptive product launches planned in our DBS business. In CVG, we're awaiting the presentation of two landmark clinical trials at the American College of Cardiology meeting on March 17th. The first is the interim results of our low-risk TAVR study, which has the potential to expand indications for our transcatheter valve therapy to the largest segment of the market. The second is the results of the rapid trial of our Tyrex antibacterial envelope, which could enable guideline changes in cardiac rhythm implantables. In FY20, we're expecting to launch our next generation TAVR valve, the Evolut Pro Plus, which features a lower profile and improved predictability of placement for enhanced ease of use. We also expect to launch our next generation insertable cardiac monitor, the RevealLink 2.0. which will include Bluetooth connectivity, five-year battery longevity, and the ability to monitor additional physiological parameters. In the second half of FY20, we're planning to launch new conventional ICD and CRTD product families based on our Polaris high-power technology platform, and we expect to receive a new drug-coated balloon indication in the U.S. for the AV fistula market. Finally, around year-end FY20, We're expecting FDA approval for our micro-AV transcatheter cardiac pacemaker, which would enable us to access and disrupt over 55% of the eligible pacemaker market, up from 16% today. The pipeline at MITG is equally impressive. We're currently expanding into key specialty areas of our tri-staple technology, and we're launching our new micro-stream advanced capnography solutions for the CapnoStream 35 portable respiratory monitor. We're also currently launching a next-generation sonicision ultrasound dissection system. Regarding our robotic-assisted surgery platform, we're hitting key milestones that are on track for an expected launch in FY20. We've had several pre-submission meetings with regulatory bodies around the world, including the US FDA. More than 100 surgeons have used the system and provided us with very positive feedback. We're also partnering with physician societies to develop guidelines for use of the platform. We believe this robotic-assisted surgery platform, combined with our industry-leading surgical instruments and surgeon training centers around the world, will expand the market for minimally invasive surgery. In diabetes, we're continuing the introduction of the 670G into new geographies around the world. In FY20, we expect to launch our advanced hybrid closed-loop system with Bluetooth, which we're calling the MiniMed 780G. The 780G will feature next-generation algorithms designed to improve time and range to over 80% by automating insulin delivery following a snack or a meal. In addition, the system will reduce the burden of carb counting and enable remote monitoring and remote software downloads. We also expect to submit our application for non-adjunctive designation for our Guardian sensor tree in the next few months. So we expect the next five quarters or so to be very exciting as we bring these innovative pipeline products to market. However, I'm equally excited about our longer-term pipeline. In CVG, we're developing several technologies that will create large and important new markets, including the intrepid transcatheter microvalve replacement system and the simplicity spiral renal denervation system for hypertension. We also expect to disrupt existing markets, with our pulse field ablation technology for AF and the extravascular ICD. When launched, all of these new products are expected to create multiple new multibillion-dollar growth opportunities. In RTG, we're developing InterStim Micro, a 3cc sacral nerve microstimulator for bladder control with full-body MRI compatibility. In DBS, we expect to build on our sensing technology to develop a closed-loop deep brain stimulation system. In addition, we're planning to introduce a cranial-mounted DBS system, leveraging our differentiated miniaturization and battery technology. I'm really excited about our plans to disrupt the deep brain stimulation market with a series of new products and make a real impact to patients. In MITG, we continue to develop disruptive products for these markets, too. with our portable hemodialysis system, as well as a next-generation capsule endoscopy product called PulCam Genius. Overall, we expect to launch more than 90 products over the next five years in MITG. In diabetes, I hope you saw our announcement this morning that the FDA has granted breakthrough device designation to our personalized closed-loop system. This system will feature real-time personalized algorithms that are designed to automate insulin delivery in a personalized basis that continuously adapts to the user. The system will also provide insights and predictive diagnostics unique to the individual, all of which will dramatically simplify diabetes management for the patient. In addition to this product, we're also advancing our CGM sensor pipeline by reducing the need for calibration and making the sensors smaller and longer lasting, all while using cognitive computing to enhance personalized insights. Of course, our pipeline is deeper than the few highlights that I've mentioned today. But the key takeaway is that we're executing well on the strongest and most exciting pipeline in Medtronic's near 70-year history. Let me now ask Karen to take you through a discussion of our third quarter financials. Karen.