Medtronic plc

Ladies and gentlemen, thank you for standing by and welcome to the Medtronic Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Ryan Weisfenning, Vice President, Investor Relations. Please go ahead, sir.

Thank you. Good morning and welcome to Medtronic's fiscal year 2020 second 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 second quarter, which ended on October 25, 2019. After our prepared remarks, we'll 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. For this call, unless we say otherwise, rates and ranges are given on a constant currency basis, which compares to the second quarter of fiscal year 2019 after adjusting for foreign currency. References to organic revenue growth exclude the impact of our tightened spine acquisition and currency, Reconciliations of all non-GAAP financial measures can be found in the attachment to our earnings press release or on our website at InvestorRelations.Medtronic.com. 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'm now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Omar Ishraq. Omar?

Thank you, Ryan, and thank you to everyone for joining us. This morning, we reported another quarter of solid results with organic revenue growth and EPS both coming in ahead of street expectations, reflecting our continued focus on executing to our commitments across Medtronic. Q2 revenue grew 4.3% constant currency and 4.1% organic, an acceleration from the first quarter without performances in RTG, MITG, and diabetes. We also delivered another quarter of double-digit growth in emerging markets, Our adjusted operating margin expanded approximately 20 basis points, in line with expectations, and included key investments ahead of several major new product launches. Our enterprise excellence initiatives, where we leverage our size and scale to improve our effectiveness and efficiency, continue to benefit our P&L, particularly on the SG&A line. On the bottom line, our diluted EPS grew 7.4% or 9% at constant currency, despite the headwind and EPS growth from the increase in our non-GAAP nominal tax rate. Overall, our broad-based performance this quarter demonstrates the consistency of our execution, the strength of our innovation, and the benefit of our business and geographic diversification. Let's take a look now at the drivers of our quarterly performance, starting with our restorative therapies group. RTG delivered a particularly impressive performance, boasting 6% organic growth, which was 150 basis points ahead of our expectations. Strong sales in spine and brain therapies more than offset slower growth in pain therapies. Our surgical synergy strategy for spine surgery, which combines the enabling capital equipment in our brain therapies division with the implants in our spine division, is having an exceptional and sustained impact on RTG's growth. Our spine division grew 5.5% organic in the U.S. and 3.5% organic globally. This excludes the early contribution from our Titan spine acquisition, which is off to a good start. Organic revenue growth in spine hit its highest level in two and a half years, with strong double-digit growth in infused bone graft sales, as well as 3% organic core spine growth, both globally and in the U.S. This was driven by our surgical synergy strategy, where surgeon use of our capital equipment, in particular our Mazor robot, is resulting in increased sales of our core spine implants. In fact, when you combine our spine division sales with the sales of our capital equipment from our brain therapies division that are used in spine surgery, which is how our spine competitors report results, our spine division grew a robust 6.7% organic, with our US spine business growing 7.7% organic, well above the market. As I just mentioned, our surgical synergy strategy is also benefiting our brain therapies division. which sells the capital equipment used in spine surgery. Brain therapies delivered another above-market quarter of 11.3% growth. In neurosurgery, we had double-digit growth in all three of our offerings, robotics, navigation, and imaging. Our Midas-Rex powered surgical instruments also grew double digits as we fully launched the new Midas-Rex MRH system in the U.S. during the quarter. In brain therapies, our market-leading neurovascular business also had a very strong quarter with high teens growth reflecting strength in both ischemic and hemorrhagic stroke. Our ischemic stroke business grew in the high 20s on strong adoption of our Solitaire X strength retriever, Riptide aspiration system, and React capitals. In hemorrhagic stroke, we grew low double digits as expanded indications of our pipeline flex floor diversion system continue to drive growth. This was Jeff Martha's last quarter leading RTG before taking over as president of Medtronic earlier this month. Over his four-year tenure, Jeff revitalized the group. He implemented a strong strategy, built a robust management team, and invested in an innovative pipeline. It is also noteworthy that he named his successor from within RTG. Brett Wall has done an outstanding job leading our brain therapies division, and he has played a vital role in the turnaround of RTG. We look forward to his leadership of the group. In the minimally invasive therapies group, we had another very strong quarter, growing 6.1% and ahead of expectations, driven by very good performances in both surgical innovations and RGR. In surgical innovations, we grew mid-single digits in both advanced stapling and advanced energy. Advanced stapling growth was driven by new products in our tri-staple line, including our EEA circular stapler and tri-staple 2.0 reloads. Advanced energy growth benefited from continuous innovation in our Ligasure franchise, including our Ligasure Xacti sector. Respiratory GI and renal delivered another exceptional quarter, growing 6.1%. The GI solutions business grew high single digits. led by strong sales of Bravo calibration-free reflux systems, endoflip imaging systems, and pill cam systems. Respiratory and patient monitoring also grew high single digits on strength and null-core pulse oximetry, microstream cryptography and BIS brain monitoring consumables, Puritan Bennett 980 ventilators, and McGrath video laryngoscopes. In our cardiac and vascular group, we grew 1.3% this quarter, which was in line with our expectations. CVG has gone through a series of below-trend quarters, which we believe are coming to an end. CVG's growth this quarter reflects the challenges of the last few quarters in LVADs and DCBs, as well as the sustained headwind and CRM replacement devices, given the longer-life batteries we launched several years ago. In addition, during the quarter, we implemented a number of changes to our manufacturing processes for our Tirex product line, which temporarily limited supply and affected our revenue growth in CRHF high power. We're seeing clear signs of overcoming these headwinds. U.S. DCBs and LVADs both grew in the teens quarter over quarter. We have now passed the one-year anniversary of the step-down in LVADs, and we expect to anniversary the DCB challenges in March. With our CRM replacement devices, both pacemakers and CRTD replacement implants grew sequentially for the first time in several years. We expect CRM replacement devices to be a net neutral impact to CRHF growth next fiscal year after several years of being a headwind to growth. Regarding Tirex, we launched our new manufacturing process late last month and expect production volumes in Q3 to return to normal levels. Despite these areas of pressure on CVG growth, we're seeing strong performance in other CVG businesses, including pacing and TAVR, which combined represent over 25% of CVG revenue. Our pacing business grew mid-single digits globally and high single digits in the U.S. as our micro-single-chamber transcatheter pacing system Beyond Micra, our global pacemaker share is benefiting from unique feature differentiation in our conventional pacemakers, including our reactive ATP feature, which resulted in differential reimbursement in Japan, as well as the increasing popularity of his bundle and left bundle branch spacing, where Medtronic offers unique lead and lead delivery products that enable such procedures. In our TAVR business, we grew in the low 20s, with mid-20s growth in the U.S., Driven by expansion into the low-risk patient population, we launched our Evolute Probe Plus TAVR system in the U.S. late in the quarter, and this drove some of the highest procedural implant volumes that we have ever had in the final two weeks of the quarter. We see an accelerating growth profile for CVG over the back half of our fiscal year, with the anniversary of the LVAD challenges, improving sequential growth in DCBs, improvements in pacemaker and CRTD replacement volumes, and the benefit of multiple important new product launches. In diabetes, we grew 4.3%, slightly ahead of our expectations. Our U.S. business declined in the high single digits. which is anticipated and resulted from competitive challenges while we await our new products. At the same time, our international business, which represents just under half of our diabetes revenue, grew 19%. The Minimed 670G, which drove strong growth in the U.S. last year, is experiencing that same strong consumer demand as we launch and receive reimbursement in select international markets. This demand is not only driving double-digit growth in insulin pumps, but it is also resulting in double-digit growth and recurring revenue from CGM and other consumables. Late last month, we announced that Sean Salmon, who has successfully led our coronary and structural heart division, is taking over leadership of the diabetes group. Sean has an excellent track record in developing and executing competitive business strategies, including the successful launches of several important new technologies for Medtronic. Sean is actively engaged, and we look forward to the impact that he will make on the business. Now, turning to emerging markets, which represent 16% of our revenue. In Q2, we grew emerging markets 12%, with contributions from geographies around the globe. China grew 13%, South Asia grew 14%, as did Eastern Europe, which included 20% growth in Russia. In addition, Southeast Asia grew 12%, the Middle East and Africa 10%, and We continue to drive strong growth in these markets as we optimize the distribution channel and in certain markets, localize R&D and manufacturing. In addition, the diversified growth in markets around the world is important. We believe the geographic breadth of our business and the rapid expansion of healthcare across these markets typically insulates us from country-specific economic cycles. As a result, we expect continued and consistent double-digit growth in emerging markets. The first half of this fiscal year has gone well, as we've executed to our commitments and delivered better-than-expected results. Now, as we look forward, we're even more excited about what lies ahead, as investments we've made in our pipeline begin to pay off by accelerating our revenue growth and creating value for our shareholders. In CVG, as I mentioned earlier, we just launched our next-generation Evolute Pro Plus TAVR Valve. and we expect to see a full quarter's contribution starting in Q3. In addition, we're expecting imminent U.S. approval for our Impact Admiral AV fistular indication. As we look to the fourth quarter and into the start of fiscal 21, we're anticipating U.S. approval and launch of our micro-AV pacemaker, our next-generation cobalt and chrome families of ICDs and CRTDs, and our RevealLink 2.0 insertable cardiac monitor. Outside the U.S., we're also expecting multiple new product introductions, including the European launch of our Diamond Temp ablation catheter and Japanese approvals for our Valiant Navion thoracic stun graft, our Perceptor Quad CRTP family, and the Tain Stability Quad Active Fixation CRT pacing lead. In MITG, as we discussed in September during our event in Hartford, We're starting the global launch sequence of our soft tissue robotic system, with first in human use and commercial sales commencing later this fiscal year. Next fiscal year, we plan to submit for CE mark in Q1, as well as submit for US IDE approval in the first half, which, when approved, will allow for system placements and surgeon training so we can begin gathering clinical data in the United States. In RTG, as I mentioned earlier, the Midas Rex MRA drill platform is being launched now in the U.S. and will be introduced to international markets in the back half of this fiscal year. We're also planning to launch our Stealth AutoGuide cranial robotic system in Q3. In pelvic health, we filed our PMA supplement with the US FDA last month for our InterStem SureScan MRI leads and our InterStem Micro with MRI, which is 3cc in volume and rechargeable. In ENT, we're preparing for a fiscal year-end launch of our next-generation intraoperative nerve monitoring system, NIMVITAL. In pain therapies, we plan to unveil our next-generation spinal cord stimulator at the NANS conference in January. In diabetes, we continue to prepare for the launch of the Minimet 780G, our advanced hybrid closed-loop system with Bluetooth connectivity. We expect our 780G pivotal data to be presented at the ATTD conference in February. Earlier this month, to bridge the time before our next-generation technology is available in the U.S., we put in place a Next Tech Pathway program, which allows customers who are out of warranty or new to pump therapy to purchase a Minimet 670G while accessing our next-generation pump technology at no additional cost when it becomes available. These are some of the highlights from our pipeline. There are, of course, several more product launches that we're preparing for across the company. in building out a robust, long-term pipeline of continuous innovation, invention, and disruption. As I've noted before, we expect our growth rate to accelerate, with the second half of FY20 growing faster than the first as we anniversary recent headwinds and launch multiple new products. And in FY21, we expect our top-line momentum to accelerate, as we get the increasing benefit of the FY20 product launches, as well as the products slated to launch next fiscal year. With that, let me now ask Karen to take you through a discussion of our second quarter financials. Karen?