Medtronic plc

Ladies and gentlemen, thank you for standing by and welcome to the Medtronic Third 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 the 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 zero. I would now like to hand the conference over to Ryan Weissmaning, Vice President, Head of Investor Relations. Please go ahead, sir.

Thank you. Good morning and welcome to Medtronic's fiscal year 2020 third quarter conference call and webcast. During the next hour, Omar Ishraq, Medtronic Chairman and Chief Executive Officer, Karen Parkhill, Medtronic Chief Financial Officer, and Jeff Martha, Medtronic President and will provide comments on the results of our third quarter, which ended on January 24, 2020. 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 third quarter of fiscal year 2019, after adjusting for foreign currency. References to organic revenue growth exclude the impact of our tight and 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 results for the third fiscal quarter. Revenue growth was light this quarter, reflecting a series of largely transient issues, which I'll walk you through in a minute. The good news, however, is that this was more than offset by 90 basis points of operating margin expansion, well ahead of our expectations, resulting in strong EPS and free cash flow growth, both ahead of plan. Importantly, despite the top-line shortfall this quarter, our Q4 outlook is unchanged, as we expect significant revenue growth acceleration, excluding any impact from the coronavirus. Q3 revenue grew 2.9% constant currency and 2.6% organic. Revenue growth fell short of our expectations, driven in part by customers curbing their purchasing ahead of our new product launches, principally in CVG and RTG. In MITG, we upgraded the group's ERP system in the U.S. and Canada to our company-wide system, resulting in a temporary slowdown in our ability to supply customers, which in some cases resulted in lost procedures and lasted longer in the quarter than we anticipated. That upgrade is now complete. And as of early this quarter, we're in the process of returning to full supply. All of these items led to our quarterly revenue underperformance. We weren't able to offset these issues, given that many of them emerged late in the quarter. I'm not happy with this top line performance, and we are focused on quickly addressing the dynamics that led to this result. Jeff will provide a little more color on this later on the call. Looking down the P&L, we drove significant operating leverage despite the softer top line. Our adjusted operating margin expanded 90 basis points as we continue to see the benefits of our enterprise excellence initiatives, particularly on the SG&A line. We also had strong financial leverage, driven in part by the debt refinancing that we completed earlier this fiscal year. This resulted in an adjusted EPS of $1.44, which was $0.06 above the midpoint of our guidance and up 11.6% year-over-year. Let's take a look now at the drivers for our group performances, starting with our restorative therapies group, which grew 3.6% organic this quarter. RTG's performance was affected by customer buying patterns in BMP and the continued market slowdown and slight share loss in pain stim ahead of our DTM therapy launch. On an organic basis, our overall spine division was flat this quarter. reflecting customer drawdown of Infuse inventory. Despite this, our core spine business grew 2%, both globally and in the U.S. In addition, when you include sales of enabling technology sold by our brain therapies division, which is how our competitors report, core spine grew 5% organically, both globally and in the U.S., well above market. Our surgical synergy strategy is resulting in increased sales of our core spine implants. driven by surgeons' use of our capital equipment, in particular, our Mazor robot. It is also benefiting our brain therapies division, which sells the capital equipment used in spine surgery. Brain therapies delivered another above-market quarter of 9.2% growth. In neurosurgery, which grew low double digits, we had strong growth in Mazor robotics, where we are meaningfully outpacing the competition, as well as in stealth station navigation, O-arm imaging, and our new Midas-Rex MRH systems. In brain therapies, our market-leading neurovascular business had another strong quarter, with mid-teens growth driven by mid-20s growth in ischemic stroke and strong adoption of our Solitaire X Tent Retriever, Riptide Aspiration System, and React catheters. In pain therapies, the pain stim market had another sluggish quarter, and we had some slight share loss ahead of the launch of the Stimgenics DTM therapy on our Intellis platform. We're excited about the response we've received from physicians and the broader SES community following the acquisition announcement and Stimgenics data presentation last month at NAND, as well as on our nine-year battery warranty on Intelis. We continue to be optimistic about the outlook for the pain stim market and have begun training physicians on the DTM waveform. Our minimally invasive therapies group grew 3.2% organic, including flat results in the U.S., MITG's performance this quarter was affected by the upgrade of its ERP system in the U.S. and Canada, which caused some temporary slowdown in our ability to supply customers with the full breadth of our products, and in some cases resulted in lost procedures. This was, however, a transient issue. The ERP upgrade is now complete, and the related supply slowdown are behind us as of this month. Within MITG, our surgical innovations division grew 3.6% this quarter, driven by our advanced surgical business, particularly in advanced energy, which grew in the high single digits on strength in our Ligasure franchise and sales of our Valley Lab FT10 energy platform. Respiratory, GI, and renal division grew 2.2%, driven by low double-digit growth in our GI solutions business and high single-digit growth in pulse oximetry sensors and advanced parameter sensors. In our cardiac and vascular group, we grew 1.8% this quarter, which was below our expectations, due in part to customers holding back their purchasing ahead of new product launches in CRHF. We saw high single-digit declines in our high-powered business as customers awaited approval of our Cobalt and Chrome devices, which have launched this month in Europe and are expected to launch in the U.S. during Q1. In heart failure, Although our LVAD business has anniversaried the headwinds we've faced over the past year, the business declined in the low single digits and hasn't returned to the growth levels we were expecting. The other driver of our below-expectation CVG performance was our U.S. TAVR business, which grew 13% this quarter, below the market growth rate. While the TAVR market has been rapidly expanding, we currently have fully experienced field support coverage in a little more than two-thirds of the approximately 700 US centers performing TAVR. We began aggressively hiring and training new field personnel months ago. However, our data shows that it's taking longer than expected for our new reps to reach full productivity. We plan to certify an additional 70 field personnel by the end of this fiscal year. We expect our U.S. TAVR performance to improve relative to the market going forward as our expanded field organization reaches full productivity and we focus the market on the hemodynamic benefits of Evolute Pro Plus platform and the launch of our new confider sheet. Outside the U.S., our TAVR market share grew modestly in Q3. Our pacing business grew in the high single digits, well above the market. driven by our exclusive MICRA leadless pacemaker and Azure family of conventional pacemakers. We announced the MICRA AV approval in the last week of our quarter and are excited about its growth potential as it expands the MICRA target population from 15% to 55% of pacemaker patients. While we did not have revenue from MICRA AV in the third quarter, we're already seeing strong interest in early adoption of this new technology in the fourth quarter. In diabetes, we grew 0.8%, slightly ahead of expectations. Our U.S. business declined in the low double digits, which was anticipated and resulted from competitive challenges while we await our new products. We're seeing strong enrollment in our Next Tech Pathway program, which allows purchasers of the MiniMed 670G to upgrade for free to our next-generation pump when launched. Keep in mind that as a result of this program, we're currently deferring a portion of the revenue of our pump sales which we will recognize when patients trade in their 670G for the next generation pump. In markets outside the United States, which represents just under half of our diabetes revenue, we had solid mid-teens growth, driven by the continued adoption of the MiniMed 670G. This demand is not only driving strong growth in our installed base, it is also resulting in double-digit growth in recurring revenue from CGM and other consumables. now turning to emerging markets, which represented 17% of our revenue. In Q3, we grew emerging markets 14%, with contributions from geographies around the globe. China grew 14%, as did Southeast Asia, and Eastern Europe grew 16%, which included 39% growth in Russia. In addition, South Asia grew 13%, as did the Middle East and Africa, and Latin America grew 12%. We continue to drive strong growth in these markets as we optimize the distribution channel and in certain markets, localized R&D and manufacturing. Regarding the coronavirus, our top concern is the health and well-being of our employees in China and across the globe. We have activated response teams in China, the Asia-Pacific region, and globally, and we remain vigilant in monitoring the virus and taking action as necessary. All of our manufacturing operations are up and running in China. We're committed to helping the Chinese government and Chinese physicians address this crisis. As the Chinese health care system is focused on containing the spread of the virus, hospitals in China have experienced a slowing of medical device procedure rates, and we are seeing procedure delays. We do expect this to have a negative impact on our fourth quarter financial results, but given the fluidity of this situation, the duration and magnitude of the impact are difficult to quantify at this time. Now, turning to our product pipeline. As we look forward, we're excited about what lies ahead, as investments we made in our product pipeline begin to pay off by accelerating our revenue growth and creating value for our shareholders. We have recently received approval or launched a number of new products that we expect to contribute to our growth going forward. I mentioned earlier the U.S. approval of our micro-AV pacemaker and the launch that is now underway. We also received U.S. approval for our Impact Admiral AV fistula indication, which expands the market potential of our drug-coated balloons. We received U.S. approval and are launching our Stealth AutoGuide cranial robotic system. In Europe, we recently received C-Mark approval for our Cobalt and Chrome portfolio of BlueSync-enabled high-power devices, our InterStim Micro rechargeable implantable sacral neuromodulation device, and InterStim SureScan MRI leads as well as our Percept PC DBS device with BrainSense technology. And over the next few quarters, we expect approval and launch of a number of additional new products. We expect U.S. approval of the Cobalt and Chrome high-power devices, RevealLink 2.0 insertable cardiac monitor, InterStim Micro, and InterStim SureScan MRI leads, and our Percept PC DBS device. We're also expecting European launch of the Minimet 780G, and our diamond temp ablation catheter. Regarding our Miniment 780G in the U.S., we intend to file our adult clinical data with the FDA in March, which will push expected approval beyond the fiscal year end. In pain stim, we unveiled DTM spinal cord stim last month at the NANS conference and are now training our field force on this novel waveform with an expected limited launch in Q4 and full launch in Q1. In MITG, we continue to make progress in our soft tissue robotics program. Last week, we announced the acquisition of Digital Surgery, a pioneer in artificial intelligence and analytics for surgery. They lead the industry with a unique touch surgery ecosystem of products, including AI that identifies surgical steps and instrumentation. These products can be leveraged to provide insight into the procedure time, cost, and process to improve surgical care. We're excited about utilizing the strength and capability of digital surgery to advance our minimally invasive and robotic surgery platforms. We also have a number of important upcoming data presentations, starting with use case data under extreme conditions for our advanced hybrid closed-loop algorithm at ATTD later this week. Next month, ACC will be a big conference for us. Data from our off-med renal denovational pivotal trial will be presented. as well as data for both low-risk bicuspid and leaflet immobility for our TAVR program. Also, we will share risk stratification data for our Tyrex anti-infection product. And finally, in June, at ADA, we expect to present the U.S. pivotal data for our MiniMed 780G advanced hybrid closed-loop system. These are just some of the near-term highlights from our pipeline. Importantly, we're continuing to invest in building out a robust long-term pipeline of continuous innovation, invention, and disruption. I mentioned earlier that we expect significant acceleration in our fourth quarter revenue growth, driven in part by our pipeline and excluding the impact of the coronavirus. And as we look to FY21, we expect our top-line momentum to continue 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 third quarter financials and forward outlook. Karen?