Medtronic plc

Ladies and gentlemen, thank you for standing by and welcome to the Medtronic fourth quarter earnings conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star 1 on your telephone. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to Ryan Weiss-Spenning, Vice President and Head of Investor Relations. Sir, the floor is yours.

Thank you. Good morning and welcome to Medtronic's fiscal year 2020 fourth quarter conference call and webcast. During the next hour, Jeff Martha, Medtronic Chief Executive Officer, Karen Parkhill, Medtronic Chief Financial Officer, and Omar Ishraq, Medtronic Executive Chairman, will provide comments on the results of our fourth quarter in fiscal year 2020, which ended on April 24, 2020. 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. 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 given risks and uncertainties, including those related to the impact COVID-19 has had and is expected to continue to have on our business. 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. Finally, unless we say otherwise, revenue rates and ranges mentioned during this call are given on a constant currency basis, which compares to the fourth quarter 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. With that, I'm now pleased to turn the call over to Medtronic Chief Executive Officer Jeff Martha.

Jeff. Thanks, Ryan. And thanks to everyone for joining us today. I hope everyone is staying healthy and safe. And our thoughts are with the many people who have been affected by the COVID-19 pandemic. I'd like to recognize the incredible heroism, resolve, and sacrifice of the frontline healthcare workers fighting COVID-19, as well as our employees who are supporting them. Many of these frontline health care workers are our longtime customers and friends, and we are continually inspired by their selfless efforts to care for others. As has been said, this pandemic presented the world with an unprecedented challenge, which required an unprecedented response, including by our team at Medtronic. And I'm extremely proud of the way our employees have risen to the occasion and jumped in to help health care workers, governments, and NGOs. and for the way they've continued to support their communities and their families. Our top priority during this pandemic has been to ensure the health and well being of our 90,000 employees and their families around the globe. Our employees have been impacted by this virus like everyone else. But I'm grateful for the way our people have continued to do their jobs and persevere through these challenging circumstances. Whether that employee is an engineer working on the next innovation breakthrough, in our factories making critical, life-saving products, a field rep assisting a physician on the front line with a medical procedure, or any of our employees working virtually, we are all fulfilling the Medtronic mission. We've taken a number of measures in our facilities around the world to protect our employees, and importantly, we've continued to invest in our employees during this time. including implementing reward and recognition programs for business critical onsite workers. We're also protecting our sales reps from significant impacts to their incentive compensation during this period. And we've developed an extensive emergency leave policy to provide temporary pay for employees who can't work remotely and are facing certain situations such as homeschooling, childcare issues, or a positive COVID-19 diagnosis. During the pandemic, We've been at the service of medical professionals and healthcare systems around the world, stepping up for physicians, hospitals, and health facilities that are on the front lines. We've developed and rapidly deployed new remote procedure support and remote monitoring solutions to reduce patients' and clinicians' exposure to the virus causing COVID-19. We've hosted dozens of virtual forums and medical education programs to help physicians navigate the challenges of the pandemic. We've also worked tirelessly to make sure our products and therapies are readily available. The most visible example of these efforts is the work we've done to expand our ventilator's capabilities and dramatically increase the ventilator production. Physicians asked us if we could engineer a way to adjust ventilator settings remotely, outside of the ICU and away from the patient. So we partnered with Intel to develop a solution that we brought to the market in a matter of weeks. Furthermore, we're on track to increase our production of ventilators five-fold from pre-pandemic levels by the end of next month. We've enlisted help from others to accomplish this, including SpaceX, who is working to supply a critical valve for our PB980. And we continue to closely partner with key government authorities to allocate our ventilators to the communities that need them most, including a recent focus on emerging markets. But we understood that simply increasing our own production volumes would not be enough. So we did what Medtronic does. Consistent with our mission, we put patients first. We decided to make our PB560 ventilator design specifications available at no cost so other manufacturers can use these specs in manufacturing ventilators during the pandemic. Through this initiative, we're creating partnerships with large-scale manufacturing companies such as Foxconn in the U.S., Bayless Medical in Canada, Vinn Group in Vietnam, Walton Group in Bangladesh, and Tata Group in India. During this time of need, we've been supporting our communities. Since the start of the fourth quarter, Medtronic, along with the Medtronic Foundation, has pledged more than $36 million in monetary and product donations to nearly 50 nonprofit organizations to support health systems, patients, and vulnerable communities around the world. If you're interested in reading more on our response to our employees, our customers, and our communities, I encourage you to visit our website, Medtronic.com forward slash COVID-19. Now, let me turn to our Q4 financial results, which have suffered due to COVID-19. Our revenue has declined 25%, both constant currency and organic. This resulted in EPS of 58 cents, which was down 62%. These results are in line with the press release we provided last month where we discussed the expected negative impact on our fourth quarter revenue resulting from a slowdown in procedures and the associated significant deleveraging that was expected to affect our earnings. They're also consistent with the impact seen across the industry. It's important to note that our quarterly results include an additional month of impact in April when compared to the quarterly results of our competitors on a calendar year cycle. When we look at our Q4 revenue, the difference in our individual business results can be explained by four factors. The first was the mix of urgent procedures versus those that are more deferrable. Almost all of our businesses were affected by the decline in procedure volumes this quarter. Healthcare systems diverted their attention and resources to fighting COVID-19. Governments implemented restrictions on elective procedures. And people avoided seeking treatment, even for emergency conditions. Our businesses that had a larger mix of products used in urgent procedures felt an impact, but they were far less effective than those with therapies where the procedure could be deferred longer. The second factor was the loss of large bulk purchases near the end of the quarter. As you can imagine, the normal flow of these orders, which tend to be larger in April given our fiscal year end, did not materialize. As I noted in our last earnings call, prior to COVID-19, we were already planning to reduce large bulk orders and balance them across the quarter, starting with our next fiscal year. With the pandemic, our efforts were clearly accelerated. The third factor was centered around capital equipment. While capital equipment represents a small amount of our overall revenue, there are certain businesses that have a higher mix and felt the impact of hospitals and surgery centers delaying their capital evaluation and purchases. The last factor was the degree to which businesses and products and services that played a role in fighting COVID-19 or had specific products and customers that were stocking ahead of the pandemic. This led to greater than expected growth in a select few of our businesses. So with these four factors in mind, let's look at our results by business group. Our cardiac and vascular group declined 33%. CBG's therapies tend to overall be less deferrable. but we still saw substantial declines in procedure volumes. Moreover, CVG felt a greater impact than some of our groups from the reduction in bulk purchases, with particular impact on CRM implantables, diagnostics, and transcatheter valves. Our minimally invasive therapies group declined 12%. MITG's revenue mix is weighted more to the middle of the deferrability spectrum, so it did experience a significant impact from the decline in surgical volumes. particularly in the surgical innovations and GI, which both declined in the low 20s. This was offset by growth in respiratory and patient monitoring, as well as in renal care solutions. In respiratory and patient monitoring, which was up mid-teens, we saw significant growth in airways and ventilators as we sought to meet the COVID-19-related patient needs around the world. We significantly ramped production, which led to ventilator revenue nearly doubling. We also saw strong correlation in demand for pulse oximetry and capnography, but the increased demand was offset by overall reduced demand for patient monitoring products, given fewer non-COVID-19 hospitalizations and procedures. Renal care grew high single digits, driven by access catheters and acute and chronic dialysis products, as dialysis treatment continued throughout the pandemic. Our restorative therapies group declined 32%. RTG therapies tend to be used in procedures that are more deferable, including those in core spine, pain stem, ENT, and pelvic health. RTG also was impacted by the reduction in customer bulk purchases and capital equipment purchases. RTG neurosurgery business in particular has a high mix of capital sales. Our diabetes group declined 7%. The decline was driven by a delay in new patient starts on insulin pumps. and due to the closing of physician offices as a result of COVID-19, as well as continued competitive pressure. This was offset by an increase in demand for diabetes supplies, including continuous glucose sensors and infusion sets, particularly in international markets. Next, let's review our fourth quarter performance by geography, which I think is a particularly helpful way to analyze our results, given the progression of the pandemic to different regions throughout our quarter. First, China declined 38% and experienced the impact of COVID-19 for the entire quarter. Our revenue in China declined 46% in both February and March. We started to see gradual sequential revenue improvements midway through March and our April revenue improved to a decline of 21%. In Asia Pacific, our revenue declined 13% as we saw the impact of the virus in many markets through the quarter. with the number of COVID-19 related cases peaking in some countries within the quarter. Korea declined 2% as COVID cases peaked in mid-March, and Australia and New Zealand declined 11%, with cases peaking in early April. Japan declined 14% as cases continued to increase as we exited the quarter. In EMEA, our revenue declined 10%. Western Europe revenue was tracking with expectations through mid-March, when we started to experience a significant decline. Revenue in Western Europe declined 32% in April, driven by procedure delays, and to a lesser extent, fewer customer bulk purchases. In the Americas, our revenue declined 32%, with the U.S. declining 33%, Canada down 24%, and Latin America declining 15%. Like Western Europe, our U.S. revenue was tracking with expectations through mid-March before experiencing significant declines, driven by a combination of procedure delays and the reduction of bulk purchases. Turning to our pipeline, we think about the impact of COVID-19 in three categories. Products that just received regulatory approvals over the past few months, products under regulatory review, and products that are in clinical trials or preparing to enter clinical trials. Starting with the products that recently received the regulatory approvals, The pandemic has interrupted some of our recent launches given the delay in procedures. This includes the European launches of our Percept PC Deep Brain Stimulator, Interstim Micro Rechargeable Sacral Nerve Stimulator, Cobalt and Chrome High Power CRM Devices, and the Diamond Tempt Ablation Catheter. It also slowed the US launches of our AV Fistula Indication in our Impact Admiral Drug Coated Balloon, our DTM Therapy and Pain Stim, and our Micra AV pacemaker. It's worth noting that prior to the pandemic, Micra grew over 60% in the U.S. in both February and March. The good news is that as procedures come back, we expect these launches to pick up steam. Moreover, we just received approval for Micra AV and our reveal link to cardiac diagnostic monitor in Europe, as well as U.S. approval for our Cobalt and Chrome high-power CRM devices, which we announced earlier this month. Our Cobalt and Chrome offerings should be particularly valuable in the current COVID-19 environment, as they are the first and only Bluetooth-enabled high-powered devices in the U.S. that allow for distance programming and better remote monitoring. Regarding the second category of products, those in regulatory review, the pandemic doesn't currently appear to be affecting the approval process. As a result, we're expecting a number of approvals this quarter, including U.S. approvals for our InterStim Micro product, sacral nerve stimulator, our Percept PC deep brain stimulator, and our Reveal Link 2. We're also expecting European approval this quarter of the MiniMed 780G. In the U.S., we anticipate approval this summer of a new product we're calling MiniMed 770G, which is Bluetooth-enabled and allows for wireless, over-the-air software upgrades, before launching our 780G later in the fiscal year. In addition, 770G will be the first hybrid closed-loop system available to patients aged two through six. Patients who purchase the 770G will get the free software upgrade to 780G with our advanced hybrid closed-loop algorithm upon approval. We expect to show the pivotal results of our advanced hybrid closed-loop algorithm in adults at the virtual ADA conference in June. With the third category of our pipeline, those that are enrolling clinical trials or preparing to enter clinical trials, the pandemic has slowed things down as clinical trial startups and enrollments have been placed on temporary pause. This includes our soft tissue robot, products in our diabetes CGM sensor pipeline, and our RDN on-med trial. Regarding our soft tissue robot, our ability to finalize system and preclinical testing has been delayed. And given the uncertainty of the pandemic, it's too early to update you on timelines. However, we're exploring ways to expedite this work with the intent of minimizing the delay. In diabetes, we continue to be optimistic on our ability to close the competitive gap in continuous glucose monitoring sensors. We intend to submit data to regulatory agencies on our Zeus transmitter at the end of the summer, and we've completed verification of our Synergy sensor that will enable our IDE submission within the next few weeks. And in renal denervation, we will combine our RDN on-med data with our recently presented off-med data to support U.S. approval. Look, we are excited about creating the new renal denervation market with its potential to treat millions of patients with hypertension. With all these recently approved and near-term pipeline products, customer enthusiasm remains high. And collectively, these represent growth acceleration as we emerge from the pandemic. With that, let me now ask Karen to take you through a discussion of our fourth quarter financials and outlook.