Medtronic plc

Q4 2022 Earnings Conference Call

5/26/2022

spk00: Good morning. I'm Ryan Weisfenning, Vice President and Head of Medtronic Investor Relations, and I appreciate that you're joining us today for Medtronic's Fiscal Year 2022 Fourth Quarter Earnings Video Webcast. Before we go inside to hear our prepared remarks, I'll share a few details about today's webcast. Joining me are Jeff Martha, Medtronic Chairman and Chief Executive Officer, and Karen Parkhill, Medtronic Chief Financial Officer. Jeff and Karen will provide comments on the results of our fourth quarter and fiscal year 2022, which ended on April 29th, 2022, and our outlook for fiscal year 23. After our prepared remarks, our portfolio executive VPs will join us, and we'll take questions from the sell-side analysts that cover the company. Today's program should last about an hour. Earlier this morning, we issued a press release containing our financial statements and divisional and geographic revenue summaries. We also posted an earnings presentation that provides additional details on our performance. The presentation can be accessed in our earnings press release or on our website at investorrelations.medtronic.com. During today's program, many of the statements we make 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. Unless we say otherwise, all comparisons are on a year-over-year basis and revenue comparisons are made on an organic basis, which this quarter includes only adjustments for foreign currency, as there were no acquisitions or divestitures made in the last four quarters that had a significant impact on total company or individual segment quarterly revenue growth. References to sequential revenue changes compared to the third quarter of fiscal 22 and are made on an as-reported basis. And all references to share gains or losses refer to revenue share in the first calendar quarter of 2022 compared to the first calendar quarter of 2021, unless otherwise stated. Reconciliations of all non-GAAP financial measures can be found in our earnings press release or on our website at investorrelations.medtronic.com. And 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, let's head into the studio and get started.
spk12: Hello, everyone, and thank you for joining us today. This morning we reported our Q4 results. Now, there were parts of the quarter that played out as anticipated, and there were also some unexpected challenges, more than I would have liked, which caused us to come up short of our expectations. As we anticipated, procedure volumes in most of our markets reached pre-COVID levels by the end of the quarter. We also executed and delivered on recent product launches. However, we face challenges related to supply chain and China that impacted some of our businesses and were the largest contributors to our shortfall. Now, I'll get into more detail on these challenges shortly, but you should take away that we understand the root causes and we are well down the path to addressing them. And to be prudent, however, we've assumed that these challenges will persist for the next quarter or two in the guidance that Karen is going to walk you through shortly. So let's focus on what happened this quarter. The shortfall to our revenue guidance was primarily due to two factors. China, where the extended COVID lockdowns affected our results in the quarter, particularly in April, and global supply chain challenges. Over the past few quarters, global supply chain challenges have impacted many of our businesses. And as they arise, our teams have worked quickly to resolve them. And prior to this quarter, we had largely mitigated their financial impact. However, this quarter, one of our largest businesses, Surgical Innovations, was adversely affected by certain raw material shortages. And this resulted in large back orders and caused our SI revenue to come in well below our expectations. Several of our other businesses also faced supply challenges in the quarter, but to a lesser extent. Now, we're down the path of improving our supply chain capabilities, and we're leveraging the expertise that Greg Smith, our new global ops and supply chain leader, brings from the retail, consumer product, and automotive industries. Greg and his team are making progress addressing the areas where we can improve, including the management and resiliency of our critical suppliers and manufacturing network. The recent stress of these global supply chain issues has further illuminated the need for the enhancements. we have a new global structure in place that consolidates operations and supply chain functions, which were previously fragmented throughout the organization. Now, this is a big move for us, and there's still a lot of work to be done, but I am confident we will come out of this with a more resilient end-to-end global supply chain that we believe will be a competitive advantage in our industry. While some of our Q4 challenges will persist in the near term, we expect strong improvement in the back half of our fiscal year, and we remain focused on delivering our long-term strategies. We've made significant changes over the past two years to position the company for accelerated and sustained innovation-driven growth. Our pipeline is robust and continues to advance with a number of upcoming catalysts and fast-growing medtech markets. We're committed to creating strong returns for our shareholders, and we're making progress with our enhanced portfolio management and our capital allocation processes. We're investing in future growth drivers, while at the same time returning capital primarily through our meaningful and growing dividend, which we just increased again today by 8%. Regarding portfolio management, We are continuing to advance the robust process we began talking about earlier this year. And within that, and as a smaller initial step, we're pleased to announce that we've reached an agreement where we will contribute our renal care solutions business into a new company, which we will jointly own with DaVita. And in return, we'll receive up to $400 million in value from them, and we expect this transaction will close in calendar 2023. The new company is going to develop a broad suite of novel kidney care solutions, including home-based products. I'm excited about this for a couple of reasons. First, this business is going to have the focus that it needs. Second, DaVita is a global leader in kidney care and will be a great partner to commercialize and scale this innovative technology. And finally, both Medtronic and DaVita will participate in the expected upside. Now turning to market share, product availability affected our performance in the quarter, with our overall company share down about a half a point. On the bright side, even with our challenges, half of our businesses held or gained share. And as you know, market share is an important metric for us at Medtronic, as it is a driver of our annual variable compensation, along with revenue growth, profit, and free cash flow. While I won't go through market share business by business in the interest of time, we'll be happy to take questions in Q&A. Now let's cover our product pipeline, where we're advancing several meaningful technologies that can create new markets, disrupt existing ones, and accelerate the growth profile of Medtronic. We made great strides with our organic pipeline in fiscal 22, conducting over 300 clinical trials, and receiving over 200 regulatory approvals in the U.S., Europe, Japan, and China. Our recent product launches are starting to make an impact across our businesses. And as we look ahead, we have increasing visibility to upcoming catalysts in the back half of the calendar year that we expect will help accelerate our growth as we go through fiscal 23 and beyond. Starting with our cardiovascular portfolio and cardiac rhythm management, recently launched leadless pacemakers, including our micro AV in Japan and micro VR in China, led to above market growth again this quarter. We just received approval for micro AV in China earlier this month, and we expect geographic expansion to continue to drive strong micro growth. In ICDs, we're preparing to disrupt the single chamber market with our Aurora extravascular ICD. We continue to drive towards CE mark approval for Aurora later this calendar year and US approval next year. With micro and EV ICD, we expect continued strength in CRM. In cardiac ablation solutions, we've been assembling a number of technologies to increase our impact in the $8 billion EP ablation market, building on our leadership in cryoablation. We're continuing the rollout of our Diamond TEMPT-RF system and exclusive cryoablation first-line indication for paroxysmal AF. We're advancing our pulse field select anatomical pulse field ablation system, having fully enrolled our global pivotal trial. We're also expecting to fill competitive gaps in cardiac ablation with our recent announcements to add a differentiated mapping and navigation system and left heart access portfolio, including a transeptal access system that can perform both mechanical and RF crossings. In renal denervation, data from our Spiral HCN OnMed pilot study were presented last month at ACC and simultaneously published in The Lancet. These data demonstrated durable and clinically significant blood pressure reductions through three years. And last week, additional data were presented at EuroPCR, which showed those receiving Ardian spent significantly more time in target blood pressure range, adding to our robust body of evidence. In Q4, we also announced that we completed enrollment in the full cohort of patients in the OnMed study, which we expect to complete the six-month follow-up in the second half of this calendar year. We'll then look to present the data and submit for FDA approval, as OnMed is the final piece of our submission. In structural heart, differentiated durability data for our TAVR valves were presented as a late breaker at ACC last month. The data showed that our TAVR platform is the only one to outperform surgical valves in durability at five years as measured by SVD or structural valve deterioration. And less SVD was associated with better clinical outcomes, including mortality and heart failure hospitalization. Additionally, durability data were presented from a separate UK registry, the first to look at TAVR data past 10 years. And it showed core valve had one-third the rate of structural valve deterioration compared to sapien and sapien XT. And data at EuroPCR last week reinforced our excellent clinical outcomes with our cusp overlap implant technique, including one-day hospital discharge, single-digit pacemaker rates, and the absence of moderate or severe PVL. In the quarter, we also continue to launch Evolute Pro Plus in Europe and began the launch of Evolute Pro in China, our first entry into this large and under-penetrated market. In the U.S., we're planning to start the limited market release of our next generation tower valve, Evolute FX, here in our first fiscal quarter and move into full market release later in the fiscal year. We're also looking to expand our TAVR indications. We had first enrollment earlier this month in our Expand TAVR 2 pivotal trial, evaluating our TAVR platform in patients with moderate symptomatic aortic stenosis. Overall, TAVR represents a large growth driver for Medtronic, as we expect this roughly $5.5 billion market to exceed $7 billion within the next three years and reach $10 billion in the next five years. Moving to our med-surg portfolio and surgical robotics, we remain focused on the limited market release of our Hugo robot while we scale production. We completed Hugo installations in Denmark, France, and Italy. We also continue to increase our installed base of Touch Surgery Enterprise, our AI-powered surgical video and analytics platform. In our patient monitoring business, we just received FDA clearance earlier this month for our next generation Nelcor OxySoft PulseOx sensor. Now, this sensor includes a special silicone adhesive designed to protect fragile skin while enhancing adherence. Its low profile and brighter LEDs improve accuracy and responsiveness for the most challenging neonatal and adult critical care patients. Now turning to our neuroscience portfolio and our cranial and spinal technologies business, we're seeing strong adoption of our unit AI-enabled surgical planning platform with a mid-30s sequential growth in our US user base. The ongoing launch of our Catalyft Expandable Titanium Interbody System and the rollout of our enabling technologies continues to differentiate us in spine. Customer demand for our capital equipment remains strong, and we had record quarters for our Mazor robotic system and stealth station navigation system. In neuromodulation, we're building our commercial teams and have started the initial launch of our Intellis and Vanta spinal cord stimulators to treat diabetic peripheral neuropathy. We believe DPN is one of the largest opportunities in med tech, and we expect the market to reach $300 million by FY26, with an annual total addressable market of up to $2 billion. And we're also excited about our Inceptive eCAPS closed-loop spinal cord stimulator, which we submitted to the FDA late last calendar year. We expect Inceptive's closed-loop therapy, which optimizes pain relief for patients, to revolutionize the SCS market. In brain modulation, our ongoing launch of the Percept PC Neurostimulator and Sensite Directonal Leads is driving new implant share in both Europe and the U.S., and this is the only system that can stimulate and sense brain signals. In pelvic health, we received FDA approval of our next-gen InterStim recharge-free device, InterStim X, and that was happening in the fourth quarter. InterStim X features our proprietary fifth-generation battery chemistry that provides 10 to 15 years of battery life without the need to recharge. And in ENT, we announced earlier this month that we completed the acquisition of Intersect ENT. and we're excited to add their attractive, high-growth, complementary products into our existing business. We believe we can grow Intersex products in the double digits over the next several years as we expand use of both the Propel and Sinuva sinus implants globally. In diabetes, our MiniMed 780G insulin pump, combined with our Guardian Force sensor, continues to be extremely well-received in markets where it's available. Now, this system has a very positive user experience with no finger sticks and more time and range. This is due to its near real-time basal insulin and auto-correction boluses every five minutes to address underestimated carb counts and occasional missed meal doses. Very strong data on 780G and Guardian 4 were presented at ATTD last month, showing improved time and range with less user interaction. Additional data sets on this differentiated system will be shared at ADA next month. And we also announced that Germany and France began reimbursement of our system in the quarter, which helped drive high teen sequential international growth in diabetes. And in the U.S., we made substantial progress in meeting our observation and warning letter commitments and continue to have regular communication with the FDA. In our CGM pipeline, we expect to submit our next-generation sensor, Simplera, for CE mark and FDA approval this summer. In addition, we're advancing multiple next-gen sensor and pump programs, including patch pumps. We're making considerable investments in our diabetes pipeline, with line of sight to restoring strong growth in this business over the coming years. And with that, I'll turn it over to Karen to discuss our fourth quarter financial performance and our new guidance for the next fiscal year. Karen?
spk11: Thank you, Jeff. Our fourth quarter organic revenue increased 1.4 percent below our guidance and consensus. Compared to consensus, about 15% of the difference can be attributed to China, given recent COVID shutdowns and slowing distributor purchases in spine ahead of a potential national volume-based tender. About 10% of the difference is a result of changes in foreign exchange rates over the course of the quarter. And the remaining difference, and the largest driver, is due to supply chain issues that Jeff discussed. Despite revenue coming in roughly $350 million less than we expected, we reduced the impact that this would have had on our bottom line, resulting in EPS of $1.52, four cents below our guidance range. From a geographic perspective, our U.S. revenue declined 2%. Non-U.S. developed markets grew 4%, and our emerging markets grew 7%. Within emerging markets, China declined 10% given the impact of the COVID lockdowns. But we had very strong growth in many other emerging markets, including high teens growth in Eastern Europe, low 20s growth in Latin America, low 30s growth in the Middle East and Africa, and mid 30s growth in South Asia. In fact, excluding China, emerging markets grew in the low 20s. Turning to our margins, our fourth quarter adjusted gross margin improved by 30 basis points year over year, driven by product mix with lower sales of ventilators and higher sales of products like Micra. While we were impacted by inflation with increased freight expense, it's worth noting that the full impact from inflation on raw material and direct labor costs will be realized over the next couple of quarters as our inventory rolls off our balance sheet, negatively affecting our gross margin. Moving down the P&L, we also drove additional and continued improvement in our adjusted operating margin, which increased by 40 basis points, excluding the benefit from currency. We also ended the year with free cash flow at $6 billion, representing year-over-year growth of 22% and meeting our goal of 80% conversion from adjusted net income. Our balance sheet remains strong, and we continue to allocate our capital to investments that we expect will generate solid future growth and shareholder returns. We're investing heavily in R&D, with programs especially targeted for faster-growing medtech markets, or where we have an opportunity to create new markets. We're also using our balance sheet to complement our innovation-driven growth strategy with tuck-in M&A, utilizing our very active capital committee process that was developed as part of our new operating model. In fiscal 22, we announced four acquisitions, totaling over $2.1 billion in total consideration. As Jeff mentioned, we closed our acquisition of Intersect ENT earlier this month and also announced our intent to acquire a Left Heart Access portfolio last month. At the same time, we're investing in promising early-stage ventures to keep our fingers on the pulse of new products and technologies incubated by companies that one day could become future acquisitions. We're also actively providing strong return to our shareholders, returning $5.5 billion in fiscal 22 through our dividend and net share repurchase. And this morning, we announced that we're increasing our dividend by 8%, reflecting the confidence we and our Board have in our financial strength and future earnings power. We are an S&P dividend aristocrat, having increased our dividend for 45 years now, and our dividend is an important component of the total return we generate for our shareholders. This past year, we paid $3.4 billion in dividends, and we're supplementing that through opportunistic share repurchase, particularly in periods where we see share price dislocation. In fact, we repurchased over $2.5 billion of our stock in fiscal 22, including $1.4 billion in the fourth quarter. Now, turning to our guidance and starting with revenue. We continue to expect our recent launches and product pipeline to make a difference in many of our businesses, and Jeff covered many of them earlier. We expect organic revenue growth in fiscal 23 of 4 to 5 percent. While the impact of currency is fluid, if recent exchange rates hold, foreign currency would have a negative impact on full year revenue of $1 to $1.1 billion. By segment, we expect cardiovascular to grow 5.5 to 6.5 percent, medical-surgical to grow 3.5 to 4.5 percent, neuroscience to grow 5 to 6 percent, and diabetes to decline 6 to 7 percent, all on an organic basis. While we are hopeful that we can receive approval for 780G and Guardian 4 sensor in the United States, we've elected not to include it in our guidance. In the first quarter, we would have you model organic revenue to decline in the range of 4.5% to 5.5%, which conservatively assumes no near-term improvement in our supply chain and no major change to underlying fundamentals. Assuming recent exchange rates hold, the first quarter would have a currency headwind between $350 and $400 million. By segment, we expect cardiovascular to decline 1% to 2%, medical-surgical to decline 7.5% to 8.5%, neuroscience to be down 5% to 6%, and diabetes down 8% to 10%, all on an organic basis. Moving down the P&L, I provided early color for Fiscal 23 on the last quarterly earnings call, where I talked about the expected impact of inflation, wages, acquisition dilution, and foreign exchange headwinds. These still hold, but we've also seen environmental changes since late February. Inflation and foreign exchange rates have become larger headwinds, and we're now factoring in continued supply chain challenges early in the year. Inflation and FX pressures also create near-term challenges on our margins, although we continue to look for opportunities to offset them. At the same time, we continue to prioritize our long-term investments in organic R&D, with a focus on large opportunities in future growth markets, like renal denervation, robotics, diabetic peripheral neuropathy, and transcatheter mitral valves. Taking this all into account on the bottom line, we expect non-GAAP diluted EPS in the range of $5.53 to $5.65 in fiscal 23, which includes an unfavorable impact of 20 to 25 cents from currency at recent rates. For the first quarter, we expect EPS of $1.10 to $1.14, including an FX headwind of about 5 cents at current rates. Before I send it back to Jeff, I want to thank our employees around the globe who are working hard to overcome the macro challenges we face. Thanks for all you do to fulfill our mission every day. Back to you, Jeff.
spk12: Thank you, Karen. While we spent a lot of time covering the fourth quarter, it's worth briefly reflecting on what we've accomplished in fiscal 22. It's certainly been a difficult environment and our organization has enacted big changes in such a short period of time and under unique circumstances to better position the company. It was our first full year in the new operating model, and with our enhanced Medtronic mindset of acting boldly, competing to win, moving with speed and decisiveness, fostering belonging, and delivering results the right way. We've also made strides to becoming a more diverse and inclusive organization. And I was very proud that Medtronic was recognized earlier this month as number 10 on Diversity, Inc's top 50 US companies for diversity. Even with that, we're committed to improving through innovative programs to attract, develop, and retain top talent from all gender and ethnic backgrounds. Along those lines, we've made notable hires in fiscal 22, recruiting great talent from healthcare technology industry and beyond. While we've implemented a number of changes, this past year has been choppier than I would have liked, with some of our growth drivers being pushed out and the impact from the pandemic, quality challenges, and supply chain affecting our results. But we have a clear direction, a clear direction where we're headed as we transform the company. Let's start with the top line. We remain laser-focused on accelerating the growth through robust capital allocation and portfolio management. you're seeing our efforts to enhance our future growth through greater investment in organic R&D as well as portfolio moves. We've already spoken of the organic growth catalysts in front of us, many coming later this fiscal year. We're also executing a healthy cadence of tuck-in acquisitions in faster-growing markets, and we're focused on reducing our footprint in lower-growth and lower-margin businesses. We continue to work on additional portfolio moves with the goal of creating a portfolio where we have distinct expertise, synergies across the company, and ultimately higher growth and higher margins. And to aid this effort, we've assembled a dedicated team that is 100% focused on our integrations and divestitures. At the same time, we have the opportunity to improve our global supply chain and operations by centralizing these activities, allowing us to leverage our scale, invest in new technology, and ensure we have world-class supply chain experts responsible for our global operations. And this isn't something new that we're just starting now. Although recent challenges have given us a greater sense of urgency, we've been on this journey for over a year. And while it will take time, I fully expect our efforts to drive lower costs and lead to consistent and reliable quality, along with greater product availability, all on a sustainable basis. Now, well beyond health care, our world is facing a lot of economic uncertainty with questions around inflation, global supply chain challenges, and continued impacts from the pandemic and a potential recession. But our business, the business of healthcare and the delivery of essential life-saving technology is something that continues in good times and uncertain times like these. And demand for our products continues to increase with the aging and growing of our global population. When you look at healthcare technology, Medtronic is uniquely situated, particularly in these uncertain times, given our diversified businesses with leading market positions in growth markets. a robust product pipeline, solid free cash flow, strong balance sheet, and a very attractive and growing dividend to add to our return to shareholders. We have near-term challenges that we are overcoming, and the opportunities in healthcare technology and at Medtronic are immense. We are fully focused on continuing on our transformation journey and making our opportunities a reality as we alleviate pain, restore health, and extend life for millions of people around the world. Finally, I want to thank our exceptional Medtronic employees. I get to see the outcome of their efforts to fulfill our mission every day. It's inspiring. In addition, their willingness to lean into our new operating model and embrace our new culture have been key to the ongoing transformation of the company. I also want to thank our partners in healthcare, the frontline workers who are at that final step in ensuring patients get our therapies and are dedicating their lives day in and day out. Their incredible efforts to continue care delivery and get us all through the pandemic will be noted as one of the great accomplishments in history. Now let's move to Q&A. We're going to try to get as many analysts as possible, so we ask that you limit yourself to just one question and only, if needed, a related follow-up. If you have additional questions, you can reach out to Ryan and the investor relations team after the call. With that, Brad, can you please give the instructions for asking a question?
spk15: For the sell-side analysts that would like to ask a question, please select the Participants button and click Raise Hand. If you're using the mobile app, press the More button and select Raise Hand. Your lines are currently on mute. When called upon, you will receive a request to unmute your line, which you must respond to before asking your question. Lastly, please be advised that this Q&A session is being recorded. For today's session, Jeff, Karen, and Ryan are joined by Sean Salmon, EVP and President of the Cardiovascular Portfolio and former head of the Diabetes Operating Unit, Bob White, EVP and President of the Medical Surgical Portfolio, and Brett Wall, EVP and President of the Neuroscience Portfolio. We'll pause for a few seconds to assemble the queue.
spk07: We'll take the first question from Vijay Kumar at Evercourt ISI. Vijay, please go ahead.
spk05: Hi, guys. Thanks for taking my question. Jeff and Karen, maybe I had a two-part question. I'll ask both of them right away. When I look at that four to five organic guide for fiscal 23, perhaps it came in slightly better than expected. Can you talk about some specific assumptions around You know, you noted supply chain. You know, there were some back orders. Is there some contribution from supply chain back orders? Any further disruption from supply chain? What are you assuming for diabetes, robotics? I think China VBP is something that investors have asked. And, Jeff, related to that, I think if I take a step back, the Medtronic thesis of mid-singles talk, high singles earnings, you know, consistency has been something that people have questioned. You know, we've had some moving parts over the years. As you look at all the changes that have happened, maybe talk about what gives you the confidence that this consistency of mid-singles on the top and high singles on the EPS line should be something that investors should look forward to.
spk12: Sure. Well, let me – thanks for the question, Vijay. Maybe I'll take the second part of that question, and then Karen can take the first part of the details behind the 4% to 5% for FY23. But on the second part, in terms of the confidence of getting back to getting to that constant mid-single-digit currency top line and high single-digit BPS growth or double-digit total return to shareholders, I do think we're putting the right things in place. So first of all, just over the next, Karen can detail this, but over the next year, you'll see the acute backorder issues that we faced in Q4. Those abate over the next quarter or so, and we can get into the details of that. In addition, we're definitely anniversarying a lot of things that hurt us in FY22, like exiting the LVAD business, the Navion recall, some tough, tough comps on our ventilator business from the height of the pandemic. So these things abate over, these things go away over the course of the fiscal year and starting now, actually. And then finally, we have a lot of growth catalysts. We've talked a lot about the pipeline and I can go through that. There's a long list. I went through a lot of it in the commentary, but it's much broader than like, you know, the Hugo or our soft tissue robot and And and already and there's those are big ones, but there's a whole there's a lot of other ones as well. And then so that that those those things kick in in the second half of this year and they get even bigger and in FY 24. And then finally, we've got some portfolio moves that over the next year or so, I think, well, you know, that's that's that's that'll add to this. So that's how we get from where we are to. to back to the numbers that you quoted. And then the second part of your question gets to kind of the competence and the consistency. And I'd say there are two things. One is having this robust pipeline spread across all of our businesses. And we've been working hard over the last couple of years to double down on our innovation, putting more into R&D. the new operating model that, you know, we have the 20 operating units, we have clear visibility into their end markets, their competition, people are getting evaluated on their pipeline, and we're putting more into R&D, and as well as some meaningful tuck-in acquisitions, like we just mentioned, Intersect E&T closing, and in the cardiac ablation solutions space, or the AFib space, you know, the affair acquisition. These are meaningful ads that So that gives us diversity and more growth on the top line. But the piece that we really have been focusing on over the last year and is important for our future in terms of consistency is the global operations and supply chain changes that we made. You know, coming into this role, myself and the team identified this as an opportunity for us brought in Greg Smith, as we mentioned in the commentary over a year ago, and really already centralized our supply chain. Our global ops and supply chain was really set up for a different era, a past era, and we had to make those changes. And unfortunately, they haven't fully taken hold yet. They need more time to mature. I would have liked to have those moves done earlier. It definitely would have helped in Q4 because the supply chain issues came at us fast and hard and especially in the back half of the quarter, more supplier decommits than we've ever seen. But the good news is that we're not just getting started on this transformation of supply chain. I'd hate to be starting it now in the middle of this environment. We're well down the path to building in that resiliency. We've made these moves. And we're confident that these changes will give us that resiliency that we need and that dependability. So the combination of the innovation plus some portfolio moves and just a more resilient global ops and supply chain, that's how we're confident that we get to the – the long-range forecast that we talked about of consistent mid-single digits, that 5% plus, including the plus, and the high single-digit EPS when you add in the dividend, it gets you the double-digit return. But in terms of, I hope I answered that question. Karen can add to it. But in terms of the FY23 guide and the details below that, I'll turn that over to Karen.
spk11: Yeah. Thanks, Vijay, for the question. And I'd love to take this in pieces. because I want to walk you through Q1 and then also talk about the full year because we expect improvement each quarter as we move through the year. So just starting with Q1, given our recent challenges, we've elected to take a conservative approach with our Q1 guide. We're assuming underlying fundamentals are pretty similar to last quarter, to Q4, and we've built in some conservatism in the supply chain. If you look at the year over year view, it's influenced by COVID. And so to remove that noise, I think it's really good to look at it on a COVID comp adjusted basis. And when you do that, our guide really just implies a slight deceleration from Q4 to Q1. That's not out of line with what we've seen historically. And again, I would just emphasize that we've included conservatism due to the supply chain. Some puts and takes that we've got in Q1, in addition to the supply chain impact that we factored in, we've also assumed some incremental pressure in spine in China ahead of a potential national volume-based purchasing tender. And Jeff already mentioned on the plus side, we anniversary some of our headwinds like the Navion recall and the LVAD shutdown. If I move beyond Q1 and then into the full year guide of the 4.5%, I mentioned we do expect improvement as we progress through the quarters with our back half much better than our first half. But I'd also talk about the puts and takes that we've got on the full year. We talked about the fact that we continue to actively work with the FDA on the diabetes warning letter, but for conservatism, we've elected not to assume the approval of the 780G in this guidance. And also, it's manageable, but we've got volume-based pricing in China that we believe will have a bigger impact in this fiscal year, primarily in spine. And at the same time, Jeff talked about, and we have a number of positives as we think about FY23. First, we've got headwinds that are going to go away, the LVAD business, the Navion recall, the reduced ventilator sales that Jeff mentioned. And then we also had some volume-based pricing on drug-eluting stents in China that will anniversary. And combined, all of those headwinds had a 200 basis point impact in FY22. Second, we expect these supply chain challenges to improve starting in Q2 and obviously continuing to improve from there. And then thirdly, our year-over-year comps get easier, particularly in the back half. And then lastly, we've got a number of really important product launches throughout the year. And just to name a few of them, we've got Evolute FX, we've got eCAPS, we've got Diabetic Painful Neuropathy. And again, I'm just naming a few. So I hope that that's helpful and shows what our guidance implies as we move throughout the year.
spk06: That's helpful color. Thanks, guys. Thanks, Vijay.
spk07: Next question, Brad. The next question comes from Travis Steed at Bank of America. Travis, please go ahead.
spk02: Hey, good morning. Thanks for taking the question. I'll ask a two-part one as well. I guess first on the elective procedure recovery, curious how May is shaping up versus April, kind of around the world, both in the U.S. and China as well. And then the second part was going back to some of the supply chain issues. the impact this quarter is a little bit worse than some of your peers. I don't know if things got a lot worse in April or there was something specific with surgical innovations. I just want to make sure we have the confidence that that's going to start to improve here in the next quarter or two.
spk12: Sure. I'll take the second one first. The supply chain issues, yeah, they did. Look, they did. No one's more disappointed about a Q4 miss than I am. And And we believe we understand the root cause of that miss. And it really started hitting us in the second half of Q4. And I'd say that 75% of the miss is due to, of the $340, $350 million miss is due to supply chain. 15, and I'll get into that in a second, maybe about 15% is due to the China lockdown. And then maybe another 10% is FX getting worse. And Karen can talk about that. But in the miss, the supply chain miss, it hit us across a number of businesses, but it was definitely the most pronounced in our surgical innovations business. And it was three things. It was semiconductors, which is affecting everybody. That affected a number of businesses, but particularly in our SI business. It also was resins, a particular resin that we use in our energy business in SI has been a major source of problem for us. And then packaging. our tray packaging, there was a catastrophic explosion in our supply chain. And so those last two ones, the packaging and the resins were the biggest issues, the biggest supplier decommits, and I'd say the biggest surprise. And most of that was in SI. We see this you know, getting better over the next, the SI ones, overall for the company, we see the supply chain issues getting abating over the next quarter or two. The SI issues probably will take, you know, more than a quarter. So put it on the two, you know, the first half of the year to get through those issues. We factored all that in into our guidance. I mentioned China. You know, we have, remember, we have April. This really hit us in April. We have April in our Q4. That represented roughly about 60 million of the shortfall, you know, combination of the COVID lockdown. And Karen mentioned some of the volume-based procurement. So other than China, our emerging markets, Karen mentioned in the commentary, grew 20%. China was actually down 10% or more, and the rest of emerging markets grew 20%. grew 20%. And so these, like I said, these acute issues, I mentioned in the commentary and one of my answers were well down the path of remaking our global ops and supply chain to provide that resiliency that we just haven't had. And we started that over a year ago, centralizing the function and bringing in some, building a very strong leadership team under Greg, bringing in new people from different industries investing in all kinds of, whether it be, you know, tools and technology and operating mechanisms for this. And I know I'm confident we're going down the right path there. And I'm glad that we started when we did. I wish we would have started even earlier. But so, you know, the long term building those fundamentals will take some time. But the acute issues that hit our numbers will go away or get better over the next quarter or two. I'll turn it over to Karen to answer the first part of the question.
spk11: Yeah, Travis, thank you. So just in terms of the month of May, it's still early. And we're obviously focused on managing through some supply issues that we've got in some of our businesses. So the numbers are a little cloudy, but when we look at our operating units that are not impacted by supply issues, just through the first three weeks of May, we're trending largely in line with where we were first quarter last year.
spk10: And I would note that elective procedures for the most part were back to pre-COVID levels for us last quarter.
spk06: Okay. Thanks, Travis. Take the next question, Brad.
spk07: The next question comes from Larry Beagleson with Wells Fargo Securities. Larry, please go ahead.
spk01: Hey, good morning. Thanks for taking the question. Just Jeff, on the kidney company news today, should we expect more like this or, you know, could they be more significant and just kind of remind us of what the overarching goals are? And Bob, maybe on Yugo, just help us understand what the expectations are for fiscal 23, you know, the status of the supply constraints and the pre-op setup error and, you know, when you expect to start the U.S. pivotal trial. Thanks so much, guys.
spk12: Okay. Nice to hear from you, Larry. Thanks for the question. On the real care solutions joint venture with DaVita, you know, this is what I'd characterize as a smaller initial step in terms of our portfolio management work. That work continues, and we do anticipate that there could be more portfolio moves over the course of FY23. I'm not going to comment on the size of those, but I characterize this as a smaller initial step that's been under consideration for a while. And like I said in the commentary, I am excited about this. This technology that we've been working on for years, I think the VITA, this joint venture will bring more focus to that. the finishing up the development and then and i think obviously david as a leader in kidney care and will be a great partner as we commercialize and scale this uh you know innovative technology they bring a lot to the table there and i think we bring a lot to the table on the technology side and looking forward to it but as we move forward i i don't know that i'm not you know the other portfolios would be jvs or anything like that for this one this one just made the most sense and You know, we think there's a lot of upside in this technology and the way we structured this deal, both Tevita and Medtronic will share in that upside. So looking forward to that. In terms of the goals of the portfolio work, they remain unchanged. You know, our North Star is durable growth, durable growth. without taking a step back on margins and free cash flow. We just want a higher level of growth. And so we want to remake the portfolio, you know, for a higher WAMGR and more consistency in growth. So that's the goal. And I think the other, the secondary goal would be just to simplify the company a bit. So that's, those are the goals. That's where we're headed and, you know, more to come.
spk13: Thanks, Jeff. And Larry, good to hear from you. Thanks for the question. Let me provide you a good update on Hugo. So we're still in limited market release. We're making good progress on the supply chain issues. We're currently in eight countries. We've had a number of installs this past quarter in France and Italy and Denmark. We did receive regulatory approval in Brazil and Saudi Arabia. And you'll recall this followed Canada and Australia. We've begun general surgery cases in Panama, in Chile, in India, and now we've done procedures across urology, gynecology, and general surgery, including our first bariatric case, which was a nice milestone. The second part of your question was relating to the IDE. We expect to begin the IDE relatively soon. We're working closely. to train the site personnel and gain IRB approval. So we'll certainly keep you posted on that. But hopefully that helps on a good thorough update for you where we stand on Hugo.
spk06: Thanks, Larry. Next question, please, Brad.
spk07: The next question comes from Shagan Singh at RBC Capital Markets. Shagan, please go ahead.
spk09: Thank you so much for taking the question. I was just wondering if you can give us an update on your portfolio management initiatives. You know, what are you assuming for Hugo sales in your FY23 guidance? And, you know, can you elaborate on the magnitude of China VBP impact in FY23? And lastly, if you can just comment on the capital environment, we've heard some puts and takes. Q1 has been a little soft. Just what your outlook is for the full year. Thank you for taking the questions.
spk12: Okay. All right. We've got some good music there for a second. But I'll start. There was a list there, so maybe Karen can help me out. But I'll start on the Hugo one. You know, we have quoted Hugo Numbers for FY23, but I'll just say we expect a strong ramp. We've got the order book is really strong. You heard Bob just give an update about all the countries we've got approvals in and the different type of procedures that we're now doing, you know, various type of procedures, including general surgery procedures and So we're moving up the food chain there. So we really gained a lot of confidence that we have something in Hugo, and we see a nice ramp in FY23, but we haven't quoted exact numbers. In terms of the capital environment, capital for us in Q4 was a bright spot. And A lot of our capital that we sell are tied, directly tied to specific revenue-producing procedures, profitable procedures. I think that helps. And we had record numbers in the neuroscience space in our spine business. We had record number of sales of our stealth station equipment. Navigation, Oarm, and Mazurs, that capital equipment is at record highs for us and really excited as we place those or we sell that capital equipment, that's just further building out our ecosystem, which is our differentiating strength in the spine business and portrays optimism for the future of that business. I'll turn it over to Karen for the other parts of your question.
spk11: Thanks, Jeff. The other two, you had a question on portfolio management, which I know Jeff shared when he answered Larry's question. So I'll cover China VBP. With VBP, we've been dealing with a variety of regional and national tenders already. And just from a national perspective, we expect the government to continue to focus on the top 10 medical device products by public insurance spending. So, we've been through stents already and some of our other industry players have gone through large joints. And we see two more potential tenders on that list where we've got exposure, spine and surgical stapling. And I talked about the fact that we expect spine to impact us this fiscal year. and to likely happen in the second quarter, but ahead of tenders, distributors do pull back on their purchases. So we built that into our first quarter guide as well. Just to remind you though, our gross exposure for both Spine and Stapling in China is somewhere between one to one and a half percent of our total company revenue. So it is small. And based on what we experienced with the coronary tender, we do believe there could be offsets to the ultimate net impact number because we have pulled through of other product lines and we'll be working on those.
spk06: Okay. Thanks, Jagan. Let's go to the next question, please, Brad.
spk07: Yep. The next question comes from Josh Jennings at Cowan & Company. Josh, please go ahead.
spk06: Hi, good morning.
spk08: Thanks for taking the questions. I wanted to ask on the diabetes U.S. pump business. I know there's a lot of moving parts, but just with the further deceleration in fiscal 4Q, hoping you can share some insights in terms of why you think that's occurring. Is the warning letter in place, kind of tainting endocrinologist prescription patterns, or are or patient sentiment? Are you seeing incremental renewal pressure? Just wanted to get a better sense and then how you see that U.S. pump business trending over the course of the year. And then any other incremental details you can share just on interactions with the FDA. And I know you pulled that out of your guidance for fiscal 23, any 780G or Guardian 4 approvals. But what gives you hope that you could still see those approvals occur in this fiscal year? Thanks for taking the questions.
spk12: All right. Thanks, Josh, for the questions. I'm going to turn it over to Sean here in a second. Although he has officially moved on from that role to focus exclusively on our cardiology portfolio, we have him on the call answering the diabetes questions this quarter. And I'll just say a few words about Q Dallara. She joined the company here a couple of weeks ago and has taken over our diabetes business unit. And we couldn't be really excited about having Q. She's already diving right in. She was already at ATTD and she'll be at some other upcoming diabetes meetings that you'll get to see her. And she'll be on our next earnings call to field these questions. And she's getting settled in out and moving her family out to our Northridge, California site. and really excited you'll get a chance to hear from her shortly. In the meantime, I'm going to field this question to Sean. So, Sean, can you answer the question that Josh posed?
spk04: Yeah, sure. Josh, thanks for the question. So the dynamics on the revenue side of things are really all about the competitiveness in the United States. We grew sequentially quarter on quarter in EMEA by 20%, high 20s. And that's really based on the strong demand for that combination of 780 and the Guardian 4 sensor, which is now in 40 different countries. So everywhere we go, it's really picked up a lot of steam. This past quarter, that was driven by favorable reimbursement. We had no reimbursement in either France or Germany. We picked up that reimbursement. That really helped us drive that continued growth. So within the U.S., the dynamic is obviously, you know, people waiting for the new technology to come before prescribing it for new patients or some patients not wanting to wait for it and moving on to competitive therapies. You know, with regard to the warning letter progression, that's really, as Karen said, we did conservatively leave that out of the guidance. I think that's prudent. But, you know, the most important thing we have to do is to improve and sustainably improve the quality system, which was outlined in those items that were in the 483 and the subsequent warning letter. And we've made excellent progress against those commitments. We're more than 80% of the way through. fulfilling all those commitments. And it's also important to know that the 780 and Guardian Force sensor are under active review with the FDA right now. And, you know, we don't want to get ahead of the FDA on timing or predictions, and that's really the reason for the conservatism. But, you know, suffice to say, there's huge interest from patients. The technology continues to prove itself in real-world applications, and you just see the numbers going up for both revenue as well as You know, the data we shared, the recent ATDD meeting, what's coming up ADA, it's really a robust solution, a unique solution where, you know, we're getting kids to time and range that has never been seen before. And that's during the day, overnight. And, of course, it's working great for adults, too, the highest time and range yet reported. So we're very confident that when we get the solution out, we'll turn the boat around. But I think for conservatism, because we can't predict it, that's what's in the guidance.
spk06: Thanks, Josh. Next question, please.
spk07: The next question comes from Joanne Winch at Citi. Joanne, please go ahead.
spk14: Hi, how are you this morning?
spk12: Good, Joanne. Good to hear from you.
spk14: So when I take a look at your guidance, you've got what, in your words, are or is a pretty conservative first quarter. And then it ramps pretty aggressively throughout the remainder of the year. I know you don't like to give quarterly guidance, but just to sort of level set us so that we're not resetting the quarters as we go along. Talk us through how you ramp and what improves. And if you can just sort of give a classic like X percent in the first quarter, Y in the second quarter, et cetera, that would be really helpful just to, you know, sort of build out from here.
spk10: Yeah. Thanks, Joanne, for the question.
spk11: I'm going to not give specific guidance for the other quarters, but I will let you know that we've got these things at anniversary through the quarter. So ventilator sales was up and down in the quarter. And I know Ryan can take you in the after call about those changes that happen in ventilator sales. And then obviously, we expect our biggest supply challenges this quarter and starting to improve in second quarter. So think about a ramp of revenue growth just getting better and better every quarter. And by the time you get to the back half, our year-over-year comps obviously get easier. And particularly in the fourth quarter, particularly in med-surg, given the fourth quarter that we had. So think of strongest growth obviously in the fourth quarter as you ramp. And that is in line with how we think about our product launches too going through the year. We've got some product launches that are helping us earlier in the year and then more that will ramp as we go through the year. So I know that Ryan can easily take you through some more of the detail too.
spk14: Appreciate that. And then for my second question, renal denervation, you've completed the enrollment of the last piece of the puzzle. It sounds like data won't be presented in the fall, but we may get data in the spring. Are you thinking FDA approval mid next year, calendar year?
spk12: Sean, you want to take that one?
spk04: Yeah, John, we will file that last piece of the PMA, which is that last bit of data, when we have it. And that would dictate the timing for the review clock to start. It's important to note that we've done a modular PMA, so every other part of this, device characterization, all the manufacturing modules, has already been reviewed and closed. So it's really this last piece of it that would go into the review.
spk14: Excellent. Thank you, and have a great day.
spk06: Thanks, Joanne. Thank you, Joanne. Well, we have time for one more question, Brett.
spk07: Good. Our final question comes from Pito Chickering at Deutsche Bank.
spk06: Pito, please go ahead. Pito, are you on mute? Yep, there you go.
spk03: Can you guys hear me now? Yes, we can. Great. Thanks for taking my questions here. This question sort of, you know, is sort of a pretty hard answer, but I'll ask it anyway. We've heard the U.S. hospitals are beginning to defer procedures due to lack of contrast dye supplies for interventional cardiology. Any chance you can let us know what you're seeing and hearing, what you're assuming sort of in your first quarter guidance, and what, if any, impact there is from outside the U.S. due to the shortages from GE?
spk11: Yeah, thanks Peter for that question. So contrast dye is, we believe it's a transient issue. It's mostly contained to the US. It is something that we're closely watching because it can impact our cardiovascular and neurosciences portfolios. But we do expect it to resolve within the quarter just based on what we're hearing. Many health systems in the United States have already instituted conservation measures, and we're working with them to see how we can help support them through thoughtful allocation. But at this stage, we've built, you know, our view of it into the guidance for the first quarter.
spk10: And we do believe it's a transient issue getting better after the first quarter.
spk03: A quick follow-up on the transaction with DeVita today. What was the organic growth rate of renal care solutions? And, you know, kind of what is the strategic value that you guys see DeVita adding to their portfolio? Thanks so much.
spk12: Well, I'll answer, thanks for the question, Pete. I'll answer the second part of it, the strategic value. I mean, look, I think we both, the transaction revolves around a big piece of the value creation will be us bringing some innovative home dialysis technologies to the market. The inherent in that technology is something that we picked up from other businesses and Medtronic and the IP around it and the know-how. And we're building that into this home dialysis technologies. There'll be a couple of different products. It drives up access, it lowers costs, and there's a better patient experience. And we bring that to the table, but you know, Even just in the United States context, the dialysis market is pretty unique, and the go-to-market channel is not something that we have any kind of synergies with. And so, you know, DaVita brings, you know, one, that channel, that access to these customers, and they have a lot of – obviously, they're a leader in kidney care, so they bring a lot of clinical expertise as well. So I think it really is regarding the – the home dialysis technology, it is, you know, one plus one definitely equals more than two here. And we're excited about it. We think it's going to have a big impact. And the way, like I said before, the way we structured it, we get to share in the upside with DaVita. In terms of the other, the question, the organic.
spk11: I asked about the growth in renal care, Pito, and it was low single digits for us last fiscal year.
spk10: It is a, you know, lower growth, lower margin business for us.
spk06: Okay. Thanks, Pito.
spk00: Jeff, please go ahead with your closing remarks.
spk12: Sure. Thanks, Ryan. Okay. Well, thanks for the questions, everyone. And as usual, we appreciate your support and your continued interest in Medtronic. And look, I realize there's a lot to sort through here, including the macro issues of supply chain and China that surprised us this quarter. But as we've talked about, we've conservatively factored these into our guidance going forward. But I think more importantly, I hope you see that there's a clear direction, a clear direction of travel for the company, where we're headed. And it gets back to some of the questions earlier, like Vijay posed. in terms of us getting to that mid single digit, that 5% plus and the double digit shareholder returns on a consistent basis. The things that we're doing, the new operating model that's driving the more innovation driven growth, the capital allocation and portfolio management to reposition our portfolio for higher growth. And finally, the global operations and supply chain changes that we've been working on to provide that resiliency and provide that that consistency that we need. These are the right things to do. I'm confident. I mean, the macro environment has made it choppier to execute on these things, but we're heading in the right direction. We're making the right moves. And I just, again, you know, this will benefit the company and get us where we need to go. So we're looking forward to update you on the progress in our Q1 earnings program, which we anticipate opening on August 23rd. And so with that, thanks again for tuning in today and please stay healthy and safe and have a great rest of your day.
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