Medtronic plc

Good morning, and welcome to Minnesota, where we finally have some snow. I'm Ryan Weissfenning, Vice President and Head of Medtronic Investor Relations, and I appreciate that you're joining us this morning for our Fiscal 24 Third Quarter Video Earnings 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 third quarter, which ended on January 26, 2024, and our outlook for the remainder of the fiscal year. After our prepared remarks, the executive VPs covering our segments 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 statements. Unless we say otherwise, all comparisons are on a year-over-year basis, and revenue comparisons are made on an organic basis, which excludes the impact of foreign currency and third quarter revenue in the current and prior year reported as other, which stems from prior business separations. There were no acquisitions 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 second quarter of fiscal 24 and are made on an as-reported basis. And all references to share gains or losses referred to revenue share in the fourth calendar quarter of 2023 compared to the fourth calendar quarter of 2022, 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 hear about the quarter.

Hi, everyone, and thank you for joining us today. Our momentum and solid execution continued this quarter as we establish a track record of consistently delivering mid-single-digit organic revenue growth. Diabetes took another step forward with double-digit growth, supported by a return to growth in the U.S. I'd also note the particular strength we saw in multiple businesses like CoreSpine, Cardiac Surgery, Structural Heart, and Cardiac Pacing. and we had strong growth across international markets as we expand access to our innovative healthcare technologies all around the globe. At the same time, we've had a rapid cadence of new product approvals and we're continuing to differentially invest in our pipeline of highest growth opportunities. We're advancing innovative core technologies like robotics, AI, and closed-loop systems. And with five AI products already FDA approved, we're leading the way in bringing the tech into med tech. We also continue to make progress on our comprehensive transformation of the company. We're incorporating a performance-driven culture that's based on execution, speed, and playing to win. And we're leveraging our scale to drive efficiencies. So when you look at our financials this quarter, you're seeing the early results of our focus on restoring earnings power and converting our earnings into strong cash flow. And we're using that cash to both invest in high return opportunities and return value to our shareholders. So we're executing and we're delivering. and we expect to continue over the coming quarters and years given our momentum, our ongoing transformation, our breakthrough innovation, our exposure to strong secular growth markets, and our numerous catalysts across the business. Now, before I get into the details of our Q3 results, I do want to mention that we provided a portfolio management update this morning on our patient monitoring and respiratory interventions businesses. After a comprehensive review, we have decided to exit our unprofitable ventilator product line and retain and bring together our remaining PMRI businesses into one business, which we're calling Acute Care and Monitoring. Now, we've determined it is in the best interest of Medtronic, its stakeholders, the ACM business, both near and long-term, to exit vents because of its increasing unprofitability and market preference shift to lower-acuity ventilators. Now, as we exit vents, I want to recognize the strong legacy of our business and the Puritan Bennett brand. And we're committed to serving the needs of our customers and honoring our ventilator service contracts. And I also want to thank the employees in our ventilator business who played an incredible role during the pandemic to dramatically expand production to get ventilators to the communities around the world that needed them. And while we exit, we do believe that existing manufacturers can meet the customer demand for new ventilators going forward. Now, at the same time, we decided to retain and refocus the remaining PMRI businesses. Three main factors have driven this decision. First, we have strong conviction in our ability to lead and drive growth and acute care and monitoring given our improved competitive position and our ability to properly fund this business with savings from exiting events. Second, the importance of data in this space is changing rapidly. It's becoming the basis of innovation, and this fact further improves our competitive differentiation. And lastly, as a company more broadly, we continue to prioritize profitable, innovation-driven growth and category leadership, and ACM can deliver both. That does not mean we will shy away from additional portfolio moves going forward, but the bar is high for any strategic activity that dilutes our focus on our profit and growth. So when you take these decisions together, we're able to provide increased investment for acute care and monitoring, using the savings from events and bringing two businesses together, all without creating dilution to our P&L. Now let's get into the details behind our Q3 results. We continue to look at our portfolio in three categories, established market leaders, synergistic, and highest growth businesses. In this quarter, all three grew in line with our expected growth algorithm. Our established market leader and synergistic businesses grew mid-single digits, while our highest growth businesses posted high single-digit growth, and we expect their contribution to our overall growth to further accelerate in the quarters ahead. Now, looking first at the established market leaders. Combined, they made up just under half of our revenue and grew 4%. Starting with cranial and spinal technologies, we're driving consistent above-market growth on the continued adoption of our ABLE ecosystem. CST delivered high single-digit growth in core spine, mid-teens growth in biologics, and high single-digit growth in enabling technology. We had strong double-digit unit growth in stealth station navigation, OARM imaging, and Mazor robotic systems, a leading indicator for future growth in this business. We also continue to see strong adoption of unit adaptive spine intelligence, our integrated AI-based surgical planning solution. Now with Able, we're offering a complete, robust ecosystem of enabling technologies and associated implants for spine surgeons. Our global footprint, which includes over 10,000 systems, is over four times greater than the nearest competitor. And with this scale and extensive and rapidly increasing install base, we're transforming the spine industry. We're leading the way. As more surgeons adopt our integrated spine technologies and in an environment where there is disruption from consolidation, we're attracting the best sales teams to Medtronic to grow and expand our business. Next in surgical, we grew 3%. Our wound management business, one share, growing in the high teens on the strength of our V-lock barb sutures. We also had solid mid-single-digit growth in hernia products, as we one share in synthetic permanent mesh with our ProGrip platform. And as expected, our surgical growth continued to have a modest impact from declines in bariatric surgery. Now, we still believe this impact will be temporary as more patients become eligible for surgery and as patients seek a more permanent treatment to weight loss. To wrap up our established market leaders, cardiac rhythm also grew 3%, driven by high single-digit growth in cardiac pacing. Our Micra leadless pacemakers continue to post strong results, growing 15%, driven by the launch of our next-generation Micra AV2 and VR2 devices. We're also benefiting from the adoption of conduction system pacing, an alternative to traditional single or dual chamber pacing. Our 3830 lead, the only one on the market approved for conduction system pacing, continue to grow strong double digits. In CRM, we also began training in the limited launch of our Aurora EVICD. Now, we expect the EVICD to reaccelerate our defibrillation solutions growth in the coming quarters. As I've shared with you in the past, Aurora is a game changer in the ICD space. It delivers the benefits of a traditional ICD, including similar size, longevity, and pacing features, but without the leads and the harder veins. And these benefits can be realized with one device and only one implant procedure. We expect our advantages will not only displace the competitor's device, we will expand the population far beyond the existing segment and be a strong growth driver for CRM. Now, turning to our synergistic businesses, combined, they grew mid-single digits in Q3. And I'll highlight some of the drivers here. Let's start with Aortic, which grew 13% on supply recovery and continued momentum of our Endurant AAA franchise. Cardiac Surgery grew 10%, driven by strength and perfusion and cannula and ECLS oxygenators, given competitor quality issues, and the strong sales in international markets of our Avelis surgical valve. Coronary grew 7%, driven by double-digit growth in both guide catheters and balloons. And we increased our drug-eluting stent share in the U.S. and in Europe on the continued rollout of our Onyx Frontier drug-eluting stent. Now turning to businesses in our highest growth markets. As I mentioned earlier, together these businesses grew in the high single digits this quarter, and we expect their contribution to our growth to accelerate going forward. Diabetes led the way, growing double digits on the global adoption of our game-changing MiniMed 780G system. We're seeing strong sequential momentum, growing 5% over the prior quarter. Our customer base is growing sequentially, and we're driving more revenue per customer. In the U.S., we not only returned to growth, we grew mid-single digits. driven by nearly 50% revenue growth in insulin pumps. We doubled our new users year over year, attracting those on multiple daily injections, as well as users of competitor systems. Users are choosing 7-AAG for the outcomes it delivers. With intensive insulin users, these outcomes matter, and the 7-AAG is highly differentiated. It's the only AID system to automatically adjust and correct sugars every five minutes. It offers flexible glucose targets as low as 100 and features our proprietary meal detection technology. This leads to high time and range for users. And this type of glycemic control is coming with less effort and burden. As users realize the relief that comes from spending more time in automation with our SmartGuard technology, it's worth pointing out that in a recent third-party survey of nearly 2,000 U.S. diabetes pump users, the 780G scored number one in overall pump satisfaction. And among Type 1 CGM users, our Guardian Force sensor mirrored competitor sensors in overall satisfaction. And during the quarter, we secured CE Mark for our Simplera Sync sensor for use with the 780G. And we look to begin the limited release this spring. And in the U.S., we're planning to submit the 780G with Simplera Sync to the FDA in the first half of this calendar year. Simplera Sync is half the size of our current sensor. It has a disposable design and is much easier to put on. Now, we've been driving the diabetes turnaround for some time, and I got to tell you, it certainly feels really good to return to double-digit growth. But we're not finished here. There is definitely more work to be done as we work to bring to market an even more robust ecosystem of differentiated technology for people living with diabetes, including next-generation durable pumps, smart pens, patch pumps, sensors, and algorithms. And as the intensive insulin management space moves to using smart dosing through either AID or smart MDI, we expect an acceleration in the growth contribution from our diabetes business. Now turning to cardiac ablation solutions, we delivered 11% growth in international markets, including 9% growth in Western Europe. Our strong international growth, as well as our overall performance, continues to be driven by our leading Arctic Front cryo solution, as pulse field ablation is still in the early stages. We're seeing, though, a lot of enthusiasm in the market for our PFA products. In Europe, we're the only company with PFA offerings for both the single shot and the focal segments. And in single shot, we have now started the limited market release of our Pulse Select PFA system here in fiscal Q4. And we're seeing very efficient procedures and after just a couple of cases. And so the learning curve is really short. The catheter handling and maneuverability has been excellent due to its small shaft and our custom 10 French bi-directional sheath. Clinicians are also reporting no noticeable muscle contraction with our PFA product, which is beneficial for patient experience. In focal, we continue to ramp manufacturing of the Afera mapping system and Sphere 9 catheter and remain in limited market release in Europe. Sphere 9 is the only catheter that can perform both pulse field ablation and radiofrequency ablation and high-density mapping. It's really an all-in-one catheter. In the U.S., our cast business declined in the quarter. We faced the first full quarter of competition in the cryoablation space, which is a space we created and had been the only player. In addition, many customers actually held back purchases as they awaited the launch of our Pulse Select PFA catheter, which is now commercially available. We do expect to improve from here as we roll out the recently approved next-generation Nitron Cryo Console and Pulse Select. the only PFA catheter FDA approved for both paroxysmal and persistent AF. And in addition to the European feedback, clinicians have consistently commented on how well it's visualized and how easily it connects to their mapping system. So we're also making progress in bringing our Afera mapping system and Sphere 9 catheter to the U.S. with the last patient follow-up in our Sphere per AF pivotal trial now completed. We expect to see the results at a medical meeting in the first half of this calendar year. With an $8 billion market size, expanding our share in this under-penetrated cardiac ablation space is a big opportunity for us. We expect our growth profile to improve over time, first moving towards market growth and then winning share, as we bring our rich pipeline of innovation to patients who need this technology. In neurovascular this quarter, we grew high single digits when you exclude sales in China, where the market is subject to volume-based procurement. We continue to have strong double-digit growth in flow diversion globally. This is being driven by our innovative SHIELD technology for treating brain aneurysms, which is available on both PipelineFlex and Vantage flow diverters. In robotic surgical technologies, we continued growing the install base for our differentiated Hugo robotic system in international markets. In the U.S., our Expand Euro Pivotal trial continues to enroll, and we expect to have first enrollment in our hernia trial very soon. We expect Hugo, equipped with advanced digital capabilities, to be a meaningful growth driver for us in the years ahead. We believe surgeon preference for our open console and modular design, our leading position in minimally invasive surgery and instrumentation, our connected digital ecosystem and data-enabled insights, along with our world-class surgical training program and partnerships, will meaningfully advance the low penetration of robotic surgery around the world. Now turning to structural heart, we grew high single digits in the quarter, including mid-single digits sequentially, as we see ongoing adoption of EVOLUTE FX and its improved design and market-leading valve performance. In Europe, where FX was launched for the first full quarter, we grew double digits. And Japan grew in the low 20s on the continued adoption of FX. I'm pleased to share the news today that we have submitted Evolute FX Plus to the FDA for approval. FX Plus has three windows in the frame to allow easy coronary access while providing the same dependable valve performance of our Evolute platform. And we were also pleased to hear that one-year trial results of our SMART trial will be presented as a late breaker at ACC on April 7th. We're excited to see the results and are looking forward to having both FX Plus and the SMART trial, as well as the continued strength of our four-year low-risk data as catalysts for our structural heart business. Now with that, let's go to Karen for a deeper look at our Q3 financial performance and our fiscal 24 guidance raise. Karen?

So looking at our financials, our third quarter was another quarter where we delivered on our commitments. Our revenue grew 4.6% ahead of expectations. An adjusted EPS was $1.30, 4 cents above the midpoint of our guidance range. We attribute the beat to stronger-than-expected revenue growth and gross margin, offset by 4 cents from greater-than-anticipated currency impact, primarily from the devaluation in the Argentine peso in December. We're delivering durable mid-single-digit revenue growth, and have now for several quarters. As Jeff mentioned, international markets were an important driver for us. Our non-US developed markets grew 6%, including 8% growth in Western Europe and 7% growth in Japan. In fact, we had double-digit growth in several of our businesses across both of those regions. Emerging markets grew 10%. We had high teens growth in the Middle East and Africa and mid-teens growth in South Asia. China grew low double digits as some of the VBP we expected there continues to be delayed. And Eastern Europe grow in the low single digits, given Russian sanctions. In the U.S., we grew 2%. We have several new product approvals that are at the earliest stages of their launches and expect those launches to positively impact our U.S. growth over the next couple of quarters and beyond. Looking down the P&L, we delivered a strong quarter. Both our adjusted gross and operating margins were ahead of expectations. Our adjusted gross margin of 66.1% improved year over year, overcoming a 60 basis point headwind from foreign exchange and continued elevated inflation. We attribute the favorability primarily to the delayed China VBP and lower freight costs. We also continue to see traction from our pricing efforts and an early benefit from our comprehensive COGS efficiency efforts. While our adjusted operating margin of 25.2% declined 70 basis points, it was entirely driven by currency. In fact, operating margin on a constant currency basis was up 160 basis points from improvement in gross margin and strong SG&A leverage as we continue to drive efficiencies across the enterprise. Below the operating margin line, our adjusted tax rate was a little higher than anticipated, mainly due to the jurisdictional mix of profits. On the flip side, income on our investments was also a little better than expected with higher rates. It's worth noting that while our adjusted EPS was flat year over year, it grew 8.5% on a constant currency basis from the leverage we drove down the P&L. We also significantly improved our free cash flow and conversion in the quarter. Now turning to guidance. Given our top and bottom line beat and continued strength in our underlying fundamentals, we're raising our full year revenue and EPS guidance. We now expect full-year organic revenue growth of 4.75% to 5%. For the fourth quarter, we're expecting organic revenue growth to be in the range of 4% to 4.5%. On a comp-adjusted basis, this is an acceleration from the third quarter, as we continue to ramp our recent product launches. With the exit of ventilators that we announced today, we are moving the associated revenue to the other segment starting in the fourth quarter. As is the case with all revenue in other, we will exclude it from our organic revenue growth, and additional details can be found in our third quarter earnings presentation. Regarding currency, based on recent rates, we would see a full-year revenue impact in the range of an unfavorable $15 million to a favorable $35 million, including an unfavorable impact of $70 to $120 million in the fourth quarter. On the bottom line, with the beat in the third quarter, we're raising our full-year EPS guidance by 4 cents at the midpoint to a new range of $519 to $521. I'd point out that given our durable performance, we've been able to increase this guidance by 15 cents at the midpoint from where we initially started the year. For the fourth quarter, we expect adjusted EPS of $1.44 to $1.46. And regarding currency, based on recent rates, we're seeing an unfavorable impact of 7% on full-year EPS, including an unfavorable 5% impact in the fourth quarter. Lastly, while we'll give our fiscal year 25 guidance on our earnings call in May after we finish our planning, I want to share our early thoughts. You've seen us deliver durable revenue growth for several quarters, and we expect that to continue. Down the P&L, inflation, currency, and tax are currently headwinds to earnings growth, and we expect to continue to increase our investments in R&D. That said, we're very focused on driving offsets where we can and improving the earnings power of the company. And regarding the portfolio management decisions we announced today, while the street's FY25 numbers didn't yet reflect the potential separation, with today's decision, we're able to increase investment in innovation-driven growth without near-term earnings dilution or an ongoing impact to cash flow. all with a focus on optimizing long-term shareholder value. I want to close by expressing my sincere gratitude to all of our employees for your hard work and unwavering commitment to the Medtronic mission. Your dedication was instrumental in achieving our results this quarter and making a difference for so many people around the world. Thank you. Jeff, turning it back to you to take it home.