Medtronic plc

Good morning. I'm Ryan Weisfenning, Vice President and Head of Medtronic Investor Relations. And I appreciate that you're joining us for our fiscal 25 second 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, Chairman and Chief Executive Officer, and Gary Corona, Interim Chief Financial Officer. Jeff and Gary will provide comments on the results of our second quarter, which ended on October 25th, 2024, and our outlook for the remainder of fiscal year 25. After our prepared remarks, the executive VPs from each of our four 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, divisional and geographic revenue summaries, and non-GAAP reconciliations. 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 our 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 second quarter revenue in the current and prior year reported as other. References to sequential revenue changes compared to the first quarter of fiscal 25 and are made on an as-reported basis. All references to share gains or losses are on a revenue and year-over-year basis and compare our second fiscal quarter against our competitor's third calendar quarter. 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.

Hello everyone and thanks for tuning in today. Our momentum is building as we keep executing on our commitments, delivering yet another quarter of strong results that came in ahead of expectations and another guidance raise. This makes it eight quarters in a row now of solid mid single digit organic revenue growth. And we translated that 5% organic top line growth into 8% EPS growth on a constant currency basis and we remain on track to deliver high single-digit EPS growth on a reported basis in the back half of the fiscal year. We know that innovation matters, and innovation is what really is driving our growth today across multiple areas. We're seeing strong performance from franchises like TAVR, PFA, leadless pacemakers, diabetes, spine, and neuromodulation, just to name a few. And we're confident that this diversified growth will keep going, especially with the strength of our pipeline in high-impact markets like hypertension, which is a big exciting opportunity for us. If you look at our recent performance, it's clear. The foundation of the company is much stronger. We've integrated a real performance mindset alongside our mission-driven culture, and it's making a difference. And as we continue to drive durable top-line growth, use our scale to deliver leveraged earnings, generate strong free cash flow, pursue smart tuck-in M&A, and grow our dividend, we're setting ourselves up to create strong long-term returns for our shareholders. Now let's turn to the details of our Q2 business results and discuss our performance. Looking first at our highest growth businesses, combined they grew 8% again this quarter and made up 20% of our revenue. Starting with Structural Heart, we grew high single digits on the strength of our TAVR franchise. In the U.S., we launched Evolute FX Plus, and we're seeing strong customer adoption. We also received CE Mark for FX Plus last month and began commercializing in Europe last week. FX Plus is important not only for the lifetime management benefit it offers, but also because it creates an additional opportunity for us to reiterate our positive smart trial results. Now, you'll recall that SMART demonstrated our superior valve performance in small annulus patients who are primarily women, and they make up about 40% of the TAVR segment. With this combination of FX+, low-risk data, and now SMART data, we expect to continue to grow at or above market in the quarters ahead. Next, in cardiac ablation solutions, our technology is helping to drive the rapid shift of the market to pulse field ablation. We've been significantly expanding our manufacturing capacity to meet this growing demand, and we're well positioned as the only company with both single shot and focal PFA catheters. We continue to drive our growth of our Pulse Select PFA single shot catheter. This is offsetting cryoablation declines and our rate of cryo-sequential decline significantly improved versus what we saw in Q1. With PFA this quarter, we nearly doubled the number of physicians using Pulse Select, and we more than doubled the total number of patients treated with this catheter in Q2. That said, our overall cast growth did not accelerate as expected this quarter due to a third-party component supplier interruption. They've now expanded capacity, allowing us to continue to ramp Pulse Select availability and activate new accounts. On top of Pulse Select, we were pleased to receive FDA approval late last month for our FARA mapping and ablation system and Sphere 9 focal catheter. This all-in-one catheter was designed from the ground up to perform high-density mapping as well as pulse field and RF ablations. Sphere 9 replaces competitors' mapping and RF catheters, allowing us to increase our revenue per case. We're ramping commercial availability now, having already entered some of the top U.S. centers by volume, and this will accelerate over the coming weeks and quarters to meet this significant demand. And we continue to rapidly hire mapping specialists in advance of entering new centers, giving us confidence in our ability to accelerate account activations. With the strong customer response to the breadth of our new PFA portfolio, we expect our overall CAS growth rate to accelerate through the back half of the fiscal year, including strong double-digit growth in Q3. And we expect to reach and then exceed market growth in this large and fast-growing $9 billion cardiac ablation space. Next, in surgical robotics, we continue to invest in our Hugo platform. building a strong foundation for future growth. In the U.S., we've completed capturing the necessary data for our urology submission and expect to file with the FDA in the first quarter of calendar 25. We're also seeing fast enrollment in our next two U.S. indication studies, hernia and gynecology. In digital, we commenced commercial rollout of our touch surgery live stream remote connectivity solution across the U.S. and Western Europe. as we continue to digitize operating rooms globally. And we're making progress bringing our advanced surgical technologies to Hugo. We expect ICG fluorescent imaging to be available in certain countries soon, followed by adding our market leading ligature vessel sealing technology to Hugo next calendar year. Next, in diabetes, we delivered another quarter of double digit growth, growing 11% despite more difficult comparisons from the 780G US launch last year. Our CGM sales grew over 20% in both the US and international markets, driven by the high CGM attachment rates to the 780G. In addition, our Simplera Sync Sensor, which is half the size and much easier to apply than our previous sensor, is gaining strong acceptance in international markets. On the smart MDI front, We just secured FDA clearance for our InPen app, which paves the way for a limited U.S. release of our smart MDI system with our Simplera CGM. So we continue to add new patients with the 780G system. The majority are coming from MDI, and we're also seeing success from our competitive switch programs. patients are attracted to 7AG's highest time and range of any commercial AID system and achieving this control with less burden. In the DQ&A survey of over 1,500 AID users in the U.S., the 7AG had the highest user satisfaction of any AID system, including scoring 20 percentage points higher than the tandem Dexcom combination and 25 points higher than the insolent Dexcom combination. We're investing heavily in diabetes to expand manufacturing capacity and advance our robust technology pipeline, including our partnership with Abbott on an integrated sensor. These activities support our strategy to be number one in the fast-growing AID and smart MDI space, with a technology ecosystem that is focused on achieving better control with less burden. now turning to hypertension and the large future growth opportunity of our Simplicity blood pressure procedure. With a proven track record of long-term efficacy and safety and unique design, this innovative solution is poised to transform hypertension management. We're pleased that CMS earlier this month finalized the outpatient transitional pass-through payment, which will take effect on January 1st. With coding and sufficient Medicare payment Now in place, the key step for broader adoption is to establish standardized coverage. On this front, we continue to engage with CMS to facilitate access for patients to this important therapy. And we're working with private payers to advance coverage as well. Hypertension is a global health challenge and the leading cause of cardiovascular disease and premature death worldwide. In fact, it impacts more than 1 billion people globally, including nearly half of all U.S. adults. Despite the availability of numerous medications, only one in four adults with hypertension in the U.S. have it under control. And the direct costs to the U.S. healthcare system for hypertension are massive. somewhere between $100 and $200 billion a year. So our simplicity procedure can play a very important role in cost-effectively improving public health. Now looking at our established market leaders. Combined, they made up nearly half of our revenue and grew mid-single digits. In many cases, we've innovated on the technology and business models to reinvent these businesses over the past few years. and we continue to invest in them to ensure durable growth. They are a key part of our financial model, helping us to consistently deliver on the top line, and they contribute a disproportionate amount of profit and cash flow. In cranial and spinal technologies, we grew 6% worldwide, including 7% growth in U.S. core spine and biologics. In a market that rewards scale, we're continuing to win. This is driven by our leading Able ecosystem of differentiated spine implants and enabling technologies, including AI-driven pre-op planning software, imaging, robotics, navigation, and powered surgical instruments. Our large global Able installed base is changing the competitive dynamics in spine. And we continue to expand its features and its capabilities. At the NASS conference in September, we announced a new partnership with Siemens Healthineers to co-market and integrate their imaging technologies for spine care. We expect CST to continue to deliver sustained, above-market growth with able and its differentiated best-in-class solutions, attracting not only spine surgeons around the world, but also the best sales reps and distributors who continue to leave the competition to join our winning team. Next, in surgical, we had flat results. As I mentioned last quarter, we had difficult year-over-year comparisons given the supply recovery last year as well as the Korean market slowdown from the ongoing physician strikes. It's worth noting that on a sequential basis, surgical had strong, high single-digit growth both globally and in the U.S., We had outsized strength and advanced energy, driven by accelerated adoption of our Ligasure XP Maryland Vessel Sealer. Overall, we continue to expect surgical to return to more normalized growth starting next quarter as these comparisons ease. In cardiac rhythm management, we had another strong quarter, growing in the mid-single digits, including high single-digit growth in both defibrillation solutions and in cardiac pacing therapies. Our micro-leadless pacemaker franchise grew high teens with broad strength around the world. Now turning to our synergistic businesses, which collectively grew mid-single digits and represented over 30% of our revenue. The highlight again this quarter was neuromodulation, where growth accelerated to 12% and the business continues to grow well above the market. We're seeing broad-based growth across product lines, including pain stim and brain modulation. In pain stim, we grew 10%, including 12% growth in the U.S. on the continued launch of the Inceptive closed-loop spinal cord stimulator. The innovation in Inceptive is transforming the treatment of chronic pain for patients. It automatically keeps therapy at the optimal dose and allows patients to focus on everyday life, not on managing their chronic pain. In addition, it has the best full-body MRI conditional access on the market, and the competition really isn't even close. This is important given that over 80% of these patients need an MRI within five years, and nearly all of them need one within 10 years. In brain modulation, growth accelerated to 17%, the third quarter in a row of double-digit growth. This innovation-driven growth is built on the ongoing launch of our Percept-RC with BrainSense technology. Percept is having a huge impact for patients with movement disorders like Parkinson's, essential tremor, dystonia, and epilepsy. It not only delivers therapy to specific brain targets, but it is the only DBS system that captures and records brain signals. Now this equips physicians with valuable data and the insights needed to personalize the therapy. And just like in pain stim, our DBS devices have differentiated MRI advantages versus the competition. In addition to Neuromod, we also had strong performances in other synergistic businesses. Cardiac surgery grew 10%, with the broad strength coming from innovative products like our Avalis Ultra Surgical Valve, Peneture LAA Exclusion System, and Vital Flow ECMO System. Acute care and monitoring grew 3%, including 9% in Nelcor Pulse Oximetry. And pelvic health accelerated its growth to 5%. Now with that, let's go to Gary, who will give you a deeper look at our Q2 financial performances and our outlook. Gary, over to you.

Thanks, Jeff. We delivered a strong top-line performance again this quarter with revenue growth of 5%, 50 basis points above our guidance. On the bottom line, adjusted EPS was $1.26, a penny above the midpoint of our guidance. We continue to invest in our pipeline and behind our emerging growth drivers, while also delivering bottom line growth, which was up 8% on a constant currency basis. The EPS beat was driven by two cents from greater operating profit on the revenue beat, partially offset by one cent from tax. The sources of our revenue growth continue to be diversified, both by business and geography, which gives us confidence in its durability. From a segment perspective, we had double-digit growth in diabetes, high single-digit growth in neuroscience, and mid-single-digit growth in cardiovascular. The low single-digit growth in our medical-surgical portfolio was expected, given the comparisons in surgical that Jeff addressed. It's worth noting that MED's surge grew 7% sequentially, and we expect to return to more normalized year-over-year growth starting next quarter. From a geographic perspective, our international markets grew revenue high single digits, including mid-single-digit growth in Western Europe and Japan and low double-digit growth in emerging markets. Moving down the P&L, our adjusted gross margin was 65.2%, down 70 basis points, but in line with our expectations. The decline was entirely driven by foreign currency as our adjusted gross margin was up 40 basis points on a constant currency basis. Our adjusted operating margin was 24.3%, also in line with our expectations. The 90 basis point year-over-year decline was entirely driven by FX. On a constant currency basis, operating margins increased 100 basis points. The organization remains extremely focused on improving our margins. We're more than doubling our underlying productivity in the COGS line through centralizing operations, consolidating factories and suppliers, and driving the Medtronic performance system across our manufacturing network. We're also laser focused on pricing, discipline, and optimization, particularly behind our new innovation. At the same time, we're very early in a number of new product launches that aren't fully at scale, including Afera, Simplera, and Hugo, which can create a mixed headwind for us. That said, on the SG&A line, we're focused on growing at less than sales, like we did again this quarter, as we drive efficiency and productivity gains, particularly in our back office functions. Given all the levers we have, we have line of sight to improving our margins over time while continuing to prioritize and make significant investments in our organic pipeline and product launches. Now, regarding capital allocation, we continue to make choices and invest to drive future profitable growth while also returning capital to shareholders, primarily through our dividend and from time to time opportunistic share repurchases. As I mentioned last quarter, we've increased our focus on tuck-in M&A. We're also continuing to work to evaluate our portfolio. Overall, we view active portfolio management as an important lever to delivering on our long-term strategic and financial objectives. Now turning to guidance. Given our continued outperformance and positive momentum, we're raising our full-year revenue and EPS guidance. We now expect fiscal 25 organic revenue growth of 4.75 to 5%, an increase from the prior range of 4.5 to 5%. For Q3, we're expecting to deliver another quarter of mid-single-digit growth on the top line, and we'd have you model organic revenue growth of approximately 4.75%. Based on recent rates, FX would have an unfavorable impact to fiscal 25 in the range of $225 to $325 million, including $100 to $150 million in the third quarter. Moving down the P&L, we expect our third and fourth quarter gross margins to improve sequentially as currency becomes much less of an impact. We also continue to expect our full-year operating margins to expand as we balance driving efficiencies with investing behind our product launches and in our long-term pipeline. On the bottom line, we're raising our fiscal 25 non-GAAP diluted EPS guidance to a new range of 544 to 550, an increase from the prior range of 542 to 550. For the third quarter, we expect EPS of $1.35 to $1.37. The fiscal year 25 guidance range continues to include an unfavorable 5% impact from foreign currency, including an unfavorable 1% impact in Q3. Further details on our annual guidance can be found in the guidance slide in our presentation. So to conclude, we remain focused on restoring our earnings power, having just delivered another quarter of leveraged EPS growth on a constant currency basis. We continue to expect to report high single-digit adjusted EPS growth in the back half of our fiscal year, in line with our long-term commitment to deliver durable, mid-single-digit organic revenue growth with EPS leverage. Jeff, back to you. Thank you, Gary.