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 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, Chairman and Chief Executive Officer, and Gary Corona, Interim Chief Financial Officer. Jeff and Gary will provide comments on the results of our third quarter, which ended on January 24th, 2025. 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 statement. 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. References to sequential revenue changes compared to the second quarter of fiscal 25 and are made on an as-reported basis. All share references are on a revenue and year-over-year basis and compare our third fiscal quarter to our competitor's fourth 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 joining us today. We delivered another quarter of mid-single-digit revenue growth for the ninth quarter in a row. We had strong performances in several areas, starting with 22% growth in cardiac ablation solutions powered by our PFA portfolio. Leadless pacing, neuromodulation, and diabetes all grew double digits. And structural heart, excluding congenital, and US cranial and spinal technologies Both grew high single digits. We advanced our innovation pipeline and are opening up the largest total addressable market in MedTech with renal denervation. It's an exciting time as we're stacking growth drivers on top of growth drivers with groundbreaking innovation in some of the most attractive markets in MedTech. We overcame a short-term U.S. distributor dynamic and delivered strong earnings power with high single-digit EPS growth coming in ahead of both consensus and the high end of our guidance range, with strong improvements in both our gross margin and operating margin. And as we look ahead to our fiscal fourth quarter, we expect our revenue and EPS growth to accelerate as we build on momentum in important growth markets and continue to drive earnings leverage. We expect our formula of delivering durable revenue growth, leveraged earnings, and generating strong free cash flow to create significant value for our shareholders. Now let's turn to the details of our Q3 business results and discuss our performance. Starting first with our cardiovascular portfolio, which grew mid-single digits overall. The highlight was our cardiac ablation solutions business. Now we forecasted strong double-digit growth this quarter and CAST delivered meaningful acceleration, growing 22%. Our pulse-filled ablation products are driving rapid growth. We've hit a new gear on supply and demand for our PFA portfolio continues to accelerate. We are the only company with two PFA platforms, Afera and Pulse Select, which gives us flexibility. Afera has separated itself from the pack as the most desired workhorse platform with its integrated high density mapping as well as both PF and RF capabilities in a focal catheter. This is increasing our revenue per case as we replace competitors mapping and RF catheters. We also have Pulse Select and as customers use this single shot PFA catheter, they want to use it more and more. Pulse Select gives us just a ton of flexibility to grow the market globally and compete. Across both our Afera and Pulse Select platforms, customers appreciate their ease of use, precision, durable efficacy, and now increasingly their differentiated safety profile. We believe the safety profile of our PFA technology is a significant point of differentiation competitively, and it is one of several factors that gives us high confidence in our outlook. Looking ahead, we expect this rapid growth trajectory to continue. For Q4, we expect Cass to accelerate its growth rate and deliver another strong double-digit growth quarter. This will be a billion-dollar business for us this fiscal year, and we have line of sight to $2 billion as our PFA portfolio expands into new accounts around the world. Next, in structural heart, we grew high single digits excluding congenital. We continue to see good adoption of our Evolut FX Plus TAVR system in the U.S., and the international launch is off to a very good start. As we look ahead, we have some important upcoming data catalysts as we continue to share long-term evidence on the benefits of our EVOLUTE platform. Our five-year low-risk data will be presented as a late breaker at ACC next month, and two-year data from our SMART trial, which is a head-to-head versus our largest competitor, will be shared later this spring. Look, we're at a moment now where we've really solidified this business with product improvements, important clinical data, and strong execution by the team. It's now in a really good spot. Next in cardiac pacing therapies, we grew 9%. This business has grown upper single digits for 10 quarters in a row now on the strength of our leadless pacemaker franchise and conduction system pacing technology. In April, we will mark the 10th anniversary of our first micro leadless pacemaker receiving CE mark. And now, a decade later, our micro franchise continues to set the standard, delivering outstanding 24% growth in Q3, and we expect this strength to continue. Now turning to hypertension and our simplicity blood pressure procedure. We're poised to change the standard of care for uncontrolled high blood pressure. Medicare coding and payment is now in place and just last month we had a pivotal development when CMS opened a national coverage analysis. This is exciting news as we will now have Medicare coverage in place within the next eight months. We're activating new accounts across the U.S. and helping them set up simplicity clinics and establish care pathways so they're prepared to quickly ramp procedures when coverage is in place. And upon coverage, this will be an immediate growth driver and will become a significant source of growth for the company. Nearly half of U.S. adults have hypertension, and one in four of those with hypertension, they just don't have it under control, despite the broad availability of numerous generic medications. So as we take a step back, the patient population is large. The current standard of care just isn't working. Patients want this new therapy. Physicians can easily do the procedure, and health systems support it. The opportunity here is just massive, and we're poised to be the leader in addressing this large and unmet need. And as we look at the overall cardiovascular portfolio, taking all of these growth drivers together, we expect its growth to meaningfully accelerate in the quarters ahead, starting with Q4. Turning to our neuroscience portfolio, which also grew mid-single digits this quarter, in cranial and spinal technologies, we had another strong quarter with 5% global growth, including 8% growth in the U.S., as we won another point of share. I've been saying for some time now that the basis of competition in the spine market is rapidly changing. And you saw yet another example last month when a major competitor decided to get out of the spine business. We're causing this disruption. We're causing this disruption with our arsenal of differentiated enabling technology. including AI-driven pre-op planning software, imaging, robotics, navigation, and powered surgical instruments. And we recently expanded into pre- and post-op imaging through our partnership with Siemens Healthineers. Look, surgeons have to make a choice, and they're standardizing with a company that can offer them this full complement of innovative technologies. And those competitors that can't or can only offer certain pieces Well, we're seeing them either struggle or just exit the market altogether. Our differentiated, best-in-class, able ecosystem is attracting the best spine surgeons, as well as the best reps and distributors from competitors. And as these dynamics continue to play out and we continue to expand our innovation lead, we expect our CST business to deliver sustained above-market growth. Next, neuromodulation grew 13%, well above the market. And just like in spine, our game-changing innovation and strong commercial execution is disrupting the competitive dynamics. The closed-loop sensing technology that we've developed for both pain stim and brain modulation has been a big engineering feat. We now have therapies that can be personalized at scale, which is better for patients and can lessen the load on the healthcare system. and it raises the bar on what it takes to compete, which is evident in our Neuromod growth. In pain stim, we grew 12%, including 17% in the US, on the strength of our Inceptive closed-loop spinal cord stimulator. On top of being the smallest and thinnest SCS device, Inceptive instantly adjusts based on neural responses to keep the therapy at an optimal dose. And it has the best full-body MRI conditional access on the market. which is a very important feature for patients with chronic pain. In brain modulation, we grew 15%, including 26% in the U.S., driven by the adoption of our Percept DBS systems. Percept and its brain-computer interface technology is transforming treatment for patients with movement disorders like Parkinson's, essential tremor, dystonia, and epilepsy. Last month, we received CE mark clearance for our BrainSense Adaptive DBS for people with Parkinson's. With this groundbreaking technology, Percept devices, through a software upgrade, can become personalized, fully closed-loop systems with real-time automatic therapy adjustments based on brain activity feedback. Now, we expect this launch to drive continued above-market growth for our brain mod business in the quarters ahead. Now, turning to our medical-surgical portfolio, let's discuss our performance in surgical. This quarter we experienced a change in U.S. distributor buying patterns, which had a couple of hundred basis point impact on our surgical performance. We expect this to resolve as we start fiscal 26. Apart from this distributor dynamic, our U.S. hospital customer purchasing, direct from us and through distributors, has been stable. And while we continue to see market and competitive pressures in our stapling franchise, We're offsetting this by winning share with our ligature advanced energy products globally and by driving strong, high single-digit growth in emerging markets. With our Hugo soft tissue robotic platform, we're approaching some important milestones, including entering the U.S. market, expanding indications, adding features, and enhancing system performance. In international markets, utilization continues to increase, and we've more than doubled Hugo procedure volume year over year. In the U.S., we are on track to submit for FDA approval for Hugo with urology indications by the end of next month. I also have some new information to share with you today. We have finished enrollment in our hernia and benign GYN studies. Further, we recently received FDA approval to initiate our GYN oncology ID study and are actively moving that forward. We're also making progress adding features and instrumentation. We just completed our first cases using our ICG fluorescent imaging, and we expect to add our ligature vessel sealing technology to Hugo later this calendar year. So in total, we are confident in our path forward. Hugo will be a growth driver for our surgical business in fiscal 26, and a meaningful growth driver for Medtronic in the midterm. Finally, in diabetes, we had our fifth quarter in a row of double digit growth. We printed 10% growth on top of 10% growth in the prior year. Our growth is driven by one, the overall move of the market from standalone CGM with MDI to AID systems, and two, the strength of our MiniMed 780G system within the AID category. We continue to grow our 780G install base, and we're seeing very high CGM attachment rates, as well as strong growth in consumables. In Europe, we're getting excellent user feedback on our Simplera Sync sensor, which is half the size and much easier to apply than our previous sensor. In the U.S., we've submitted Simplera Sync for FDA approval, and we're also continuing to make progress on the integration work with the Abbott-based sensor. We expect these two new sensors to really accelerate our U.S. growth when fully launched. Beyond sensors, we're also investing heavily in our robust diabetes technology pipeline, including next-gen durable pumps, patch pumps, smart pens, and algorithms. We're also seeking expanded labeling for the 780G, including type 2 diabetes, which is a meaningful new opportunity. We expect to file this with the FDA here in the first half of the calendar year. So across Medtronic, we continue to drive mid-single-digit growth, and you're now seeing this translate into strong earnings power. We're delivering leveraged earnings as we focus on disciplined pricing, holding our SG&A growth below sales, and realizing the benefits of our scale, including more than doubling our underlying COGS productivity. Gary will now walk you through a deeper look at our Q3 financial performance and our outlook. Gary, over to you.

Thanks, Jeff. Our Q3 revenue of $8.3 billion grew 4.1% organic. On the bottom line, adjusted EPS was $1.39, up 6.9%. This was three pennies above both consensus and the midpoint of our guidance. The EPS beat was driven by better-than-expected operating profit on stronger gross margins and a better-than-expected tax rate. We like the shape of the P&L this quarter, with mid-single-digit organic growth on the top line, improved gross and operating margin, strong investment behind our growth drivers resulting in leveraged earnings growth. We continue to see breadth and diversification in our revenue growth, with double-digit growth in diabetes and mid-single-digit growth in cardiovascular and neuroscience offsetting medical-surgical. We continue to see stronger overall growth in our international markets, which grew 5%, including high single-digit growth in Japan. Emerging markets grew high single digits, including high teens growth in India, mid-teens growth in Eastern Europe, and low double-digit growth in Southeast Asia and the Middle East and Africa. Moving down our P&L, our adjusted gross margin was 66.6%, up 50 basis points versus last year, and ahead of our expectations. We continue to execute on our COGS efficiency programs, and that's helping to drive margin upside. We also drove the upside with our focus on better pricing and business mix. The improved gross margin translated into an operating margin that was also ahead of our expectations. Our adjusted operating margin was 26.2%, up 100 basis points versus a year ago. The organization remains extremely focused on improving our margins over time. We're also prioritizing investments in our pipeline and important product launch capabilities, like hiring hundreds of mappers to support PFA growth and market development specialists in renal denervation to accelerate Ardian growth. At the same time, we're returning significant capital to our shareholders, primarily through our strong and growing dividend, and from time to time, opportunistic share repurchases. Regarding our portfolio, we've increased our focus on finding tuck-in acquisitions that can enhance our growth and margin profile. We're also continuing to actively evaluate our portfolio at the business, product line, and geographic level, all through the lens of maximizing shareholder value. Now turning to guidance. We're reiterating our full-year revenue and EPS guidance today, and both our revenue and EPS growth will accelerate in the fourth quarter. On the top line, we continue to expect FY25 organic revenue growth to be in the range of 4.75 to 5%. For Q4, given the strong trajectory of our growth drivers and expected acceleration in the cardiovascular portfolio, we're comfortable with current street organic revenue growth consensus and expect to deliver our 10th quarter in a row of mid-single-digit revenue growth. Based on recent rates, FX would have an impact to Fiscal 25 in the range of $275 to $325 million, including $125 to $175 million in the fourth quarter. On the bottom line, we continue to expect Fiscal 25 non-GAAP diluted EPS in the range of $544 to $550 and are comfortable with current full-year street consensus. Based on recent rates, our EPS guide factors in a five-point impact from foreign currency, and we will have a significantly smaller impact than that in fiscal 26. In Q4, we expect our restored earnings power and strong operating margin expansion to continue, resulting in high single-digit adjusted EPS growth in the back half of our fiscal year, consistent to the commitment that we have been sharing all year. Further details on our guidance can be found in the guidance slide in our presentation. Jeff, back to you.

Thank you, Gary. And I want to thank you for stepping in as CFO over the last few quarters. I know you're going to help ensure a smooth transition as we welcome Thierry, and I look forward to your continued contributions to Medtronic. Now, Thierry will be joining us in a couple of weeks. And as I've heard from several of you in the investment community, it sounds like your checks are confirming what led us to hire him. He has a very strong reputation for his operational focus and ability to lead organizations to drive margin improvement, portfolio management, and earnings power to create shareholder value. Now, before we go to analyst questions, I'll share a few final thoughts. Look, we've made a number of changes to the company. And the turnaround definitely hasn't been overnight. It's been building. It's been building with nine quarters in a row of mid-single-digit growth. And now we're clearly entering a new phase with the growth drivers kicking in. And these are big growth drivers. As I said earlier, we're stacking growth drivers on top of growth drivers. We're in the moment with 780G and diabetes, closed-loop technology and neuromodulation, And of course, PFA in our cardiac ablation solutions business. And we're about to start a massive growth driver with our simplicity procedure in hypertension. And there's even more to come with opportunities like tibial stim for overactive bladder, our Hugo robot, and our transcatheter mitral and tricuspid valves, among many others. And at the same time, our earnings power is now kicking in with high single-digit EPS growth this quarter and next. So look, it's a very exciting time to be here at Medtronic. And I want to close by thanking our employees who are listening today and make all of this possible. You're making a difference every day for patients around the world, innovating and advancing healthcare technology and improving healthcare access. You're inventing, developing, and deploying meaningful technologies that will change standard of care and create whole new markets. I appreciate your dedication to the Medtronic mission, and I'm really looking forward to what we will collectively accomplish in the days ahead. With that, let's move to Q&A, where we're going to try to get to 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. So with that, Brad, can you please give the instructions for asking a question?

For the cell site 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, Gary, and Ryan are joined by Q DeLara, EVP and President of Diabetes, Mike Marinaro, EVP and President of the Medical Surgical Portfolio, Sean Salmon, EVP and President of the Cardiovascular Portfolio, and Brett Wall, EVP and President of the Neuroscience Portfolio. We'll pause for a few seconds to assemble the queue. We'll take the first question from Patrick Wood at Morgan Stanley. Patrick, please go ahead.

Perfect. Thank you so much for taking the question. I promise I'll keep it to one. As you guys are moving into fiscal 26, obviously there's Hugo, Cass is accelerating, Inceptive doing well, Micra, et cetera. So there's a lot of moving parts. I know it's only Q3, but would it be fair to assume But the base algorithm, call it mid-single digit growth and then high singles in the bottom line, that that's a fair assumption moving into fiscal 26. Also, can we got that as an exit rate in Q4? Is that a fair assumption?

Sure. Patrick, thanks for the question. Yeah, you know, we'll obviously like you've been, we'll give FY26 guidance on our Q4 call. But yeah, our objective is unchanged. We're committed to doing the things that we need to do to drive profitable growth. and operating leverage at Medtronic. As Gary pointed out in the commentary, we reiterated our guidance for this fiscal year of 4.75% to 5% organic revenue growth and high single-digit realized EPS growth in the back half of the year. And as we look into the future, we think that we're still committed to that LRP that you outlined.

Fantastic. Thanks for taking the question.

Thanks, Patrick.

Next question, please, Brad. We'll take the next question from Larry Beagleson at Wells Fargo. Larry, please go ahead.

Larry, are you there?

Hey, I'm here. I'm here, guys. Can you hear me? Hey, can you hear me? Yeah, we can. Sorry about that. Sorry. So thanks for taking the question, guys. I wanted to ask Sean a question on AF Solutions, which was obviously a bright spot in Q3. So, Sean, talk about the drivers of the acceleration in Q4 and how you're thinking about fiscal 26 and, you know, specifically the ramp of the fair, where you are with supply and, you know, your ability to get mapping in the field and that $2 billion line of sight, you know, how quickly can you get there? Thank you.

Larry, let me take the first swing at that and then have Sean come in on some of the details. First of all, it's great to see how PFA is, the impact it's having on patients and also increasing physician and hospital productivity with its speed and efficacy and safety profile. And we're really excited about our positioning in the market. You're starting to see that and in our last quarter's results, as you pointed out. And we consider this to be like a hyper growth driver for us, and we're really just getting started. Back to the line of sight question, that's what I wanted to get at, the 2 billion line of sight. Here's what I'll say. First of all, the market is super strong and will continue. We see PFA as a roughly $9 billion market and growing in the high teens. And we've got strong demand for both of our platforms, Pulse Select and Afera. And this gives us a ton of flexibility as we grow the market globally. And as many of you pointed out, Afera is getting rave reviews. I mean, it's high demand. And as I've traveled the globe here in the first couple weeks of the year, everybody seems to know that name, Afera. Supply is a lot better across the board. Our suppliers are performing well, and our new factory in Galway is a game changer with an immediate impact for Afera. And so I'd say, you know, these finances, these are not, you know, like the $2 billion line of sight. They're not like forward-looking statements. This is, you know, in the moment. And we're not stopping at the $2 billion. That's not an endgame. That's, you know, line of sight, shorter term. Beyond, when you get beyond next year, don't forget that Afera will be moving into the single-shot space as well. And so we still have a lot of confidence about the near-term and long-term opportunity here with PFA and our two platforms. I don't know, Sean, do you want to? I think Larry had a few other things on there as well. Do you want to jump in?

Yeah, sure, Jeff. I think you've covered it pretty well. We are aggressively expanding both capacity within the factory and within the field. And it's important that we stay ahead of that as we add mapping in. And I think as Jeff said, you know, we're not just seeing strong demand for FARA. It's, you know, launched in the third quarter. And the United States has driven a lot of growth. But we also, when we're in those hospitals, we're getting a lot of the paroxysmal cases with Pulse Select as well. So it's really a kind of dual platform, multiple use sort of penetration to the accounts. We also see a lot of utility for, you know, certain geographies that don't use mapping where Pulse Select is a really favorite product too because of its precision and its proven and durable efficacy and increasingly that safety profile, which is really a distinguishing feature for it. So, you know, as we step into next year, I think we got lots of growth to look ahead to as we expand out that footprint in the field and have capacity really well ahead of the demand, and we push it forward. So, you know, things are going to continue to rock for us within the pulse field ablation world, and, you know, the team's really excited about it, and physicians really appreciate the technology we're bringing. Thank you.

Thanks, Larry. Next question, please, Brett.

The next question comes from Robbie Marcus at JPMorgan. Robbie, please go ahead.

Oh, hi. Good morning, and thank you very much for taking the question. There's talk of all these big growth drivers with pulse field ablation and Hugo, especially now with the trials enrolling and submission coming at the end of the month. and also renal denervation how do you think about balancing the spend of investing in these programs to make sure they're successful versus uh being able to continue driving margin expansion like we saw in this quarter thanks a lot yeah well thanks for the thanks for the question robbie look i'd say

we do have a lot of, I'll call them, you know, growth drivers that come with investment opportunities. And, you know, the goal here is to be able to do both, right? Is to be able to invest in these things and growth as well as hit our, you know, our financial algorithm that Patrick asked about. And the gross margin improvement is a key piece of that, right? So over the last, you know, a couple of quarters and even years, we've really, I think, gotten better at being able to grow the sales number, that mid-single digit, without growing the G&A, the SG&A even, nearly at the same pace. And that will continue. And then adding the gross margin improvement to that gives us a lot more flexibility. So that, and then finally, I would add tuck-in M&A. I think tuck-in M&A, we've got a strong balance sheet and tuck-in M&A gives us an opportunity to, because the tuck-ins we're doing are just another form of R&D for the most part. And so that's how we do it. But a key for us is stepping up the tuck-in M&A, I'd say, and continuing the margin improvement. Gary, anything to add to that?

No, you hit it, Jeff. It's been our focus. We grew gross margin in the first half of the year on a constant currency basis, and we'll grow gross margin on an AFX basis in the second half of the year. And that's really what's going to be key to us being able to deliver the high single-digit EPS while we fund the growth drivers like investing in mappers, as I talked about in my prepared remarks.

Great. Thanks a lot.

I mean, the goal here, we've got some, I mean, some of these growth drivers, we've got to continue to make the investment. We want to put the foot play offense at this point in time.

Okay. Thank you. Thank you, Robbie. Next question, please, Brad.

The next question comes from Vijay Kumar at Evercore ISI. Vijay, please go ahead.

Hey guys, good morning and thank you for taking my question. Jeff, I think I had a two-parter. When it comes to large companies, this is exactly what we wanted to see. Diversified portfolio, we have some moving parts, but would you still have the ability to manage the P&L and drive earnings? I feel like that's what we got here. When I look at the print here, US Surgical, I think you called out a distributor timing impact. What gives you the confidence this is not a share loss? And I think related to that P&L management rate, this gross margin stood out. Any one-timers in gross margins? Maybe talk about what drove the sequential step up in gross margins in sustainability. Thank you.

Sure. Well, thanks for the question. You know, I'd say on the surgical question, you know, first, like I said in the commentary, the – you know, the performance there was driven by, you know, a couple of our larger distributors stepping down their carried inventory levels OF METRONIC INVENTORY BELOW THEIR NORMAL LEVERS. THIS DYNAMIC COST US ABOUT A COUPLE HUNDRED BASIS POINTS IN Q3 GROWTH. HOWEVER, WE DO EXPECT THESE DYNAMICS TO RESOLVE AS WE ENTER Q1. WHEN THESE DISTRIBUTORS REACH THEIR TARGET INVENTORY LEVELS, SO WHEN THEY GET TO THOSE INVENTORY LEVELS THAT THEY COMMUNICATED THAT THEY WANT TO GET TO US, THAT'S WHEN THIS RESOLVES AND THAT'S GOING TO BE AS WE ENTER Q1. NOW YOUR QUESTION ABOUT SHARE, WE DO HAVE THE ABILITY TO uh see uh through we we track this very closely the end customer um purchases and one we know they're stable and two uh you know we're we're we're not losing share uh you know we continue i think to you know outperform uh slightly uh in the non-robotic space um you know robotics in the us obviously is is a headwind for us um so that's that's what i'd say to to that one And on the second one, I'll let Gary handle the gross margin question.

Thanks. And Vijay, thanks for your comments on balancing the puts and takes. As Jeff and I have talked about, we're really focused on delivering the earnings power. On gross margin specifically, we were pleased with the performance, 140 bps sequentially and 50 bps year over year on an AFX basis. The drivers, as Jeff talked about, continuing our COGS efficiency programs in really improving our operating efficiencies. We continue to be disciplined on pricing. And we did see some actually in the gross margin line, foreign exchange favorability. I will say our second half gross margins will be up both on a constant currency and an AFX basis. And we're really focused on it to not only drive the earnings power, but also to fund the investment

um as uh as jeff talked about yeah i mean i think that like gary said the the focus on the margins um in every every aspect of them whether it be pricing mix and of course uh our cost down programs uh and those are those are having an impact and and improving the margins you know getting getting back to surgery your question on you know share loss i'd also say um you know the the business you know, is doing well, you know, in outside the US at mid single digit growth and emerging emerging market, we're seeing high single, we're seeing high single digit growth. And then We're gaining share worldwide in areas like ligature and barbed sutures. And then really what we want to do is get this business back to our corporate average. And that, as we look to FY26, Hugo accelerates and becomes more of a growth driver for Surgical. at the surgical level and you know as i mentioned in the commentary hugo's approaching some you know important milestones as in some of you has asked about these and and we're seeing solid progress on hugo as measured by i say a comprehensive comprehensive set of leading indicators it's and it's these indicators that give us confidence and probably mike you know maybe mike marinero is in the best position to discuss these maybe i'll ask mike to comment on these leading indicators for hugo

Yeah, thanks, Jeff. And thanks, Vijay, for the question. I think you've commented on some of these in your commentary, Jeff. But when we look at a complex program like Hugo, there's many elements that come together to really make it go. The system, the indications, instruments, of course, and getting into markets around the world. So we're now in over 25 markets around the world. Our procedure volume has more than doubled on a year-on-year basis. We're seeing utilization improve in current programs, which is a really important measure of success. We track external publications, independent publications. There's been over 170 now at this point. We're looking at the performance and utility of Hugo compared to the market leader. And, you know, what we see is that the commentary is broadly comparable. both in procedure times and functionality. So that's obviously a great external measure. We're making progress with our advanced capabilities. So we've just completed our first ICG cases. Ligature is obviously critical for Hugo. We expect to introduce that this year. And then I think as Jeff mentioned in the commentary, we are on track to submit to the FDA for the urology indication. And I think at the end of next month, But as importantly, we're increasing our capability in driving the clinical evidence to support multiple indications in the U.S., having now completed hernia, benign gynecology, moving into GYN-ONC here near term, which will then give us a cadence of indication opportunity to really have a fully you know, featured product. So, you know, we take all of these things together and you can see that it comes together and really drives the progress and optimism that we see as we're preparing to enter the U.S. market, you know, in FY26. Helpful comments. Thank you.

Yes, thanks, Vijay. Next question, please, Brad.

We'll take the next question from Travis Steed at Bank of America. Travis, please go ahead.

Hey, thanks for taking the question. I just wanted to push a little more on the surgical side, since it was kind of the one area that was a little bit different this quarter. I guess, Chris, why do you think the distributors destocked in the quarter? And, you know, why didn't you have kind of visibility in that ahead of time? And did you talk to the distributors? And did they say they would kind of return back to normal buying patterns in the quarter? I guess I'm just looking at this U.S. surgery business. It's kind of been below the electronic corporate average for about five quarters now. And there's been a lot of one-time things going on there. But I just want to kind of get investors' confidence that this business can return back to growth next year. And, you know, is Hugo required, do you think, to get this business back to kind of mid-single-digit-plus growth?

Yeah, okay, Travis, thanks for the question. As I mentioned, this distributor issue that came up, it is temporary, came in. you know, late in the quarter for us. And the distributor's reasons for bringing down their inventory, it's really to hit their goals. I'm not going to get into that. It's specific distributors and two of our larger ones. But that that's their own goals and but as they get down to very specific inventory levels, that's when they'll be getting back to that normal trajectory. Like I said, that'll happen as we enter Q1. Now, getting back to your point on the US surgical business, just taking a step back. you know, the competitive issues, you know, facing our, really, it's our stapling franchise over the last, call it, you know, several quarters, as you've outlined, has brought the surgical growth levels down, you know, below the corporate average, as you pointed out. However, you know, these pressures, you know, aren't new. And we're committed to returning the surgical business, you know, to a stronger growth profile, more aligned with the corporate average. you know mike walk you through um you know uh the the the our confidence in in robotics uh you know and that's that's you know becoming a growth driver for the surgical business itself in fy26 and then beyond it'll become more of a in the midterm a more growth driver at the medtronic level at the 33 billion dollar revenue level you'll start to feel it uh in addition you know we just got to maintain our strength in emerging markets where we're seeing the high single digit growth. We need to continue to take share with ligature and Barb sutures on a worldwide basis. And I already talked about Hugo. Um, so we have confidence in, in this because, you know, the progress, you know, you know, we feel we have confidence, we have confidence in this because of progress we're making and, and, and how we're holding in other parts of the business. Mike, uh, anything you want to add to that?

I think you've outlined it really well, Jeff, the, um, Now, we are focused on our areas of growth that you highlighted. where we can gain share. This dynamic that we experienced this quarter was a bit unique and it did come in late. Although we have had conversations, we understand what the objectives are. We expect that when we hit those levels that we then see more normalized performance moving forward. So that really should address that issue. And then we get it back into our normal sort of rhythm focusing on the areas of growth that you described.

And then, you know, the guidance that we've given, you know, implies both the top and bottom line acceleration in Q4, even though we still have this distributor issue in Q4. And this is driven largely by, you know, acceleration of CV because, you know, cardiovascular will accelerate and drive upside going forward. So when you think about cardiovascular, we've had, you know, about 10 quarters in a row of mid-single digit growth without much of any contribution from, you know, CAS or Ardian and So let's refer to this as like the CV-based business, you know, without Cass and Ardian. And we'll continue to see this performance in the base business driven by above-market performance in CRM, think leadless, conduction system pacing, EVICD. And again, as I mentioned, the commentary structural heart's in a great place and with strong evidence and that we'll keep building upon and product improvements that have come out and EvolutFX Plus and I think just better commercial execution against the main competitor there from our team. I mentioned cardiac surgery, where we've revamped the product lineup, refreshed it over the last two years, and now it's been growing at high single digits. So you have all that in this base business that we don't see changing going forward, that mid-single digit growth that we've seen over the last 10 quarters. And now you add the contributions from Cass and Ardian on top of that, that you'll accelerate in Q4. And then as you enter into FY26, you pick up the RDN piece as well, and CAS keeps going.

Great. Thanks a lot for that. Yeah, it does. Thank you.

Thank you, Travis. Next question, Brad.

We'll take the next question from Matt Mixick at Barclays. Matt, please go ahead.

Thanks so much. So I wanted to just follow up on the other sort of soft spot in the quarter here around peripheral vascular. That went from like a mid-single-digit growth in previous quarters to this low single-digit decline. And I guess similar to the questions around distributor stocking is timing for turning that around, confidence, that that can kind of turn a corner here since that really was the only business in CV that pulled down a little bit on a pretty solid mid-single-digit growth portfolio average. Thanks.

Yeah, Matt, you broke up a second there. I think you were talking about peripheral vascular. But yeah, that is really a China issue. That is a China VBP issue that we're dealing with there that'll work its way out. China, you know, We've worked through most of the VVP, but there is still a little bit left to go. And it's created, you know, I'd say a little bit of volatility within the China line. And we've been able to overall do well there and actually do well profitably as well. But you see volatility that shows up in an individual business. And that's what happened for peripheral vascular this quarter. Anything to add to that, Gary or Sean, in terms of?

All right. Thanks, Matt. Next question, please, Brad.

The next question comes from Josh Jennings at TD Cowen. Josh, please go ahead.

Thanks so much for taking the question. I was hoping you guys talked about the massive global opportunity for the renal denervation franchise, and you laid out the path to unlocking the U.S. I was hoping to just get an update on the international opportunity, just where the business stands. Should we be thinking or could we be seeing some coverage and announcements in different countries? And then what do you expect, what needs to happen in order for that international ramp for the spiral unit going forward? Thanks for taking the question.

Sure. Thanks for the question, John. I'm going to let Sean answer the global question, the international question, but before I just got to comment on, you know, look, the RDN, it's been a journey for us. We're, as we sit here today, you know, we're really excited. I mean, the NCA is a huge milestone and, you know, now we have a, you know, we're going to be going after the Basically, we're excited to change the standard of care and the largest chronic disease issue in healthcare with hypertension, the number one contributor to death. This NCA going to an NCD, we have a lot of confidence. We've gone back and looked. Over the last decade plus, we haven't seen an example where an NCA doesn't convert to an NCD. You know, we've got in the FDA or the CMS has laid out really definitive timing for the announcement in July and then take effect in October. So that really unlocks this huge opportunity in the U.S. And we think it does create a halo effect, not just in the U.S. for commercial payers, but globally. And that's where your question comes in. So, Sean, you want to talk about the international progress and opportunity? Sure.

Yeah, sure. Thanks, Josh. Appreciate the question. So, you know, like a lot of these reimbursement efforts, you have to do them country by country by meeting the individual expectations. And across Europe, mostly that's the health technology assessment. And we've published numerous cost-effectiveness studies which would support those analyses. The other thing that really drives payment decision at the country level is going to be the guidelines that get published. All those society statements have been very supportive to the european guidelines and esc guidelines so we're seeing country by country increases including france which is established reimbursement and then you know outside the united states and europe we've recently gotten approval within within china and then we have to go to the hospital listing price process there so we'll start in big cities and then and go beyond that and of course the um Only outstanding country for approval is Japan, and we're working on that to gain regulatory approval. And then, you know, typically it's six months from the time of approval to when you get reimbursement for those products. So we're making a good push in every country where we can. But make no mistake about it, the U.S. is going to be the dominant growth driver for renal innervation, given both the prevalence of the disease and the setup we have for both Medicare payment as well as the building commercial insurers' interest in covering this device as well.

Okay, thank you, Josh. Next question, please, Brad.

The next question comes from David Rescott at Baird. David, please go ahead.

Oh, great. Thanks for taking the questions. I wanted to ask on FX, Jeff, I think you called out the opportunity recently to more actively manage the FX risk exposure. Maybe could you help us understand exactly how you can do that? Maybe the kind of level or magnitude of control these factors ultimately could have on FX and then over what, you know, period you think you could start to mitigate some of that FX risk. Thank you.

So thanks for the question, David. I mean, I'd say on that, you know, on your last point, the actions we've taken have already started to mitigate this. And it's been something we've been working on now for quite a while, a couple of quarters, and you're starting to see the effects. But I'm going to have Gary outline exactly what we're doing and the opportunity here.

yeah david i'll start with your second question and then i'll i'll come back to what we're doing about it and i think your second question was just what are we seeing and you know what we're seeing this year has been very consistent um so there's no new news for for fy25 and and then as i i talked about in my prepared comments you know as we have visibility into into 26 um you know we'll have meaningfully less of a headwind um on the fx line than we did in fy25 Thanks for recognizing what we've been talking about. And as Jeff said, we're making progress by really taking a greater level of ownership and proactive measures. We're changing our incentive structure to US dollars versus local currency for many of our emerging markets. And it drives commercial changes dynamic pricing. That might mean updating our pricing as often as every month. And this was a big change for us. And as Jeff mentioned, we're seeing the progress. That activity will help our gross margins. And as we talked about, earlier, that's the key to driving the earnings power as well as, you know, funding the investments and growth, you know, while we deliver against our financial commitments. So thanks for the question. I appreciate it. And please know it's a key area of focus for us.

The only other thing I'd say to that is, and Gary's team's done a lot of work on this as well, is our global operations and supply team is creating natural hedges in our supply chain as well with our suppliers and how we look at supply chain. So it's a comprehensive view, a comprehensive approach, if you will, that is starting to pay off.

Hey, thank you, David.

Well, I think we've got time for two more questions, Brad. The next question comes from Shagan Singh at RBC Capital Markets. Shagan, please go ahead.

Great. Thank you for taking the question. Jeff, I was very intrigued by your comments around stacking growth drivers on top of growth drivers. And I was wondering if you could put maybe a final point. Some of the drivers here could be pretty meaningful. So anything you can share in terms of magnitude of growth the incremental growth contribution in year one versus year five, anything there. And then, you know, can you talk a little bit about the specific timing here? So, you know, the line of sight to two billion, when do you think you can get there? You said that's, you know, a first stop. So where does it go over time? In Hugo, you mentioned for Hugo, you mentioned growth contributed in FY 2026, as well as the you know, meaningful growth in the medium term. So can you define that better? And then just on RDN, you said it'll be an immediate growth driver upon coverage. So, you know, just any color on near-term appetite and what that looks like. Thank you.

Okay. Yeah, thanks for that. That was a loaded question there, Shai. And thanks for the question. I mean, I'd say the way we're looking at the growth drivers, like look, three are, these are, these are, We define a growth driver is areas where we have high confidence in a large, fast-growing market that's also a large market, and then confidence in our position in that market. So three that are, you know... uh here now uh obviously diabetes we've talked a lot about we've had a number in several quarters in a row of double-digit growth and and we still have on the basis of 780g we still haven't gotten our suppliers sync yeah that's in front of the fda for the us and we've got you know a pipeline here of of other things like patch. We talked about expanded indications for 7-ADG like type 2, which are meaningful. So there's a lot in diabetes to come, but it's already been growing double digits here for a number of quarters. We talked a lot about PFA and CAS and kind of how we're just moving forward here and that line of sight comment. I answered that earlier that let me put a specific timeframe around that 2 billion, but it's in the near term as we've unlocked supply here. I came to find out that there was a lot, people had looked at, and this is based on both of our platforms. I know there's a lot of questions around Afera and there was, I think we've kind of cracked the code, if you will, on supply there. And this new factory in Galway, Ireland has really been a game changer for us. And of course, Neuromod, because I think we're one of the few that's growing in the teens here. I think we're the only one. Uh, and, and, and this isn't, you know, you know, maybe not quite as big as some of these other markets, but it's still big multi-billion dollar market. And, you know, we've got a fundamental change in technology here with sensing that whether it be SC at Payne STEM or DBS, the sensing is, is very differentiated and we feel the basis of competition going forward. Uh, and that's why we have confidence in this, in this growth profile going forward in the stories. that we're getting on the ability, what sensing means, and particularly when you get to things like adaptive DBS, where you can close the loop, the impact on the patient and the impact on the healthcare system, where it's automatically programmed is massive. And so we see that moving forward. Those are all here right now and contributing. And then, you know, you get into FY26, Hugo starts to be a meaningful growth driver for a surgical business like we talked about. Ardian kicks in. You know, we haven't quantified that. You have to wait for the Q4 call in terms of the short-term impact on Ardian, but obviously the NCD really unlocks that and And, you know, the patients that we're treating right now, the efficacy is just, you know, better than even we expected. And sure, physicians are giving us great feedback. But then you get out beyond that, and all these growth drivers are going to keep going. But then you add tibial on that. And tibial is another one that I think we're one of the only ones talking about it. And for overactive bladder, this is, you know, we think this will double the size of that business over the next, you know, over a couple of years once we launch it. I mean, it... it is, there's such a pent up demand for this. And it takes, you know, this from a, I call it a tibial for, or a stimulation for a rectal bladder. It takes it from, you know, more of a medical device to not quite a wearable, but you're getting close to a wearable when you're just going and under the skin on the ankle, but above the fascia with a tiny device that, and I'm not gonna give away all the, it's very compelling story that is gonna open up that market. So you can see, we've got this flywheel going Robbie's question earlier about the investments that keep it going. We feel good about that, especially with the gross margin improvements and some dry powder we have in M&A to augment that. But that's about the extent of the color I can give at this point. And I probably left one or two out, but those are the ones that are on the top of my mind.

Okay. Thanks, Shane. We've got time for one more question, Brad. Our final question comes from Pito Chickering at Deutsche Bank.

Pito, please go ahead. Hey, good morning, guys. And I'll make this one quick at the top of the hour. A follow-up question just to Travis's on medical surgical. Is there any risk that this is from distributors that are pushing their own privately manufactured products and displacing Medtronic products? In general, as you look at your portfolio in that division, is that a potential risk for the future? Thank you.

No, I'll let Mike answer that question, but I think the short answer is no. But Mike, why don't you tell them why?

Yeah, we've been given no evidence of that at all. We have very active conversations and specific agreements with them around the products that we sell and that they distribute for us. And we're very clear pedo on just how that all comes together in the marketplace. And so there's no indication that there's any pressure at all from that front, just based on our work together with them.

The other thing I'd augment that answer is that, look, we do we go through distributors because there's a lot of products here in the surgical business. Right. But the contracting we do a lot of directly with between us and the hospital. So we have very tight contracts that have been tested over time. You know, like if. If we have a supply shortage and then, you know, and a competitor takes up that and we get it back, you know, we get our we get that supply back. We're right back to where we were based on the contracts. These contracts with the hospitals are pretty tight as well. So you have the dynamic. Mike said that we, you know, these these distributors, we have tight contracts now, but then we have tight contracts that we enter directly. with the end user hospital. So that we don't, you know, it's the first time I've got that question, but that's not something that we're concerned about in the business.

Okay. Thanks, Beto. Jeff, please go ahead with your final remarks.

Okay. Well, thanks to all the analysts for the questions and to all that you've joined us today. We appreciate your support and continued interest in Medtronic, and we hope you'll join us for our Q4 earnings broadcast, which we We anticipate we're going to be holding on Wednesday, May 21st, where we'll update you on how we finish the fiscal year, including all of our growth drivers and margin expansion and how that's all tracking and give you guidance, of course, for FY26. So with that, thanks for spending time with us today and have a great rest of your day.