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.