Medtronic Plc (MDT) — Q1 2021 Earnings Call Transcript

Thank you. Good morning, and welcome to Medtronic's fiscal year 2021 first quarter conference call and webcast. Geoff Martha's first quarter as Chief Executive Officer. Another first today is that we're presenting our prepared remarks by video. We hope that you'll appreciate this new format, and please let me know if you have any feedback. Today's earnings call should last about an hour. Geoff along with Karen Parkhill, Medtronic Chief Financial Officer, will provide comments on the results of our first quarter, which ended on July 31, 2020. After our prepared remarks, we'll take questions from the analysts. Before I turn it over to Geoff, here's a few things to keep in mind. Earlier this morning, we issued a press release containing our financial statements and a revenue by division summary. We also issued an earnings presentation that provides additional details on our performance. During today's prepared remarks and Q&A session, 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, given risks and uncertainties, including those related to the impact COVID-19 has had and is expected to continue to have on our business. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports and other filings that we make with the SEC. And we do not undertake to update any forward-looking statement. Unless we say otherwise, all year-over-year revenue comparisons mentioned during this call are given on an organic basis which adjusts for three things. First, the inorganic impact of our Titan Spine acquisition, second, foreign currency. And third, the extra week that we had in the first fiscal month this quarter, compared to the first quarter of fiscal year 2020. The extra week is a result of our 52-53 week fiscal year calendar, which results in an extra week every five or six years. Finally, reconciliations of all non-GAAP financial measures can be found in the attachment to our earnings press release or on our website at investorrelations.medtronic.com. With that, I'll turn it over to Medtronic Chief Executive Officer, Geoff Martha. Geoff?

Okay. Thanks, Ryan. And I appreciate everyone joining us today. But before we dive into our Q1 results, I want to once again thank the frontline healthcare workers who continue to fight COVID-19 every day. We are thankful beyond words for your sacrifice and tireless resolve. I also want to acknowledge all of the Medtronic employees, who have gone that extra mile to support our customers and patients during this difficult time. Thank you for showing that our mission written 60 years ago, still inspires us and really defines who we are as a company. I also want to acknowledge the wildfires burning in Northern California. Medtronic has been a long-time member of the Santa Rosa Community, and while our operations aren't currently affected, our thoughts are with those heroes battling these terrible blazes and the people affected, including some of our employees. We hope for a quick containment, and we're standing by ready to assist. Okay, now let's switch gears to Q1. Our results reflect a very strong recovery from the depths of the pandemic that we saw back in April. Procedure volumes began to recover this quarter in multiple markets around the world. And we drove market share gains in a number of our large businesses. Our revenue declined 17% on an organic year-over-year basis. And our adjusted EPS of $0.62, while down 51%, was well ahead of expectations. We've seen a faster than expected recovery. Our pipeline is kicking in and we're increasing our cadence of tuck-in M&A. But most importantly, we're finding a new gear at Medtronic, and we're becoming a more nimble and competitive organization. In the coming weeks, you're going to hear more from me on this topic, as we begin to outline the new Medtronic. When the pandemic first hit, we had to postpone our biennial Investor Day, originally scheduled for June. Well, today, we're announcing that we've rescheduled the meeting, and we're now going to host a virtual meeting with you on Wednesday, October 14. We're going to use that opportunity to lay out where we're headed, including a deeper dive on our pipeline now that it's coming to fruition, as well as the actions we're taking to simplify the company. So we look forward to being with you virtually at least on October 14. Now, I'd like to do something a little different than our past earnings calls, and lead with the discussion of market share. Collectively, our results in the month of June were stronger than many of our competitors, and that strength continued into July and now into the first few weeks of August. In some businesses, we're benefiting from the actions we took at the start of the pandemic, to better partner with our customers. In other businesses, we're seeing the benefit of new product launches, as our pipeline kicks in across the company. In fact, we've already had over 130 regulatory approvals this calendar year in the U.S. and Europe, Japan and China. We've included a key approval slide in our earnings presentation that outlines all of this. We're gaining share in our largest businesses like Spine and CRHF, Pacing and High Power. For example, our U.S. Core Spine business declined in the high-single-digits, which was better than the market. We estimate that we gained over a half a point of share in the second calendar quarter. Our differentiated offerings of enabling technologies, which includes robotics, imaging and navigation, combined with our implants is reshaping the spine industry. In CRHF, we estimate that we gained significant implant share in both the High and Low Power markets in the second calendar quarter, with the greatest gains coming in the U.S. Micra, our leadless pacemaker grew in the low-40s globally, and approximately 60% in the U.S. While many have been focused on how Micra is expanding the market and taking share, our new Cobalt and Crome, ICD and CRT-D platforms are also beginning to drive meaningful implant share in High Power. We launched these devices mid-quarter in the U.S. and we're now working with a growing number of providers across the country, who have not implanted with Medtronic in years. Electrophysiologists are choosing Cobalt and Crome for their unique AF and heart failure therapeutic algorithms. The high-40 joule output, extended battery longevity, heart failure management capabilities, as well as their blue sync remote programming and remote device management. These features provide layers of competitive advantage for us. We saw a 35% sequential increase in smart sync accounts globally. And our proprietary remote control programming technology, which was launched in the previous quarter, saw a six-fold increase in adoption sequentially. In addition, utilization of our TYRX absorbable antibacterial envelopes increased by 9 points sequentially, to 50% of our U.S. transcatheter pacing and ICD implants, as hospitals are focusing on minimizing patient rehospitalization rates during COVID. We've also begun to return to sequential implants share capture and TAVR, one of our largest growth drivers. In the second calendar quarter, we maintained our share and market leadership in Europe, and gained approximately 1 point of implant share sequentially in the U.S., as we opened new NCD accounts and saw great response from interventional cardiologists and cardiac surgeons to the bicuspid, leaflet immobility and hemodynamic clinical data that was shared at ACC in the spring. In fact, we've received approval from the FDA just last week to remove bicuspid labeling limitations for low risk TAVR on the strength of these data. This labeling change complements the approval we received earlier this summer, as the only CE Mark TAVR system, with a bicuspid indication for intermediate risk patients. These are important regulatory milestones given the large size of the bicuspid patient population, including 60% of the low risk population. I'll also point out the share gains that we're seeing in our Pain Stim business, within neuromodulation, where we've been rolling out our new DTM therapy. The superiority data that we have for DTM is resonating in the market. We're taking advantage of this by focusing on customers that either don't use Medtronic devices, or split their business across multiple companies. And we're having great success with this strategy. In fact, almost half of our DTM implants in the quarter occurred with these types of customers. And equally important, our SCS trials, which are a predictor of our future implants, were ahead of our expectations and even caught up to prior year levels in June. This bodes really well for our Pain Stim business going forward. So while we're driving share gains in many important businesses, there are also areas that we need to improve. In DBS and Pelvic Health, while we lost share in the quarter, we're very bullish on where we're headed. In DBS, we received FDA approval for our Percept PC deep brain stimulation system with brain sense technology, in late June. Percept is the first DBS to record brain signals while delivering therapy, and we expect this to drive share gains in this high growth market going forward. In fact, we believe this is the beginning of a multi-year run in DBS, with our directional lead launching next year, followed by a Closed-Loop DBS system. We're redefining the standard-of-care and creating a significant technology gap between us and our competitors. In Pelvic Health, we just received FDA approval for Interstim Micro device, which has important features over the competition. Our device is 50% smaller, it recharges far faster. And importantly, the recharger doesn't need to be perfectly aligned for a successful charge. Additionally, Medtronic is the only company to offer physician practices the choice of recharge and recharge free. And this is very important in the neuromodulation space. The feedback from physicians on our InterStim Micro rechargeable product has been universally positive. And there are several early indications that our share in the U.S. is rebounding quickly, much like we saw in Europe following the Micro launch earlier this year. In just a few weeks, we're winning back accounts and we're seeing cases where our competitors' device is being explanted and replaced by Micro. We've been waiting for this. Patients now have the ability to choose a smaller, better rechargeable product. Physician practices prefer to deal with one company. And our team is enjoying taking back the share. Finally, in diabetes, we're missing out on the better growth of this market, and nobody at Medtronic is comfortable with this dynamic. And we're pushing on several fronts to advance our technology. We're actively increasing both our near and long-term growth opportunities through increased organic investment, innovative funding with our recently announced Blackstone partnership, and inorganic activity, highlighted by the announcement earlier this month of our pending acquisition of Companion Medical. Companion Smartpen technology expands our ecosystem to include the multi-daily injection portion of the diabetes market, with a patient population that is nearly 12 times larger than that that use insulin pumps. But make no mistake, we are still very focused on regaining technology leadership in the pump and the sensor market. However, we're also going to meet patients where they are, and provide them with real-time data guided support. We expect to build a system that combines in pen with our Smart CGM technology, including our Neutrino and Clue artificial intelligence algorithms. All of this designed to deliver better outcomes and reduce the burden of managing the disease for MDI patients. See, Companion is just one more example of how we're going on the offensive as a company through an increased cadence of tuck-in acquisitions. In fact, in addition to Companion, we've done two other major tuck-in acquisitions this calendar year, with Digital Surgery and Medicrea. Combined, these three deals totaled approximately $1 billion in total consideration. Data and analytics are the next big frontier in surgery. That's why we acquired the pioneering technology company, Digital Surgery, the leader in surgical artificial intelligence. We're integrating their technology into our soft tissue robotic-assisted surgery system, and also intend to use their surgical video management and clinician decision support solutions beyond robotics. In fact, we plan on a limited launch this fall for the Touch Surgery Enterprise, which is an extremely easy-to-use surgical video capture solution, paired with a computer and connected to the cloud. Medicrea, a pending acquisition we announced last month has differentiated technology that incorporates artificial intelligence into surgical planning for spine cases, and then uses the plan to create personalized spinal implants. With Medicrea, Medtronic will be the first company to offer an integrated spine surgery solution that includes AI-driven surgical planning, personalized implants, and robotic-assisted surgical delivery. This further extends our competitive advantage in Spine. We will continue to use the strength of our balance sheet to supplement our organic growth and help drive increased and sustained revenue growth into the future. Next, let's turn to our pipeline, which is not just a share-taking pipeline, it expands the total addressable market for Medtronic, as we intend to bring innovative technology to large healthcare opportunities, such as hypertension and cancer screening. So starting with our cardiac and vascular group, I've already mentioned the impact that our recent launches of Micro AV and Cobalt and Chrome are having in our CRHF division. But in addition to that, our next-generation cardiac diagnostic LINQ II received FDA approval in the quarter, and we began the limited U.S. release and expect the full market launch by calendar year end. In our cardiac ablation solutions business, we started the European limited release of our Diamond Temp Cardiac Ablation system, with its unique closed-loop temperature-controlled RF system. And in June, our Arctic Front Advance Cryo system became the first ablation system to receive FDA approval to treat patients with persistent AF. And this Saturday, results from our STOP AF First trial, which studied our Cryoballoon as a first-line treatment for paroxysmal AF, will be presented virtually as a late-breaking trial at ESC. And in our coronary business, our Resolute Onyx Drug-Eluting Stent became the first and only stent to receive CE Mark for one month DAPT treatment for high bleeding risk patients. And we expect FDA approval for this differentiated labeling later this calendar year. In CVG, we also resumed a number of important clinical trials that were on hold due to the pandemic, including our pivotal trials for our extravascular ICD, our Intrepid Transcatheter Mitral Valve, our PulseSelect Pulsed Field Ablation system, and our Symplicity Spyral renal denervation system. In our ON MED renal denervation trial, half of the sites have resumed enrollment, and we're aiming to complete the trial and present the data next calendar year. We're in the lead with Ardian, and this represents a multibillion-dollar opportunity to better treat the millions of patients around the world, who suffer from hypertension. As I've already mentioned, we're now launching a number of products across the restorative therapies group, like the DTM spinal cord stimulator, our InterStim Micro sacral nerve stimulator, and our Percept PC deep brain stimulator. Look, RTG is on a roll. And we expect these products to drive growth and take share going forward. And we intend to keep the RTG momentum going well into the future. We're making large investments in new products for neurovascular, for ENT, and for enhancements to our Mazor X spinal robotic system. In diabetes, we continue to execute on our near-term pipeline. We're on track for the Minimed 770G approval later this summer. We've received CE Mark approval for our Minimed 780G, advanced hybrid closed-loop system, and we'll launch this fall. We also continue to make meaningful progress on our sensor pipeline. Our U.S. pivotal trial for synergy is now underway. Enrollment is going well, and we're getting great feedback on this disposable sensor that is 50% smaller than our current product. In our Minimally Invasive Therapies group, we continue to make progress on bringing our soft tissue robotic system to market. Our final validation and verification testing is going very well, and our surgeon feedback continues to be positive. On the last earnings call, we told you that our timeline had been disrupted by COVID-19, but we've been managing through this and mitigating the impact to our timelines. In fact, we expect to be in a position to file for CE Mark and U.S. IDE approval in the first calendar quarter of 2021. Now COVID could change that, but we thought it was important to update you as to where we are today, and let you know that we have a high level of confidence as we move towards commercialization. In MITG, we've also been rapidly developing new solutions to treat COVID-19, including adding remote management capability to our Puritan Bennett 980 ventilator, integrating nalcor pulse oximetry sensors with label therms, closed-loop high flow ventilation system, and enhancing our vital sync remote monitoring solution to allow caregivers to remotely monitor our pulse oximetry and our capnography devices through a mobile application. Many of these features, they were developed in days and weeks, which in the past might have taken us months and quarters. But because we found new ways, we're moving faster. We're partnering with others, whether that's on technology development or in supply chain relationships. We're working with our regulators to ensure they have everything they need to streamline their decision-makers, and our own people are stepping up across the company. As one example, we increased our internal ventilator production fivefold in a matter of just a few months, from 200 a week to over 1,000 a week. This is what I mean when I say Medtronic is finding a new gear. We've been operating with a high sense of urgency, and we're going to carry this forward. I've discussed in the past how our organization needs to simplify and become less bureaucratic. In the coming weeks, you're going to hear more about the actions we're taking to become a more nimble and competitive organization, empowering our business units, while also allowing them to take advantage of Medtronic's global scale. I'm really excited about this direction. And I'm convinced that by empowering our general managers, we can become more competitive, we can accelerate our innovation, we can serve our customers better, and we're going to unlock a lot of value for our shareholders. So, with that, let me now ask Karen to take you through a discussion of our first quarter financials and our outlook. Karen, over to you.

Thank you. As Geoff mentioned, our first quarter organic revenue decline of approximately 17% was better than initially expected, and an 8-point improvement over last quarter. CVG and RTG, in particular, had double-digit improvement from their fourth quarter decline. Within CVG, cardiac rhythm and heart failure improved the most declining in the mid-teens, thanks to both rebounding procedures, and share capture from new products. And within RTG, core spine and pain stim had strong sequential improvement, with the bounce back of these more deferrable procedures in the United States. I would note that our organic revenue decline excludes the benefit we received from an extra week of sales in the first fiscal month of the quarter, which we estimate added approximately $360 million to $390 million in revenue, less than our extra week would have been without a pandemic. But it's important to know this benefit was offset by our plan to reduce customer purchases. Hopefully, you'll recall from prior earnings calls that we intended to use a good portion of the benefit from this extra week to reduce the practice of customers placing large bulk orders, as we're working to better balance these across the quarter. We began this process earlier than planned, due to depressed demand with COVID in the fourth quarter, and we still had some residual reduction in customer inventory levels this quarter. As we look ahead, the vast majority of the bulk reduction is behind us. There are only a small number of areas, such as our TAVR business, where we've been transitioning to a consignment model in select U.S. accounts, and where we should see another quarter or two of modest headwind. On the bottom line, our adjusted EPS was $0.62, a decline of 51%, including an estimated benefit from the extra week of approximately $0.06 to $0.10. As our revenue improved throughout the quarter, we saw a strong flow through to our bottom line, resulting in EPS well ahead of expectations. That said, with a decline in revenue, we continue to see deleveraging down our P&L. Several of our plants ran at less than full capacity, resulting in a larger period expense of our fixed overhead costs, and a decline in our gross margin as we expected. We also had increased SG&A and R&D spend, as I signaled last quarter, given both the extra week and the increased investment we are making in our pipeline and product launches. As a result, our operating margin was 16.5%, down 12 points year-over-year, but an improvement of 40 basis points from last quarter. Turning to our balance sheet, our financial position is strong, with ample liquidity to act on opportunities. We remain focused on investing, both organically and inorganically through tuck-in acquisitions and minority investments, to drive our long-term growth strategies. We've increased our cadence of M&A, and we're increasing our level of R&D investment, with partners like Blackstone Life Sciences, who will invest more than $300 million over the next several years, to help us accelerate specific pump and CGM programs and diabetes. These creative strategies will enable us to accelerate our planned investment and our growth. I view this as a key win for our company, the patients we serve, and you, our shareholders. Turning more to the macro level, we expect both organic and inorganic investments to fuel a longer-term revenue growth acceleration, creating strong returns for our shareholders, supplemented by our growing dividend. As an S&P dividend aristocrat, we've increased our dividend for 43 years, and our current yield of 2.3% is in the upper quartile of S&P 500 healthcare companies. Looking ahead, the uncertainty of the COVID-19 pandemic continues to make it difficult to provide our traditional, annual and quarterly guidance. However, as we shared last quarter, we intend to be as transparent as possible to help you understand how we're thinking about the trajectory of our business. We've experienced a faster than expected recovery. On the topline, May was better than April and June was better than May. And that improvement has continued into July and August. While there's still uncertainty regarding recovery, if these trends hold, we would expect our second quarter organic growth rate to improve at a rate similar to what we saw between the fourth and the first quarters, where the fourth was down 25% and the first declined 17%. From there, we expect sequential improvement in the third and fourth quarters. And we still expect to be back to normal growth in the fourth quarter on a two-year stacked basis. When we look at our second quarter expectations by group, MITG should be better than the company average, given continued increased demand in our respiratory business and increased volumes in surgical innovation. CVG has the potential to be a little better than company average, given its new product introductions. Diabetes is expected to perform roughly in line. And RTG could be a little below the total company, given its high mix capital equipment sales, but we're still seeing some sequential improvement. Looking at the P&L, we're investing to support numerous product launches. And we're investing in R&D programs to ensure our pipeline remains full. Despite the pandemic, we're not pulling back. Instead, we're focused on making the necessary investments to accelerate our revenue growth and ensure the long-term health of our company. Having said that, we could see a couple of points of sequential improvement in both our gross and operating margins in the second quarter compared to the first. And we expect continued margin improvement through the second half, until we return to more normal margins sometime toward the end of our fiscal year. Regarding currency, the picture has improved with a weakening dollar. On revenue, assuming recent rate holds constant, our second-quarter impact flips to a slight tailwind, after two years of a headwind, and a full-year benefit is now over $100 million. On the bottom line at recent rates, the second-quarter headwind should be similar to the first, and the full year has improved by about a nickel from the $0.20 impact mentioned last quarter. As I wrap up, I would want you to take away that whatever the recovery looks like, we intend to outpace our end market. We're focused on competing and winning, and we have the industry's best and broadest pipeline, the resources, and the people to do it. The future is bright. And I'm proud to be part of this team driving our imperatives to fuel our growth and also fulfill our mission, ensuring that millions of people around the world can benefit from our products and services. Back to you, Geoff.

Okay. Thanks, Karen. I hope you got a sense today for our recovery trajectory, as well as how we're changing at Medtronic. And we'll continue this conversation at our Investor Day on October 14. During the pandemic, our entire leadership team came together to determine how we could better serve our customers and evolve our culture. We worked together to find this new gear, and we're on our way to becoming a more nimble and competitive organization. We're playing offense, and we're energized to use this moment, when our pipeline is kicking in, to expand our markets and take share. And importantly, we're driving towards faster and broader topline growth, not just as we emerge from the pandemic, but sustainable growth over the long-term. So, with that, let's now move to Q&A. In addition to Karen and me, we also have our four group presidents: Mike Coyle, Bob White, Brett Wall, and Sean Salmon, here to answer your questions. As usual, we want to get to as many questions as possible, so please help us by limiting yourself to one question, and if necessary, a related follow-up. If you have additional questions, please contact Ryan and our Investor Relations team after the call. Operator, first question please?

Thank you for taking my question. Geoff, congratulations on the strong earnings per share. I have a question and a follow-up. It's interesting that you started your comments by focusing on market share. Does this mean that Medtronic needs to grow in line with or above market growth? I feel that one of the prevailing thoughts is that Medtronic is too large to grow. Will this focus on market share lead to a change? What’s driving this new emphasis on market share, and has something changed internally that we should know about? For my follow-up, regarding the robotic timeline for the first quarter of '21, the original timeline was mid-year, and now it’s been pushed back by five to six months. I want to confirm that this delay is purely due to COVID and software issues, and that these have been resolved. What does this mean for our market share in robotic surgery? If the focus is on market share in these segments, should we expect Medtronic to capture its fair share, or possibly even more, in robotic surgery? Thank you, and I will stop there.

Thank you, Vijay. I appreciate your questions. Regarding market share, you're asking about our focus and what has changed. Over the past couple of years, we've been concentrating on our pipeline, which is the strongest it's been in a long time. Throughout the CEO transition, we held numerous Zoom calls with the team to ensure this pipeline benefits not only patients and our customers but also our shareholders. We believe our market share should be higher, reflecting the quality of our technology. Therefore, we are prioritizing a better understanding of our end markets, our competitors, and how to effectively compete against them. This is an organizational effort involving everyone, not just our field. We need to recognize the competitive challenges we face, know what it will take to succeed, and keep track of these battles. Each competitive challenge matters, and there's no room for error in this regard. This enhanced focus on market share feels timely given our upcoming product launches. Our goal is to ensure our pipeline is valuable for patients, customers, and shareholders. We believe now is the right moment to act on this. We expect overall growth to match or exceed market trends, which we have not consistently achieved in the past. In some areas, we need to outpace market growth to compensate for past shortcomings. We have made it clear that every segment must grow at least in line with market share, and that message is being communicated within Medtronic. Regarding the robot, the delays were indeed caused by COVID and past software issues, which we believe are now resolved. We are in the final stages of validation and verification, and testing has been successful. Surgeons are already working with these robots and are providing positive feedback. We are on track for our market release date soon, which allows us to file for both CE Mark and U.S. IDE in calendar Q1. We are confident in what we have achieved, and the enthusiasm within the company and among the surgeons involved is building. As for a market share forecast, I'm not ready to provide that yet, as we're facing strong competition. However, my experience at Medtronic has shown me we can defend our high market shares from new entrants. I'm excited about being on the proactive side of this dynamic while needing to establish ourselves as a strong player with advanced technology and robust financial resources. While I won't share specific market share forecasts, we expect to be a significant competitor in this market. Go big or go home, Vijay. We're genuinely excited about this opportunity.

I love that. Go big or go home. Congrats, guys.

Hi, good morning, and thanks for taking the questions. Just one clarification and one question. On the clarification side, you mentioned talking about some disclosure you'll be making over the next couple of weeks about kind of changes at Medtronic. Is that all stuff that's going to come at the Analyst Day? Or are there disclosures coming before that? So that's just the clarification. And then the question is, Geoff I was really encouraged to hear your comments about improvements continuing into July and August. And obviously Karen made those as well. That's a huge issue for Medtronic and for all of medtech, because there is a lot of uncertainty out there. So, Geoff, I was wondering if you could just make some comments on just what you're seeing out there in July and August in terms of kind of the rescheduled procedures versus new demand. And what you're hearing from hospitals and patients, just any comments on that kind of the pace of the broader recovery would be much appreciated?

Thank you, Bob. Regarding the changes, we will delve deeper into them during our Investor Day, so I won't elaborate too much today. The key points are that we're implementing structural adjustments to empower our businesses for quicker decision-making and flexibility. We're facing competition from smaller, focused companies both domestically and internationally, including in China. At the same time, we want these businesses to leverage our strengths in areas where our scale matters, such as technology platforms. When our teams utilize Medtronic's comprehensive technology platforms, they can consistently and rapidly innovate and disrupt the market, as we've seen with our Micro initiatives in the pacing sector. We are also focused on maintaining a high-quality manufacturing standard at competitive costs. As we expand into new regions, we want to ensure that our businesses can take advantage of these enhancements. In terms of disclosures, there won't be any specific updates prior to Investor Day, and we plan to roll out this information internally in the coming weeks and months. Regarding market improvements, there is encouraging news, though it varies by therapy or product area. We are seeing notable recovery trends, especially in urgent areas like neurovascular, contrasted with more elective fields such as pelvic health. Our recovery rates differ by country, with the United States and Europe demonstrating a sharper rebound. China remains steady, but overall, we observe positive month-over-month improvements across all geographies and therapy areas. Since our last earnings call, where we discussed April's performance and positive momentum into May, we've seen consistent improvements into June, July, and early August. Concerning patient apprehension, surveys indicate that while it still exists, it has lessened significantly. Hospitals, especially in the U.S., are committed to remaining operational and serving patients, as they can't afford another shutdown. We are actively involved in alleviating patient fears through partnerships with organizations like the American Heart Association and the American Stroke Association. Our focus remains on our customers and assisting them in implementing new technologies, especially remote capabilities in cardiac rhythm, which are crucial during this COVID period. Our responsiveness to specific requests from hospitals has strengthened our engagement, enhancing our presence with hospital leadership. Overall, taking into account market recovery across different regions and therapy areas, along with our recent efforts, we find ourselves in a much stronger position compared to three months ago and are optimistic about continued momentum. Although there is some concern about disruptions in the fall, we believe that hospitals are determined to stay open. Therefore, we are feeling more confident about the situation than we were a few months back. I hope this information is helpful.

Thank you.

Next question please, Regina?

Good morning. Just two for me. I'll ask them right up front for Geoff and Karen. So Geoff, I know it's early, but what's the profile Medtronic should aspire to relative to 4% and 8% top and bottom you gave back in 2018? And if we can't get specific numbers, I'm just sort of curious should investors expect that both of those numbers should move higher? Or is the focus more on revenue for the intermediate-term? And then Karen, just kind of related question. There's been a series of often on balance sheet transactions, most notably the recent M&A and Blackstone. So that clearly suggests the company's desire to accelerate growth. What does it tell us, if anything, Karen about sort of the flexibility of the P&L in terms of margin opportunities going forward? Thanks so much.

I'll take a stab, David, first. Thanks for the question. Let me take a stab at it, and then I'll hand it off to Karen. But on the 8% EPS, and we're committed to that, right? So, we talk about market share and we talk about growth. Let me be clear, it's not at the expense of that 8% EPS growth, and our free cash flow conversion, which we've worked so hard to improve over the last couple years. So, we're not going to take a step back there, we're committed to that. And as we grow more, right, as we grow at the market more as an aggregate which would be a meaningful improvement over the last couple years, and take share, the growth will get higher, we'll have some optionality of what to do with that incremental earnings. But we're committed to that 8%. And we'll decide as that growth gets there, what we're going to do with the extra EPS, I'd like to invest some of it. And we'll see what we do with the rest here. But with that, maybe I'll turn it over to Karen to also comment.

Yes, thanks, Geoff. And thanks, David, for the questions. Yes, we have a strong balance sheet. And we have been using that to help our growth. And we've supplemented that, as you mentioned, with partners like Blackstone to help us accelerate that growth. In terms of the flexibility of the P&L for margin going forward, what I would say is that our bias is going to be on driving revenue acceleration higher and keeping it consistent. And so, given that bias, we will be focused on continuing to invest to ensure that our pipeline remains as full as it has been in the recent past. So, could margins improve? Yes, a little bit. But we're more committed to driving that revenue growth acceleration and maintaining a bottom line EPS of 8% plus, than we are on dropping a significant amount to the bottom line. We'll be focused more on investing. Hope that helps.

Super helpful. Thanks so much.

Thanks, David. Next question, please?

Thanks for taking the question. And I'll be the first to tell you I did kind of like the video format. It was good to see you after being virtual for so long. Maybe on the question, and I'll kind of loop two in here. The first is we're seeing you year-over-year increases in R&D, while we're seeing most of your peers down year-over-year. You're clearly leaning in on R&D. I was wondering where are these dollars going. What are the projects that you're seeing and you're investing in? And then maybe along those lines, you're also clearly investing heavily in diabetes. There was speculation a while ago, maybe you'd exit that business. It looks to me less likely given how much you're putting in resources here. What's the latest thoughts? You have new management, lots of investment there. How should we be thinking about this business? And is this a three to five year turnaround story? Or is it something we could see in the shorter-term? Thanks.

Thank you, Robbie, for those questions. I appreciate the positive feedback on the video; I thought it went well despite my wife's skepticism. As for our R&D investments, we aim to increase funding in both traditional R&D and innovative third-party partnerships like Blackstone, which offer strong returns. Our focus remains on acquiring technology-oriented assets that are in various stages of commercialization. We have numerous promising ideas and recognize the need for enhanced R&D capabilities. Today, we discussed our product pipeline, highlighting the R&D needed for sustaining and iterating on developments such as spinal robotics. We're just beginning this journey, with significant opportunities ahead, including multibillion-dollar initiatives like the EV ICD, specifically in cardiac, and the PulseSelect Pulsed Field Ablation technology. These, along with other areas in neurovascular, represent exciting medium-term prospects that warrant further investment to maximize their potential. In neuromodulation, we’re particularly focused on closed-loop systems, recognizing its importance for both the industry and patients. Additionally, we have the soft tissue robot and the timeline for its commercialization requires further investment, even if it's not reflected directly in our R&D expenses. The developments emerging from our digital surgery acquisition are promising, and we believe we are at the forefront of robotic soft tissue advancements and AI integration. Regarding diabetes, we acknowledge the need to enhance our sensor technology. We're really enthusiastic about our sensor pipeline and while we wish progress could happen more rapidly, we are experiencing faster advancements than anticipated. Currently, we are in the midst of the synergy trial enrollment and receiving excellent feedback on a new disposable sensor that is half the size of our existing product. Overall, a significant portion of our internal focus is on boosting our R&D efforts. As for the diabetes business, the outlook is much more optimistic than a three to five-year timeframe; we're confident about faster progress. We remain committed to this segment and will continue investing, as there’s much unrealized potential here.

Thanks a lot.

Thanks, Robbie. Next question please, Regina?

Good morning, everybody. As has been communicated with investors this morning, one of the themes coming across is a sense of being reinvigorated or quote a different Medtronic. So what do you see just because you're relatively new in the CEO role and you get to do it in the midst of a pandemic? What do you see that is different that how you're going to make your mark on the company? And on the other side of this pandemic, how do you think Medtronic is going to look different?

We feel reinvigorated as a company, largely due to our exciting pipeline, which we've invested in for a long time. While COVID has had a significant human and economic impact, it has also allowed our leadership team to come together, primarily through numerous Zoom calls and some face-to-face meetings, to assess our position. We've discovered that we have more opportunities than challenges. Our mission has become even more critical during this pandemic, guiding our decisions and distinguishing us from others in how we respond. This inherent strength has been highlighted during these challenging times. Our technology and market position are strong, and our leadership team is experienced. As we evaluate everything, we see a tremendous opportunity that we are eager to capitalize on. This investment in our pipeline excites us, and while the term "reinvigorated" might not perfectly capture it, we are genuinely enthusiastic about the prospects ahead. Our focus extends beyond just managing the pipeline; we're actively refilling it. With ongoing R&D efforts, there is much to accomplish and a wealth of opportunity to pursue. In the immediate term, we aim to grow at or above the market levels. While forecasting the recovery remains challenging, we intend to lead the way and outperform our competitors, supported by effective commercial execution. The loyalty of our employees to Medtronic has always been strong, but it has intensified recently as they recognize the significance of our mission. We also intend to take a stronger stance on social justice issues affecting our communities and, by extension, our workplaces. Looking forward, we want to integrate advanced technologies into our medical devices. By incorporating digital technologies, analytics, and data into our offerings, we aim to enhance our products beyond traditional device therapy. Initiatives like the Neutrino acquisition in diabetes, digital surgery acquisition, and partnerships with companies such as Viz.ai for stroke detection illustrate our commitment to developing smarter, self-learning solutions that deliver valuable data and insights to our customers. This journey may take time, but we are dedicated to making this vision a reality.

Thank you.

Thanks, Joanne. Next question please, Regina?

Good morning. Thanks for taking the question. And mine are for Karen. Just Karen, one clarification, how much of the extra week was offset by reduced bulk purchases in the quarter? And for my question, last quarter, you gave some helpful commentary on the exit rates in the last month. What did you see in July relative to what looks like about a negative 9% organic year-over-year growth rate you're guiding to in fiscal Q2? And can you get to flat or growth in fiscal Q3? Thanks for taking the questions.

Thank you, Larry. Regarding the extra week, it was entirely offset by a decrease in customer bulk purchases, resulting in a minimal net effect. We won’t provide year-over-year monthly comparisons because the drop in bulk sales and the varying number of selling days in the quarter could lead to confusion. However, it's important to note, as Geoff mentioned, that our average daily sales rate experienced a significant increase in May, followed by further growth in June, which has continued into July and August. We anticipate this trend will persist. We expect our second quarter to show improvement similar to the gain we saw from the fourth quarter to the first quarter. Just to remind you, the fourth quarter experienced a decline of 25%, while the first quarter was down 17%, which gives us an 8% improvement expectation for the second quarter. We foresee continuing that upward trend in the latter half of the year, and by the time we reach our fourth quarter, we anticipate returning to more typical growth on a two-year comparison basis.

Thank you.

Thanks, Larry. I think we have time for maybe two more questions. We can take the next one, Regina.

Hey, good morning, guys. Thanks so much for taking the question. And I second Robbie's comments on the visual, too, so thanks for that. If I could just ask a question, Geoff, on the commentary around market share gains. And I'm curious, just more specifically, tied to sort of what you're talking about with the new infrastructure investments and things like that that we'll hear more about on the Analyst Day, how much of this sort of reinvigorated effort around really gaining market share and being more aggressive is tied to things like that versus potentially having to build out further from a product perspective and innovate even more on the pipeline? And that's my only question. Thank you so much.

On the innovation front, we believe we have a strong pipeline, the best we've had, which is now starting to materialize, and we have more planned for the medium and long term. However, we will never be completely satisfied with our pipeline as innovation is essential to our company. We aim to continually invest in this area. The true measure of our success will be the level of innovation and the outcomes we achieve with these technologies, both for patients and for the health system's economic performance. While we are increasing our investment and leveraging partnerships like the one with Blackstone, we also strive for greater efficiency in our R&D. Innovation is never-ending; we are committed to addressing healthcare's persistent demand for solutions. To maintain market share, we must focus on a few key areas: having the right products and an effective pipeline, enhancing our structural approach to foster innovation, ensuring our business units have more flexibility and are agile enough to compete, especially against smaller, focused competitors. We do not accept the notion that smaller companies automatically grow faster; our leadership shares this view. We aim to empower our businesses to compete with anyone, regardless of their size or technological resources. Additionally, we understand the importance of fostering a culture that is mission-driven and innovation-focused, always pushing boundaries and exploring new therapy areas. We want to maintain our market position and enhance our competitiveness, particularly in sectors like soft tissue robotics, where we may not have been the first but aim to be a strong second. We believe there’s room for improvement in our competitive mindset, emphasizing the importance of our pipeline, implementing structural adjustments, and fostering cultural shifts around competition expectations.

Thank you so much.

Thanks, Danielle. We'll take the last question, please, Regina.

Good morning. Wondering if maybe I could ask you about Companion Medical. You talked about the potential for that product in the diabetes market, but maybe you could share a little bit about your internal projections for revenue growth for that? And when it can start to be a meaningful contributor to your growth?

Well, first on Companion, we haven't finalized the acquisition, so we're limited in what we can say, but Sean is the real champion and architect behind on that deal. And so maybe Sean, Sean Salmon's on the phone here. I'll turn it over to Sean for some comments.

Yes, great, thanks. Thanks for the question Raj. Yes, as Geoff said, the deal is not yet finalized, but the opportunity is very attractive. You'd heard Geoff’s commentary, so there's about 12 times the number of patients. We think, by our modeling, it's about 13.5 million patients worldwide, who are using multiple daily injections to treat their diabetes. And it's a very, very underpenetrated opportunity. So for us to go into that market and add value to those who either choose to be there or have to be there, because of other considerations is where we want to meet those patients. And this really dovetails very nicely into our improving sensor pipeline, and adding the capabilities that we've added in the company over time. Those building blocks for the powerful AI and data science capabilities, which we think when deployed against knowing how much insulin you're getting, at what time, you can markedly improve the outcomes for patients who choose to use multiple daily injections. So, it does a few things right? We can capture more of the patients who are upstream and maybe patients who get comfortable with technology into some other solutions that we have in our automated insulin delivery systems.

Great. And maybe just Geoff one follow-up for you relative to acquisitions broadly right, so Companion and other kind of tuck-in deals you've talked about. Should one assume that you have no appetite for larger deals? Or we continue to focus really just on the tuck-in side of things, really just any broader thoughts here would be helpful?

The focus is on the tuck-ins. And the tuck-ins can get up to billion dollars or low billions. But that's the focus. That's the focus. Like where we are right now, and the tuck-ins will help us. But we're not focused beyond that.

Great. Thank you.

Thanks, Raj. Geoff, would you like to conclude?

Okay. Well, thanks for the questions. And look, I really appreciate, we all really appreciate your support and interest in Medtronic. And we're looking forward to presenting more details of our longer-term strategy at our October 14, Investor Day. And then updating you on our quarterly progress on our Q2 earnings call, which we anticipate holding on November 24. So thanks for joining us today. Stay healthy and safe, and have a great day.