Medtronic Plc (MDT) — Q1 2022 Earnings Call Transcript

Good morning, and welcome to Medtronic's fiscal year 2022, First Quarter earnings video webcast. I'm Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations. Before we start the prepared remarks, I'm going to share with you a few details to keep in mind about today's webcast. Joining me are Geoff Martha, Medtronic Chairman and Chief Executive Officer, and Karen Parkhill, Medtronic Chief Financial Officer. Geoff and Karen will provide comments on the results of our first quarter, which ended on July 30th, 2021, and our outlook for the remainder of our fiscal year. After our prepared remarks, our portfolio Executive VPs will join us and we will take questions from the sell-side analysts that cover the Company. Today's event should last about an hour. Earlier this morning, we issued a press release containing our financial statements and divisional and geographic revenue summaries. We also posted an earnings presentation that provides additional details on our performance. The presentation can be accessed in our earnings press release or on our website at investorrelations.medtronic.com. During today's webcast, many of the statements we make may be considered forward-looking statements and actual results may differ materially from those projected in any forward-looking statement. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports and other filings that we make with the SEC and we do not undertake to update any forward-looking statement. Unless we say otherwise, all comparisons are on a year-over-year basis, and revenue comparisons are made on an organic basis. First-quarter organic revenue comparisons adjusted only for foreign currency as renewal acquisitions or divestitures made in the last 4 quarters that had a significant impact on total Company or individual segment quarterly revenue growth. References to sequential revenue changes compared to the fourth quarter of fiscal '21 and are made on an as-reported basis. And all references to share gains or losses refer to revenue share in the second calendar quarter of 2021 unless otherwise stated. Reconciliations of all non-GAAP financial measures can be found in our earnings press release or on our website at investorrelations.medtronic.com. And finally, our EPS guidance does not include any charges or gains that would be reported as non-GAAP adjustments to earnings during the fiscal year. With that, let's head into the studio and get started.

Hello, everyone. And thank you for joining us today. We started off fiscal 2021 with a strong first quarter, beating street estimates on revenue, margins, and EPS. We drove market share gains across a number of our businesses, including 3 of our largest: Cardiac Rhythm, Surgical Innovations, and Spine. Our results reflected the recovery of elective procedures during the quarter, with most of our businesses finishing at or above pre-COVID levels. Now, while the delta variant is having an impact on procedure volumes in certain geographies, we believe the effects will be manageable. Healthcare systems are really just better prepared and vaccination rates continue to increase. Our new operating model and the Medtronic mindset, culture enhancements are delivering results. As our first-quarter performance demonstrates, our employees are energized by the transformation of our organizational structure and the competitive culture. And our most recent employee engagement survey results were the strongest that we've ever had. We continue to focus on accelerating and sustaining the higher top and bottom-line growth of Medtronic. In fact, we've already made a number of disciplined and targeted capital allocation decisions that drive that acceleration. We've increased our investments at the front-end of major product launches and surgical robots and Renal Denervation, which represent large new markets for Medtronic. We're growing our R&D investments broadly across the Company, complementing a long list of organic opportunities with disciplined tuck-in acquisitions, such as our recently announced intent to acquire Intersect ENT. Now we expect these actions to drive share gains in our markets today, which we've talked a lot about. And to increase our weighted average market growth rate, producing stronger returns for our shareholders. Now, turning to the details of our first-quarter results, we'll start again with a brief look at our market share performance. It's an important metric that our teams are being evaluated against along with revenue growth, profit, and free cash flow. We continue to see a number of our businesses winning share driven by our innovation and increased competitiveness. And it's worth noting that when we talk about our share dynamics, we're referring to revenue share in the calendar quarter Q2. We gained share in our three largest businesses this quarter. Our Cardiac Rhythm Management business continued to perform well above the market, adding over 3 points of share driven by our differentiated Micro family of pacemakers. Cobalt and Chrome high-power devices, and our TYRX Antibacterial Envelope. In Surgical Innovations, we gained share as our EndoStapling and advanced energy technology continues to be the preferred and trusted instruments used by surgeons all around the world. And in Spine, the ecosystem that we offer of spine implants, biologics, and enabling technologies like the preoperative planning software, robotics, imaging, and navigation resulted in above-market growth from Medtronic. And it's not just our largest businesses that are winning share; we also had share gains in some of our faster-growing businesses like TAVR, Pelvic Health, and Pain Stem. As new evidence, technology, and sales execution resulted in Medtronic outpacing our competition. In Pain Stem, we did observe a gradual slowdown in permanent implants and trialing procedures in the latter parts of our quarter due to the delta variant, and we do expect that this will affect the market during Q2. That said, we continue to win share and have a lot of momentum in our Intel with DTM technology. And with the launch of The Vanta Recharge-free system, our portfolio is complete, highly competitive, and well-positioned. Now while we are winning share in a number of our businesses, we still have areas where we have work to do. In cardiovascular, we continued to lose share in our cardiac diagnostics business. However, we do expect these trends will reverse over the course of our fiscal year as we ramp up the supply of our link to the insertable cardiac monitoring system. Now we also lost share year-over-year in neurovascular, but we were pleased with our momentum as we ramped our recent product launches. This included our 2 new flow diverters, the Pipeline Flex with shield technology in the U.S. and the Pipeline Vantage in Europe, as well as our Salter X 3-millimeter Stent Retriever. And finally, in diabetes, we continue to execute our turnaround strategy. But as expected, we continued to lose share in the U.S. as we wait for new product approvals. We understand the current challenges we face in diabetes, and we believe our product pipeline and our differentiated technologies will return us to market growth as these products move through development approval and ultimately become available to patients. Now speaking of new products, let's now turn to our product pipeline. Today, you are seeing the strong flow of new products launching across our businesses. We've launched over 190 products in the U.S., Western Europe, Japan, and China in just the last 12 months. We also continue to advance the innovation we have in development. We are increasing our R&D spend by more than 10% this fiscal year. This is the biggest dollar increase in R&D spend in our Company's history. The investments we're making in our pipeline will play a key role in accelerating our topline growth. And we're at the front-end of some large opportunities to win share, create new markets, and disrupt existing markets. Starting with one of our largest future growth drivers, Renal Denervation. We're making good progress on our solution to go after this multibillion-dollar hypertension opportunity. We expect that the results of our unmet pivotal trial will be ready for presentation at the TCT Conference in November, assuming the interim look at this based on design study reaches statistical significance. The unmet clinical trial represents the final piece of a large body of evidence that we intend to submit to the FDA for approval. The progress in our surgical robotics business has been impressive in recent months. And we have momentum on a number of important milestones and initiatives. But most notable, and something that has energized our entire Company and the robotics team, the first procedures with Hugo were performed at Clinica Santa Maria in Chile by Dr. Ruben Alvarez in June. And as he said, a picture is worth a thousand words. So let's watch this short clip detailing this important milestone. It's truly amazing to see our robotic technology in use. And I want to thank the hundreds of Medtronic employees that have worked tirelessly over many years as well as the surgeon and hospital leaders whose partnership helped make Hugo a reality. We look forward to expanding the surgical robotics market by addressing the per procedure cost and utilization barriers that have limited robotic surgery to date. And shortly after the first geological procedures in Chile, we had the first gynecological procedures performed last month at the Pacifica Salute Hospital in Panama. We are receiving positive feedback from early users for our approach to robotic surgery, including our thoughtful design choices. For example, as you can see by this picture, our open console design allows for natural interaction and participation of the entire surgical team. And it's just one of the many important differentiated features of Hugo. Looking ahead, we remain on track for CE Mark approval of Hugo following our submission in late March, and we continue to make progress towards starting our U.S. expand Euro pivotal trial, where the first procedures in the U.S. will occur. Around the globe, a number of hospital systems have expressed interest in our partners and possibility Program, joining a group of pioneering hospitals that will be among the first to use Hugo. In Cardiac Rhythm. We filed for CE Mark for extravascular ICD this quarter. Enrollment is going well in our U.S. pivotal trial. EV ICD represents a disruptive technology in implantable devices as it can pace and shock without leads inside the heart. And it can do all of this in a single device with the same size and longevity as a traditional ICD. In TAVR, we continue to advance our Evolut platform. And I am pleased to share with you the news today that we just received FDA approval last week for our next-generation Evolut Fx TAVR system. Now, this innovative system is designed to improve the overall procedural experience through enhancements in deliverability, implant visibility, and deployment stability. We're planning to start rolling out this next-gen system in the U.S. market later this fall. In neuromodulation, in addition to receiving FDA approval in the quarter for our recharge-free spinal cord stimulator, we also received FDA approval for our SenSight Directional Deep Brain Stimulation lead. Now SenSight combined with our recently approved Percept PC system is the only DBS system on the market that can sense and record brain activity, in addition to providing normal stimulation to treat diseases like Parkinson's and essential tremors. We also remain on track to submit our ECAP Spinal Cord Stimulator to the FDA later this calendar year, which has the potential to be a disruptive technology in Pain Stem. Now moving to our Pelvic Health business. As you know, we don't reveal all of our development programs underway at Medtronic for competitive reasons, but I'm going to unveil a new one today. We've been working in stealth mode on our next-gen InterStim recharge-free device. And earlier this month, we submitted our PMA supplement to the U.S. FDA seeking approval. This device has some very attractive specs. It's designed with a 10-year battery. It's got a constant current and it's full-body MRI compatible at both 1.5 and 3 Tesla. We're expecting approval in the first half of the next calendar year, and we can't wait to have this best-in-class recharge-free device available for patients. In diabetes, the international launch of our MiniMed 780G insulin pump continues to go well. The 780G has the highest reported time and range of any insulin pump. And starting this fall, people with diabetes in many international markets will not only have access to the 780G, but also our no calibration 7-day, Guardian 4 Sensor, and our 7-day extended infusion set. The longest-lasting set on the market. This complete offering will be highly differentiated and ease patient burden, and we're working to bring this technology to other markets. In the U.S., the seven AG and guardians for sensors continued to be under active review with the FDA. And we're expecting to submit our next-gen synergy CGM sensor to the FDA in Q3. Synergy is disposable, easier to apply, and half the size of our current sensor.

Thank you, Geoff. Our first-quarter organic revenue increased 19%. And adjusted EPS increased 127%, significant growth as we anniversary the downturn from the pandemic impact last year. Our end markets are recovering and we continue to launch new technology and gain market share, which is reflected in our growth and profitability. Our adjusted EPS was $0.09 better than consensus, with the entire beat coming from higher revenue growth and operating profit. As I noted on our last earnings call, we did not adjust our first-quarter results for the extra week of sales last year given the concurrent reduction of customer purchases, as these two items roughly offset each other at the total Company level. That said, not all areas of the Company had large quarter-end customers both purchasing activity, diabetes, for example. As a result, I would point out that our Diabetes growth rate would be roughly 6 points higher in the first quarter had we adjusted for the extra week. On our cadence of recovery, the monthly improvement trends continued. Average daily sales in June were stronger than in May, and July was stronger than June. That said, we did begin to see a slowdown in certain businesses in the last few weeks of July related to the spread of the delta variant in the U.S. If not for the COVID impact in July, our first-quarter performance would have been even stronger. Turning to our P&L, we saw significant year-over-year improvement in our margins. 670 basis points on gross margin and over 1,000 basis points on operating margin. Our operating margin was better than expected as investments we initiated in the first quarter took longer to ramp, but are expected to pick up starting in the second quarter. Turning to capital allocation, we continue to balance our investment for future growth while returning cash to our shareholders, primarily through our strong and growing dividend. As we've noted for several quarters, we are increasing our level of tuck-in acquisitions. Having announced seven for a total of $2.3 billion since the start of fiscal '21. Less than three weeks ago, we announced our intent to acquire Intersect ENT. Our ENT business has quietly been a strong performer for us, led by a great team with a track record of consistently outperforming the market. With the addition of Intersect's complementary products, we can accelerate the growth profile of this business for years to come. The deal is accretive to our weighted average market growth rate. Initially neutral, but quickly accretive to earnings and has expected returns well ahead of our cost of capital. Now, turning to our guidance. As you know, it is still early in our fiscal year. We had a strong first quarter. And despite the current impact from COVID, we are optimistic about the outlook for the year. Given how early it is in the year, we are maintaining our revenue guidance for the full year at 9% plus or minus. If recent exchange rates hold, the foreign currency would have a positive impact on full-year revenue of $100 million to $200 million down from the prior 400 million to 500 million I gave last quarter. By segment, we continue to expect cardiovascular and neuroscience to grow 10% to 11%. The Medical-Surgical Portfolio to now grow 8% to 9%, and diabetes to be roughly flat, all on an organic basis. On the bottom line, we are raising the lower end of our guidance by our first quarter bit, offset by a lower expected benefit from FX. We now expect non-GAAP diluted EPS in the range of $5.65 to $5.75, an increase from our prior range of $5.60 to $5.75. This includes a currency benefit of $0.05 to $0.10 at recent rates, down from the $0.10 to $0.15 benefit we signaled last quarter. Our second Quarter is likely to reflect the current impacts from COVID, particularly in a handful of businesses in cardiovascular and neuroscience. So we expect organic growth in the quarter of around 4% with a currency tailwind of $0 to $50 million at recent rates. Keep in mind that we are facing a particularly tough comp in our Ventilator business, which peaked in the second Quarter last year. Ex ventilator sales, we expect organic growth in the quarter of around 6%. By segment, we expect cardiovascular to grow 5% to 6%, neuroscience 6% to 7%, and both medical-surgical and diabetes to be flat to up 1%, all on an organic basis. Excluding ventilator sales, medical-surgical is expected to grow 8% to 9%. We expect EPS between $1.28 and $1.30 with a current tailwind of about $0.04 at recent rates. As previously mentioned, we do believe the near-term COVID impact on our business will be relatively less severe than prior waves, given hospital preparedness and increasing vaccination rates around the globe. That said to be conservative, our guidance does not assume that procedures canceled in the near term will be rescheduled. So to the extent those procedures are simply delayed, that should be an upside. We are confident as ever in the strength of our underlying business, our execution, and the impact of our new products. We saw that in the first quarter. And as we move past the current impact of COVID, we feel really good about the underlying strength for the rest of the year. Before I send it back to Geoff, I'd like to step back and acknowledge how much our employees have accomplished over the last year since the pandemic started. And our results this past quarter reflect that unwavering focus by our global team to drive our business and fulfill our mission. And for that, I'm incredibly proud. Back to you, Geoff.

Okay. Thanks, Karen. Next, I'd like to cover a few ESG related topics. Inclusion, diversity, and equity, as well as product quality. First, inclusion, diversity, and equity is something that is personally important to me and important to our success at Medtronic. Now, we best fulfill our mission when we have a workplace where ID&E for all of our employees is championed. While we know there's much more to be done, we've made a lot of progress here, and this is being recognized by others. I mentioned our Diversity Inc. award last quarter, and we were recently recognized by several other organizations for the innovative and inclusive work environment. We were named as one of Fast Company's best workplaces for innovators in 2021. As the best place to work for disability inclusion by the Disability Equality Index, and we were one of the 15 companies awarded the Secretary of Defense Freedom Award for our efforts to support our military and veteran employees. Next, I want to emphasize our continued focus on product quality. Striving without reserve for the greatest possible reliability and quality in our products is a key tenant of the Medtronic Mission and core to our commitment to improving outcomes for patients. In fact, there is nothing more important than patient safety. In Q1, we made the decision to stop HVAD sales. We did this because of a growing body of clinical comparisons indicating that our device had a higher frequency of adverse events than a competitor's product. This decision was consistent with our commitment to patient safety. Importantly, we remain committed to supporting current HVAD patients, their caregivers, and healthcare professionals. At Medtronic, we have a purpose deeply rooted in our mission. And our employees translate this mission into tangible, day-to-day actions, which in turn create an impact in our society. When I reflect on product quality in IDE, we've made progress, but there's always room for improvement. One step is ensuring that we have the right incentives in place to drive the actions that will elevate our impact. Our board and executive leadership have been evaluating our annual incentive plans. And as a result of this, we're planning to further strengthen our existing quality metrics, and we intend to introduce new IDE metrics into our incentive plans. These will help guide our plans and drive our work on a daily basis and ultimately hold us accountable to translate our actions into even greater impact. For those of you that would like to learn more about our ESG efforts underway at Medtronic, I encourage you to save the date to virtually attend our first-ever ESG Investor and Analyst Event, which we're planning to broadcast on Wednesday, October 13. You're going to hear from leaders from across Medtronic covering important topics including inclusion, diversity, and equity, and product quality and safety. And I'll close by noting that we are on track to accelerate our revenue growth. We're executing on our pipeline. And we're winning share in the marketplace with our leading technology. And we have some really big opportunities ahead of us with near-term milestones in both renewed innovation and surgical robotics businesses. And the energy across the organization is palpable as we operate under a new model and instill our new cultural traits, including acting boldly, competing to win, moving with speed and decisiveness in everything that we do, and getting results and getting them the right way. And to our employees, many of whom I'm sure are watching today, thank you. I truly appreciate your efforts to deliver these results. Look, these are exciting times and I'm really looking forward to all that we're going to accomplish over the coming months. Momentum is building, and we're creating value, and there is a lot more to come. With that now let's move to Q&A. Now we're going to try to get to as many analysts as possible, so we ask that you limit yourself to just one question. If you have additional questions, you can reach out to Ryan and the investor relations team after the call. With that, Francesca, can you please give the instructions for asking a question?

Okay. Thank you and thanks for taking the question. Just as a technology check here, can you hear me okay?

Yeah, sure, we can hear you. We can hear you just fine, Bob.

Excellent. Thanks, Geoff, and congrats on a good start to your fiscal year. I guess since we're limiting it to one question, I'll ask something a little bit more short-term-oriented. And that is that you guys mentioned that at the end of July you started to see a little bit of a slowdown, I'm just curious, is that slowdown stabilized at this point, or are things still getting worse? And if you could give us a sense of what you're seeing geographically, especially in China, that would be appreciated too. So just want to get a sense of where the things have stabilized relative to what you saw start to happen at the end of July. Thank you.

Hi, Bob. It's Karen, and thank you for your question. The slowdown we noticed in late July has continued into August. We anticipate that the delta variant will affect us, especially in the U.S., this quarter, particularly in areas like cardiovascular and neuroscience where procedures can be deferred, such as cardiac diagnostics and pain management, as well as those requiring ICU bed capacity, like TAVR. However, we expect infection rates from the delta variant to peak around late August to early September, with improvements in hospital and ICU capacity following a few weeks later. By the end of the second quarter, we believe procedures will return to more normal levels, and we have incorporated this outlook into our second quarter guidance. We remain optimistic about the fundamental strength of our business, not just for the second quarter, but also for the latter half of the year and beyond.

In China?

You asked about China. Look, Bob, we're seeing alluded impact so far in China, much less so than in the prior waves. I mean, they're pretty aggressive, when they see a COVID case, they can isolate that geographic area and they do reduce mobility via consumer mobility if you will, but they've kept the hospitals open. And I think they handled it pretty well. So we've seen limited impact so far in China.

Great. Thank you.

Thanks, Bob. Next question, please, Francesca.

Thank you for taking my question. Congratulations on a successful quarter. I want to follow up on the previous question. Karen, although you don't provide quarterly guidance, I want to ensure that I accurately interpret your comments. We're slightly below the consensus estimate of 8.2 billion in sales and $1.35 for fiscal Q2. Can you help us understand if that's a reasonable position in light of your comments on the impact of COVID and any trends you might share for the remainder of the year? Thank you.

Thanks, Robbie. For the second quarter, considering the impact of the delta variant, we expect growth of about 4%. This figure includes an estimated 150 basis points impact from COVID, indicating stronger underlying growth outside of COVID. Additionally, I want to remind you that ventilators are coming down from their peak in the second quarter last year, which contributes another approximately 200 basis points headwind. Also, our decision to stop distributing LVADs in our MCS business adds around 50 basis points of headwind. Therefore, the true underlying strength, excluding the impacts of COVID and MCS, is approximately 8% for the quarter. Regarding EPS, we are guiding for the quarter at $1.28 to $1.30, which includes a currency tailwind of about $0.04. Looking ahead to the rest of the year, we will provide Q3 guidance during our Q2 earnings call. However, please keep in mind that you can expect our investments to increase in the upcoming quarters as we move forward with important new product launches. Hopefully, that provides clarity.

Yeah. Thanks, Karen.

Thanks, Robbie, next question, please, Francesca.

Hi. Good morning, and a good start to the year. Can you hear me okay?

Sure. Matt. Yeah, we can.

Okay. I just wanted to ask you for some more color on the progression through the quarter. And the reason for the question in that way, is I want to understand how things were coming back as a proxy for how they could come back again after the delta variant passes. So can you give us any color on how strong things got in July before you saw the impact or help us understand what the impact was in the second half of July?

We were progressing through the previous backlog quite rapidly, and we've noticed improvements since our last earnings call. May was an improvement over April, June bettered May, and July surpassed June. It wasn't until the last few weeks of July that we started to see a decline, which appears to be mainly confined to developed countries, particularly the U.S., Japan, Australia, and New Zealand. In the U.S., this decline is primarily in regions with lower vaccination rates. In areas where vaccination rates are high, the decline is not evident. We also observed that the procedures affected are similar to those seen during the first wave, particularly the more elective procedures like pain stimulators, spinal procedures, and cardiac diagnostics, which often require an ICU stay, such as TAVR. These pullbacks are occurring in U.S. regions with lower vaccination rates. Hospitals are better equipped now, and we anticipate that the peak impact will occur around the end of August, with hospitalization rates trailing behind infection rates by a couple of weeks. We believe this scenario will be shorter and easier to manage than previous waves. The progression has been positive up until now, and we didn't start noticing the pullback until late July. At that point, we had returned to or exceeded 100% of pre-COVID levels in some of our therapies.

Thanks for the call, I'll leave it there. Thank you.

Thanks, Matt.

Francesca, next question, please.

Good morning. Thank you for the question. Sean, this quarter, I have more questions about Renal Denervation than anything else related to Medtronic. When will you know if the interim look is positive? How confident are you that it will be positive? If it doesn't conclude on this interim alone, when will the trial ultimately end? Also, can you provide any insights from the trio trial, which was another unmet trial that indicated a difference of about 4 to 4.5 millimeters of mercury in ambulatory systolic blood pressure? Thank you, Sean.

Hey Sean, you're on mute.

You hear me now?

Yeah, we can. You're going strong, but no one could hear you.

I understand. We have no information.

We lost Sean again. This is our fifth earnings call, and it's our first technical issue, so I was feeling optimistic. I'll see if we can reconnect with Sean. While he tries to join us again, he was beginning to mention that we haven't received any new information since our last call. We expect to get it due to the Bayesian trial design and how it's structured, with another interim look scheduled for this fall. There's a reason for optimism since part of the denominator for the trial was based on the feasibility work we completed, and we know those numbers. We still have existing registries, and the evidence continues to grow through our registries and other activities, which leads us to believe it's positive. However, this is why we conduct these trials. Sean, if you're back, what happens after this interim look in the fall if it doesn't meet our expectations?

Can you hear me now? Am I back?

Yeah, yeah.

It really depends on the difference between the groups and the standard deviation. We don't have a specific date; it will happen when it happens. If it eases your concerns, we encountered a similar situation with the SURTAVI trial, which was also based on design. It didn't reach statistical significance during the first interim look, but it did on the second. The two-year results were nearly identical to those when they were finally released. There will be three reviews for this, and as I mentioned, we are confident we'll reach our goal. However, we don't have any information until the Events Committee informs us that we're ready to present. That's our plan, and we'll take it from there. Regarding the retro Trio, it's beneficial for leveraging the positive share in a controlled study, but I don't believe that patient population for our regimens is directly comparable. So it truly isn't a reversion.

Thanks, Sean.

Hey, thanks, Larry. Let's take the next question, please. Francesca.

Hey, guys. Thanks for taking my question. Not based on our solid start to the year. Geoff neither one on the product side, can you remind us of the U.S. timelines for approvals on Hugo, SICD, and diabetes. And I'm curious now that you're placing Hugo, what has been the early learning so far? Has it been in line with expectations, or perhaps surprised you to the positive there?

Sure. I'll let Bob on some of the more specifics of Hugo and Sean on the cardiovascular timing there. But I'll just say look, you saw the video and we were just out. The surgeon's feedback has been great. Very excited and look as I talked to the other health systems around the world, there's definitely an appetite. They want us to win here. So that's a positive sentiment. The demand is high, surgeon feedback initially is strong, and we just had our whole leadership team at one of our operational centers here for the robotics business. They have a couple of R&D centers around the world and a large operational center in Connecticut. Our whole XCOM was there and they just made so much progress. And we're feeling pretty good right now, but I'll let Bob give you more of the specifics.

Thank you, Geoff, and thank you, VJ, for the question. We are truly energized by the potential that Hugo presents now that the first case is behind us. The feedback from the surgeons and staff who have worked with Hugo has been overwhelmingly positive. What they appreciate most is the system's modular design, the open council, the 3D visualization, and the platform's flexibility, which has spurred thoughts about expanding robotic-assisted surgery applications. Additionally, I want to mention our touch surgery enterprise. As you may remember, our acquisition of digital surgery a couple of years ago has been utilized in all Hugo cases. The surgeons have been really impressed by its analytical capabilities, video storage, case sharing, and similar features, which is very encouraging. Regarding your question about U.S. commercial progress, it largely hinges on the timeline for completing the clinical trial and the FDA review. As Geoff highlighted at the beginning of the session today, we are making excellent progress on our EXPAND URO trial. We're gaining ethics committee approvals, working through the IRB, conducting site training, and activating clinical study sites. While I can't disclose all the sites for competitive reasons, we are eager to treat our first patient in the U.S. We feel optimistic and confident that we are on the way to building a multi-billion dollar surgical robotics business, Vijay. Geoff, I'll turn it back to you.

Thanks. I think Vijay had a question on the ICD Sean. I think it was the timing of the approval there, I believe, Vijay?

So Vijay, we expect to mark this quarter, as the U.S. approval is currently enrolling. We anticipate seeing the mark sometime in the first half of calendar year '22, and it will be approximately a year later.

Thank you, Vijay. Let's go to the next question, please, Francesca.

Hi. Good morning, and congratulations on a solid start to the year. I have another question regarding Renal Denervation and the adoption curve. If the data resembles what we saw in the pulse study, what steps do you take to get payors on board? How do you establish the referral channel, and how quickly could revenue escalate? Also, considering the MCIT delay, is it necessary to reach that $1 billion RDN market size by 2026?

Yes, sure I know. Sean, speak up.

Thank you, Geoff. I appreciate the question. You're correct that securing reimbursement is crucial for our progress. We have already achieved approvals in CE Mark countries, and the European Society of Cardiology released a statement in July recommending our treatments as part of the treatment paradigm, which is significant for payer considerations. In the U.S., obtaining coverage approval has faced delays due to changes in administration, and this is currently under review. We're determining whether we can secure coverage the same way we do with other therapies by addressing payers geographically, including in the U.S. It's essential to navigate payment and coding processes moving forward. A sizable portion of patients will have commercial insurance, and we've been actively working on that. This was a primary reason for structuring our clinical trials to demonstrate effective medications. The adoption will occur in the commercial market on a case-by-case basis with payers, while we're also working to get Medicare coverage in place. However, predicting how quickly this will ramp up is challenging due to the uncertainty surrounding that final aspect.

Okay, thank you, Travis. Let's go to the next question, please, Francesca.

Hi, good morning. Thank you for taking my questions. I have a multipart question for Sean regarding the TAVR franchise. I’m curious about the marketing efforts and the data related to patient mismatch. I'm also interested in how we are improving techniques to reduce the pacemaker rate, the launch of our FX product in the U.S., expectations for market share gains in the U.S., updates on low-risk reimbursement timing in Japan, and any insights on Medtronic's potential market share in China, including timelines for the TAVR franchise there. Thank you for addressing my question.

Yes, we have recently gained market share in both the U.S. and Europe. Factors such as customer overlap, reducing the pacemaker rate, and enhancing the predictability of procedures have contributed to this success. In Europe, we have recently launched the PRO+ and received approval in Japan for the low-risk indication. Generally, it takes about a quarter for our reimbursement to align with such approvals. We see China as a significant opportunity and have been making good progress on our local clinical strategy there. Although China is still an emerging market for converts, it is experiencing growth, albeit limited to a few centers in major cities at this time. Our efforts to penetrate low-risk procedures continue to be the main growth driver. As we expand into Asia, we anticipate positive developments, and despite the challenges posed by COVID, we feel confident about our pipeline. We've seen significant improvement in our predictability, especially regarding the performance of our products. The market needs to adapt to the new strategies we are implementing, and we believe our techniques will result in substantial success for us.

Thank you, Josh. Next, let's go to the line of Anthony Petrone from Jefferies. Anthony, please go ahead.

Great, thanks. Two quick points here. Just on the commentary on this procedure volumes, tracking either at 100% or slightly above certain in categories until they get expectedly bring through there at the midpoint in August that were once again at some discount to 100%, if so where is that settling, and then just on diabetes a few quick follow-ups to Vijay. 780G launch in Europe, is that still on track second half? And then the 780G clearance as well as ICGM designation for standalone sensors. Is that still expected in the second half? Thanks.

I'll let Sean address the diabetes questions, but regarding procedure volumes, we believe COVID cases peaked around the end of August to early September, with hospitalizations lagging by a few weeks, likely peaking in mid-September. We hope to recover those cases over the year and return to pre-COVID levels. I want to note that our guidance does not factor in making up for these cases, but it remains a possibility given how quickly we recovered during prior waves that were worse than what we expect from the delta variant. As for diabetes, the 780G is already approved in Europe and performing well. We are optimistic because it is showing the best time in range among competitors, and the feedback from users and physicians has been extremely positive. I'm excited about that, but there were additional questions about ICGM, and Sean, perhaps you could address those?

Thank you, Geoff. The combination of the 780G system with a sensor as a required confirmation has been submitted to the U.S. We're experiencing positive interactions regarding the sensor. This is promising, especially with the launch in Europe during the second quarter, where there's a blend of no fingerstick sensors and infusion sets with the 780G, which is a favorable combination. We are eager to introduce this to the U.S. as soon as we can. Currently, everything seems to be on schedule. However, it's worth noting that the FDA has been quite occupied with COVID matters, making it challenging to predict exact timelines. Nonetheless, we believe we are making significant progress.

Thanks, Anthony. Let's go next to Matt Miksic from Credit Suisse. Matt, please go ahead.

Hi, thanks so much. So just a follow-up on some of the comments you made on sort of the COVID pressure in the U.S. and elsewhere if you could maybe give some additional color around what the strengths and weaknesses look like regionally, whether you're seeing so far any indication. I know bed availability and capacity is one element and, of course, patient sentiments, willingness to get cases done is another. So wondering if you're seeing anything, so there appreciate the additional color.

Thanks, Matt for the question. So in terms of regionally, the impact that we're seeing is mostly in the U.S. and we've talked about that. We do have Japan and certain countries in Asia-Pacific like Australia, New Zealand, and Vietnam being impacted because lockdowns are still in place there. In Europe, we're seeing the impact in the UK. And in Latin America, we're not seeing a big impact on the Delta variant at this point. So hopefully that's helpful. In terms of patient sentiment and the impact around capacity availability, we do expect this impact to be short-lived. And really it's because hospitals are better equipped as Geoff talked about, vaccination rates are increasing around the world. And the patient sentiment is understanding that we need to have life go on with the COVID variant. And so we're seeing that. And so we do expect a recovery here to be faster, certainly than it was in the first wave and even in the second wave.

On patient sentiment, I would say it's much better than it was a year ago. There were a lot of unknowns. There was no vaccination. I think you're seeing a lot of people that have a concern have gotten vaccinated, and there are others that have not that have a different viewpoint on the virus. And but all-in-all, patient sentiments are in a much better spot. And as Karen pointed out, hospitals are much better equipped.

Okay. Thanks, Matt. Francesca, let's take the next question, please.

Good morning. I have a question for Karen about our margin. Are you still anticipating a $400 million negative impact on our margin this year due to investments in Hugo and RDN? How much of that impact was realized in the first quarter? Also, regarding the second quarter, is it correct that our margin is expected to be in the range of 25.5 to 27%? Thank you.

Thanks for the question, Jason. We are still expecting strong investment against those already in and the robot. And yes, a $400 million impact to the operating margin for the year from those two very important programs which represent what we believe to be the largest opportunity in Med-Tech. In terms of how much that hit in the first quarter, we expected some ramps and those investments plus others in the first quarter. And we didn't see all of those ramps in the first quarter, so we're expecting more in the second quarter just because of the fact that we're hiring lots of people and it takes a little bit of time. So we are expecting that ramp in the second quarter and in the third quarter beyond that. What I would say on operating margins for the second quarter is that we'll still expect a few hundred points basis points improvements in operating margin for the second quarter. So despite all of that investment, we still expect very strong year-over-year improvement.

Thank you all for including me, and congratulations on the start of the fiscal year. I have a question regarding your M&A strategy. Congratulations on the Intersect ENT deal; it seems to make a lot of strategic sense. At a high level, should we consider this as an indication of how you plan to approach M&A going forward? Also, now that Intersect is part of the company, where else should we be looking for Medtronic to fill in gaps? Thank you.

Thanks for the comments and the question, Danielle. The tuck-in strategy is definitely the one that we're focused on. And it's been consistent with what we've been doing over the last couple of quarters. I think we've done 7 deals over the last 1.5 years or so for about $2.3 billion. This one is roughly a billion dollars; this is the kind of deal I would expect from us. This one happens to be earnings neutral in the first 12 months and accretive thereafter. It's accretive to our average market growth rate at the segment with any ENTs growing in the mid-teens. And the returns are strong. Well, well above our weighted average cost of capital. These are the kind of deals we would like to see. They are in areas that we're strong, so the ENT is one of our stronger businesses, Karen pointed out in her opening remarks. In terms of where to look beyond, I mean that's tough to forecast. I'd say this: we're looking at all of our different operating units and the different segments that they serve. We spent a lot of time and resources looking at different opportunities and engaging different companies. Yes, we've got opportunities across the portfolio, and it's difficult to predict where the next one will be, but we're still very focused on this tuck-in strategy. And I'd like to say that we're not buying growth here; we're growing what we buy. We buy these earlier stage companies, and there tends to be a lot of synergies that drive growth, whether it be technical or clinical, or a big one would be commercial, especially outside the U.S. since a lot of these companies tend to be U.S. based, these startups. That's how I'd answer that, and hopefully, we can continue to keep this going because it does add to our weighted average market growth rate.

Okay. Thanks, Danielle. Geoff, please go ahead with your closing remarks.

Okay. I will. And thanks to everybody for the questions, and we definitely appreciate your support and your continued interest in Medtronic. And look, I hope you all join us for our Q2 earnings webcast, which we anticipate holding on November 23rd, where we will update you on our continued progress here. So with that, thanks for watching today. Hope you enjoyed it; the drumline is back. Please stay healthy and safe. And have a great rest of your day. Thank you.