Medtronic Plc (MDT) — Q2 2022 Earnings Call Transcript

Good morning, and welcome to Medtronic's Fiscal Year 2022 Second Quarter Earnings Video Webcast. I'm Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations. Before we start the prepared remarks, I'll share a few details 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 second quarter, which ended on October 29, 2021, and our outlook for the remainder of the fiscal year. After our prepared remarks, our portfolio executive VPs will join us and we'll 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. Second quarter organic revenue comparisons adjust only for foreign currency as there were no 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 first quarter of fiscal '22, and are made on an as-reported basis and all references to share gains or losses refer to revenue share in the third calendar quarter of 2021 compared to the third calendar quarter of 2020, 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. This morning, we reported Q2 results, which despite a challenging market backdrop, reflects solid execution around new product launches and strong underlying earnings growth. Obviously, our end markets were impacted by the COVID-19 resurgence and the health care system staffing shortages particularly in the U.S., which affected our quarterly revenue growth. Procedure volumes were lighter than expected in markets where our technology is used in more deferrable procedures like our Spine business or those that require ICU bed capacity like TAVR. Yet in markets where procedures are less deferrable, like pacing, we experienced stronger growth. While the U.S. market was a headwind, many of our international markets were much stronger. We delivered 6% revenue growth outside the U.S., including mid-teens growth in emerging markets. And our emerging market growth is up 9% versus pre-pandemic levels in Q2 fiscal '20. In the midst of these market headwinds, we focused on managing what was in our control and executed to advance our pipeline, launch new products and win share. And when you look at our sequential revenue performance, our 2% decline was slightly better than most of our large cap med tech competitors. While the pace of the recovery from pandemic headwinds is hard to predict, our markets will recover. And as that happens, Medtronic is one of the best positioned companies in health care. The underlying health of our business is strong, and it's getting stronger. We have an expansive pipeline of leading technology, a robust balance sheet and an expanding roster of proven top talent. Coupled with our revitalized operating model and new competitive mindset, we remain poised to accelerate and sustain growth. As I've done in prior quarters, let's start with a look at our market share performance. Year-over-year market share is an important metric that our teams are evaluated against in their annual incentive plans, along with revenue growth, profit and free cash flow. And right now, the majority of our businesses are winning share, driven by our innovation and increased competitiveness. And this is exactly the sort of market share performance that gives us confidence in the deep strength of our businesses. And to avoid any confusion about how we're performing, when we talk about our share dynamics, we'll refer to revenue share in the third calendar quarter to keep it directly comparable to our competition. Share momentum in our 3 largest businesses continued. In the Cardiac Rhythm Management business, we extended category leadership, adding over 1 point of share year-over-year, driven by our differentiated Micra family of pacemakers, Cobalt and Crome high-power devices and our TYRX antibacterial envelopes. In Surgical Innovations, we outperformed competition with strong performances in endo stapling and sutures. And our Signia powered stapling system and Tri-Staple technology continues to see great market adoption. In Cranial & Spinal Technologies, we're winning share and launching new spine implants that enhance the overall value of our ecosystem of preoperative planning software, imaging, navigation and robotic systems and powered surgical instruments, which is transforming care in spine surgery. Our new implants also go directly at the competition, starting this past quarter with our Catalyft expandable interbodies to specifically attract Globus users. In addition to our 3 largest, a broad array of our other businesses have increased their competitiveness, are launching new products and winning share in their end markets. So for example, in Patient Monitoring, we're winning share with our Nellcor pulse oximetry sensors and our monitors. In Respiratory Interventions, we picked up 4 points of share in premium ventilation due to our ability to respond quickly to spikes in demand from COVID resurgence. And in Neuromodulation, we won share across our product lines, including Pain Stim and DBS as we continue to launch new products. In Pain Stim, despite the sequential slowdown in the market, we're gaining share with our Intellis with DTM technology and our Vanta recharge-free system. In DBS, we had a very strong quarter, winning over 6 points of share. We're executing on the launch of our Percept neurostimulator with BrainSense technology paired with our SenSight directional lead, and we continue to be the only company with sensing capabilities. Since launching SenSight in the U.S. earlier this fiscal year, we surged ahead of the competition in new implant share. Sensing has redefined what it takes to compete in DBS. Our competitors don't have it. And as a result, we're expecting a long runway of share gains as we build upon our category leadership. Now, while the majority of our businesses are winning share, we do have a few businesses that are flat or losing share, and we're focusing our efforts and our investments to grow above the market. In Cardiac Diagnostics, we're focused on improving supply to reverse share declines, and we're investing in new indications and novel AI detection algorithms to expand the market and drive growth. In Cardiac Ablation Solutions, we expect to win share as we expand the rollout of our DiamondTemp RF Ablation System and drive awareness and adoption of our Arctic Front Advance Pro cryoablation as a first-line treatment for paroxysmal AF. In Diabetes, while we lost share again this quarter, we remain pleased with the momentum we're building outside the U.S., not only with the 780G insulin pumps, but also with the positive customer feedback we've heard on our extended infusion set and fingerstick-free Guardian Sensor 4. And we expect our U.S. results to turn around as we launch these new products. Next, let's turn to our product pipeline. I've already talked about the impact our strong flow of new products is having in the market. We've launched over 180 products in the U.S., Western Europe, Japan and China in the last 12 months. At the same time, we continue to advance new technologies that are in development. We're heavily investing in this pipeline with a targeted R&D spend of over $2.7 billion this fiscal year, which is an increase of over 10%, the largest dollar increase in our history. We're expecting these investments to create new markets, disrupt existing ones and accelerate the growth profile of Medtronic. Let's start with our Simplicity renal denervation procedure for hypertension. While we weren't able to end our ON MED study early, we remain confident in our program and our ability to serve the millions of patients who make up this multibillion-dollar opportunity. As a reminder, our previous 3 sham-controlled Simplicity studies all reached statistical significance, including the pivotal OFF MED study. And the ON MED study remains powered to detect a statistically significant and clinically relevant benefit at the final analysis. We expect that ON MED follow-up will complete in the second half of next calendar year, and then we'll submit the PMA to the U.S. FDA for approval. When we think about renal denervation, let's start with the patients who have indicated that they want options, like the Simplicity blood pressure lowering procedure to treat their hypertension as confirmed by our patient preference study presented earlier this month at TCT. We believe demand will be high, and we continue to expect this to be a massive opportunity that we will lead. Another opportunity for Medtronic is surgical robotics, where we are entering the soft tissue robotics market as a second meaningful player. We achieved a major milestone when we received CE Mark for Hugo last month. And we also completed our first procedures with Hugo in our Asia Pacific region at Apollo Hospitals in India. The first surgeons to use Hugo in the clinical setting have told us they believe Hugo addresses the cost and utilization barriers that have held back the growth of robotic surgery. Look, demand is high, and we're building a long list of hospitals that want to join our Partners in Possibility Program and be among the first in the world to use Hugo and participate in our global registry, which will collect clinical data to support regulatory submissions around the world. Our robotic program is making progress toward a broader launch, and we remain well positioned in this critical field relative to every other potential new entrant. As we prepare for this broader launch, we're working hard to ensure an outstanding customer experience. We're also focused on optimizing our supply chain, manufacturing and logistics to prepare for scaling this business. We're making steady progress on these activities, but not at the pace that we'd originally planned. And as a result, sales this fiscal year are likely to come in below our $50 million to $100 million target. Now that said, we still expect double-digit millions in sales this fiscal year, and we continue to expect a strong ramp in FY '23. We're off schedule, but we're not off track. And while we're disappointed in the revenue push-out for this important program, we're confident that we have line of sight to the solutions we need to be successful and to optimize the customer experience. Demand remains high. Surgeons continue to do cases. Our order pipeline continues to build, and we're looking forward to starting our U.S. IDE soon. We remain confident in the success of this program, and we believe that we're poised to meaningfully expand the soft tissue robotic market and drive growth for years to come. In Cardiac Rhythm, we just launched our Micra AV leadless pacemaker in Japan earlier this month. We also completed the U.S. pivotal study enrollment for our EV ICD, which follows our CE Mark submission in Q1. Just as we disrupted the pacing market with Micra, we intend to do the same in the implantable defibrillator space with our EV ICD. Our device can both pace and shock without any leads inside the heart and veins, and it does this in a single device that is the same size as a traditional ICD. In structural heart, we're starting the limited U.S. launch of our next-gen TAVR system, the Evolut FX this month, with a full market launch planned for fiscal Q4. Evolut FX enhances ease of use with improvements in deliverability, implant visibility and deployment stability. We're also making progress on our transcatheter mitral program. At TCT earlier this month, we presented very encouraging early data of our transfemoral delivery system for our Intrepid mitral valve, and we will be rolling that system into our APOLLO pivotal trial. In Diabetes, our MiniMed 780G insulin pump, combined with our Guardian 4 sensor continue to be under active review with the FDA. When approved and launched in the U.S., we expect the 780G system to drive growth as it will be highly differentiated and further address the burden of daily diabetes management, and for the first time ever is helping hard to manage pediatric and adolescent patients achieve outcomes mirroring well-controlled adults. The user experience has also improved markedly, and these outstanding results were achieved with our 780G paired with our Guardian 3 sensor, so we expect the experience will be even stronger with Guardian 4. And the value of our offering will be further enhanced when we bring our synergy sensor, which is now called Simplera to market. Simplera is disposable. It's easier to apply and half the size of Guardian 4, and we expect to submit it to FDA later this fiscal year. In Pelvic Health, we're awaiting FDA approval for our next-gen InterStim recharge-free device, which we expect in the first half of next calendar year with its best-in-class battery, constant current and full-body MRI compatibility at both 1.5 and 3 Tesla, we expect this device will extend our category leadership in this space. In Neuromodulation, we recently submitted our ECAPs closed-loop spinal cord stimulator to the FDA. We're calling this device Inceptiv SCS, and we expect it to revolutionize SCS with closed-loop therapy to optimize pain relief for patients. We also continue to make progress on expanding indications for SCS into nonsurgical refractory back pain, painful diabetic neuropathy and upper limb and neck chronic pain. Finally, in DBS, we continue to enroll patients in our ADAPT-PD trial studying our closed-loop adaptive DBS therapy in patients with Parkinson's. We're expecting enrollment in the trial to complete later this fiscal year. Now before I turn it over to Karen, the one thing I most want to emphasize is that despite the ups and downs of the pandemic and its collateral impacts on hospital procedures, nursing and staffing shortages and the supply chain, our underlying business remains strong. Medtronic is advancing a pipeline of meaningful innovation that we believe will not only enhance our competitiveness, but will accelerate our total company growth going forward. And with that, I'll turn it over to Karen to discuss our financial performance and our guidance. Karen?

Thank you, Geoff. Our second quarter organic revenue increased 2%, reflecting the market impact of COVID and health system staffing shortages on procedure volumes, primarily in the United States. Despite the softer end markets, our team executed to deliver strong margin improvement and earnings growth. In fact, our adjusted EPS increased 29%, significant growth reflecting the pandemic impact last year. And our adjusted EPS was $0.03 better than consensus with $0.02 from stronger operating profit and $0.01 from a lower-than-expected tax rate. Our second quarter revenue growth came in lower than we were expecting back in August. We did see improving trends in our average daily sales each month of the quarter as COVID hospitalizations declined. That said, the bounce back in the U.S. wasn't as fast as we had expected or had seen in prior waves. We recognize many of our customers are dealing with staffing shortages on top of increased COVID patients, and we believe that had an increasing effect on procedure volume. Looking down our P&L, we had strong year-over-year improvement in our margins. 360 basis points on gross margin as we continue to recover from the significant impacts from COVID last year, and 470 basis points on operating margin, given savings from our simplification program tied to our operating model. Converting our earnings into strong free cash flow continues to be a priority. Our year-to-date free cash flow was $2.4 billion, up 58% from last year, and we continue to target a full year conversion of 80% or greater. Turning to capital allocation. We continue to allocate significant capital to organic R&D, and we continue to seek attractive tuck-in acquisitions to enhance our businesses. For example, Intersect ENT, we announced our intent to acquire back in August. Intersect's assets complement our own and are accretive to our WAMGR. Plus, we believe we can accelerate their growth around the globe. We're also returning capital back to our shareholders with a commitment to return greater than 50% of our free cash flow primarily through our dividend. Year-to-date, we’ve paid $1.7 billion in dividends. And as a dividend aristocrat, our attractive and growing dividend is an important component of our total shareholder return. Looking ahead, although the environment remains fluid, we are seeing some improvement in procedures and our average daily sales in the first few weeks of November. So we're encouraged that the negative impact of the pandemic and health care system staffing shortages on our markets could be moderating. And while our operations team has done a terrific job managing our supply chain to date, like other companies, we are dealing with an elevated risk of raw material supply shortages. As a result of these potential headwinds and given we're only midway through our fiscal year, we believe it is prudent to update our fiscal '22 organic revenue growth guidance to 7% to 8% from the prior 9%. If recent exchange rates hold, foreign currency would have a positive impact on full year revenue of zero to $50 million, down from the prior $100 million to $200 million I gave last quarter. By segment, we expect Neurosciences to now grow 9% to 10%, Cardiovascular and Medical Surgical to grow 7.5% to 8.5%, and Diabetes to be down low single-digits, all on an organic basis. Despite the headwinds we face on revenue, we will manage well what we can control, which includes expenses not directly tied to our future growth. We will continue to invest heavily in R&D and market development. And on the bottom line, we reiterate our non-GAAP diluted EPS guidance range of $5.65 to $5.75. This continues to include a currency benefit of $0.05 to $0.10 at recent rates. For the third quarter, we're expecting organic revenue growth of 3% to 4% year-over-year. This assumes no real pickup in organic comp adjusted growth versus pre-pandemic levels from what we saw in the second quarter despite the improving trends we saw in September and October. While we are encouraged by those trends and by what we're seeing in November, we wanted to err on the side of caution with near-term guidance given the dynamic macro environment. At recent rates, we're expecting a currency headwind on third quarter revenue of $80 million to $120 million. By segment, we expect Cardiovascular to grow 5% to 6%; Neuroscience, 4% to 5%; Medical Surgical, 2% to 3%; and Diabetes to be down mid-single-digits, all on an organic basis. We expect EPS between $1.37 and $1.39 with a currency tailwind of $0.02 to $0.04 at recent rates. While we expect our markets will continue to be affected by the pandemic in the back half of our fiscal year, we remain focused on delivering solid revenue growth, strong earnings growth and investing in our pipeline to fuel our future. We also remain confident about the underlying strength and competitiveness of our business and our ability to accelerate revenue growth ahead. Finally, I'd like to take a moment to acknowledge our incredible employees around the world who have worked tirelessly to overcome the many challenges created by the pandemic executing our operations and supply chain, helping our customers and through it all, continuing to invent, develop and deliver the health care technology of tomorrow. I also want to recognize a new member of our team, who many of you know. We couldn't be more excited to have Bob Hopkins, the top-rated med tech analyst over the past 3 years join our team as Head of Strategy. And we look forward to a strong contribution and influence in the years ahead. Back to you, Geoff.

Okay. Thank you, Karen. And yes, it is great to have Bob here at Medtronic. For the last few quarters, I've been closing by commenting on the progress the company is making in various areas of ESG, or environmental, social and governance impacts. Part of the S in ESG is our focus on inclusion, diversity and equity and high employee engagement, which I discussed last quarter, and this makes Medtronic an attractive destination for top talent. In the release we issued last week, you read about how Bob Hopkins and other highly sought after world-class leaders chose to join Medtronic and drive our transformation to become the undisputed global leader in healthcare technology. It's very important for our culture that we're bringing in new ideas and diverse perspectives to add to those of our talented leadership and employees across the company. On the E front of ESG, as you know, we set an aggressive goal last year to be carbon-neutral in our operations by the end of the decade. And 2 weeks ago, we upped our game, announcing our ambition to achieve net-zero carbon emissions by FY '45 across our value chain. This ambition outlined in our FY '45 decarbonization roadmap will focus on operational carbon neutrality, supply chain greenhouse gas emissions reductions and ongoing logistics improvements. To support our progress, as well as progress across our entire industry, we joined the International Leadership Committee for a Net Zero NHS in the UK. And we're taking a leadership role with the U.S. National Academy of Medicine action collaborative to decarbonize the U.S. healthcare sector. Our ESG efforts are gaining recognition as last week, Medtronic was elevated from being a constituent of the Dow Jones Sustainability North America Index to joining a select group of companies in the Dow Jones Sustainability World Index. Look, we are really proud of this achievement. In addition, I hope many of you were able to watch our inaugural ESG investor briefing last month. And if you haven't, I encourage that you watch the replay on our Investor Relations website. Now, let me close on this note. The lingering effects of the pandemic combined with healthcare system staffing shortages impacted our Q2 revenue more than we originally anticipated. We have both puts and takes on the timing of our pipeline and the supply chain dynamics pose near-term challenges. But our challenges will be manageable. We've got this. Our pipeline is delivering, and we're poised to deliver more innovation over the coming quarters and the next several years. We have to show you that we can deliver, but robotics is coming, R&D is coming. Closed-loop SCS is coming. And our diabetes turnaround is coming. And Evolut FX and Mitra on EV-ICD and the pending acquisition of Intersect ENT, these are all coming. We're ready to execute and capitalize on these opportunities. We're in good markets, and we're focused on innovating, winning share and maintaining and/or achieving true category leadership across our businesses. I know we have more to prove, but I'm confident that our organization, our talented and dedicated 90,000-plus global employees are up for the challenge. We're focused, we're hungry and ultimately, we're going to deliver on these opportunities to accelerate our growth. And as always, we remain deeply committed to creating value for you, our shareholders. And with that, let's now move to Q&A. Now we're going to try to get as many analysts as possible, so we ask that you limit yourself to just 1 question. And if you have additional questions, you can reach out to Ryan and the Investor Relations team after the call.

Great. Good morning, everyone. I think everyone is happy to see the EPS guide reiterated here, but I think the top line guide is a little bit surprising, particularly where you have third quarter organic sales guidance, given I believe you made the comment that November was trending better. So I was hoping you could talk through that and maybe just walk through the Hugo launch delay, what you're seeing there? Is it an adoption issue, a technology issue? Or is it purely difficulty getting into hospitals with COVID-19 going on?

Robbie, thanks for the questions. I'll let Karen answer the guide question and maybe I'll hit the robotics question.

Thanks, Robbie. I'm going to walk you through the quarters to provide some context. I'll start with Q2. Compared to pre-pandemic levels from two years ago, our organic growth in Q2 was about 1%. While this was slightly below our peers, it's important to note that our inventory levels were lower at that time due to our shift to bulk purchasing. If we take that inventory issue into account, along with a slightly tougher comparison, our growth for Q2 was in the 2% to 3% range compared to pre-pandemic levels. In terms of sequential performance, our revenue from Q1 to Q2 decreased by less than 2%, while most of our peers experienced declines between 3% and 5%. We believe our Q2 performance aligns well with what we're seeing from our peers. Looking at Q3, we anticipate the same growth of 2% to 3% compared to pre-pandemic levels. This does represent a slight slowdown from what we observed in October, but we remain encouraged by the trends in October and November. Given the current dynamic environment, we prefer to be cautious with our Q3 guidance. For Q4, we expect normal sequential seasonality as it's our fiscal year-end, so you should see improvement in Q4. I hope this information is helpful.

Regarding the robotics question, I want to clarify that it is not a demand issue; demand is still very high and exceeds our current capacity. We are continuing our regulatory filings globally, and we will soon begin the U.S. Investigational Device Exemption. Surgeons are actively performing procedures, primarily in urology and gynecology, and we anticipate starting our first general surgery case shortly. Demand continues to grow, and we are currently in a limited release phase, focusing on enhancing user experience. We are addressing some supply chain and initial manufacturing challenges. Our priority is to ensure that the initial experiences for surgeons are positive, which is contributing to slower revenue this year. However, we anticipate a strong ramp-up in the next fiscal year.

Geoff, I had a two-part product-related question. One on Micra, there was an FDA earlier this month on complications related to perforations. How should we think about Micra? Is that something The Street needs to worry about? And one on Ardian, you expressed a lot of confidence in the outlook. I mean we've had a couple of trials where some of your peers have missed endpoints. Is your trial design different from your peer? Because when I look at your peer, they added a drug, and that's when you saw the control arm improve. So if your trial design is similar to your peers, what is the confidence we have that your control trial will have the primary endpoint a year from now?

Thanks, Vijay. I'm going to hand this over to Sean, but first I want to give a brief update on Micra. There's no need for concern; Micra is performing very well. Sean will provide more details regarding the FDA letter. Regarding Ardian, we are very confident about this. We have a wealth of data, having maintained a registry for quite some time while monitoring numerous patients. It's important to note that our trial was not structured to conclude prematurely. I recognize that some expectations may have been heightened regarding an early conclusion. We are assured about this outcome. The FDA has reviewed the patient preference data, and they have worked with us; patients are very eager for this. The FDA understands this. Recently, I've been speaking with several of our investigators, and it's clear that this works. This is effective, and patients appreciate it. The FDA is aware of this, and we are confident in our trial. I'll let Sean provide further insights on this. Sean, do you want to add anything? Please unmute yourself.

And Vijay, thanks for the question. I'd say, first on Micra, this FDA letter is more of just a reiteration about the importance of being mindful of implant safety. But the actual rate of perforation that we've seen in the Continued Access Study, the Continued Evidence Development Study, which we just reported out 2-year results at the ESC is actually below what we showed in the preclinical work, in the pre-approval trial, and the overall complication rates for leadless pacemaking are about 30% lower at 2 years than what we see with transvenous. So there's certainly no concern here. And the customer reception has been really, really excellent and continues to be despite the letter of the FDA just emphasized. And on the clinical trial front for Ardian. You are right. There are differences in the clinical trials. And we remain, as Geoff said, very confident that our ON MEDS trial is going to make us endpoint. I think what you're referring to is the RADIANCE study that was reported on the RADIANCE TRIO study, which at 6 months, they did a full titration of drugs to get patients to their goal. So that was part of their study design was after the primary endpoint of 2 months, they added drugs on it until blood pressure went down. And that's kind of the point of renal denervation in general is that you can get there without as many drugs. And we saw something similar in the pilot study for ON MEDS, where we were able to titrate drugs after the primary endpoint and get people's blood pressure there without having to go to diuretics, which patients really hate taking. So yes, there's nothing to read through on that one. The trial we did in Japan and Korea was a little different. It was more like InterStim III, where they didn't control for medications. They had none of those types of controls.

So one on diabetes. The quarter was in line, but you took down the guidance. Why is that? What are your expectations for the timing of 780G and Guardian 4? And Geoff, we've seen a wave of spins recently. What's your view of spins in general? And do you see opportunities at Medtronic for spinning off noncore or underperforming segments?

Thank you for the questions, Larry. I'll address the spin and then let Sean discuss diabetes. As we've mentioned before, analyzing our portfolio and capital allocation is a top priority. With the new operating model, our executive committee and leadership team are dedicating significantly more time to this than we have in the last decade, without a doubt. We're continuously evaluating our various businesses, including our high-performance and high-growth sectors, to ensure we are the right owners because focus is crucial. It's important to provide the appropriate amount of capital and identify meaningful synergies between our businesses. This is an ongoing discussion that involves our Board as well, and a significant portion of our Board meetings is dedicated to this topic. While I'm not indicating any specific moves, I can assure you that we are always exploring opportunities. I don't view us in the same light as companies like GE or J&J with vastly different businesses, but I believe there is potential for us in the future. Sean, would you like to discuss diabetes?

Yes, I apologize, Geoff. My mute button was malfunctioning. Larry, we’re seeing strong uptake of the 780G and Guardian 4 sensor outside the United States. In the U.S., we are awaiting approval and have had positive discussions with the FDA. We believe we're making great progress. It’s important to remember that launching a new diabetes product involves a training phase, which can delay revenue recognition until it gains traction. In the U.S., while our pump share is growing globally, we do have to rebuild our patient base to create momentum, which will be driven by the launch of the 780 with the Guardian 4 sensor.

I had kind of 2 small follow-ups. One on the overall environment. When you're talking about these COVID impacts and staffing shortages, it sounds like you've seen things get a little bit better in November. And I was just wondering if you had a hypothesis as to why that was? And could you give us more of a flavor for how much the improvement has been sequentially?

Sure. Regarding the environment, as we mentioned in our commentary, each month during our second quarter showed improvement over the last, and this trend continued into November. While our procedures have rebounded, the pace has not matched previous waves or our expectations. The situation remains fluid and has become a bit harder to predict. Previously, discussions centered on COVID case numbers and their severity, along with the impact on ICU capacities. Now, we're facing a significant staffing shortage in hospitals globally, especially pronounced in the U.S. with the nursing shortage that has been highlighted. This situation has added to the unpredictability we experienced last quarter. Additionally, there are some manageable supply chain challenges we are facing, but they become increasingly difficult over time. Our guidance for the upcoming quarter reflects a conservative approach in light of these uncertainties. The rise in COVID cases in Europe, nursing shortages in the U.S., and ongoing supply chain issues make it complex to assess all the factors at play. Hospitals are effectively managing the challenges they're facing, and our team has done well in addressing supply chain concerns. During the pandemic, we were able to stock up on critical product inventory, but as these issues persist, they become more daunting. That's why we have adopted a cautious stance for our guidance moving forward.

And maybe I could just ask a follow-up, supply chain. You talked about some of the issues with Hugo and the impact on this year’s revenue. Do you have any thoughts on how quickly that can resolve and what kind of contributions we should expect in the subsequent years versus the prior guidance that you had given?

First of all, I should have mentioned earlier that we underestimated the supply chain challenges and initial manufacturing issues in a complex program like this, and that’s our responsibility. We should have offered a bit more flexibility in our expectations because, as we’ve emphasized, our focus is on ensuring a positive customer experience. Regarding the duration of these challenges, we still anticipate double-digit revenue this year, and while we are not providing specifics for next year, I can assure you that we expect a strong increase this year. As mentioned, demand continues to grow, we're receiving new regulatory filings for approval, and we are about to start our U.S. IDE process. There’s significant activity and positive feedback, and we are focused on enhancing the customer experience. Fiscal year '23 is set to be a strong year for the robot.

I wanted to ask about Hugo as well. Ardian, regarding the expenses you mentioned earlier, the $400 million this year, how should we approach realizing that amount this year compared to what might be deferred to next year? Additionally, how should we consider the expense ramp in fiscal '23 related to your other pipeline products?

Yes. Thanks, Cecilia. I'm happy to take that. So the $400 million operating profit drag that we talked about earlier this year was not just Hugo. It was both Hugo and Ardian, and the important investments we're making in those big product launches for us. And so we will continue to have more expense on those products in FY '23. It is too early to give you a signal because we still have 2 quarters to go this fiscal year, and we're just beginning our planning process for next fiscal year.

There are many topics we could discuss, but let me focus on one question. I’d like to revisit the staffing issue. Geoff and Karen, it seems you’ve made some observations regarding the fiscal third quarter, which is a crucial calendar quarter for everyone in the medical devices sector, especially with the upcoming Q4 push. Could you share your thoughts on your confidence in seeing an improvement after this period? Is the expected impact primarily for Q3, or do you anticipate a positive shift into Q4? Lastly, I understand this is a challenging topic, but what indicators would reassure you that we will move beyond the staffing challenges as we transition from spring to midyear next year?

Thank you for the question, Matt. The staffing issue is certainly a significant topic, and I've been working closely with our team and hospital customers on it. Hospitals are increasing their investments in staffing, which I believe is one of the biggest challenges but also opportunities. They are offering higher pay to incentivize people to return. Additionally, hospitals are adopting more remote capabilities and business models. For instance, we are managing cardiac rhythm patients remotely, eliminating the need for them to come back for device checks. There's also the rollout of our PillCam in the U.K.'s NHS to perform diagnostic colonoscopies, addressing a backlog of cases. Currently, hospitals are providing short-term bonuses and incentives, while also rapidly adopting remote healthcare solutions and prioritizing therapies that reduce complications and hospitalizations. Although this situation is not sustainable long term, they are making significant efforts. We are seeing positive results even into November, although it remains a fluid situation, which is why we've approached our guidance in this way. I don't have anything further to add on this matter, Matt. It is indeed a challenging issue.

A couple of things I'm curious about. Do you think that there's been a change in the way that consumers are looking at healthcare?

I'm not certain if there's an underlying question, but yes, it seems consumers are now much more engaged in healthcare, which influences our strategy. Last quarter, we rebranded Medtronic and adopted a fresh look in engineering. This is our initial step toward more actively reaching out to consumers and educating them about our therapies. We're focusing on products like PillCam and Genius and introducing cryoablation as a primary option for Afib patients who prefer not to rely on medication. Historically, we've depended on our specialist physician partners, such as electrophysiologists, to establish referral pathways for treatments like cryoablation for Afib. However, with advancements in technology, including miniaturization and improved connectivity of our devices, we are moving closer to being considered a first-line option, especially for conditions like Afib. Some of our areas, like diabetes and pelvic health for overactive bladder, are already more consumer-focused. Therefore, you can expect to see greater direct engagement with consumers. We're optimistic about this approach because, as I mentioned, our therapies have evolved to become less invasive and more effective. Additionally, we have observed increased consumer involvement, exemplified by our Ardian trial, which filled up rapidly due to consumers self-enrolling through our digital marketing and social media initiatives—this is a first for us. We are witnessing heightened engagement from consumers in managing their care, utilizing the Internet and digital platforms for education, which is reshaping our strategy.

As I examine the various surgical segments, the one experiencing the most decline from the initial guidance provided last quarter is the Cardiovascular business. I understand the issue with staffing shortages. However, I find it a bit surprising, especially since TAVR procedures cannot be postponed for too long. I'm curious about how long you anticipate these pressures will persist. Will this be an ongoing challenge well into 2022 for this segment? Additionally, what measures can you take to address these staffing issues?

It's difficult to predict the timing. I recently met with one of our larger customers in the Southern United States about a week and a half ago, and they had a few TAVR cases canceled that day. There is a significant urgency due to the nursing shortage, and they are prioritizing solutions to that issue. They are becoming more aggressive with their staffing strategies to attract and retain nurses and are reallocating resources within the hospital to place more nurses in critical areas. They are also moving some cases to ambulatory surgical centers, which require fewer staff to operate. We are actively assisting them in these efforts. As you've mentioned, these cases can't really be deferred indefinitely. I’ve never liked the term “elective” because I think it implies they can always wait; they are more like deferrable cases, but only for a limited time. Hospitals are indeed finding innovative solutions, but it's hard to provide clear predictions. Last quarter, we underestimated the impact of the nursing shortage. While we are seeing some improvements, we've taken a conservative approach in our fiscal Q3 guidance, but it's challenging to give more specific details beyond that.

Matt, I might add. I know you're all trying to figure out how long this will last. And if you just look at the recent trends in November, we saw some good upticks last month, particularly in cardio. Now we don't know if that's because it's preholiday pre-Thanksgiving, but we are seeing some good encouraging trends.

Karen and Geoff, most of the focus in terms of macro headwinds has been on the U.S. so far, but some of the recent headlines that in Europe have been a bit concerning. Just curious what you're seeing in your European business over the past few weeks, whether guidance assumes any deceleration in OUS procedure trends during the third quarter?

Well, Chris, thanks for the question. And you're right, the Q2 was a U.S. story for us. I mean the other regions performed well, especially our emerging markets, we're seeing really strong growth in emerging markets. But Europe performed well as well in other developed markets last quarter. Now in the last few days and weeks, you're hearing in Europe about certain countries pulling back on elective cases. I really don't see this to be long-lived here, given the vaccination status in these countries, the high vaccination rates in most of these countries and other new therapies like the oral antiviral therapies coming online. So I don't see it taking too long there directly from COVID, and we've reflected that in our guidance.

Good morning, everyone. Geoff, since I'm following up here, I have a broader question for you, and then I’ll direct one to Karen. You're clearly working hard to accelerate growth and innovation at Medtronic. I'm curious about your thoughts on whether the challenges posed by COVID and staffing issues have affected your mission to advance that agenda. You’ve emphasized innovation and new products, but at a high level, I wonder how your perspective has evolved. And Karen, could you provide some additional insights on gross margins? Despite the challenges in the quarter, they were better than anticipated. Can you elaborate on whether we can expect this trend to continue in the second half, and do you feel more optimistic about the long-term potential for gross margin expansion as these new innovations are introduced?

Thanks for the question. I appreciate it. I’m very optimistic about our situation and here’s why. While COVID and the nursing staffing shortage have been distractions, I’m pleased with the overall progress we’re making. We’ve effectively streamlined our company into 20 operating units, which gives us clarity into market demands and competitor actions. We have a strong understanding of our pipelines for each unit and have become more proactive in funding these businesses while holding them accountable for innovative choices. My team is focused on assessing appropriate funding and competitive positioning, encouraging thoughtful discussions and diversity of perspectives that lead to better decisions. Despite challenges, our employee satisfaction scores remain high, and we’re attracting talent like never before, with a significant increase in job applications. We acknowledge our challenges ahead, particularly with our robot program and diabetes turnaround, but we see promising developments, especially in Europe, that we aim to replicate in the U.S. We’re making progress, and there’s a noticeable culture of competitiveness and accountability. While our revenue fell short this quarter, we outperformed on operational earnings and are maintaining our EPS guidance for the year, which reflects the company we strive to be. Although there were environmental factors affecting our performance, I'm confident we can navigate through these challenges and remain committed to being the leading technology company while growing at a rate above the market. I’m optimistic about our direction.

Gross margin, I'll address that. I want to emphasize something Geoff mentioned before discussing gross margin, Rick. Despite the challenges we've faced due to COVID, our R&D investment remains steady. We stated at the beginning of the year that we would increase it by 10%, and we still plan to do so. We are addressing our challenges in a different way regarding our bottom line. Additionally, our gross margin exceeded expectations, which we are very pleased about. We are making a strong effort to enhance our operations to achieve better gross margins. Our goal is to return our gross margin to pre-COVID levels and then sustain it, with hopes of improvement. Year-over-year, we are still aiming for a 2.5 to 3 points improvement in gross margin this fiscal year. Looking ahead, I want to reiterate our commitment to achieving over 5% revenue growth and more than 8% bottom line growth. This commitment persists into next fiscal year, FY '23, even with the headwinds we've discussed today.

Thank you, Rick. Geoff, please go ahead with your closing remarks.

Thank you, everyone, for your questions. We truly appreciate your support and continued interest in Medtronic. We invite you to join us for our Q3 earnings webcast on February 22, where we will provide updates on our progress. Ryan will be starting that call from outside our world headquarters in Minneapolis, without a coat, as he's assured us he will brave the weather. Thanks for watching today. Please take care and stay safe during the holiday season. For those celebrating in the U.S., I wish you and your families a very Happy Thanksgiving.