Medtronic Plc (MDT) — Q4 2022 Earnings Call Transcript

Good morning. I'm Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations. And I appreciate that you're joining us today for Medtronic’s Fiscal Year 2022 Fourth Quarter Earnings Video Webcast. Before we go inside to hear 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 fourth quarter and fiscal year 2022, which ended on April 29, 2022, and our outlook for fiscal year ‘23. 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 program 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 program, many of the statements we make may be considered forward-looking statements and actual results may differ materially from those projected in any forward-looking statements. 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 statements. Unless we say otherwise, all comparisons are on a year-over-year basis. And revenue comparisons are made on an organic basis, which this quarter includes only adjustments for foreign currency as there were no acquisitions or divestitures made in the last four quarters that had a significant impact on total company or individual segment quarterly revenue growth. References to sequential revenue changes compared to the third 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 first calendar quarter of 2022 compared to the first 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 this studio and get started.

Hello, everyone. And thank you for joining us today. This morning we reported our Q4 results. Now there were parts of the quarter that played out as anticipated, and there were also some unexpected challenges more than I would have liked, which caused us to come up short of our expectations. As we anticipated, procedure volumes in most of our markets reached pre-COVID levels by the end of the quarter. We also executed and delivered on recent product launches. However, we faced challenges related to the supply chain in China that impacted some of our businesses and were the largest contributors to our shortfall. Now, I’ll get into more detail on these challenges shortly, but you should take away that we understand the root causes, and we are well down the path to addressing them. And to be prudent, we’ve assumed that these challenges will persist for the next quarter or two in the guidance that Karen is going to walk you through shortly. So let's focus on what happened this quarter. The shortfall to our revenue guidance was primarily due to two factors. China, where the extended COVID lockdowns affected our results in the quarter, particularly in April, and global supply chain challenges. Over the past few quarters, global supply chain challenges have impacted many of our businesses. And as they arise, our teams have worked quickly to resolve them. And prior to this quarter, we had largely mitigated their financial impact. However, this quarter one of our largest businesses, Surgical Innovations, was adversely affected by certain raw material shortages. Several of our other businesses also face supply challenges in the quarter, but to a lesser extent. Now we're down the path of improving our supply chain capabilities. And we're leveraging the expertise that Greg Smith, our new Global Ops and Supply Chain leader brings from the retail consumer product and automotive industries. Greg and his team are making progress addressing the areas where we can improve, including the management and resiliency of our critical suppliers and manufacturing network. The recent stress of these global supply chain issues has further illuminated the need for enhancements. We have a new global structure in place that consolidates operations and supply chain functions, which were previously fragmented throughout the organization. Now, this is a big move for us. And there is still a lot of work to be done. But I am confident we will come out of this with a more resilient end-to-end global supply chain that we believe will be a competitive advantage in our industry. While some of our Q4 challenges will persist in the near term, we expect strong improvement in the back half of our fiscal year. And we remain focused on delivering our long-term strategies. We've made significant changes over the past two years to position the company for accelerated and sustained innovation-driven growth. Our pipeline is robust and continues to advance with a number of upcoming catalysts and fast-growing medtech markets. We’re committed to creating strong returns for our shareholders, and we’re making progress with our enhanced portfolio management and our capital allocation processes. We're investing in future growth drivers, while at the same time returning capital primarily through our meaningful and growing dividend, which we just increased again today by 8%. Regarding portfolio management, we are continuing to advance the robust process we began talking about earlier this year. And within that, and as a smaller initial step, we're pleased to announce that we've reached an agreement where we will contribute our Renal Care Solutions business into a new company, which we will jointly own with DaVita. In return, we’ll receive up to $400 million in value from them, and we expect this transaction will close in calendar 2023. The new company is going to develop a broad suite of novel kidney care solutions, including home-based products. I'm excited about this for a couple of reasons. First, this business is going to have the focus that it needs. Second, DaVita is a global leader in kidney care and will be a great partner to commercialize and scale this innovative technology. And finally, both Medtronic and DaVita will participate in the expected upside. Now turning to market share, product availability affected our performance in the quarter with our overall company share down about half a point. On the bright side, even with our challenges, half of our businesses held or gained share. And as you know, market share is an important metric for us at Medtronic as it is a driver of our annual variable compensation, along with revenue growth, profit, and free cash flow. Well, I won't go through market share business by business in the interest of time, we'll be happy to take questions in Q&A. Now, let's cover our product pipeline, where we're advancing several meaningful technologies that can create new markets, disrupt existing ones, and accelerate the growth profile of Medtronic. We made great strides with our organic pipeline in fiscal ‘22, conducting over 300 clinical trials and receiving over 200 regulatory approvals in the U.S., Europe, Japan and China. Our recent product launches are starting to make an impact across our businesses. And as we look ahead, we have increasing visibility to upcoming catalysts in the back half of the calendar year that we expect will help accelerate our growth as we go through fiscal ‘23 and beyond. Starting with our Cardiovascular Portfolio and Cardiac Rhythm Management, recently launched Leadless Pacemakers, including our Micra AV in Japan and Micra VR in China led to above-market growth again this quarter. We just received approval for Micra AV in China earlier this month. And we expect geographic expansion to continue to drive strong Micra growth. In ICDs, we're preparing to disrupt the single-chamber market with our Aurora extravascular ICD. We continue to drive towards CE Mark approval for Aurora later this calendar year and U.S. approval next year. With Micra and EV-ICD, we expect continued strength in CRM. In Cardiac Ablation Solutions, we've been assembling a number of technologies to increase our impact in the $8 billion EP ablation market, building on our leadership in cryoablation. We're continuing the rollout of our DiamondTempt RF system and exclusive cryoablation first-line indication for paroxysmal AF. We're advancing our Pulsed Field Select anatomical pulsed field ablation system having fully enrolled our global pivotal trial. We're also expecting to fill competitive gaps in cardiac ablation with our recent announcements to add a differentiated mapping and navigation system and left heart access portfolio including a transseptal access system that can perform both mechanical and RF crossings. In renal denervation, data from our SPYRAL HTN-ON MED pilot study were presented last month at ACC and simultaneously published in the Lancet. These data demonstrated durable and clinically significant blood pressure reductions through three years. And last week, additional data were presented at EuroPCR which showed those receiving renal denervation spent significantly more time in target blood pressure range, adding to our robust body of evidence. In Q4, we also announced that we completed enrollment in the full cohort of patients in the ON MED study, which we expect to complete the six-month follow-up in the second half of this calendar year. We'll then look to present the data and submit for FDA approval as ON MED is the final piece of our submission. In Structural Heart, differentiated durability data for our TAVR valves were presented as a late breaker at ACC last month. The data showed that our TAVR platform is the only one to outperform surgical valves in durability at five years as measured by SVD or Structural Valve Deterioration. And less SVD was associated with better clinical outcomes, including mortality and heart failure hospitalization. Additionally, durability data were presented from a separate UK registry, the first to look at TAVR data past 10 years. And it showed CoreValve had one-third the rate of structural valve deterioration compared to SAPIEN and SAPIEN XT. And data at EuroPCR last week reinforced our excellent clinical outcomes with our cusp overlap implant technique, including one-day hospital discharge, single-digit pacemaker rates and the absence of moderate or severe PBL. In the quarter, we also continued to launch Evolut PRO+ in Europe and began the launch of Evolut Pro in China, our first entry into this large and underpenetrated market. In the U.S., we're planning to start the limited market release of our next-generation TAVR valve, Evolut FX here in our first fiscal quarter and move into full market release later in the fiscal year. We're also looking to expand our TAVR indications. We had first enrollment earlier this month in our EXPAND TAVR 2 pivotal trial, evaluating our TAVR platform in patients with moderate symptomatic aortic stenosis. Overall, TAVR represents a large growth driver for Medtronic as we expect this roughly $5.5 billion market to exceed $7 billion within the next three years and reach $10 billion in the next five years. Moving to our MedSurg portfolio and Surgical Robotics, we remain focused on the limited market release of our Hugo robot while we scale production. We completed Hugo installations in Denmark, France and Italy. We also continue to increase our installed base of Touch Surgery Enterprise, our AI-powered surgical video and analytics platform. In our Patient Monitoring business, we just received FDA clearance earlier this month for our next-generation Nellcor OxySoft pulse ox sensor. Now this sensor includes a special silicon adhesive designed to protect fragile skin while enhancing adherence. Its low profile and brighter LEDs improve accuracy and responsiveness for the most challenging neonatal and adult critical care patients. Now turning to our Neuroscience portfolio and our Cranial & Spinal Technologies business. We're seeing strong adoption of our unit AI-enabled surgical planning platform with a mid-30 sequential growth in our U.S. user base. The ongoing launch of our Catalyft expandable titanium interbody system and the rollout of our enabling technologies continues to differentiate us in spine. Customer demand for our Catalyft equipment remains strong. And we had record quarters for our Mazor robotics system and StealthStation navigation system. In Neuromodulation, we're building our commercial teams and have started the initial launch of our Intellis and Vanta spinal cord stimulators to treat diabetic peripheral neuropathy. We believe DPN is one of the largest opportunities in medtech, and we expect the market to reach $300 million by FY '26, with an annual total addressable market of up to $2 billion. And we're also excited about our Inceptiv ECAP’s closed loop spinal cord stimulator, which we submitted to the FDA late last calendar year. We expect Inceptiv’s closed-loop therapy, which optimizes pain relief for patients, to revolutionize the SCS market. In Brain Modulation, our ongoing launch of the Percept PC neurostimulator and SenSight directional leads is driving new implant share in both Europe and the U.S. And this is the only system that can stimulate and sense brain signals. In Pelvic Health, we received FDA approval of our next-gen InterStim recharge-free device, InterStim X, and that happened in the fourth quarter. InterStim X features our proprietary fifth-generation battery chemistry that provides 10 to 15 years of battery life without the need to recharge. And in ENT, we announced earlier this month that we completed the acquisition of Intersect ENT. And we're excited to add their attractive high-growth complementary products into our existing business. We believe we can grow Intersect's products in the double digits over the next several years as we expand use of both the PROPEL and SINUVA sinus implants globally. In Diabetes, our MiniMed 780G insulin pump, combined with our Guardian 4 sensor continues to be extremely well received in markets where it's available. Now this system has a very positive user experience with no fingersticks and more time in range. This is due to its near real-time basal insulin and auto-correction boluses every five minutes to address underestimated carbohydrate counts and occasional mismeal doses. Very strong data on 780G and Guardian 4 were presented at ATTD last month, showing improved time and range with less user interaction. Additional datasets on this differentiated system will be shared at ADA next month. And we also announced that Germany and France began reimbursement of our system in the quarter, which helped drive high-teens sequential international growth in diabetes. In the U.S., we made substantial progress in meeting our observation and warning letter commitments and continue to have regular communication with the FDA. In our CGM pipeline, we expect to submit our next generation sensor, Simplera, for CE Mark and FDA approval this summer. In addition, we're advancing multiple next-gen sensor and pump programs, including patch pumps. We're making considerable investments in our diabetes pipeline with line of sight to restoring strong growth in this business over the coming years. And with that, I'll turn it over to Karen to discuss our fourth quarter financial performance, and our new guidance for the next fiscal year.

Thank you, Geoff. Our fourth quarter organic revenue increased 1.4%, below our guidance and consensus. Compared to consensus, about 15% of the difference can be attributed to China, given recent COVID shutdowns and slowing distributor purchases in spine ahead of a potential national volume-based tender. About 10% of the difference is a result of changes in foreign exchange rates over the course of the quarter. And the remaining difference, and the largest driver, is due to supply chain issues that Geoff discussed. Despite revenue coming in roughly $350 million less than we expected, we reduced the impact that this would have had on our bottom line, resulting in EPS of $1.52, $0.04 below our guidance range. From a geographic perspective, our U.S. revenue declined 2%. Non-U.S. developed markets grew 4% and our emerging markets grew 7%. Within emerging markets, China declined 10%, given the impact of the COVID lockdowns. But we had very strong growth in many other emerging markets, including high-teens growth in Eastern Europe, low-20s growth in Latin America, low-30s growth in the Middle East and Africa, and mid-30s growth in South Asia. In fact, excluding China, emerging markets grew in the low 20s. Turning to our margins, our fourth quarter adjusted gross margin improved by 30 basis points year-over-year, driven by product mix with lower sales of ventilators and higher sales of products like Micra. While we were impacted by inflation with increased freight expense, it's worth noting that the full impact from inflation on raw material and direct labor costs will be realized over the next couple of quarters as our inventory rolls off our balance sheet, negatively affecting our gross margin. Moving down the P&L, we also drove additional and continued improvement in our adjusted operating margin, which increased by 40 basis points, excluding the benefit from currency. We also ended the year with free cash flow at $6 billion, representing year-over-year growth of 22% and meeting our goal of 80% conversion from adjusted net income. Our balance sheet remains strong, and we continue to allocate our capital to investments that we expect will generate solid future growth and shareholder returns. We're investing heavily in R&D, with programs especially targeted for faster growing medtech markets or where we have an opportunity to create new markets. We're also using our balance sheet to complement our innovation-driven growth strategy with tuck-in M&A, utilizing our very active capital committee process that was developed as part of our new operating model. In fiscal '22, we announced four acquisitions totaling over $2.1 billion in total consideration. As Geoff mentioned, we closed our acquisition of Intersect ENT earlier this month and also announced our intent to acquire a left heart access portfolio last month. At the same time, we're investing in promising early-stage ventures to keep our fingers on the pulse of new products and technologies, incubated by companies that one day could become future acquisitions. We're also actively providing a strong return to our shareholders, returning $5.5 billion in fiscal '22 through our dividend and net share repurchase. And this morning, we announced that we're increasing our dividend by 8%, reflecting the confidence we and our board have in our financial strength and future earnings power. We are an S&P Dividend Aristocrat, having increased our dividend for 45 years now. And our dividend is an important component of the total return we generate for our shareholders. This past year, we paid $3.4 billion in dividends and we're supplementing that through opportunistic share repurchase, particularly in periods where we see share price dislocation. In fact, we repurchased over $2.5 billion of our stock in fiscal '22, including $1.4 billion in the fourth quarter. Now turning to our guidance and starting with revenue. We continue to expect our recent launches and product pipeline to make a difference in many of our businesses. And Geoff covered many of them earlier. We expect organic revenue growth in fiscal '23 of 4% to 5%. While the impact of currency is fluid, if recent exchange rates hold, foreign currency would have a negative impact on full year revenue of $1 billion to $1.1 billion. By segment, we expect Cardiovascular to grow 5.5% to 6.5%; Medical Surgical to grow 3.5% to 4.5%; Neuroscience to grow 5% to 6%; and Diabetes to decline 6% to 7%, all on an organic basis. While we are hopeful that we can receive approval for 780G and Guardian 4 Sensor in the United States, we've elected not to include it in our guidance. In the first quarter, we would have you model organic revenue to decline in the range of 4.5% to 5.5%, which conservatively assumes no near-term improvement in our supply chain and no major change to underlying fundamentals. Assuming recent exchange rates hold, the first quarter would have a currency headwind between $350 million and $400 million. By segment, we expect Cardiovascular to decline 1% to 2%; Medical Surgical to decline 7.5% to 8.5%; Neuroscience to be down 5% to 6%; and Diabetes down 8% to 10%, all on an organic basis. Moving down the P&L, I provided early color for fiscal '23 on the last quarterly earnings call, where I talked about the expected impact of inflation, wages, acquisition dilution, and foreign exchange headwinds. These still hold, but we've also seen environmental changes since late-February. Inflation and foreign exchange rates have become larger headwinds, and we're now factoring in continued supply chain challenges early in the year. Inflation and FX pressures also create near-term challenges on our margins, although we continue to look for opportunities to offset them. At the same time, we continue to prioritize our long-term investments in organic R&D, with a focus on large opportunities in future growth markets, like renal denervation, robotics, diabetic peripheral neuropathy, and transcatheter mitral valves. Taking this all into account on the bottom line, we expect non-GAAP diluted EPS in the range of $5.53 to $5.65 in fiscal '23, which includes an unfavorable impact of $0.20 to $0.25 from currency at recent rates, for the first quarter, we expect EPS of $1.10 to $1.14, including an FX headwind of about $0.05 at current rates. Before I send it back to Geoff, I want to thank our employees around the globe who are working hard to overcome the macro challenges we face. Thanks for all you do to fulfill our mission every day. Back to you, Geoff.

Thank you, Karen. While we spent a lot of time covering the fourth quarter, it's worth briefly reflecting on what we've accomplished in fiscal '22. It's certainly been a difficult environment, and our organization has enacted big changes in such a short period of time and under unique circumstances to better position the company. It was our first full year in the new operating model, and with our enhanced Medtronic mindset of acting boldly, competing to win, moving with speed and decisiveness, fostering belonging, and delivering results the right way. We've also made strides to becoming a more diverse and inclusive organization. And I was very proud that Medtronic was recognized earlier this month as number 10 on Diversity Inc.'s Top 50 U.S. Companies for Diversity. Even with that, we're committed to improving through innovative programs to attract, develop and retain top talent from all gender and ethnic backgrounds. Along those lines, we've made notable hires in fiscal '22, recruiting great talent from the healthcare technology industry and beyond. While we've implemented a number of changes, this past year has been choppier than I would have liked with some of our growth drivers being pushed out and the impact from the pandemic, quality challenges and supply chain affecting our results. But we have a clear direction, a clear direction where we're headed as we transform the company. Let's start with the top-line. We remain laser-focused on accelerating the growth through robust capital allocation and portfolio management. You're seeing our efforts to enhance our future growth through greater investment in organic R&D, as well as portfolio moves. We've already spoken of the organic growth catalysts in front of us, many coming later this fiscal year. We're also executing a healthy cadence of tuck-in acquisitions in faster-growing markets, and we're focused on reducing our footprint in lower growth and lower-margin businesses. We continue to work on additional portfolio moves with the goal of creating a portfolio where we have distinct expertise, synergies across the company, and ultimately, higher growth and higher margins. And to aid this effort, we've assembled a dedicated team that is 100% focused on our integrations and divestitures. At the same time, we have the opportunity to improve our global supply chain and operations by centralizing these activities, allowing us to leverage our scale, invest in new technology, and ensure we have world-class supply chain experts responsible for our global operations. And this isn't something new that we're just starting now. Although recent challenges have given us a greater sense of urgency, we've been on this journey for over a year. And while it will take time, I fully expect our efforts to drive lower costs and lead to consistent and reliable quality along with greater product availability, all on a sustainable basis. Now well beyond healthcare, our world is facing a lot of economic uncertainty with questions around inflation, global supply chain challenges and continued impacts from the pandemic and a potential recession. But our business, the business of healthcare and the delivery of essential lifesaving technology is something that continues in good times and uncertain times like these. And demand for our products continues to increase with the aging and growing of our global population. When you look at healthcare technology, Medtronic is uniquely situated, particularly in these uncertain times, given our diversified businesses with leading market positions in growth markets, a robust product pipeline, solid free cash flow, strong balance sheet, and a very attractive and growing dividend to add to our return to shareholders. We have near-term challenges that we are overcoming. And the opportunities in healthcare technology and at Medtronic are immense. We are fully focused on continuing on our transformation journey and making our opportunities a reality as we alleviate pain, restore health, and extend life for millions of people around the world. Finally, I want to thank our exceptional Medtronic employees. I get to see the outcome of their efforts to fulfill our mission every day. It's inspiring. In addition, their willingness to lean into our new operating model and embrace our new culture have been key to the ongoing transformation of the company. I also want to thank our partners in healthcare, the frontline workers who are at that final step in ensuring patients get our therapies and are dedicating their lives day in and day out. Their incredible efforts to continue care delivery and get us all through the pandemic will be noted as one of the great accomplishments in history. Now let's move to Q&A. We're going to try to get as many analysts as possible, so we ask that you limit yourself to just one question and only if needed, a related follow-up. If you have additional questions, you can reach out to Ryan and the Investor Relations team after the call. With that, Brad, can you please give the instructions for asking a question?

Hi, everyone. I appreciate the opportunity to ask my question. Geoff and Karen, I have a two-part question that I would like to pose at once. Looking at the 4 to 5 percent organic growth forecast for fiscal '23, it appears to have exceeded expectations, so could you elaborate on the specific assumptions behind this? You mentioned supply chain issues, including some back orders. Is there a role that these supply chain back orders play in this? Will there be any further disruptions from the supply chain? Additionally, what are your expectations for diabetes and robotics? Investors have shown interest in the China AVP as well. Also, Geoff, if I may take a broader perspective, when considering the Medtronic segments, the mid-single to high-single digit earnings have been a topic of inquiry regarding their consistency, especially given past fluctuations. As you reflect on the changes that have occurred, could you share what gives you the confidence that maintaining mid-singles in revenue and high singles in EPS is something that investors can look forward to?

Thank you for the question, Vijay. I'll address the second part of your question regarding our confidence in achieving mid-single digit currency top-line growth and high-single digit EPS growth, or a double-digit total return to shareholders. We're implementing the right strategies for this. Over the next year, we expect to see improvements in the back order issues we encountered in Q4, which should alleviate over the coming quarter. Additionally, we are moving past several challenges we faced in FY '22, such as exiting the LVAD business and the Navion recall, as well as tough comparisons in our ventilator business during the pandemic. These challenges will diminish throughout the fiscal year, starting now. We also have numerous growth catalysts in our pipeline, which extends beyond products like Hugo or our soft tissue robot. There are several significant projects underway, and these will become more impactful in the second half of this year and even more so in FY '24. Furthermore, we are making portfolio adjustments that will contribute to our growth in the next year. In terms of our confidence in consistency, we are focusing on a robust pipeline across all our businesses. We've worked hard to enhance innovation by increasing our investment in R&D and implementing a new operating model with 20 distinct units that have clear visibility into their markets and competition. Team members are evaluated based on their pipelines, and we are pursuing meaningful acquisitions, such as Intersect ENT and AFFERA, which provide additional diversity and growth potential. Another key area we've concentrated on is our global operations and supply chain. Upon taking this role, we identified this as a significant opportunity and brought in Greg Smith over a year ago to centralize our supply chain. Our prior structure was not suited for the challenges we face today, and although we've started to make necessary changes, we still need time for these improvements to fully mature. While these changes would have benefited us in Q4, as supply chain disruptions intensified, being well into this transformation now is advantageous in our current environment. We've made substantial progress, and we're confident these changes will provide the resilience and reliability we need. Combining innovation, strategic portfolio shifts, and a more robust supply chain gives us confidence in achieving our long-term forecast of consistent growth in mid-single digits, supplemented by high-single digit EPS growth, which leads to a double-digit overall return, including dividends. I hope that answers your question, and I'll turn it over to Karen for further details on the FY '23 guide.

Yeah. Thanks, Vijay, for the question, and I'd love to take this in pieces because I want to walk you through Q1 and then also talk about the full year because we expect improvement each quarter as we move through the year. So just starting with Q1, given our recent challenges, we've elected to take a conservative approach with our Q1 guide. We're assuming underlying fundamentals are pretty similar to last quarter to Q4, and we've built in some conservatism in the supply chain. If you look at the year-over-year view, it's influenced by COVID. And so to remove that noise, I think it's really good to look at it on a COVID comp-adjusted basis. And when you do that, our guide really just implies a slight deceleration from Q4 to Q1. That's not out of line with what we've seen historically. And again, I would just emphasize that we've included conservatism due to the supply chain. Some puts and takes that we've got in Q1, in addition to the supply chain impact that we factored in, we've also assumed some incremental pressure in spine in China ahead of a potential national volume-based purchasing tender. And Geoff already mentioned on the plus side, we anniversary some of our headwinds like the Navion recall and the LVAD shutdown. If I move beyond Q1 and then into the full year guide of the 4.5%, I mentioned we do expect improvement as we progress through the quarters with our back half much better than our first half. But I'd also talk about the puts and takes that we've got on the full year. We talked about the fact that we continue to actively work with the FDA on the diabetes warning letter. But for conservatism, we've elected not to assume the approval of the 780G in this guidance. And also, it's manageable, but we've got volume-based pricing in China that we believe will have a bigger impact in this fiscal year, primarily in Spine. And at the same time, Geoff talked about it, and we have a number of positives as we think about FY '23. First, we've got headwinds that are going to go away, the LVAD business, the Navion recall, the reduced ventilator sales that Geoff mentioned. And then we also had some volume-based pricing on drug-eluting stents in China that will anniversary. And combined, all of those headwinds had a 200 basis point impact in FY '22. Second, we expect these supply chain challenges to improve as starting in Q2 and obviously continuing to improve from there. And then thirdly, our year-over-year comps get easier, particularly in the back half. And then lastly, we've got a number of really important product launches throughout the year. And just to name a few of them, we've got Evolut FX, we've got ECAPs, we've got diabetic pain neuropathy. And again, I'm just naming a few. So I hope that's helpful and shows what our guidance implies as we move throughout the year.

That’s helpful color. Thanks, guys.

Thanks, Vijay. Next question, Brad?

Hey, good morning. Thanks for taking the question. I'll ask a two-part one as well. I guess, first on the elective procedure recovery. Curious how May is shaping up versus April kind of around the world, both in the U.S. and China as well. And then the second part was going back to some of the supply chain issues. The impact this quarter is a little bit worse than some of your peers. I don't know if things got a lot worse in April, or there was something specific with surgical innovations. I just want to make sure we have the confidence that, that's going to start to improve here in the next quarter or two.

Sure. I'll address the second question first. The supply chain issues were disappointing, and I take responsibility for our Q4 miss. We believe we understand the underlying causes, which began to affect us in the second half of Q4. Approximately 75% of the $340 million to $350 million miss can be attributed to supply chain challenges. Around 15% is related to the China lockdown, and another 10% is due to worsening foreign exchange factors, which Karen can elaborate on. The supply chain problems impacted several businesses, but they were particularly severe in our Surgical Innovations segment. The main issues stemmed from semiconductors, which affected many companies but were especially challenging for SI, as well as specific resins used in our energy and SI businesses, and significant problems with trade packaging due to a catastrophic event in our supply chain. The last two issues, packaging and resins, were the most critical supplier decommits; most of these setbacks were felt in SI. We expect conditions to improve overall in the company within the next quarter or two, although it may take more time for SI to recover, likely into the first half of the year. We have considered these factors in our guidance. Regarding China, we were hit hard in April, which accounted for about $60 million of the shortfall due to COVID lockdowns, as Karen mentioned regarding volume-based procurement. Outside of China, our emerging markets, as Karen highlighted, grew by 20%, while China itself declined by over 10%. We are actively working on redesigning our global operations and supply chain to enhance resilience, a process we began over a year ago by centralizing functions, building a robust leadership team with new talent from various industries, and investing in tools, technology, and operational mechanisms. I am confident we are on the right path and wish we had initiated this effort even earlier. While it will take time to build these long-term fundamentals, the immediate issues affecting our numbers should improve over the next quarter or two. I'll now turn it over to Karen to address the first part of the question.

Yeah. Travis, thank you. So just in terms of the month of May, it's still early. And we're obviously focused on managing through some supply issues that we've got in some of our businesses. So the numbers are a little cloudy, but when we look at our operating units that are not impacted by supply issues, just through the first three weeks of May, we're trending largely in-line with where we were first quarter last year. And I would note that elective procedures for the most part were back to pre-COVID levels for us last quarter.

Okay. Thanks, Travis. Take the next question, Brad?

Hey, good morning. Thanks for taking the question. Just Geoff, on the Kidney Company news today, should we expect more like this? Or could they be more significant? Just kind of remind us of what the overarching goals are. And Bob, maybe on Hugo, just help us understand what the expectations are for fiscal '23, the status of the supply constraints and the preop setup error, and when you expect to start the U.S. pivotal trial. Thanks so much, guys.

It's great to hear from you, Larry. I appreciate the question. Regarding the Renal Care Solutions joint venture with DaVita, I see this as a smaller initial step in our portfolio management efforts. We are actively working on this and expect more changes to our portfolio throughout FY '22, although I won't disclose the size of those changes. This venture has been in consideration for some time, and I'm excited about it. The technology we've developed over the years will benefit from this partnership, allowing us to focus on completing its development. DaVita, as a leading entity in kidney care, will be an excellent partner as we move towards commercializing and scaling this innovative technology, which they enhance with their contributions. We also have significant strengths on the technology side, and I look forward to our collaboration. However, I want to clarify that other potential portfolio changes may not necessarily be joint ventures like this one; this particular deal simply made the most sense to us. We see substantial potential in this technology and the way we've structured the agreement benefits both DaVita and Medtronic. As for our portfolio goals, they remain consistent. Our primary objective is sustainable growth while maintaining margins and free cash flow. We aim to reshape our portfolio to achieve higher growth and more consistent results. Additionally, we want to simplify the company's structure. Those are our goals moving forward, and there's more to come.

Thanks, Geoff. And Larry, good to hear from you. Thanks for the question. Let me provide you a good update on Hugo. So we're still in limited market release. We're making good progress on the supply chain issues. We're currently in eight countries. We've had a number of installs this past quarter in France and Italy and Denmark. We did receive regulatory approval in Brazil in Saudi Arabia, and you'll recall this followed Canada and Australia. We've begun general surgery cases in Panama, in Chile in India. And now we've done procedures across urology, gynecology, and general surgery, including our first bariatric case, which was a nice milestone. The second part of your question was relating to the IDE. We expect to begin the IDE relatively soon. We're working closely to train the site personnel and gain IRB approval. So we'll certainly keep posted on that. But hopefully, that helps done a good thorough take for where we stand on Hugo.

Thanks, Larry. Next question, please, Brad.

Thank you so much for taking the question. I was just wondering if you can give us an update on your portfolio management initiatives. What are you assuming for Hugo sales in your FY '23 guidance? And can you elaborate on the magnitude of China VBP impacted FY '23? And lastly, if you can just comment on the capital environment. We've heard some puts and takes. Q1 has been a little soft. Just what your outlook is for the full year. Thank you for taking the questions.

We've had some good updates regarding Hugo. While we haven't provided specific numbers for FY '23, we anticipate a strong increase. Our order book looks robust, and we've received numerous approvals across various countries for different types of procedures, including general surgery. This gives us confidence in our Hugo platform. In the capital environment for Q4, we saw positive results. A significant portion of our capital sales is linked to specific profitable procedures, which is beneficial. We've achieved record sales in our neuroscience segment, particularly in our Spine business with StealthStation navigation, O-arm, and Mazor. The demand for this capital equipment has reached record levels, and as we continue to sell and place this equipment, it strengthens our ecosystem, showcasing our competitive edge in the Spine market and our optimistic outlook for its future. I'll hand the discussion over to Karen for more details on other aspects.

Thanks, Geoff. The other two, you had a question on portfolio management, which I know Geoff shared when he answered Larry's question. So I'll cover China VBP. With VBP, we've been dealing with a variety of regional and national tenders already. And just from a national expectation we expect the government to continue to focus on the top 10 medical device products by public insurance spending. So we've been through stents already, and some of our other industry players have gone through large joints. And we see two more potential tenders on that list where we've got exposure, spine and surgical stapling. And I talked about the fact that we expect spine to impact us this fiscal year and to likely happen in the second quarter. But ahead of tenders, distributors do pull back on their purchases. So we built that into our first quarter guide as well. Just to remind you, though, our gross exposure for both spine and stapling in China somewhere between 1% to 1.5% of our total company revenue. So it is small. And based on what we experienced with the coronary tender, we do believe there could be offsets to the ultimate net impact number because we have pull-through of other product lines, and we'll be working on those.

Thanks, Shagun. Let’s go to the next question please, Brad.

Hi, good morning. Thanks for taking the questions. I wanted to ask on the diabetes U.S. pump business. I know there's a lot of moving parts. But just with the further deceleration in fiscal 4Q, I was hoping you could share some insights in terms of why you think that's occurring. Is the warning letter in place kind of painting endocrine prescription patterns work or patient sentiment? Are you seeing incremental renewal pressure? Just wanted to get a better sense and then how you see that U.S. pump business trending over the course of the year. And then any other incremental details you can share just on interactions with the FDA? And I know you pulled that out of your guidance for fiscal '23 and the 780G regarding for approvals. But what gives you hope that you could still see those approvals occur in this fiscal year? Thanks for taking the questions.

Thanks, Josh for the questions. I'm going to turn it over to Sean here in a second, although he has officially moved on from that role to focus exclusively on our Cardiology portfolio. We have him on the call answering the diabetes questions this quarter. And I'll just say a few words about Que Dallara. She joined the company here a couple of weeks ago and has taken over our diabetes business unit, and we couldn't be really excited about having Que. She's already diving right in, she's already at ATTD, and she'll be in some other upcoming diabetes meetings that you'll get to see her. And she'll be on our next earnings call to fuel these questions, and she's getting settled in now and is moving her family out to our Northridge, California site and really excited you'll get a chance to hear from her shortly. In the meantime, I'm going to field this question to Sean. So Sean, can you answer the question that Josh posted?

Thank you for the question, Josh. The factors affecting our revenue are primarily related to competitiveness in the U.S. We saw a sequential growth of around 20% in EMEA, driven by strong demand for the combination of the 780 and Guardian 4 sensor, which is now available in 40 countries. This past quarter saw significant momentum due to favorable reimbursement, especially as we secured reimbursement in France and Germany, which was crucial for our continued growth. In the U.S., some patients are holding off on prescriptions pending new technology, while others are opting for competitive options. Concerning the warning letter, as Karen mentioned, we have intentionally excluded it from our guidance, which is a prudent approach. Our top priority is to enhance our quality system as outlined in the issues related to the warning letter. We've made substantial progress, having fulfilled over 80% of our commitments. It's also important to highlight that the 780 and Guardian 4 Sensor are currently under FDA review. We want to avoid making premature predictions regarding timing, hence our cautious stance. However, there is considerable patient interest, and the technology is demonstrating its effectiveness in practical applications. The revenue numbers and data presented at the recent ATDD meeting and the upcoming ADA reflect a strong solution that is helping patients achieve unprecedented time in range, both during the day and overnight. We're confident that once this solution is available, it will significantly improve our performance, but we must remain conservative in our forecasts as we cannot predict the timing accurately.

Thanks, Josh. Next question, please, Brad?

Hi, how are you this morning.

Hey, Joanne. Good to hear from you.

So when I take a look at your guidance, you've got what, in your words are or is a pretty conservative first quarter, and then it ramps pretty aggressively throughout the remainder of the year. I know you don't like to give quarterly guidance, but just to sort of level set us so that we're not resetting the quarters as we go along. Talk us through how you ramp and what improves. And if you can just sort of give a classic like X percent in the first quarter, Y in the second quarter, et cetera, that would be really helpful. Just to sort of build out from here.

Yeah. Thanks, Joanne, for the question. I'm going to not give specific guidance for the other quarters. But I will let you know that we've got these things that anniversary through the quarter. So ventilator sales was up and down in the quarter. And I know Ryan can take you in the after call about those changes that that happen in ventilator sales. And then obviously, we expect our biggest supply challenges this quarter and starting to improve in second quarter. So think about a ramp of revenue growth just getting better and better every quarter. And by the time you get to the back half, our year-over-year comps obviously get easier. And particularly in the fourth quarter, particularly in MedSurg, given the fourth quarter that we had. So think of strongest growth, obviously, in the fourth quarter as you ramp. And that is in line with how we think about our product launches too going through the year. We've got some product launches that are helping us earlier in the year, and then more that will ramp as we go through the year.

Yeah. Thanks, Joanne. And then for my second question, renal denervation you've completed the enrollment of the last piece of the puzzle. It sounds like data won't be presented in the fall, but we may get data in the spring. Are you thinking FDA approval mid next year, calendar year?

Yeah, Joanne, we will fill that last piece of the PMA, which is that last bit of data when we have it. And that would dictate the timing for the review clock starts. It's important to note that we've done a modular PMA. So every other part of this advice characterization, all the manufacturing modules have already been reviewed and closed. So it's really this last piece of it that would go into the review.

Excellent. Thank you and have a great day.

Thank you, everyone, for attending our earnings call and for your continued support of Medtronic. We appreciate your time and look forward to speaking with you again soon.