Medtronic Plc (MDT) — Q1 2023 Earnings Call Transcript

Good morning, and welcome to Medtronic’s Fiscal Year 2023 First Quarter Earnings Broadcast. I’m Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations. I’m inside one of our Medtronic mobile labs, which is making a stop here at our operational headquarters in Minneapolis. These high-tech mobile classrooms will give about 5,000 U.S. clinicians every year the opportunity to train on some of our most advanced state-of-the-art technology, including our O-arm and StealthStation. As you can see, it’s on 18 wheels. Our fleet of mobile lab trucks allows us to play big literally as they traverse the United States. In fact, with over 200 stops planned this fiscal year, they’re likely coming to a hospital near you. Now before we go inside to hear our prepared remarks, I’ll share a few details about today’s earnings broadcast. Joining me are Geoff Martha, Medtronic Chairman and Chief Executive Officer; and Karen Parkhill, Medtronic Chief Financial Officer. Geoff and Karen will provide comments on the results of our first quarter, which ended on July 29, 2022, and our outlook for the remainder of the fiscal year. After our prepared remarks, the Executive VPs for each of our four segments will join us and will 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 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, which excludes the impact of foreign currency and revenue from our recent acquisition of Intersect ENT, references to sequential revenue changes compared to the fourth 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 second calendar quarter of 2022 compared to the second calendar quarter of 2021, unless otherwise stated. Reconciliations of all non-GAAP financial measures can be found in our earnings press release or on our website at investorrelations.medtronic.com. And finally, our EPS guidance does not include any charges or gains that would be reported as non-GAAP adjustments to earnings during the fiscal year. With that, let’s head into the studio and hear about the quarter.

Hello, everyone, and thank you for joining us today. We reported our Q1 results this morning, and the quarter played out largely as expected. Our organization executed to deliver revenue ahead of our guidance and EPS that was in line with our guidance. Macro factors that we discussed with you and forecasted over the past few quarters, like supply chain, inflation, and foreign exchange, along with difficult comparisons to the prior year, caused our revenue and EPS to decline. At the same time, there were several bright spots in the quarter across our businesses, including strength in pacing, cardiac surgery, U.S. core spine, neurovascular, diabetes in Europe, and strong overall growth in many emerging markets. And as we look to the future, we have several near-term pipeline catalysts approaching that will accelerate growth. We’re also making progress on our initiatives around quality and operating improvement. And in an uncertain economy, our business is well-positioned with our robust balance sheet, strong and growing dividend, and leadership positions in many secular growth healthcare technology markets. So, taking a closer look at our Q1 results, as expected, acute supply chain disruptions impacted our performance, most notably, our Surgical Innovations business. We saw improvement in areas like packaging and resin supply as we progressed through the quarter. We also continue to manage semiconductor shortages across our businesses to minimize their impact on product availability as well as our financial results, and we’re expecting these chip shortages to linger throughout our fiscal year. Overall, our operations teams have executed and worked closely with our suppliers to minimize impact, improving our order backlogs as we exited the quarter. We expect our overall supply chain issues to continue to improve as we move through the fiscal year. On the demand side, we’re still seeing impacts to procedure volumes due to health professional labor shortages. And COVID is still causing procedure cancellations and deferrals in some pockets around the world. We see our hospital and physician customers are doing all they can to manage these dynamics. So, while procedure volumes in most of our markets remain at pre-COVID levels, we do have certain procedures or geographies where volumes are still lagging. Turning to market share. This is an important metric at Medtronic and is part of our annual incentive plan, along with revenue growth, profitability, and free cash flow. And when we look at our quarterly market share performance, acute product availability challenges impacted our share capture opportunities in certain businesses, including surgical innovations and high-power CRM implants. We’re also facing some competitive pressures in pelvic health and in diabetes, predominantly in the U.S. We’re making good progress on the acute product availability issues and have pipeline plans in place to address competitive pressures over time. Now, let me highlight some of our bright spots. In CRM, our pacing business continues to outperform the market as our Micra leadless pacemaker family is driving strong growth around the globe as we enter new geographies and expand penetration in existing markets. Micra grew 15% in the quarter, including high-70s growth in Japan, mid-teens growth in Western Europe, and high-30s growth in emerging markets. In CST, we had a good quarter in U.S. Core Spine, which grew 4%. We won market share on the strength of our overall portfolio, including our unit AI-enabled surgical planning platform and patient-specific implants, which had strong double-digit sequential growth in our U.S. user base. In addition, our recently launched Catalyft PL spinal system designed to target the TLIF and PLIF markets, drove meaningful results in Q1. And the breadth of our enabling imaging, navigation, and robotic technologies is a key differentiator. In our Neuromodulation business, we are gaining initial implant share in both Pain Stim and DBS. In Pain Stim, the market continues to gravitate toward our Vanta recharge-free and Intellis with DTM rechargeable neurostimulators. And in DBS, customers value the differentiated sensing capabilities of our Percept PC system with our SenSight directional lead. In diabetes, we continue to see significant growth in markets outside the U.S. due to the increasing user base of our MiniMed 780G insulin pump, combined with our Guardian 4 sensor. The increase in this user base over the past couple of years is now driving significant recurring revenue growth for our CGM sensors and other supplies. In markets outside the U.S. where launched, the 780G and our Guardian 4 sensor have a very positive user experience with no fingersticks and more time in range. Now, this is due to its near real-time basal insulin and auto-correction boluses every 5 minutes to address underestimated carb counts and occasional missed mealtime boluses. Now, let’s move to our product pipeline, where we’re advancing several meaningful technologies that can create new markets, disrupt existing ones, and accelerate our growth. We continue to execute on our pipeline, having received over 200 regulatory approvals in the U.S., Europe, Japan, and China over the past 12 months. And looking ahead, we have several near-term pipeline catalysts approaching that we expect will enhance the weighted average market growth rate of Medtronic. Now, starting with our cardiovascular portfolio in transcatheter valves. The limited U.S. market release of our Evolut FX valve is receiving an overwhelmingly positive customer reception. And we’re excited about the impact this next-gen valve can have as we move to full market release this fall. Evolut FX enhances ease of use and provides implanters with greater precision and control during the procedure, and it maintains all the industry-leading hemodynamic and durability benefits of the Evolut platform. When you combine the FX launch in the U.S., PRO+ launch in Europe, and Evolut PRO launch in China, we feel really good about the opportunities in our TAVR franchise around the globe. TAVR is one of the largest growth drivers for Medtronic, and we expect the market, which is roughly $5.5 billion today, to exceed $7 billion within the next three years and reach $10 billion in the next five years. In cardiac rhythm management, we’re really looking forward to disrupting the single-chamber ICD market with our Aurora extravascular ICD. Now, as you may know, one of our competitors has had a subcutaneous ICD in the market for many years, but it’s remained a niche device given its limitations compared to conventional ICDs. With Aurora, we’ve created a true game changer where the electrophysiologist and the patient don’t have to make trade-offs. It will deliver the benefits of a traditional ICD, including having the same size, battery longevity, and ability to use proven antitachy pacing in lieu of delivering a painful shock to terminate life-threatening arrhythmias. Aurora does all of this without having to place leads inside the heart. Our EV-ICD global pivotal data will be presented this weekend in a late-breaking session at the ESC Congress in Barcelona. We’re also awaiting CE Mark approval for Aurora, and we expect U.S. approval next calendar year. In renal denervation, our breakthrough procedure to treat hypertension, we’re nearing completion of the six-month follow-up for the full cohort of patients in our SPYRAL HTN-ON MED study. We’ll then analyze the data and plan to present the findings in the next few months. This data will complete the final piece of our clinical module submission to the U.S. FDA as every other module has been submitted, reviewed, and closed. The data on our simplicity blood pressure procedure is robust, including strong pivotal trial results and compelling real-world registry data from over 3,000 patients. And more recently, data has been presented that shows that patients spend nearly double the time in target blood pressure range through three years than those who received a sham procedure. This could have a profound effect on public health through the reduction of cardiovascular events, including stroke, heart failure, and CV mortality. And we expect to be a leader in this market, which we project to exceed $500 million by calendar year 2026 and $2 billion to $3 billion by 2030. Moving to our Medical Surgical Portfolio, which includes surgical robotics. We continue to execute on the limited market release of our Hugo robot. We’re installing new systems and collecting clinical data in approved geographies, enhancing the system based on surgeon feedback, improving supply chain resiliency, and scaling manufacturing production. Feedback and demand continue to be very strong. We’ve made progress over the last quarter, and we’re nearing the start of the U.S. IDE clinical trial for our urology indication. We also continue to increase our user base of Touch Surgery Enterprise, our AI-powered surgical video and analytics platform. With Touch Surgery Enterprise, surgeons can now easily review film from their surgeries to continuously improve and advance patient care. Overall, when it comes to surgical robotics, we’re investing heavily to become a major player in the market for the long term, leveraging our decades of experience and leadership in minimally invasive surgery. Now turning to our neuroscience portfolio. In Neuromodulation, we’ve submitted our inceptive ECAPs closed-loop stimulator. We expect inceptive’s closed-loop therapy, which optimizes pain relief for patients, to revolutionize the SCS market. We’re also continuing to ramp our commercial activities to go after the diabetic peripheral neuropathy opportunity with our first cohort of DPN market development reps now trained. We believe DPN is one of the largest opportunities in med-tech, and we expect the market to reach $300 million by FY26 with an annual total addressable market of up to $2 billion. In diabetes, we’re in active dialogue with the FDA on our regulatory submission for the MiniMed 780G with the Guardian 4 sensor, and we remain focused on resolving our warning letter. We’re making good progress on our warning letter commitments. We’ve completed more than 90% of the actions we committed to the FDA. This represents substantial progress toward resolving the warning letter and preparing for reinspection. In our CGM pipeline, we submitted our next-generation sensor, Simplera for CE Mark. Simplera is disposable. It’s easier to apply, and it’s half the size of Guardian 4. The Simplera file is ready to submit to the U.S. FDA, and we’re waiting to submit it as we’re prioritizing the 780G Guardian 4 review. And with regards to our overall diabetes pipeline, we’re making considerable investments, well above our corporate R&D average. We have a comprehensive pipeline of multiple next-gen sensor and pump programs, including patch pumps. This pipeline gives us confidence that we can restore strong growth to our diabetes business over the coming years. With that, I’ll turn it over to Karen to discuss our first quarter financial performance and our guidance.

Thank you, Geoff. Our first quarter organic revenue exceeded guidance, decreasing 3.6%. Adjusted EPS of $1.13 decreased 17%, in line with our guidance range. As we outlined on our last earnings call, we faced acute supply chain challenges in the quarter, particularly in our Surgical Innovations business. We also faced tougher underlying growth comparisons, including both strong ventilator sales and good procedure recovery following the third wave of COVID last year. Looking at our results from a geographic perspective, our U.S. revenue declined 9%, and our non-U.S. developed and emerging markets both grew 2%. Our emerging markets growth was impacted this quarter by China, which declined 9%, given COVID lockdowns and volume-based procurement. However, our teams drove strong growth in many other markets, including high-teens growth in South Asia and Latin America, mid-teens growth in the Middle East and Africa, and low-double-digit growth in Southeast Asia. And when you exclude China, our emerging markets grew 13%. Turning to our margins. Our adjusted gross margin declined 230 basis points. The impact of the strengthening dollar drove 50 basis points of the decline, and the rest was primarily due to inflation on labor and materials as well as freight, given fuel surcharges and increased expedited shipments. As we said at the beginning of the year, we expect the impact from inflation and currency to continue to negatively affect our gross margin in the quarters ahead. I want to remind you, when you look at our R&D line, we had a recast of last year’s IP R&D that we told you about last quarter. Without that recast, adjusted R&D expense would have grown 4% as we continue to prioritize investment into development programs across our businesses. While our operating margin declined 320 basis points on lower revenue and gross margin pressures, we do expect to show sequential improvement as our revenue growth accelerates through the year. And our balance sheet remains strong, allowing us to invest in future growth and return capital to shareholders. We continue to target returning a minimum of 50% of our free cash flow to our shareholders, primarily through our strong and growing dividend. And we supplement these returns through opportunistic share repurchases. This past quarter, we repurchased $336 million, which is on top of the $2.5 billion we repurchased last fiscal year. We also continue to put the cash on our balance sheet to work, investing in tuck-in acquisitions and minority investments that help fuel our near-term and future growth. We closed Intersect ENT in the quarter, and we also began the structured acquisition of the Acutus left-heart access portfolio and expect to begin distribution by the first half of calendar ‘23. Their advanced transseptal access systems will be an important part of our broad offering to electrophysiologists and interventional cardiologists. Last month, we announced a co-promotion agreement and path toward acquisition with CathWorks. We’re excited to partner with CathWorks and promote their innovative FFR angio system, which we believe can disrupt the traditional FFR market. We believe that Medtronic can add a lot of value to the technologies that we acquire, and we expect tuck-ins to supplement our organic R&D investment and long-term growth acceleration. Now, turning to our guidance. With one quarter behind us, we are maintaining our full year revenue guidance at 4% to 5% organic, which excludes currency movement and revenue from our Intersect ENT acquisition. If recent exchange rates hold, foreign currency would now have a negative impact on full year revenue of $1.4 billion to $1.5 billion, an increase of $400 million over the past quarter. We expect organic revenue growth to improve each quarter, with the second half of our fiscal year much stronger than the first, driven by our expectation that many of the acute supply chain challenges subside and new products drive our growth. It’s worth noting that we also face increasingly easier comparisons as we go through the fiscal year. By segment and on an organic basis, we continue to expect cardiovascular to grow 5.5% to 6.5%, Medical Surgical to now grow 0.75% to 2.75%, given increased volume-based procurement in many of the Chinese provinces, Neuroscience to now grow 4.75% to 5.75%, given a slightly lower outlook for the Neuromodulation market; and diabetes to now decline 3% to 6%, given stronger growth in international markets. On the bottom line, we continue to expect non-GAAP diluted EPS in the range of $5.53 to $5.65. Inflation and currency are still creating near-term impacts on our margins, and we’ve seen inflation on raw materials and freight become larger headwinds over the past quarter. We also continue to execute on initiatives to partially offset these macro impacts as well as prioritize our R&D investments to drive future growth. Given these dynamics, and the fact that we are still early in our fiscal year, we would suggest you model closer to the lower end of our EPS guidance range. Our EPS guidance includes an unfavorable impact of foreign currency, which is approximately $0.17 to $0.22 at recent rates. In the second quarter, we expect organic revenue growth in the range of 3% to 3.5%, implying a strong sequential acceleration, driven by improved product availability and the cadence of our launches. Assuming recent exchange rates hold, the second quarter would have a currency headwind between $365 million and $415 million. By segment, we expect Cardiovascular to grow 5% to 5.5%, Medical Surgical to be down 0.25 points to up 0.25 points, Neuroscience to grow 5.5% to 6%, and Diabetes to be down 3% to 6%, all on an organic basis. And we expect EPS of $1.26 to $1.30, including an FX headwind of about $0.02 at current rates. While our markets are facing challenges, we’re focused on identifying ways to offset their impact on our financials, and we are optimistic about our future as we prepare to create markets and realize new opportunities. In addition, I want to take a moment to recognize and thank our employees at Medtronic, who are unwavering in their commitment to deliver life-saving treatment to people around the world. Back to you, Geoff.

Thank you, Karen. Now, this last quarter, we made a lot of progress on our aggressive agenda of underlying changes that are needed to ultimately accelerate our growth. With supply chain, it’s getting better. And our back orders are coming down, not just because of the external environment, but because of the actions we are taking under Greg Smith’s leadership, and I expect these improvements will continue. We’ve co-located our employees with suppliers and are also working closely with sub-tier suppliers. We’re managing through the acute issues and making progress on improvements that I’m confident can enhance the resiliency of our end-to-end supply chain. On quality, we’ve been conducting a large transformation of our quality system over the past couple of years. We’re advancing quality in innovative ways, working very closely with our regulators, and this is leading to important progress. We’re also making progress on our pipeline and portfolio as these two strategies come together to create meaningful growth drivers. We’re tucking new products into dependable higher growth businesses like we did by adding Intersect ENT to our ENT business. We’re also broadening the product portfolio of some of our businesses so that they can become more meaningful growth drivers for the total company, like our strategy in cardiac ablation solutions. Overall, the path has not been easy, but I’m confident that these fundamental enhancements that we’re making to the company, combined with our op model change, culture changes, and incentive changes, are positioning us to deliver a higher level of growth that can be sustained. And as we overcome the near-term issues and start to put points on the board with the pipeline, I believe the underlying transformation of Medtronic. All the work that we’ve been doing over the past couple of years will become increasingly apparent, setting up a durable value creation engine to fully capitalize on the mega trends in the healthcare and technology markets, which will benefit all stakeholders. So, to close, I want to join Karen in thanking our employees. It’s never easy going through change, especially in a challenging macro environment, but our teams have stayed focused and are playing critical roles in helping to alleviate pain, restore health, and extend life for millions of people around the globe. Now, let’s move to Q&A. We’re going to try to get to 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 teams after the call. With that, Brad, could you please give the instructions for asking a question?

We’ll take the first question from Robbie Marcus at JPMorgan.

Good morning, everyone, and congrats on the quarter. Maybe I’ll ask both my questions upfront in one. The quarter came in a little better than expected, but second quarter guide is lower than where the street was thinking by maybe 0.5%, 0.75% on organic sales growth. So, maybe you could walk us through how you’re thinking about the cadence of the year. It includes a pretty material dollar step-up each quarter. What’s driving that? And then also, it looks like you narrowed or lowered a lot of the product segment, organic sales growth guidance with diabetes the big offset. Maybe talk to if you’re seeing any impact to share from some of the supply issues you had? And what’s driving those moderated outlooks on a segment basis? Thanks a lot.

Robbie, thank you for the question. There’s a lot to cover. I’ll start and then pass it to Karen. The quarter unfolded mostly as we anticipated, navigating macro challenges and making headway on supply chain issues like resins and packaging. Our procedures are largely back to pre-COVID levels, showing month-over-month improvement, and we ended the quarter on a positive note. As we look at the remaining three quarters of the year, we will face some tough comparisons coming out of this first quarter since we grew about 19% in Q1 last year, particularly with vents and LVADs having challenging comparisons. While we are beginning to resolve acute supply chain concerns, such as with resins and packaging, we still face semiconductor challenges that will persist for a while. However, we are making progress on these urgent issues. As for the specifics of Q2 versus the second half, we have several strong growth drivers anticipated in the second half, including the full market launch of Evolut FX and EV-ICD. Additionally, there are multiple other launches and existing products gaining momentum as we move through the next three quarters. Now, I’ll hand it over to Karen for more details on this.

Yes. Thanks, Geoff, and good morning, Robbie. So, I would add on Q2 that we do also expect some modest improvement in underlying procedural fundamentals. For example, we expect China procedures to come back. And we had some cardio procedures that were slightly impacted from contrast supply last quarter that we expect to come back. We also continue to factor in the potential for incremental pressure from volume-based procurement in China, including a potential national VBP tender in spine and continued provincial tenders in SI. But just an important reminder, in Q2, we do have much easier comparisons versus the prior year. We grew only 2% last fiscal year, and that was given the impact of the Delta variant and some labor shortages on procedure volumes. So, then as we move into the back half of the year, Geoff mentioned the exciting product launches that we have and the continued improvement in our acute supply chain challenges. And then, I would also just note that our year-over comparisons continue to get easier from where they were in Q2. We had roughly 1.5% growth in Q3 and Q4 last year. And we also have the vent headwind easing in the back half. And in terms of what’s going on with our portfolios and the diabetes offset, yes, we did see greater strength in diabetes in this quarter, particularly in international growth, and we expect that to continue. And then, we’re just being overall prudent with our guidance. We think it’s early in the fiscal year. We’ve still got a lot of macro uncertainties, particularly with inflation and freight. And so, again, we just wanted to be prudent. I hope that helps.

Thanks, Robbie. Take the next question, Brad.

Geoff, I had two product-related questions, maybe one on RDN and one on the robot. RDN, can you just talk to us, and when can we expect this data? I think you said it’s in the upcoming months. Is that going to be a headline press release? Will that be a formal presentation at a conference? Is there any chance that the FDA looks at the data and could hold an adcom, or any sense on what we can expect from RDN?

Sure. Thanks for the question. I’ll begin by passing it to Sean for the answer on this one. As you've noticed over the past few months and at various conferences, we're seeing more and more data emerging. I appreciated your interview with the key opinion leader in the field, and it was encouraging to hear his thoughts. There's been an increase in data and growing excitement and confidence among physicians as our trial sites have been working with patients for quite some time, and the data continues to be very positive. We're feeling optimistic. Sean has mentioned previously that the FDA has conducted its own patient preference studies, which clearly show that patients prefer this approach over standard medical management. They are also eager to see this reach the market. Now, regarding the specifics of your questions, I’ll let Sean address those about the timing of the data and whether we will have an advisory committee meeting or any related information.

We have completed enrollment and are on track for a six-month endpoint, which we will be ramping up shortly. We aim to target any comparisons we have this fall, likely at the AHA, where we plan to submit our findings. If accepted, that’s where we will release the results. We will also publish those results and share the top line in the same timeframe. Just to remind you, this is the final part of what we have submitted; all other modules have been reviewed and closed, with only the clinical data remaining outstanding. We are as close as we have ever been.

Got you. And then, Geoff, maybe one on the surgical robot. I thought the prepared remarks, the commentary was pretty bullish. And correct me if I’m wrong, I saw a healthy order book momentum with installations, key supply chain challenges have been addressed. This feels like a change in tone versus the last call. So perhaps can you comment on what’s changed in the last three months?

Sure. I’ll have Bob speak as well. This quarter was significant for us as we made considerable progress on some of the supply chain issues we faced and resolved specific problems while also enhancing our manufacturing capacity ahead of the U.S. IDE. More importantly, we expanded sales in Europe with several installations and received positive feedback from surgeons. I had the opportunity to meet with several of our surgical innovations sales reps and asked them what they were hearing from surgeons. I was pleased with their responses. The word is spreading; they appreciate our design and market approach. They understand that when we launch, we may not have all the necessary indications yet, and we will continue to expand our instrument offerings, but they want to be part of this journey with us. Therefore, I believe expectations are appropriately set. We have increased our manufacturing capacity and, as I mentioned earlier, we are very close to the U.S. IDE. Bob, do you want to add anything?

Yes. No, thanks, Geoff. And Vijay, thanks a lot for the question. And I think you’re right to characterize we’re making solid progress with our surgical robotic ecosystem. And we really do think about it as an ecosystem with really good progress with Touch Surgery as well. But, as Geoff mentioned, our Hugo installations continued in the quarter. We like to be accelerated as we closed the quarter as well. And as I’ve spoken on previous calls, we were really focused on hardening our supply chain and our operations performance, and we’ve seen progress there. And then third, we continue to train surgeons across the globe and across multiple specialties, and so solid progress there. So, we’re near the start of our IDE, and so we believe we continue on track. So thanks, Vijay. And thanks, Geoff.

Bob mentioned Touch Surgery, which is another significant component of our ecosystem. We have learned from the spine sector how crucial it is to not only have the robot but also the supporting technologies. Customers are beginning to use Touch Surgery with Hugo, and surgeons are impressed with its analytical capabilities and the advantages of secure video storage and sharing for case reviews and training. The ecosystem for our soft tissue robot is developing well, as Bob noted, and there is certainly some excitement on our side.

Thanks, Vijay. Next question, please, Brad.

So Geoff, I’ll start with the portfolio management portfolio stuff. It’s been about 8 months since you started highlighting that. I didn’t know if that was something we could see in FY23. And it seems like you’re highlighting solving for your weighted average market growth rate more than other variables at this stage of the process. And then, Karen, a quick follow-up on something you said earlier. I think you said exiting the quarter with better momentum. So, curious if you could comment a little bit on some of the August trends, and there’s been some concern with investors about vacations and stuff like that. So, would love to get any color on August.

Thank you for the question, Travis. We are definitely focused on reviewing our entire portfolio more closely, which we have been doing for several months now. I want to emphasize that we are committed to making the right decisions for our shareholders and all Medtronic stakeholders. When we assess our portfolio and capital allocation, we consider both buying and selling, actively managing it to improve our weighted average market growth rate, whether through addition or subtraction, and ensuring that growth is sustainable. We have made significant progress in strategically evaluating each business. Last quarter, we announced our first step on the selling side with the Renal Care Solutions joint venture with DaVita, and this will be an ongoing process. I want to set that expectation that it will take time. Our goals remain the same, and we are continuing to pursue durable growth. It is easier to achieve growth as our market growth rate is improving as well. I'll hand it over to Karen for the next question.

Yes, thanks, Travis. We ended the quarter with improved momentum and a reduction in our backlogs, showing ongoing monthly progress. Although it's still early in August and we are managing some supply challenges in certain areas of our business, which makes the numbers a bit uncertain, we factored this into our guidance. For the operating units not affected by supply issues in the first three weeks of August, we are on track with last year's second quarter performance, indicating continued momentum and improvement.

Thanks, Travis. Take the next question, please, Brad.

I wanted to ask about the diabetes business, the updated guidance for the year. Obviously, OUS came in stronger. But just what you’re expecting now, both OUS, but then also in the U.S. from competitive pressures? And then, I wanted to follow up. It sounded like your timing for submission of Simplera shifted your strategy there. Just if you could comment on how you’re thinking about the cadence of submission. Thank you.

Thank you for the question, Cecilia. Yes, we are seeing strong growth in diabetes outside the U.S., particularly in Europe. More importantly than the quarterly growth, the clinical results we are getting from patients and their feedback on the 780G plus Guardian Sensor 4 system are very positive. We believe this will bode well for our franchise when we launch in the U.S., especially as we face competition in Europe. You had a couple of specific questions, and I want to emphasize that when I became CEO two years ago, there were many inquiries about our plans. We decided to increase our investments. We believe that our integrated insulin delivery system, which combines sensors and a durable insulin pump, enhances our market-leading algorithms and gives us a sustainable position in a growing market with high barriers to entry. The results in Europe are encouraging. Additionally, we have successfully transitioned leadership from Sean to Que, who stabilizes the business, emphasizes our competitive advantages, and shapes our product roadmap. Que has already made a significant impact in her first 14 or 15 weeks, not just in diabetes but also within the Medtronic leadership team. It's a pleasure to work with her. Now, I would like to introduce Que Dallara and welcome her to her first earnings call. Que?

Thanks, Geoff. The transition with Sean has gone very well, and I’m encouraged by the progress we’re making in restoring this business to growth and advancing our innovation roadmap. In response to your specific questions about the U.S. market and Simplera, our immediate focus is on addressing the warning letter and progressing with the FDA for the approval of the 780G and the Guardian 4 sensor system. We are making good progress, and we hope to remediate the situation and secure approval soon. However, we are not idle. In the U.S., we are seeing growth in our 770G system and InPen technology. We are also close to launching the extended-wear infusion set, approved by the FDA for up to 7 days, which we believe will significantly benefit patients. This innovation is the most significant we’ve seen in the past 20 years, enabling patients to align their sensor CGM changes with infusion set changes for improved site recovery and comfort. We are looking forward to the 780G, but we are also prioritizing the products already approved in the U.S. Regarding Simplera, we are very excited about this product, which is half the size of the Guardian 4 sensor and thinner. We submitted a CE Mark in July as planned and are prepared to submit in the U.S. However, our primary focus remains on addressing the warning letter and obtaining 780G approval.

Okay. Thank you, Que.

Thanks, Cecilia. Next question, please, Brad.

First, on supply constraints, I think in Q4, you said it was about a $260 million impact. How much was the impact in Q1? What are your expectations for Q2? And are you assuming some catch-up from lost sales? And just lastly, Karen, maybe talk about the FX hedging gain in the guidance now for ‘22. I think it was $410 million to $440 million. And how that rolls off in fiscal 2024, how we should think about that? Thanks so much.

Thank you for the question, Larry. I’ll begin with our expectations for Q2 and beyond regarding supply chain issues. As I noted, Q4 and Q1 were particularly challenging for us due to these supply chain disruptions, and I'm relieved that we can now look back on those quarters. While we're not completely past the challenges yet, our backlog is decreasing. We're observing significant improvements in areas such as resins and packaging throughout the Company. This progress is largely due to over 100 of our employees working directly with our key suppliers to prioritize Medtronic’s needs, and importantly, to improve communication and planning, which is proving effective. The overall market conditions are gradually improving, especially in certain areas. However, I should mention that semiconductor shortages will persist for a while, and we're actively collaborating with semiconductor companies to address this. Additionally, we’ve been engaging directly with raw material suppliers instead of relying solely on intermediaries, locking in contracts and ensuring prioritization, especially since these materials are crucial for medical and lifesaving products. In some cases, those raw material suppliers were unaware of the urgency. All of this is positively impacting our situation, and I believe we will continue to see our backlog diminish over time. We’re starting to move past the most critical phase of these challenges. As for recovering lost sales, similar to our approach during COVID, we don't factor in a significant increase in lost sales in our guidance. Currently, as you've noted, there are still some constraints on procedures due to the healthcare worker shortage, which is improving but still affects our customers' capacity to operate at pre-COVID levels. Therefore, we haven't included a sales recovery in our guidance. You had some specific quantification questions, and I’ll pass those to Karen. Karen, do you have anything to add regarding the qualitative points I mentioned?

Thank you. I think you covered it well on supply chain. We did say that we expect it to get a little worse before it got better, and that’s what happened in the first quarter, but we expect it to get better from here. We do have the supply chain improving, but again, not necessarily a bolus catch-up built into the guide. In terms of FX, as you’ve seen, we’ve had the strengthening dollar continue to impact our reported revenue, just like it has for many of our peers. We do have foreign currency-based cost of sales and overhead. And now we have foreign currency-based interest expense as well, and those all provided some offset. And as you know, Larry, we also have the benefit of our multiyear currency hedging program, which did produce significant gains, and that resulted in a smaller FX impact to the bottom line in the quarter. As we look ahead for FX, I would say, keep in mind, it’s only Q1 now. We’ve got foreign exchange rates that are continually volatile. So, we know they’re going to move from here. But, if we look at next fiscal year, based on recent rates, we would expect the headwind next fiscal year to be similar to the headwind this fiscal year, again, if rates stay the same. I hope that helps.

Yes. Thanks, Larry. Next question, please, Brad.

Briefly, if revenue is improving quarter-over-quarter throughout the remainder of the year, your operating margins and gross margins also improve. And I’ll just throw my second one quickly. Hugo, what does it take to bring that into the United States? And is there a parameter or a thought process on the timing? Thanks.

Yes. Thanks, Joanne. On margins, we do expect margins to improve sequentially through the year as revenue improves. So, the answer to that one is yes. And then, Geoff, for...

Yes, sure. On Hugo, what does it take to bring it to the United States? We need to initiate our U.S. IDE, which we have set up here. Bob has mentioned before about preparing our customers and trial sites, as well as training the physicians, which we’ve been actively working on. Bob, would you like to share more details on that?

You’re exactly right, Geoff. It begins with our U.S. IDE that will start the U.S. process. As we mentioned, Joanne, we’re nearing the start event, but that will be the key milestone that we’ll certainly update investors on.

Okay. Thanks, Joanne. Next question, please.

Just a couple of diabetes questions. It was mentioned that you hope to remediate the warning letter and secure approval for 780G in the near term. Do you have clarity on if you can get approval for 780G while the warning letter is still outstanding?

Thank you for the question. The variance path is one option we are considering. However, our primary priority is to work with the FDA to address the warning letter, and we are entirely focused on that. Naturally, we are eager to launch the product, but our main concern is patient safety and ensuring our remediation plans are thorough. That is our top focus. In addition, we are actively engaged with the FDA to get the 780G and Guardian 4 sensor system approved. Both initiatives are progressing, but it’s difficult to predict exactly when they will be finalized. I am very pleased with the progress we are making on both fronts.

Okay. And I apologize if I missed this earlier. But when will you submit Simplera to the FDA?

We will do that as soon as we feel confident that we’ve made sufficient progress on the warning letter remediation as well as progress on the 780G. So, as you know, we submitted for CE Mark in July, as we said we would. And we just want to make sure that our focus remains on those immediate short-term goals of warning letter remediation and approval for the 780G.

Thanks, Jayson. Next question, please, Brad.

Geoff, thinking a little longer term, How far along would you say are Greg Smith and his team in making them more durable changes in operations you’ve talked about in prior calls, and when do you think we could start seeing margin benefits from those initiatives?

That's a great question. Thanks, Steve. They’ve made significant progress in a relatively short time. Greg started in April 2021, so it's been just over a year. During this period, in collaboration with the executive team, we’ve centralized the global operations and supply chain function. This is part of our new model where we aim to balance small and large-scale operations. Some functions have been decentralized into the businesses, which are now more empowered, referred to as operating units. However, certain functions, where we can leverage our scale or enforce standards, remain centralized, with supply chain being one of those key areas. We've implemented this organizational change, which is arguably the most significant change we've made, even more than transitioning to the 20 operating units. Additionally, we’ve begun investing in new capabilities by bringing in talent from outside the company and the industry, often best-in-class individuals in various sub-functions or capabilities within global operations and supply chain, such as planning and factory automation. We have hired many new team members over the past year. Moreover, we’ve been investing in various technologies for areas like supply planning and demand planning. Our primary focus has been on resiliency and quality since they greatly influence overall quality, along with cost of goods sold productivity, which we expect to improve to twice or more than what we have historically achieved at Medtronic. This evolution will take time, and while we haven’t seen these benefits yet, we anticipate they will materialize in the future. There are several factors at play, including inflation, that are obscuring our current understanding of cost of goods sold productivity. However, we believe these improvements will surface over time, although we haven't defined the exact timeline. As I mentioned, it's been somewhat challenging to clarify the situation in the short term due to the inflationary effects on our cost of goods sold. Karen, would you like to add anything?

Yes. Thanks, Geoff, and thanks for the question. We are making a lot of progress in the ops front. And our shorter-term goal is going to be a focus on driving enough cost offset to offset the impacts that we’ve got, either in pricing or inflation. We’re not ready to give guidance for next fiscal year, but that’s the initial goal just to offset. And then over time, to hopefully more than offset. I would say, Geoff mentioned, too, that this work in operations is not just going to help on the cost of goods sold line, but also on the revenue line, as we can more predictably have products available and get quality issues in better stead. So, I think it will help on both.

Okay. Thanks, Steve. Next question, please, Brad.

Just on spine, I think you guys called out navigation and robotics may decline. I was hoping you could talk a little bit about what you’re seeing there on the funnel and the pipeline and the capital environment more broadly. Any changes that are taking place in the way you’re selling these types of capital items, especially robotics? And then we did see one of your orthopedics robotic competitors talk about changing business models, more rentals meanwhile, but your direct spine robotics competitor actually saw a sequential pickup in capital purchases. So, it would be great to get your color on the capital environment and specifically what’s going on in spine robotics.

Sure. Thanks for the question, Rich. I’m going to have Brett Wall, Mr. Neuroscience, field that question.

Sure, Rich. Yes, looking overall, the capital, we have a very extensive ecosystem and capital system within our CST business. And what we saw was extended purchasing times, particularly as we move through to the end of our quarter. Now specifically, as it relates to the technology and the selling models, we have a variety of different approaches that we use. And so, we’re well-positioned. However, the markets seem to work and hospitals are in a mode of preserving cash. We have more opportunities to put forth different models where we actually utilize the implantables and other disposable products as a way of financing this particular capital, and that works very well. We didn’t see a significant uptick in our O-arms or StealthStations during this time with that model, but we saw a little bit of an uptick with Mazor in that particular model. And we think during these times, we’ll probably see more of that. The competitor you referenced there, if you look at calendar Q2, per our calculations, we continue to outstrip them in our actual placement and sales of robots. And so, we continue to do that, and our procedural base there is nearing almost double the amount that they reported in their last earnings call. So, we are very well positioned there. And then the underlying spine business remains pretty attractive. We saw a 4% increase in our core spine business there. So we’re pleased with how that’s recovering.

Yes. We’re really excited about the positioning of our spine business with the recent product launches in the implant side, but the ecosystem that we’ve built over the last decade and how that’s come to bear and how the market is shifting to that ecosystem approach. So, we’re feeling good about spine as we move forward here.

Yes. Thanks, Rich. I think we’ve got time for one more question, Brad.

I was hoping, Geoff, just in closing, you’d expand on two of your exciting, I think, pipeline opportunities. You highlighted Aurora, the leadless subcu device. I was hoping you’d share your latest thinking in terms of the opportunity there. And when you talk about U.S. approval next year, you’re saying next calendar year or next fiscal year, and this seems like a major opportunity. I was hoping you could talk about that. And just last, you didn’t talk as much this time about the opportunity in pulsed field ablation. Maybe just update us on your internal Medtronic program and the fair programs and just some timelines on the U.S. trial, follow-up, submission, and approval timing. Any of that would be great. Thanks so much.

Thank you for the question, Rick. We have two topics to discuss, and I'll let Sean provide more details. Regarding Aurora, as I mentioned earlier, we believe we can expand this segment from what has been a somewhat niche market to a larger one, targeting $1 billion by 2030. With Aurora, we believe that neither physicians nor patients need to make trade-offs, and they can benefit from the traditional impacts of a conventional ICD while using a much less invasive approach. Now, I'll hand it over to Sean. As for PFA, you mentioned Affera; Sean will elaborate on the differences between our internal PFA program and Affera. The combination of Affera and Acutus completes our cardiac ablation solutions business and our AFib business. We see this as an opportunity to enhance that business significantly. We're expecting FTC approval for the Affera acquisition soon and plan to proceed aggressively, as it represents a high-growth market where we've been somewhat niche. This will position our business as a genuine growth driver for the Company. Sean, would you like to address some of Rick’s specific questions?

Yes, sure. So Rick, as Geoff mentioned in the commentary, today’s subcutaneous ICD market is, it’s a niche around $300 million, $350 million, $300 million to $350 million annually. And we think that within 10 years, this could be a $1 billion segment. And the reason that it expands is all those limitations of the current device where we can get sort of the benefits of traditional IC, smaller devices, monoliner life, the ability to pace out of the arrhythmia rather than having to shock out arrhythmia. That’s really both can I expand the market like we saw with leaves pacing. When we went to that, we started picking up new patients that weren’t being treated because of the acuity of disease and leads to that strong growth. And with regard to timing, we’re saying next calendar year, to kind of put a finer point on that, it’s the first half of next calendar year is what we’re targeting for approval for the U.S. Pulsed field ablation, we have completed the trial, as you know, last November, and that’s been in its follow-up period. So that would put us for availability of data in the springtime. That’s probably one of the most likely to be presented. And, of course, the filing of our technology would be at that point in time. As Geoff mentioned, we’re waiting the regulatory closure of Affera, and that really expands out the fuller bag. It gives us within both RF and pulsed field, point-by-point ablation. And what we have with our own internal PFAs really for the isolation of pulmonary veins sleeve, right? So, it’s more anatomically based. And then, the other catheters that come with Affera would be for point-by-point ablation or for lines of conduction blocks that you do with a linear catheter. So, really nice complementary sort of technologies for PFA. But more importantly, we’ve been restrained from being able to participate in the full market because we don’t control the mapping navigation systems. There’s a strong monopoly between two players, Biosense Webster and Abbot, particularly really control and dominate that field. So, that Affera acquisition allows us to have all of our catheters now with mapping navigation really expands the opportunity into that and was today an $8 billion market. Should be, by the time all this stuff rolls out, it continues to grow robustly close to $10 billion, and we’ll be able to fully participate in that market. So, two really important growth drivers, we’re excited about them, and we’re making meaningful progress on both of them.

Yes, Rick, we’re optimistic about the pipeline. The pace of new launches and growth initiatives is progressing positively along with strong operational momentum. We anticipate improvements in the second half of the fiscal year compared to the first half. We’re excited about our position across the business and our operating model. Thank you all for joining us today, and I look forward to sharing our updates on the next quarterly call. So with that, I think that is all for Q&A, and I want to thank you for the questions and your engagement. We appreciate your support and continued interest in Medtronic. We look forward to updating you on our progress during our next earnings call, which we anticipate holding on November 22, right before Thanksgiving here in the U.S. Thank you for tuning in today, and please stay healthy and safe. Have a great rest of your day.