Medtronic Plc (MDT) — Q4 2023 Earnings Call Transcript

Good morning, I'm Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations. Welcome to Minnesota, land of 10,000 lakes. I appreciate that you're joining us today for Medtronic's Fiscal Year 2023 Fourth Quarter Earnings Video Webcast. Before we go inside to hear our 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; Jeff and Karen will provide comments on the results of our fourth quarter and fiscal year 2023, which ended on April 28, 2023 and our outlook for fiscal year '24. After our prepared remarks, the executive VPs from each of our four segments 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 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 four things: one, the impact of foreign currency; two, revenues from our Q1 acquisition of intersect ENT; three, fourth quarter revenue in the current and prior year from our divestiture of our Renal Care Solutions business; and four, a one-time contribution from an intellectual property agreement, references to sequential revenue changes compared to the third quarter of fiscal '23, 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 2023 compared to the first calendar quarter of 2022, 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 had a strong finish to our fiscal year with our fourth quarter top and bottom line results coming in ahead of expectations. Our accelerating organic revenue growth was broad-based with mid-single digit organic growth in cardiovascular, neuroscience and Medical Surgical and double-digit growth in our Diabetes business in Western Europe, where we're selling our latest generation of products. Now across the company, our growth was driven by procedure volume recovery, supply improvements and innovative product introductions. And despite continued margin pressures from macroeconomic factors like inflation and foreign exchange, we delivered adjusted earnings growth this quarter. And we reduced costs while also continuing to invest heavily in R&D to drive future growth. We're confident in delivering durable revenue growth in the year ahead as our recent revenue headwinds dissipate and we drive execution across our businesses. So let's turn to the details of our Q4 results. Our growth in the quarter started with a strong foundation from our largest businesses, Cardiac Rhythm, Surgical and Spine plus ENT. These businesses have durable established leadership positions. Combined, they made up half of our revenue and grew 5% organic. CRM grew 5% and one share in the quarter as we continue to see robust double-digit growth in our micro-leadless pacemakers franchise. Earlier this month, we received FDA approval for our next-generation leadless pacemakers, Micra AV 2 and VR 2, which extend the battery life by 40% to a projected 16 and 17 years, respectively. In high power, we released data on our enhanced EVICD algorithm last weekend at HRS, and we're preparing to launch our Aurora Extravascular ICD later this year. In Surgical Innovations, we grew 4% or 8% when you exclude China given the provincial stapling VBP impacts in the quarter. Surgical procedures continue to recover and we regained share on supply improvements. Our advanced energy products, in particular, benefited from improving supply, growing high-teens, and we also launched our LigaSure XP and continued our rollout of the cordless Sonicision 7. Now Cranial and Spinal Technologies continue to deliver solid growth as well, growing 5%, including 6% growth in U.S. Core Spine. Look, we're seeing success from our market leading ecosystem of enabling technology and the associated pull-through of our best-in-class spinal implants. From our AI-enabled surgical planning platform to our patient-specific spine implants to our imaging, navigation and robotic technologies. Spine surgeons around the world are increasingly attracted to our differentiated and innovative solutions. So it was a solid quarter for our largest businesses. We also had a strong Q4 in our businesses that compete in high secular growth med tech markets. All combined, these businesses made up about 20% of our revenue and grew high-single digits organically, and we're feeding these businesses with the investments that they need. As they grow, we expect them to become a larger part of our revenue mix and drive our durable growth going forward. Starting with Neurovascular, which is now annualizing at over $1.3 billion, we grew 13%. We saw broad strength across the business in both ischemic and hemorrhagic stroke with double-digit growth in several categories, including aspiration and flow diversion. Stroke is the number two cause of death globally and combined with low therapy penetration, we see a large opportunity for neurovascular to make a difference in the treatment of stroke, driving meaningful growth with strong margins for years to come. In Structural Heart, we grew 9% organic. We're seeing improvements in the TAVR space, especially in the latter part of our quarter post-spring holidays. We won TAVR share in the U.S. on the strength of Evolut FX, which combines industry-leading durability with enhanced and predictable valve deployment. In Japan, our Structural Heart business grew low double-digits driven by the mid-quarter launch of Evolut FX. Next, in cardiac ablation solutions, we grew 5% and made significant advances in our pipeline during the quarter. In March, the impressive results of our landmark PULSE AF pivotal trial, studying our single-shot PulseSelect PFA catheter were presented as a late breaker at ACC and published in the journal circulation. The trial had strong efficacy and safety results in both persistent and paroxysmal patients. We filed our PMA with the FDA, and we expect to be one of the first companies with a PFA catheter in the U.S. market. We also received CE Mark in March for our Affera mapping and ablation system, including our Sphere-9 catheter, and we began our limited market release. Sphere-9 can perform both PFA and RF ablation as well as high-density mapping, all from the same catheter. With our Sphere-9 focal catheter and our Pulse Select single-shot catheter, we have the full breadth of PFA catheter technology, from PFA to our Affera MAP NAV system to our leading Arctic Front Cryosolution and AcQCross Transseptal Access system we're assembling a leading ecosystem of technologies and we're poised to become a much more meaningful player in the fast-growing $8 billion EP ablation space. In Surgical Robotics, we continue to have positive momentum with the rollout of our differentiated Hugo robotics system in international markets. We're making progress bringing Hugo to the U.S. as we execute our Expand URO pivotal trial. We also saw a meaningful acceleration in sales of our Touch Surgery Enterprise solution, which is the first AI powered surgical video, analytics platform for the operating room. With Hugo and Touch Surgery, we're bringing innovative solutions to surgeons around the world. Given the low penetration of robotic surgery and our strong position as a global leader in the surgical space, we expect to deliver meaningful growth over the coming years. It was a big quarter for us in diabetes, as our warning letter was lifted and we received FDA approval of our MiniMed 780G system with the Guardian 4 sensor. These products drove double-digit growth in Western Europe, and we're very excited to begin shipping them to U.S. consumers next week. We expect our U.S. Diabetes growth to ramp over time as our existing customers come up for renewal and as consumers switch to Medtronic. Health care professionals and people living with diabetes are really going to appreciate the innovation we're delivering, particularly the advanced meal detection technology. Just this morning, we announced our intent to acquire EOFlow, the manufacturer of the EOPatch, a tubeless, wearable and fully disposable insulin delivery device. The EOPatch is already available in Europe, South Korea and the UAE. This will accelerate our speed to market in the fast-growing patch pump space with a product that has demonstrated manufacturability. Upon close, we'll work quickly to integrate our clinically proven meal detection technology algorithm, which is in the MiniMed 780G system into the EOPatch and seek marketing authorization. Look, we have not blinked when it comes to diabetes, and we're shifting to offense as we continue to invest heavily in assembling our ecosystem of durable pumps, smart pens, patch pumps, sensors, algorithms and customer service with multiple programs under development. Having this ecosystem is really important because we believe the market will move from CGM first to automated insulin delivery, and we are well positioned for that trend. We look forward to updating all of you on these growth opportunities at our diabetes analyst and investor briefing next month at ADA. Turning to our synergistic businesses, there were several strong performances in the quarter. Our aortic business grew in the mid-20s as product availability and AAA share improved. Cardiac surgery had a great quarter, growing 8% with strength in perfusion and cannula sales. Cardiac Diagnostics had high-single digit growth on the continued adoption of our differentiated AI-enabled LINQ II insertable cardiac monitor. Earlier this month, our LINQ II AI technology, which we call AccuRhythm AI was awarded the 2023 MedTech Breakthrough Award for the best new technology solution in monitoring. Our GI business grew 16% on procedure volume recovery and continued strong adoption of GI Genius, another one of our AI-enabled products. GI Genius uses AI during colonoscopies to help physicians detect polyps. We also announced a strategic collaboration in the quarter with NVIDIA and Cosmo Pharmaceuticals to allow third-party developers to train and validate AI models that can eventually run as apps on the GI Genius platform. We're excited about the potentially game-changing solutions this could offer for GI physicians and their patients. Before I go to Karen, I want to note that we continue to focus on the transformation of Medtronic. As we reduce complexity, enhance our capabilities, drive efficiency and improve portfolio management and capital allocation, all with the goal of positioning the company for delivering durable growth. The progress we're making is beginning to show up in our financial results. I shared with you last quarter that we were planning for significant cost reductions. We began to execute those plans last month, which included reductions in our global workforce. While these are never easy decisions, I am mindful of the personal impact across our teams. These actions were necessary and are allowing us to increase our investments in innovation. They also help us to mitigate the inflationary and foreign exchange impacts on our profitability. We're making progress enhancing our global operations, supply chain and quality systems, which is all yielding results and we continue to advance our active portfolio management processes. We closed on the divestiture of our Renal Care Solutions business during the quarter and we continue to work on the separation path for our patient monitoring and respiratory interventions businesses. There's still work to be done, but we're making progress setting up the company to deliver durable growth and strong returns. That said, I'll turn it over to Karen to discuss our financial performance and give guidance for fiscal '24.

Thanks, Geoff. Our fourth quarter organic revenue increased 5.6%, ahead of expectations, and our non-GAAP EPS of $1.57 grew 3% was at the upper end of our guidance range and exceeded consensus. Looking at our revenue by geography, our international markets remain strong, non-U.S. developed markets in Western Europe grew 8%, and Japan returned to growth following the COVID impact last quarter, growing 5%. Emerging markets, which make up 17% of our revenue, returned to double-digit growth in the quarter, growing 11%. China also delivered growth of 3% as procedures recovered from prior lockdowns and the impact to our growth from volume-based procurement improved. We had strong growth in many other markets, including low 30s growth in Southeast Asia, low 20s growth in the Middle East and Africa, mid-teens growth in Eastern Europe, and low double-digit growth in Latin America. Turning to margins. Our adjusted gross margin was relatively stable sequentially but declined year-over-year due to inflation and a 1 percentage point impact from currency. As I've noted in prior quarters, the impact to our gross margin from inflationary pressures is delayed by two to three quarters because our incurred manufacturing variances first go onto our balance sheet and then move into our P&L as inventory is sold. While the magnitude of these variances has begun to ease slightly, they do remain high. As a result, we continue to expect pressure on our gross margins over the coming quarters. Despite that pressure, we drove a 350 basis point sequential improvement in our adjusted operating margin. On a constant currency basis, our operating margin improved 50 basis points year-over-year as we drove expense reductions including reduced incentive compensation. Below the operating profit line, our adjusted nominal tax rate was 15.8%, that was above our expectations from incremental taxes owed on the IP agreement that Ryan mentioned upfront, along with our jurisdictional mix of profits in the quarter. Our balance sheet remains strong. We continue to direct capital toward investment in future growth opportunities, along with returning a minimum of 50% of free cash flow to our shareholders. We're identifying high return organic R&D opportunities and driving efficiencies across our business to free up capital to invest in them. We also continue to evaluate opportunities to supplement our organic investments with tuck-in acquisitions to accelerate our long-term weighted average market growth rate. At the same time, you should expect us to be disciplined with a focus on maintaining our growing our returns on invested capital over the long term. We know our shareholders place strong value in our ability to return capital. In fiscal '23, we returned $4 billion through dividends and share repurchases, and just this morning, we announced that we are increasing our dividend for the 46 consecutive year, reflecting the Board's confidence in our balance sheet and our future earnings power. Now turning to guidance. We've delivered a couple of back-to-back quarters of mid-single digit growth, growing 5% in the back half of the fiscal year, with 5.6% in the fourth quarter. We're encouraged with the procedure recovery in many of our markets. Our product availability is improving. We like our competitive position across our businesses, and we have many new innovative products coming to market. At this point, we're setting our fiscal '24 organic revenue guidance at 4% to 4.5% and given it's the start of the year, we think it's prudent for you to model at the lower end of that range. This guidance excludes the impact of foreign currency and revenue from our new other segment. I direct you to the guidance slide in our earnings presentation for additional details. In the first quarter, we're guiding to the high end of our annual range with organic revenue growth of 4.5%, which suggests a sequential performance in line with what we have seen historically from our fourth quarter to our first quarter. By segment, there are puts and takes on each one, but they are all roughly aligned to the corporate average for both the first quarter and the year, with the exception of diabetes, which we expect will start the year growing below the corporate average and ramp through the year with the U.S. launch of 780G. While the impact of currency is fluid, based on rates at the beginning of May, foreign currency would have a positive impact on full year revenue of $110 million to $210 million, including an unfavorable impact of $50 million to $100 million in the first quarter. Moving down the P&L, I've been sharing for several quarters now that macroeconomic factors like inflation, foreign currency and to a lesser extent, interest and tax rates would impact our earnings power in fiscal '24. We're continuing to prioritize investments in R&D. In fact, when we exclude the separation of our Renal Care business, we expect R&D to grow above revenue as we've signaled for a while now. At the same time, and as Geoff mentioned, we've Been executing our cost reduction plans across the company to lessen the impact of these macro factors on our earnings. Taking all this into account, we expect continued pressure on our margins and our guiding fiscal '24 non-GAAP diluted EPS in the range of $5 to $5.10. The range includes an unfavorable impact of roughly 6% from foreign currency based on rates at the beginning of May and driven by the large benefit last year from our hedging program that we don't expect will repeat this year. On a constant currency basis, our EPS guidance implies low-single digit growth this year. For the first quarter, we expect EPS of $1.10 to $1.12. Excluding the approximate 8% impact from foreign currency, based on rates at the beginning of May, this would imply constant currency growth of 5% to 7%. To close, I want to recognize our outstanding employees around the world, who have been helping to drive significant change to transform our company, and they have done this while keeping the Medtronic mission front and center. Thank you for everything you do to make our company stronger and to always put patients first. Back to you, Jeff.

Thank you, Karen. Now before we go to analyst questions, I'll close with a few thoughts. It was a good quarter with our broad-based growth, our Surgical Innovations business is back to mid-single digit growth tied to the improvement in our supply. Importantly, surgeon commitment to our differentiated products remained strong. We continue to see growth in Neurovascular and Structural Heart, and we're nearing an inflection point in both Diabetes and Cardiac Ablation Solutions, both businesses have an arsenal of technologies in their pipeline. At the same time, we're seeing durable growth across our other businesses and importantly, no business is losing momentum. Behind the scenes, as I've shared with you since becoming CEO, we've really been pushing a comprehensive transformation to set up Medtronic to deliver durable growth and create value for our shareholders. Now it hasn't been a straight line. Some of that's market factors and some of that's been on us. But we've made progress, and you're starting to see this in our results. We've been making the necessary improvements to ensure long-term durability of our growth. We're investing in our key capabilities like global operations, IT, quality, and supply chain to turn our scale into an advantage. We're picking the markets where we're doubling down and redirecting investments to our most important R&D programs. We're shaping the portfolio, adding tuck-ins and divesting non-core assets. All of these actions are establishing the strong foundation that will allow us to drive sustainable and consistent growth. Now there's still work to be done, but we are on the right path and we're confident in the choices that we've made and continue to make. We're executing. And you're starting to see this all come together with our study improvement. Finally, I'd like to join Karen in expressing my sincere gratitude for our employees around the world. You've played a huge role in creating some of the world's most meaningful healthcare innovations and improving the lives of millions of people every year. Thank you for all that you do to serve our Medtronic mission every day. I'm confident that our best days are ahead of us. Now let's move to Q&A, where we're going to try to get to as many analysts as possible, so we ask you to 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?

Great. Good morning, everyone, and thanks for taking the questions. Maybe first question, Jeff and Karen. You can give us a little more color on the guidance here. You're starting off at 4% to 4.5% organic, but want us at the low end of the range. It's a little bit below your long range goal of 5% organic sales growth and then a declining EPS for the year. So maybe just walk us through how you ended up at that range? Why are we starting at the bottom and how do you plan to return to EPS growth?

Thank you for the question, Robbie. As we developed our guidance for the fiscal year, we deemed it wise to set ourselves up for success from the outset. Geoff mentioned this as well. We're heavily focused on fulfilling our commitments while continuing to transform the company. Like always, we have various factors to consider this year, but there are no new challenges affecting our growth for FY '24. In terms of geography, China is still a challenge due to lingering VBP, but we're seeing improvements compared to last year. We're encouraged by our 5% performance in the second half of '23, and early indicators in May show strong momentum. Our supply chain is getting better, markets are recovering, and we have an exciting pipeline, particularly in the latter half of the fiscal year with products like the 780G in the U.S., the complete cardiac ablation suite with Affera, and our ramping robot. We're also hopeful about the market introduction of Guardian. We don't have new significant risks to mention and feel optimistic about the upcoming year. Regarding EPS, we've pointed out in previous quarters that we face considerable headwinds to EPS growth, including mid-single digit inflation affecting our gross margins, about 6% currency impact, and around 1% from interest and tax. All of these contribute to a considerable double-digit headwind for EPS growth. However, our guidance indicates a mid-single digit decline. We've made substantial savings that enable us to protect and invest in crucial R&D, helping to offset these challenges as previously discussed. Looking at our long-term strategy, there's work ahead to enhance the bottom line, which will be influenced by gross margin affected by inflation and currency fluctuations. Nevertheless, we anticipate our gross margin will stabilize and improve over time, which will be pivotal for our future bottom line. Our long-term objectives remain unchanged, and we plan to tackle this one year at a time.

Great. And maybe just a quick follow-up. Karen, you have a pretty big divergence between first half comps and second half comps, how do you want us to think about the growth rates? And more importantly, the exit rate for next year at the low end of the guidance to start. Thanks.

Yeah. So Robbie, the comps are easier in the first half, but our pipelines weighted towards the back half. When we take all that together, you can think about Q2 through Q4 growth rates all being on about the lower end of our full year guidance. That's how we're thinking about it right now.

Thank you, Robbie, we will take the next question Brad.

We'll take the next question from Vijay Kumar at Evercore ISI. Vijay, please go ahead.

Hey, guys. Congrats on the nice execution there, and thanks for taking my question. Karen, maybe first one for you or perhaps, Jeff. Can you talk about the cadence of procedures here, how the Q-shaped down? I think some of your peers noted a strong start to the year and perhaps, the slowdown exiting the Q. I'm just curious on, what kind of trends to our 4Q?

Sure, Vijay. Thank you for the question. It's great to speak with you. Yes, procedure volume has been advantageous for us compared to previous quarters. Europe, in particular, showed a strong recovery and led the way. The U.S. was a bit slower initially, but saw acceleration in April and May. In Western Europe, we experienced high-single digit growth, an improvement in staffing issues, and better product availability, which contributed to a strong second half of Q4. Staffing issues are getting better overall. Emerging markets grew by 11%, with mid-teens growth if we exclude China, while Japan reported mid-single digits growth. There’s a noticeable global uptick. Although the U.S. was initially lagging, we did see significant growth starting in April and continuing into May. Regarding procedures, if we break it down by therapy or product area, we observed increases in surgical, gastrointestinal, and MedSurg procedures, along with TAVR and some electrical procedures like Pain Stim, likely due to improved staffing. CRM showed notable growth in initial implants, especially for Medtronic as we moved past a replacement headwind. However, coronary procedures are still lagging in recovery. Overall, we're satisfied with these trends and the acceleration we've seen is consistent with what we observed in April and May.

Understood. No, that's helpful comment. And maybe one related on the fiscal '24 guidance. I think on EPS, Karen has been pretty clear on some of the headwinds in Medtronic space. But my question is more on top line, you have utilization improving to your point, surgical innovation. I think supply chain is getting better, comps are easy, diabetes, I think the approvals in upside surprise versus our prior assumptions, pulse they’ve, I think that's going to be incremental. So when you look at these, the tailwinds rate, why is 4% to 4.5%, perhaps the right range, Geoff? Are there any headwinds? I think China is 50 basis points to 100 basis points. Anything else that we're not bear-off or is just, more perhaps being conservative and proven perhaps.

Yeah. I'm going to let Karen answer that one.

Yeah. So I think, Vijay, just as we talked about it, we just think that 4% to 4.5% for the full year is a good starting point. We have no new risk to call out. You named a lot of the great things that are happening in tailwinds. But for us, it's only Q1, and we just think it's a good place to start.

Thanks for the questions, Vijay.

Thanks, Vijay. Thanks. Brad, we are taking next question, please.

The next question comes from Larry Biegelsen at Wells Fargo. Larry, please go ahead.

Good morning. Thanks for taking the question and congrats on the strong finish to the fiscal year here. I'd like to ask about the EOFlow acquisition, specifically the timelines for Q, the timelines for an AID system in the U.S. and Europe and I thought we saw that a competitor wanted an injunction in Germany recently. So what made you comfortable with the IP, and I'd love to hear at a high level, any thoughts on how this product is differentiated? And just, maybe for Karen, maybe any update on the patient monitoring spend. I think people are interested to know how you're going to use the proceeds to offset dilution, we've seen media reports to be potentially selling the business and depending on the tax basis and the use of proceeds, that could be dilutive as well. So how should we be thinking about this? Thank you.

Thanks, Larry, for the questions. I think, I'll turn it over to Que to answer the EOFlow questions.

Good morning. We're very excited about the EOFlow acquisition. We are well-versed in the tech space and the manufacturing challenges it presents. Strategically, we are the only integrated player in the diabetes technology sector, combining continuous glucose monitoring, algorithms, and dosing systems, which positions us well for advanced insulin delivery. Our portfolio is comprehensive, as we aim to reach patients effectively, and this acquisition will expedite the launch of an automated insulin delivery patch in the market, where we anticipate being the first with a unique product. Our goal is to merge EFO's device with the meal detection algorithm currently seen in our 780G system alongside our next-generation sensor, which we believe will create a uniquely competitive offering. Regarding product differentiation, that has been addressed. Concerning our intellectual property, as previously mentioned, we have a covenant not to sue with Insulet, and we are confident about our intellectual property stance. This device is highly differentiated with our algorithms and sensor technology, and we are assured of its market differentiation.

Yes. I'll just build on Que's comments in terms of beyond just the product, just the trend here of going from CGM first to AID, automated insulin delivery. With our differentiated algorithms there with the meal detection technology, we believe this is big. We're seeing it outside the U.S. with 780G, and we want to have that same technology across a host of insulin delivery devices, whether it be a pen, smart pen, pump system, or a patch. This adds to that armamentarium and we're excited about it. Que's brought a lot of just better execution of the business as well. So that also helps our confidence in doing a deal like this. We're looking forward to the future for our diabetes business. I'll have Karen answer the question around the patient monitoring and respiratory interventions separation.

Thanks for that question, Vijay. We continue to work on the separation of patient monitoring and respiratory interventions. When we announced the separation last year, we said that a spin sets a high bar because it minimizes the tax leakage and it allows our shareholders to participate in what we believe is going to be a significant value creation opportunity. We also said we would consider alternatives and a sale as possible because we do believe that this NewCo could be an attractive asset to many parties. We also said that the spin bar is really high because it's got attractive attributes for it. Any divergence from this spin path would really need to provide a greater value creation opportunity. Whatever course we take will be in the best interest of our shareholders. How we manage dilution on this will ultimately be determined by the potential transaction, and we'll provide details as we have them at a later date.

Thank you. Thanks, Larry.

Thanks, Larry. Appreciate the questions. Just a reminder to the analysts to please stick to one question and one follow-up if needed. Brad, we will go to the next question please.

The next question comes from Matt Miksic at Barclays. Matt, please go ahead.

Hi. Can you hear me, okay?

Yes, we can, Matt.

Thank you for taking the questions, and congratulations on a strong finish to the year and successfully navigating the adjustments for fiscal '24. Given the recent HRS event with significant news and presentations from Medtronic, the main focus was on PFA. I understand you anticipate being among the first in the U.S. market. Could you provide more insight into your expected timeline for that? Additionally, how do you plan to address the perceived challenges in the single shop market? I have one follow-up question, if that's alright.

Sure. Yeah. Well, thanks for that, Matt. It's exciting for the industry, and we believe we're well positioned in those tailwinds you just mentioned. So it is good to see, and I'm going to ask Sean to answer the specific questions around PFA and how we're positioned there.

Yeah, Matt. We really like our position. As you know, we've maintained a CE Mark for our point-by-point solution in Europe, and we just filed the PMA for our single-shot product in the United States and we'll have a data readout sometime next year. We completed enrollment for ferrous persistent trial in December. So we expect that one-year endpoint will be reached mid of this fiscal year. In terms of how we see the shift, we've got 85% of the market to play in, in point by point. We have the other segment that we've been really strong in with Cryo at 15%. I think as we initially launched into Europe, that's a much bigger opportunity for us as we go to point-by-point solutions. When we come to the United States being among the first in PFA solutions and all of those are going to be anatomical or single shot. I think we'll garner interest from that 85% of the market that really wants to get to PFA, and they don't need to do that. So I think while you have the potential for some erosion of your base in anatomical, you also have the attraction of having the very first PFA offering coming in for anatomical solutions that will pull interest from 85% pool. Of course, when we launch globally, we'll have the opportunity to play in a bigger swing pool. So I think the concerns about cannibalization, I think are overblowing frankly. There's far more greenfield for us than I think people are appreciating.

That's super helpful. And then just one quick follow-up to Larry's question on diabetes. The congrats again on the warning letter and the plump approval and Guardian Sensor approval, but Sinclair is intriguing. I think a lot of folks are wondering what are your thoughts on timing and you would see potentially some data from that platform given that that could move you kind of more to the forefront of sort of sensor technology. Thanks.

Yes. Thanks, Matt, definitely.

Go ahead, as I say, Sinclair is definitely a jump forward, and I'll have Que jump in and answer that.

Thanks, Geoff. We're very excited about Sinclair. It's an all-in-one disposable sense. It's half the size of the Guardian for sensor, no process, compared to our current sensor technology. As you know, we've submitted to CE Mark last year by summer and also to the FDA earlier this year. We hope that, actually, we've got to go through the regulatory process, but we're anticipating that this fiscal year, we should be able to get approval. So that's the best we have in terms of timing.

Thanks, Matt, for the question.

The next question comes from Travis Steed at BofA Global Research. Travis, please go ahead.

Hey. Can you hear me okay?

Yeah. We can, Travis. Good to hear from you.

Maybe, Karen, if you can talk about some of the cost savings stuff that you built into this 5% to 5.10% EPS growth, and we've estimated like $0.50 offset from the cost savings side and then some of the R&D investments. Just a little bit more color on some of the puts and takes and what you have built in on the EPS guide? And then on FY '25 EPS, should we think about that as more of a transition back to the 8% plus or just kind of early comments on how to think about the out-year EPS.

Thank you for the questions, Travis. Regarding our cost savings, we are achieving significant reductions but not revealing the exact figures. To provide some context, we're experiencing mid-single digit inflation affecting our gross margins, a currency impact of about 6%, and interest and tax adjustments around 1%. Together, these create a double-digit challenge to our earnings per share. However, we are guiding for only a mid-single digit decline. The savings we are generating are substantial and enable us to protect and invest in key research and development, helping to counterbalance these costs as previously discussed. Our objective has always been to safeguard and grow R&D, ideally aligning it with or exceeding revenue growth when feasible. Looking ahead to the upcoming fiscal year, if we exclude the investments we made in R&D and RCS within our renal care business that we are separating, our revenue is indeed growing, and we anticipate that our R&D expenses will increase at an even faster rate than revenue. We have prioritized R&D, which is critical for us. Though we are just starting fiscal year 2024, it's premature to discuss fiscal year 2025. The past 18 months have been eventful as we've fortified our core operations with new personnel and structures, assessed our investment needs, made strategic portfolio adjustments, reduced expenses, and navigated some internal challenges. The transformations we’ve initiated are beginning to influence our results positively. We've seen a return to mid-single digit growth on revenue, and our primary focus remains on fulfilling our commitments for fiscal year 2024 and achieving a lasting turnaround at Medtronic. In the long term, our objectives remain unchanged as we aim for sustainable mid-single digit revenue growth. We still have work ahead to stabilize and enhance our gross margins, but we have the strategies and efforts in place to accomplish this. Ultimately, we are dedicated to building a robust and efficient profit and loss statement but will be taking it one year at a time, given our current position. I hope this provides you with some clarity.

Getting back to Karen's earlier answer on the cost actions. I think we're focused on striking the right balance, as you mentioned, between kind of offsetting or mitigating some of the headwinds out there that affected EPS with the durability of our revenue growth and think about reinvestment in some of the top areas in med tech, right, diabetes, robotics, EP, PFA. These are exciting opportunities. We've got to balance mitigating some of these headwinds with making sure that we're making the right investments and she walked through the R&D growth and to make sure that our revenue is durable.

That's super helpful. A quick follow-up on the EOFlow. I know they had a pipeline for a seven-day patch and they had a CGM in their pipeline, too. Is that something you're going to keep just a quick update on that. And then I did want to ask about TAVR mid-single digit growth in the quarter, just taking share. Maybe just an update on the overall TAVR market and the trends that you're seeing there would be helpful as well. Thank you.

Que, you want to take the EOFlow question?

Yes. Our plans right now to integrate our new detection technology algorithm as well as our next-generation Simpler sensor to bring an AID patch into the market. We think it's important for patient choice. We want to do that as soon as possible. We can't really comment any further on additional pipeline details at this point.

Thanks, Que. Sean, quick response on the TAVR question.

Sure, Travis. I would say the market is improving steadily. We observed a robust recovery in our European operations, particularly in France and Germany, and the recovery in the United States began somewhat slowly in the quarter, facing some challenges after the spring break period. As you know, there have been considerable consolidated volumes, which played a role. However, we ended the quarter on a strong note, monitoring what are known as implant rates in our notes, and we're experiencing positive recovery trends that we expect to persist throughout the year. Currently, I estimate the fundamentals for the underlying market to be in the low double to high single digits.

I appreciate the questions, Travis. Just a reminder to the analysts one question and one related follow-up if needed. Brad, next question please.

The next question comes from Matt O'Brien at Piper Sandler Companies. Matt, please go ahead.

Hey, Matt. Yeah, I think we've got a problem with your audio, Matt. We'll check that and come back to you. Can you please take the next question, Brad.

The next question comes from Peter Chickering at Deutsche Bank. Peter, please go ahead.

Good morning, guys. Can you talk about PFA adoption trends in Europe, specifically, the interplay between PFA growth, PFA pricing versus losses from quite a market share? So when you put it all together, I guess, how was the European depletion growing for you guys?

Sean, do you want to take that one?

We've done well. It's early, early innings for our PFA offering. As you know, we're just trying to scale up both training and operations for that. It's a little too early to comment on that. I'd say there's been really continued underlying growth just ablation in general continues to grow of all flavors, but of course, PFA will grow the fastest. We'll keep you appraised as to how that's going. We're seeing really good strong trends, though within Europe and overall, it's a very robust market.

Okay. And then just a quick follow-up here on the last TAVR question. You're talking about a low double, high-single digit marketplace. What do you guys assume within your market share for 2024?

I don't think we're giving share ends, but we believe we are in a strong position with the momentum we have with FX, and we plan to launch the FX into Europe in the latter half of the year. We've done well in the United States, and in Japan, the products are excellent and being well received.

Thanks a lot.

The next question comes from Matt Taylor at Jefferies. Matt, please go ahead.

Thanks for taking the question. Can you hear me okay?

Yeah, we can now.

Okay. I was hoping you could talk a little bit more about just reading that release. It talks about 1% dilution to earnings for the first few years and neutral to accretive thereafter. I guess I was hoping maybe you could touch on the run rate of the business today and how you assume that ramps revenue-wise over the next couple of years. What are some of the assumptions that go into that dilution assumption for the first couple of years? What are some of the key guideposts that we should be looking for out of that business as you acquire it?

Well, the business, I could say, Matt is, it's new and the revenue is pretty small right now and it's just in Europe. But I'll let Karen talk about the dilution assumption.

Yeah. The key here is to integrate this patch pump with our algorithm. We'll be spending on that, and that's what drives the dilution. That's the key for the first few years. Que, you want to talk about run rate from there?

The critical milestone to watch out for is really some development work to integrate our algorithm. We have that ready as part of the 780G system. We're obviously going through our sensor approvals today, so that will be variable. There's a bit of development work, not a lot, the outflow has proven manufacturability at scale. The manufacturing exists. It is a relatively straightforward integration and approval process to get that to market. Once that AID patch system is available in the market with our next-generation CGM, we think, obviously, we go through the commercialization and launch process, but we believe it's a very strong offering and second to market with this wearable disposable patch solution.

Great. Thanks for the feedback. I appreciate that.

Thank you, Matt. Next question, please Brad.

The next question comes from Rich Newitter at Truist. Rich, please go ahead.

Can you hear me?

Yes, we can. Can you hear us? Rich? Can you hear me? Yes, I don't know, maybe we might have some connection issues with Rich. We'll go to the next question and come back.

The next question comes from Shagun Singh of RBC Capital Markets. Shagun, please go ahead.

Great. Can you hear me, okay?

Yes.

A quick one on China. I was wondering if you can talk a little bit about your outlook for that business. There seems to be some initial talk of COVID cases, how concerned are you at this point? If it does become something larger than anticipated, what areas of impact are you worried about? And then secondly, I just wanted to get your thoughts on M&A. It's encouraging to see you call out something on the M&A front this quarter. I think you previously indicated that you would hold off for about 12 months to 18 months until the separation has been announced to be more active on that front. Has anything changed? And perhaps you can just talk about your appetite for M&A deal size and areas you may be interested in? Thank you for taking the questions.

Thank you for your questions. I'll begin with the situation in China and then address the M&A. Regarding China, we've heard some information about COVID, but I wouldn't label it as an outbreak. Currently, we haven't experienced any impact, and our healthcare customers are not overly concerned. However, we will monitor the situation closely. From my recent visit to China, I can say that the economy is recovering, and healthcare procedures are resuming. We're still navigating volume-based procurement, but we believe it will become the largest healthcare market globally, which is why we're investing there. As mentioned previously, we expect to have completed the adjustment related to volume-based purchases by the end of FY '24, after which we anticipate a return to double-digit growth. We've managed to reduce some costs in China due to the more structured business environment, allowing us to cut sales and marketing expenses while maintaining profitability. We are optimistic about the recent discussions between the two nations and continue to engage with the U.S. government on this matter. Regarding M&A, the EOFlow acquisition aligns with our strategy for traditional tuck-in deals in high-growth sectors where we have a robust position. We remain interested in these types of transactions, particularly those that we believe will significantly impact Medtronic, such as the Intersect ENT and Affera deals in our API area, which involve mapping, navigation, and PFA technology. The EOFlow acquisition fits well by introducing patch technology to our diabetes portfolio. As for divestitures, our position remains unchanged. We successfully completed the dialysis joint venture with DaVita, and the new company is up and running. We're also working on separating our patient monitoring and respiratory interventions, which is a substantial project. We're focused primarily on tuck-in deals, with the examples I mentioned in mind, although we could consider slightly larger or smaller opportunities. While we would evaluate larger options if they arise, our primary focus is not on pursuing them actively. I hope that clarifies the M&A situation. Karen, do you have anything to add, or did I cover everything?

You covered it well.

Thanks, Shagun. We'll check back in with Rich. Let's go to the next question, please.

The next question comes from Rich Newitter at Truist. Rich, please go ahead.

Hi, I appreciate you reaching out. I apologize for the earlier issues. I wanted to begin with Spine. I know you've experienced a significant turnaround there over the past year. Could you share some insights on the current trends? Are there any emerging disruptions that might lead to competition or M&A activity between Globus and NuVasive? Additionally, what’s the update regarding Mazor and any capital developments in that area?

Sure. Thanks for the question, Rich. I'm going to pass it to Brett shortly to discuss the details of capital and some of the other trends in Spine. To start, we've noticed a trend over several years where the industry's value proposition focuses on enabling technology such as navigation, imaging, robotics, powered instruments, and AI-based surgical planning, all integrated into our ecosystem called Able. This is impacting the marketplace and is driving consolidation within the industry. It requires significant technological expertise and a strong balance sheet, and it's greatly affecting the ongoing consolidation trends you're observing. As we move forward, we are very optimistic about our position. Brett has overseen this aspect of the business for several years and will provide more details on the value proposition and the capital dynamics.

Yes. Thanks, Jeff. And Rich, thanks for the question. When we look at overall core spine, some really good trends there. We're seeing the procedures getting back to normal, which is extremely helpful. We've had now multiple quarters of expansion in core Spine, which reflects the development, as Jeff mentioned, of a broad-based ecosystem in the capital environment. That ecosystem we've put together is taking the procedure and changing it with robotics, navigation, imaging, power surgical tools, AI surgical planning. It is the broadest, most expensive, most complete, most comprehensive system in the world of spine today. What you'll see with competitors, I think you mentioned one transaction that is, the two organizations are in the middle of, are trying to actually put these teams together and we're seeing that transformation in spine and more consolidation. If we look at capital in and of itself, we have an exceptionally strong capital footprint across the entire world. What we've seen with capital is continued good growth with capital, but we've also seen now in the United States, a bit of a transition that transition is into earn-out or lease agreements. We've seen a higher preponderance of that, as we've been in the last few quarters, given some of the current economic situations. The good news about that is we're getting those sockets. We're converting that into earn-out type of situations where we get implants on top of the socket. We've also seen globally a very strong performance in our hardware. So this capital component is critical to the business. It's also critical to the growth. I think we're just seeing that with some of the other consolidations. The Medtronic footprint here is extensive strong and very capable.

All right. Thanks, Rich. Thank you, Rich. Next question please.

The next question comes from Joanne Wuensch, Citi. Joanne, please go ahead.

Good morning and nice way to end the year and start the next. Briefly, my memory is, as you had two patch pump products in development. Are those going to be shut down, or are those also continuing along? And I'll ask my second question. Hugo, could you sort of give us an update on where the launch is outside the United States? Should we be thinking about this as number of robots in the field, or amount of revenue that it generates for the total Medtronic family? Thank you.

Okay. Thanks, Joanne. Two great questions. Que, do you want to take the patch question?

Yes. We have a complementary organic program. If anything, we're stepping on the gas on that program that continues. It's complementary with next-generation features that we're not prepared to go to at this point for competitive reasons, but that program will help expand our market access, including type two market.

Before I hand it over to Bob to discuss Hugo, I want to reiterate what Que mentioned. Despite our business not performing well these past few years, we have always maintained our confidence in our technology. With Que's improved leadership and execution, we are accelerating our efforts and investing further in this business, particularly in the patch segment, which we believe offers us several opportunities. That's my comment on diabetes. Bob, what would you like to share about Hugo?

Yes. Thanks, Jeff, and thanks, Joanne, for the question. We really like our momentum, remembering, Joanna, as you know, that less than 5% of procedures that could be done robotically assisted are actually done that way. A tremendous market development opportunity. Importantly, every quarter, we sell and install more Hugo systems than we did the prior quarter. The modularity and interoperability, the Hugo system with our leading surgical franchise is really being recognized by our customers. It's really about the ecosystem. So to respond to your question, I would look at both, right? We look at the number of robots where we don't disclose that. As Jeff pointed to, we look at this as a meaningful growth driver for Medtronic overall. We like our position. We like our feedback, and we're excited about our opportunity ahead of us.

Okay. Thanks, Bob. Thanks, Jon, for the questions. And Brad, we'll go to the final question.

Our final question comes from Anthony Petrone at Mizuho Securities. Anthony, please go ahead.

Thank you. Can you hear me okay?.

Yeah, Anthony. Happy belated birthday by the way.

Thank you very much. Thank you. A couple of questions here. One, just on the volume picture, underlying volumes. Is there anything you could share on April and May, in particular. You have about a 5.5% organic growth, 4% to 4.5% is the bridge guidance, so maybe just a little bit of color on underlying volumes. Certainly in 1Q, it did seem like we had favorable comps, but an underlying improvement in many markets. So just your comments on underlying volumes? And then, in the 4% to 4.5%, is anything of note just on 780G, how much of that is baked into the guidance? Thanks again.

Well, I might ask Sean to comment on the underlying volumes in a second because we see it across Cardiology a lot. I would just say, Anthony, that the underlying volume is definitely getting stronger and accelerated for us to our Q1 into April and May. As I mentioned earlier, we've been seeing strong growth out of Western Europe for quite some time. Then Japan came in. All throughout this, the last quarter, we saw strong growth in emerging markets. U.S. has lagged but has picked up. I think some of it, we're seeing some of that pickup in particular, in surgical procedures in our surgical business, but also across a couple of different cardiovascular procedure lines. I don't know, Sean, if you have any comments on that?

Yes, Jeff, you summarized it well. We experienced a significant recovery in Europe, especially in our procedures. In the U.S., we noted record surgery volumes, which served as a positive indicator for procedure growth. Throughout the quarter, there was improvement in various areas, including coronary stents, which had been consistently below pre-COVID levels for an extended period. By the latter half of the quarter, we reached about 95% of those pre-COVID levels. I'm optimistic as conditions seem to be improving across the globe. It's impressive how quickly China rebounded following both shutdowns and COVID-related issues at the start of the new year. Overall, global trends appear to be on the rise, and we are particularly encouraged by the recovery in procedure volumes and cardiology in the U.S. We also observed this trend in large joint procedures and, encouragingly, it's beginning to emerge in cardiology as well.

In Anthony, on your question on the annual guidance and anything of note on 780G, we expect diabetes to return to good growth in this fiscal year. We noted that we expect it to begin the year below the corporate average, but obviously ramp throughout the year as we bring the 780G to more and more patients in the United States and the consumable revenue off of that comes with it.

Very helpful. Thank you.

Yeah. Thanks, Anthony. Geoff, please go ahead with your closing remarks.

Okay. Thanks, Ryan. All right. Well, okay, everyone. Thanks for the questions. As usual, we really appreciate your support and continued interest in Medtronic. As I mentioned earlier, we'll be coming to you from ADA on June 25 with an update on our diabetes business and we hope you'll join us for our Q1 earnings broadcast, which we anticipate holding on Tuesday, August 22, where we'll update you on our progress across the company. With that, thanks for spending time with us today and have a great rest of your day.