Medtronic Plc (MDT) — Q1 2024 Earnings Call Transcript

Good morning, I'm Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations. I appreciate that you're joining us today for our Fiscal 2024 First Quarter Video Earnings Webcast. We're broadcasting to you today from our operational headquarters here in Minnesota where summer is in full force. 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. Geoff and Karen will provide comments on the results of our first quarter, which ended on July 28, 2023, and our outlook for the remainder of the fiscal year. 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. During today's program, many of the statements we make may be considered forward-looking statements and actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports and other filings that we make with the SEC. And we do not undertake to update any forward-looking statements. Unless we say otherwise, all comparisons are on a year-over-year basis and revenue comparisons are made on an organic basis, which excludes the impact of foreign currency and first quarter revenue in the current and prior year reported as other, which stems from prior business operations. References to sequential revenue changes compared to the fourth quarter of fiscal '23 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 2023 compared to the second 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. 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 are pleased with the strong start of our fiscal year. We executed and delivered another quarter of mid-single-digit organic revenue growth. Our solid results were broad-based with each of our four segments delivering 6% growth driven by execution, innovation, and much improved underlying fundamentals in our markets and supply chain. We also continue to make great strides on our comprehensive transformation which is designed to address the root causes that have held back our growth. We're executing large-scale functional improvements in global operations, supply chain, and quality. And we're decisively allocating capital particularly to our programs and fast-growing markets, as well as focusing our R&D investments on technology megatrends like robotics and artificial intelligence that will drive growth in our industry over the next decade. Simultaneously, we remain focused on our ongoing portfolio management efforts. Together, we expect this continued focus on executing our transformation will ensure durable top and bottom-line growth and create value for our shareholders. So let's turn now to the details of our Q1 results. We had another strong quarter of growth from our largest businesses: Cranial and Spinal, Surgical and Cardiac Rhythm. Combined, they accounted for just under half of our revenue and grew 6% organically. Starting with Cranial and Spinal technologies, we had another great quarter, growing 6% globally and 8% in the US, driven by our market-leading Aible ecosystem. We're seeing growth in both neurosurgery capital equipment and the associated pull-through of our best-in-class spinal implants and biologics. Neurosurgery grew 5%, including double-digit growth in Mazor robotics and high-single-digit growth in StealthStation navigation. Spine and Biologics grew 7% globally and 9% in the US. These results demonstrate our successful strategy of offering surgeons a differentiated and innovative ecosystem, including our AI-enabled surgical planning platform and patient-specific customized implants, along with imaging, navigation, and robotic technologies. Now moving to Surgical, we grew 7%. Supply continued to improve, driving high-single-digit growth in Advanced Surgical Technologies. We had particular strength in Advanced Energy as we expand our LigaSure XP and cordless Sonicision 7. Cardiac Rhythm grew 5% with mid-single-digit growth in defibrillation solutions, diagnostics, and Cardiac Pacing. Within Pacing, we saw strong mid-teens growth in our Micra leadless pacemaker franchise and launched our next-generation Microdevices AV2 and VR2 in the US. These tiny 0.8 CC devices have a battery life of 16 and 17 years, respectively, which is 40% longer than our previous generation and well beyond average battery life for competing products. We're also observing EPs rapidly adopt conduction system pacing as an alternative to traditional single or dual-chamber pacing. Our 3830 lead, the only one approved for conduction system pacing in the US, grew 45% in the quarter. Looking forward, we're preparing to launch the Aurora EV-ICD later this year, which is a game changer for the ICD space. It delivers the benefits of a traditional ICD, including the same size, longevity, and pacing features, but without leads in the heart or veins. Turning to our synergistic businesses, there were notable performances this quarter. Cardiac Surgery grew 8% with strength in perfusion and cannula. Our Aortic and ENT businesses both grew double digits, partly due to improved product availability. Peripheral Vascular grew mid-single digits with low double-digit growth in drug-coated balloons and high single-digit growth in superficial vein therapy. Neuromodulation grew mid-single digits in both Pain Stim and Brain Modulation, driven by new implants of Intellis with DTM and Percept PC with BrainSense. Recently, we received CE Mark approval for our next-generation spinal cord stimulator, Inceptiv, expected to be available in Europe in the coming months. Inceptiv incorporates closed-loop therapy with ECAPs, the result of decades of Medtronic R&D, to unlock the ability to listen and respond to signals along the spinal cord. Both our largest and synergistic businesses had strong quarters. Our businesses competing in high growth med-tech markets did well too. These businesses made up 20% of our revenue and grew in the high single digits in Q1. We continue to disproportionately invest in these businesses and expect them to contribute significantly to our lasting growth. In Structural Heart, transcatheter valves grew 11% globally, with 12% growth in the US and 21% in Japan. We continue to see improvements in the TAVR space and adoption of our differentiated Evolut FX valve, which combines enhanced and predictable valve deployment with industry-leading durability. We look forward to the presentation of the NOTION 10-year data at ESC, which will compare the durability of the CoreValve and Evolut valves to surgery over a decade. In Neurovascular, we grew mid-single digits when excluding China, where the market is subject to volume-based procurement. Global growth was fueled by continued strength in flow diversion with the strong adoption of our Shield technology for treating aneurysms available on our Pipeline Flex and Pipeline Vantage flow diverters. Cardiac Ablation Solutions grew 5%. As you know, Pulse Field Ablation has become one of the most anticipated technologies in MedTech. We will lead the way in bringing PFA catheters to market for both focal and single-shot segments. We're continuing the limited market release in Europe for the Affera mapping and ablation system, including our Sphere-9 focal catheter, which can perform both PFA and RF ablation while delivering high-density mapping, all from the same catheter. For our single-shot PFA catheter, PulseSelect, we expect to be one of the first companies with US market approval. With our PFA catheters and the Affera map navigation system, combined with our leading Arctic Front cryo solution and differentiated AcQCross Transseptal Access System, we're poised to become a substantial player in the fast-growing $8 billion EP ablation market. In Robotic Surgical Technologies, we increased our installed base with the continued international rollout of our differentiated Hugo robotic system and activated new sites in our EXPAND URO US pivotal trial, which is progressing to plan. We expect Hugo to be a meaningful growth driver in the years ahead, given its differentiated value proposition and our leading position in minimally invasive surgery with low penetration of robotic surgery worldwide. In Diabetes, we had a successful quarter as demand for the MiniMed 780G AID system continued to be strong globally. The 780G is a true second-generation AID system, the only one featuring five-minute adjustments in auto corrections and Meal Detection technology. We're getting excellent feedback from users, who report a noticeable difference within one to two days. Our real-world evidence shows that 90% of users achieve or exceed their glycemic targets using our recommended settings while also experiencing a reduction in their diabetes management burden. This differentiated value proposition is evident in our results. Non-US developed markets grew 18%, our highest growth in four years, driven by 780G adoption and increased CGM attachment rates. In the US, we are witnessing impressive results and momentum from the 780G launch, which led to low 30s growth in our US durable pump sales. We also saw a 30% increase in unique prescribers since our last update at ADA in late June, totaling over 13,000. More than half of our 770G installed base has upgraded or placed orders for the 780G since launch, with competitive conversions contributing to our growth as well. Finally, we observe very high CGM attachment rates in the 780G installed base, which will enhance our economics and instill confidence in accelerating growth. The turnaround in Diabetes is genuine and in progress, and I am pleased with the progress the team is making. We're at the beginning of this inflection point for the business. As mentioned during our ADA investor briefing in June, we predict that the intensive insulin space will evolve to include not only standalone CGM but also smart dosing through AID systems or smart MDI, and we are well positioned for this trend. We're making significant investments in next-generation durable pumps, smart pens, patch pumps, sensors, and algorithms, with multiple programs underway. Notably, we're the only company assembling this complete ecosystem of differentiated technology for people living with diabetes.

Thanks, Geoff. As Geoff mentioned, we had a strong start to our fiscal year with 6% revenue growth, coming in ahead of expectations. We also had good growth on the bottom line with non-GAAP EPS of $1.20, up 6%. This was $0.09 above the midpoint of our guidance range, with $0.07 from better-than-expected operational performance and $0.02 from FX. We're focused on positioning Medtronic to drive durable growth, which we've seen over the past several quarters regarding the top line. As we discussed on our last call, stabilizing and ultimately improving gross margins remains a priority for us. The breadth of our revenue growth this quarter is notable. Each of our four business segments grew by 6%. By geography, non-US developed and emerging markets both grew in the high single digits, with the US growing mid-single digits. Western Europe experienced 8% growth again this quarter, with high single-digit growth in Cardiovascular and Medical Surgical and high-teens growth in Diabetes. Emerging markets grew 8% but were affected by new sanctions in Russia and ongoing volume-based procurement impacts in China. China's growth of 4% was better than we expected, aided by strong procedure recovery despite some provincial VBP delays later in the year. Excluding China and Russia, emerging markets grew in the high teens, with mid-teens growth in Southeast Asia and the Middle East and Africa, as well as high-teens growth in Latin America and South Asia. Regarding margins, our adjusted gross margin was relatively stable year-over-year and ahead of expectations, driven by better-than-expected pricing and less-than-expected currency impacts offsetting inflationary pressures. Our operating margin increased 90 basis points, supported by revenue outperformance and our focus on expense management, particularly in G&A. Below the operating profit line, our adjusted nominal tax rate was 15.8%, above expectations due to a change in Puerto Rico tax law, which increased our tax line by about 120 basis points but was offset by a corresponding decrease in other operating expenses, making it net neutral to earnings. On capital allocation, we're prioritizing investment in innovation, disproportionately investing in high-growth, high-return opportunities through various channels, including organic R&D, minority investments, strategic partnerships, and disciplined acquisitions. Our commitment to returning at least 50% of our free cash flow to shareholders primarily through our strong and growing dividend also remains firm. Additionally, we continue to advance our active portfolio management. Last quarter, we moved our Renal Care Solutions business into a joint venture with DaVita, and we are focused on the separation of Patient Monitoring and Respiratory Interventions. As we've noted in our 10-K, we now expect to complete that separation in the first half of next fiscal year, if not sooner, evaluating various transaction types to maximize shareholder value. While we've set a high bar for a spin-off, that remains the likely method for separating these businesses. Regarding guidance, with our outperformance in the first quarter and improved fundamentals, we're raising our full-year revenue and EPS guidance. We now anticipate fiscal '24 organic revenue growth of 4.5%, an increase from the previous range of 4% to 4.5%. This guidance excludes foreign currency impacts and revenue from our new Other segment. In the second quarter, we expect organic revenue growth to range between 4% and 4.5%. On a comp-adjusted basis, this represents an acceleration over the first quarter, with further steady acceleration expected in the latter half of the year. The fluidity of currency impacts is acknowledged; based on recent rates, foreign currency is forecasted to have a neutral impact on full-year revenue, including a favorable impact of $85 million to $135 million in the second quarter. We anticipate inflation and currency pressures this fiscal year. Some delayed impacts from provincial VBPs benefiting us in the first quarter are expected later in the year. You're starting to see results from our actions to drive structural changes in our global operations and supply chain. For example, we are transitioning to fewer, more strategic suppliers that provide better terms and implementing improvements to run our factories more efficiently and reliably. More progress is on the horizon, and we expect this will lead to stabilization and improvement in our gross margin over time. On the bottom line, we've raised our fiscal '24 non-GAAP diluted EPS guidance to a new range of $5.08 to $5.16, an increase from the prior range of $5.00 to $5.10. This translates to a $0.07 increase at the midpoint, aligning with our first-quarter operational beat. The guidance range continues to factor in an unfavorable 6% impact from foreign currency based on recent rates, unchanged since May. For the second quarter, we expect EPS of $1.16 to $1.20, incorporating a 6% unfavorable impact from foreign currency. Before sending it back to Geoff, I'd like to acknowledge our employees watching today. I genuinely appreciate your focus on driving change to execute well and achieve our priorities. That dedication is fundamental to these results and fulfills our enduring mission to alleviate pain, restore health, and extend life for millions of patients worldwide. Thank you. Back to you, Geoff.

Okay. Thank you, Karen. Now, before we move to the analyst questions, I'll conclude with a few thoughts. First, Q1 was a strong start to our year, establishing a track record of delivering dependable mid-single-digit growth. We're executing and launching innovations in the market. We're progressing in addressing the impacts of inflation and currency on our margins, which we expect will lead to stabilization and improvement over time. We're also seeing improved underlying fundamentals across our supply chain and markets, our businesses, and geographies. As I mentioned earlier, we are at the beginning of an inflection point in our Diabetes business, along with strength in our established market-leading businesses like CRM and Spine. Our pipeline offers several significant growth catalysts that we expect to bring to market in the coming quarters. Hence, we are on the right path, building momentum. Importantly, underlying these advancements are steps we've taken to transform the company to address the deep-rooted causes of our previously inconsistent growth. We are reinforcing a performance-driven culture, partially supported by welcoming new leaders into the company. We're refining our capital allocation and portfolio management priorities to leverage high-growth opportunities. Our strategy is to implement scalable advantages, whether that's through our centralized global operations and supply chain organization, our large enterprise customers, or our ability to leverage core technologies and introduce innovations across our business lines. To expedite progress in this last area, we created a new position of Chief Technology and Innovation Officer, appointing Ken Washington, who joined us this past quarter. Ken's previous roles include leadership at Amazon in consumer robotics, and he also served as the Chief Technology Officer at Ford Motor Company. I anticipate sharing more details in upcoming quarters about how Ken will steer our initiatives involving technologies like robotics and AI throughout the company, which we believe will lead to new, differentiated therapies for patients and enhancing experiences for our customers. This is an extensive transformation with ongoing work, and we expect you'll observe some benefits in our results over time as we continue to steer towards delivering durable revenue and earnings growth, combined with our growing dividend—a proven strategy for generating shareholder value. Now, let's move to Q&A, where we'll make an effort to address as many analysts as possible. We kindly request that you limit yourself to one question, with an optional related follow-up only if necessary. If you have additional inquiries, feel free to connect with Ryan and the Investor Relations team after today’s call. I also want to mention that we have Mike Marinaro, running our Surgical and Endoscopy businesses, joining us for Q&A today. Bob White's focus remains on the PMRI businesses during their separation, which is a significant undertaking. Please direct any questions about Surgical or Endoscopy to Mike and PMRI questions to Bob. With that, Brad, could you please provide the instructions for asking a question?

Yeah. Thanks for taking my question. Geoff, congrats on a good print here, good execution. Maybe my first one on Diabetes here. The 30% US growth numbers here, I think that's a revenue number. Do you know what the comp growth number was in the US and how much of this growth was generated by existing customers? How much of this growth is from existing customers upgrading from 770G versus new customer additions?

Thanks, Vijay, for the question. First, let me just say we're very pleased with the momentum we have in Diabetes. I believe we are in the early stages of growth acceleration there. We're seeing great patient outcomes—like I mentioned in the commentary—a significant increase in unique prescribers and a higher attachment rate of CGM, which will significantly impact our economics. This is where much of our profit stems from, and we believe this is sustainable and aligns with market trends emphasizing time and range and the transition to automated insulin delivery systems. However, to address your specific questions, I will turn it over to Que, who manages that business. Que, could you elaborate on Vijay's inquiries?

Yes. Thanks, Geoff. Thanks, Vijay. We are thrilled with the momentum we've encountered in the US thus far. In terms of the low 30s AID growth, both our existing installed base of 770G users that have upgraded, and we have over 50% of that cohort upgrading or in the process of upgrading. We are additionally seeing growth from new patients, including the highest new patient numbers we've encountered over the past three years, coming both from MDI and competitive switches.

That’s helpful, Que. Maybe, Geoff, I have one quick follow-up. There are a lot of questions regarding China. The new anticorruption campaign is gaining attention, raising a lot of questions about its impact on device companies. Could you provide a brief overview of what you're observing in China? What was the VBP impact during this quarter? Any signs of potential pauses in channel activities due to this new anti-corruption effort?

Regarding the anticorruption initiative, I acknowledge existing concerns. We are actively monitoring the situation, which is fluid. Thus far, we have not encountered any material headwind for our business, especially tied to VBP. It's worth noting that with VBP, volume is contracted, and hospital pricing is predicated on VBP. Therefore, we are less dependent on field teams and distribution, which has allowed us to mitigate some price impacts. Currently, we have not noted any influence from the anticorruption campaign you mentioned, and as for VBP, we have been experiencing a two-and-a-half-year effect, which is fully included in our FY '24 guidance. We expect our revenue from China, which grew 4% this past quarter, to improve in the following years as we begin to round the impacts from recent VBP changes. This quarter's growth was better than we anticipated, and we anticipate quite a rebound in our revenue as we exit FY '24.

Yeah. Thanks for the questions, Vijay. We’ll take the next question, please, Brad?

Great, good morning. Congrats on a strong quarter. To start, I'd like to direct my question to Geoff or Karen. In light of your guidance for the rest of the year, you adjusted the organic sales growth upwards from 4% to 4.5%. Given that you achieved 6% in the first quarter, could you provide insight on why growth is expected to decelerate through the remainder of the year? What factors could potentially drive growth beyond this?

Thanks for that question, Robbie. I appreciate it. Q1 was an exceptional start for our year, and we are pleased with the breadth of our performance. As Geoff noted, this marks the third consecutive quarter of solid mid-single-digit growth. We are carrying the beat from Q1 while raising our Q2 forecast to between 4% to 4.5%. We still forecast FY '24 guidance at 4.5%. It is early in the year, and we're focused on providing guidance that positions us for success. I've previously mentioned the positives and negatives influencing our projections. We are slightly more optimistic about China, as Geoff discussed; we've noted procedure volume recovery and management of anticipated first-quarter VBP impacts that were delayed to later in the fiscal year. However, we expect that Russia will exert a larger drag on our performance due to newly imposed sanctions established in late May. Despite this, our efforts to overcome challenges, similar to how we did in Q1, leave us feeling optimistic about underlying fundamentals. For Q2, we anticipate organic revenue growth to accelerate from Q1 on a comp-adjusted basis. Additionally, we expect continued acceleration in growth as the fiscal year progresses.

Thank you for that. I have one more question on margins. The margin expansion observed this quarter was largely due to gross margin. I am aware of reductions in headcount in SG&A. Regarding operating margins moving forward, how should we consider the potential for further reductions in SG&A and improvements in gross margins that could return to pre-COVID levels?

Thanks for the inquiry, Robbie. We are indeed committed to enhancing margin expansion and striving to return gross margins to pre-COVID levels over time. This quarter, we witnessed improved margins and subsequently elevated our full-year gross margin outlook due to our outperformance. However, in Q1, our enhanced pricing and currency benefits were somewhat dependent on timing, with some provincial tender delays being a primary factor. Looking ahead for margins, we are investing in our global operations and supply chain to drive down costs throughout our organization. I've mentioned examples of this focus, including consolidating suppliers and implementing manufacturing improvements that yield efficiency. Over time, we will vacate to stabilize and enhance our margins, and we are determined to drive greater efficiency in our SG&A line, maintaining a longstanding focus on this front.

Okay. Thank you, Robbie. We’ll take the next question, please, Brad.

Good morning. Thanks for taking my question. I have a couple for Sean, especially with the upcoming Symplicity adcom and then the Affera pulse data this weekend. Sean, how are you feeling about the Simplicity panel tomorrow? If a positive recommendation is given, when could we expect approval and what would be the ramp in the US for renal denervation? Secondly, regarding the forthcoming Affera pulse data, you have shown mid-single-digit growth, appearing to be slightly below the market currently. What insights should we watch for in the Affera pulse data? How confident are you about growing your AFib business at or above market rates moving forward?

Thanks for the question, Larry. To address the adcom panel, we are indeed confident about our chances for US approval and have prepared extensively for that panel. I won't speculate on timings, but typically, it takes about three to four months post-panel for definitive outcomes. We envision an approval in the latter half of fiscal year '24 is certainly possible given this timing. The ramp will ultimately depend on reimbursement dynamics, and we are well-prepared for that as well. On the topic of pulse field ablation, we are eagerly awaiting results, just like everyone else. This is a randomized trial, so the comparative efficacy in relation to both cryo and RF ablation will be particularly noteworthy. We distinguish ourselves in pulse field by being the only company providing both a focal and a single-shot solution, with the latter accounting for approximately 15% of our market, while the rest comprises point-by-point ablation procedures. We are confident in both technologies as we advance our solutions: PulseSelect and our Affera mapping and Sphere-9 catheter system. These innovations significantly differ from existing offerings, and we look forward to introducing these to customers worldwide.

Alright. Thank you.

Thanks, Larry. Next question please, Brad.

Hey, good morning, everyone. Thanks for taking the question and congrats on a solid quarter. I have a quick inquiry regarding GLP-1s, Geoff. I know this may appear trivial, but this is a noteworthy subject impacting the broader market. While you’ve shared insight into various medical device sectors, what are your thoughts on the potential effects of GLP-1s over the next few years? Let’s focus primarily on the upcoming year, as usage of these medications becomes more common.

Thanks, Danielle, for your kind remarks and question. It's a pertinent topic. First, I want to clarify that it is critical to observe the adoption of GLP-1 therapy. Our initial analysis shows minimal impact on our business. The bariatric segment has seen some slight effects, although this segment is relatively small within our surgical offerings. Feedback from physicians and data from our obesity clinics indicate that, in the long run, this could funnel more patients into the bariatric pipeline. In the short term, we've only been slightly affected here. For Type 1 diabetes, which comprises the majority of our Diabetes business, we see no impact from GLP-1s. Overall, our evaluations suggest that GLP-1s are unlikely to have significant implications for our medical device offerings at large.

I appreciate that clarity. One more brief follow-up regarding the diabetes sector. Type 2 diabetes forms a substantial growth segment, and I understand you have an AID pen in development. Can you elaborate on the prospects in the Type 2 diabetes space? Thanks again.

Thank you. Indeed, we believe that AID systems for insulin-dependent patients, be they Type 2 or Type 1, remain significantly under-penetrated. We foresee more opportunities for growth in this area than we do for headwinds.

Thanks, Danielle. We’ll take the next question, please, Brad.

Hey, congrats on a solid quarter! My focus is on TAVR, which has shown double-digit growth this quarter. How successful have you been with the new valve in comparison to the five-year data, and I also wanted to inquire about the 21% growth seen in Japan—is that sustainable or more a one-time occurrence?

Before I hand it over to Sean, I want to express satisfaction in how our TAVR business has performed against competitors and how the new valve is faring alongside our future pipeline. Sean, could you provide answers to Travis's questions?

Certainly, Travis. The new valve has been well-received where we’ve launched it, including the US and several other regions, notably Japan. The enhancement in Japan's growth stemmed from a new indication for end-stage renal disease; this is critical for that patient demographic, contributing positively to performance there. Additionally, our long-term data on the valve remain exemplary, with more data coming this weekend and the highly anticipated 10-year NOTION data also to be revealed. We believe that our valve consistently excels in ease of use and long-term durability, and we're experiencing strong traction across the board.

That’s helpful. Regarding PMRI spend, I suspect the time to achieve results is more due to the delay in spends than in sales. Can you provide an update on the timeline for the Form 10, the associated operating margin profile of that business, and whether we need to wait for this before seeing further developments in portfolio management?

Thank you, Travis. I want to clarify that there’s no implication in this delay other than our commitment to maximizing shareholder value. We've been carefully evaluating our alternatives. As previously noted, the high bar for a potential spin-off continues to be a likely avenue for separation. We expect the completion of this separation in the first half of next fiscal year, possibly sooner. Regarding the Form 10, it will be released when it’s ready. The margins for this business remain good and are slightly higher than our corporate averages.

The business performance remains robust, as Karen noted. The margin profile has held strong. We've also seen an improvement in competitive dynamics, specifically in patient monitoring, which has further bolstered our performance.

Thanks, Travis. Next question please, Brad.

Hi, thanks for the opportunity. I have a question regarding diabetes for Que and then a quick follow-up. Could you get an update on the progress of your programs discussed at the ADA, particularly the next-gen sensor, integrated testing, and the patch pump acquisition? For my follow-up, Geoff mentioned something regarding the next-gen AID pump. While I realize it's early, can you share any preliminary hints?

Thanks for your questions. Our upcoming CGM, under FDA review, is progressing, making it difficult to determine a precise timeline for approval. In terms of our integration with the 780G, we have completed adult enrollment in clinical trials during Q1, and we plan to finish pediatric enrollment soon. Our patch pump acquisition process is also proceeding well; we anticipate closing the EOFlow acquisition at the end of this calendar year. I apologize for not being able to provide more detailed information, but the programs are ongoing in alignment with our internal timelines.

Understood, thank you. Conclusively, what are your thoughts on volumes so far this year? We’ve seen strong numbers across med-tech this season, leading me to inquire about a potentially new normalized base or if we are simply catching up on pent-up demand. What has been your observation regarding July and your expectations for fiscal Q2?

I’d like to say that we've been tracking well thus far, and the initial weeks of the quarter and July align with our expectations.

Thanks, Matt. We’ll take the next question please, Brad.

Geoff, I have a question for you and a quick one for Karen. You said Medtronic is investing heavily in artificial intelligence, a hot topic in the market. Could you cite examples of Medtronic's initiatives in this regard? Specifically, which business segments do you perceive AI will be most beneficial for soon?

Absolutely. The intersection of traditional biomedical engineering with emerging digital technologies, particularly connectivity and AI/data analytics, represents a major opportunity in our industry. We intend to lead in these sectors. Specifically, we have several AI-powered solutions approved by the FDA and other worldwide regulatory bodies, resulting in improved outcomes and access. The combination of AI with quality data—both in terms of volume and labeling—enables enhancements in efficacy with possibilities for further personalization. The FDA has authorized numerous products in our Cardiac Rhythm sector, as well as in Spine and GI, under predetermined change control plans, allowing us to enhance performance iteratively. AI’s applications span across our businesses, particularly in the GI (now referred to as Endoscopy) sector, where AI assists in detecting polyps that physicians may otherwise miss during colonoscopy, significantly impacting patient outcomes. Also, in our Spine business, AI is redefining complex surgical processes, providing measurable efficacy improvements, especially in intricate cases. Our cardiac rhythm monitoring segment is also witnessing dramatic reductions in false positives for AFib detection, creating significant clinical efficiencies. This combination of AI technology, many of which were developed through our partnerships, really positions us to deliver improved patient outcomes moving forward. The intent to support our surgeons and healthcare providers to advance clinical and operational capabilities remains steadfast.

As you highlighted on pricing, we have made incredible strides in ensuring that we price for the value delivered. Historically, we would anticipate a 200 basis points pricing pressure annually, but we've successfully neutralized that effect in recent years, particularly this quarter. Although we might not fully neutralize by quarter due to VBP effects, we believe our pricing strategy will remain robust, and even while we transition into a less inflationary environment, we will maintain our focus on leveraging this pricing muscle.

I want to reiterate Karen's earlier point—our commitment to margins remains steadfast. The pricing strategies we've implemented are designed to endure, driven by efficiency efforts and productivity improvements within our operational model. These factors together will contribute to an enhanced gross margin over time.

Good morning. Can you hear me okay?

Yes, Jayson. We can hear you just fine.

Thanks. I have a quick question on gross margin. You mentioned stabilization plans. Can you provide the expected gross margin for fiscal '24?

Initially, when we gave guidance in May, we anticipated around 65.25%. Currently, we expect it to range about 65.50%. We saw improvements in Q1 and expect to carry this forward.

Okay, just to confirm, Karen, the drop-down projections for the remainder of the year versus Q1 levels—revenue is trending higher, but is this strictly owing to VBP impacts increasing in the backend?

Yes, that's correct. Both VBP and currency environments will influence our projections. While increased revenue growth supports margins, we have encountered anticipated delays in VBP and currency variability that played a role in Q1.

Thanks, Jayson. Brad, I think we have time for just one more question.

Good morning, and thank you very much for taking my question. Congratulations on a solid start to the fiscal year. Two quick inquiries: Firstly, in light of recent strong volumes across the med-tech space, do you see a new normalized base, or are we merely catching up on pent-up demand? Secondly, regarding Hugo, you mentioned activating new U.S. sites. What are your thoughts on a launch in this market, and any additional insights into international robotic placements would be beneficial.

Sure, Joanne. I appreciate your questions. As to procedure trends, we are improving; as Karen discussed, we've observed a 5% uptick in the U.S. We’re experiencing strong procedural patterns across the board and have largely returned to or surpassed pre-COVID levels. You may have observed pent-up demand in some areas, but in our segments, we haven’t seen this skew. The industry seems to be stabilizing. For the U.S. experience, I’d like to hand over to Mike Marinaro, who oversees Hugo’s developments.

Regarding the U.S., yes, we’ve indeed activated new sites, and we're pleased to continue making progress in the EXPAND URO study. Overall, we are encouraged by our progress. We are now active in five global regions, specifically in Greater China, Asia, Western Europe, LATAM, and North America-Canada, and we've increased installations during this quarter. Notably, we have secured increasing flow of indications, having received general surgery indication in Japan, maintaining a full suite of approvals across general surgery, gynecology, and urology in both Japan and Western Europe. The U.S. opportunity remains a focal point for us.

We are excited about the setup for our business. Hugo is a significant opportunity, where supply capacity remains an issue, but improvements have been made. We have robots in place, and Mike has expertly navigated indication and geographic expansion along with updates related to the U.S. trial, underpinning a healthy growth trajectory for the Surgical space.

Thanks, Joanne. We appreciate your participation today. Geoff, please proceed with your closing remarks.

First, I appreciate everyone for their questions and continued interest in Medtronic. We look forward to our ongoing progress updates in the Q2 earnings call, which we're anticipating on Tuesday, November 21. Thanks again for joining, and have a great rest of your day.