Q2 2020 Earnings Call
Ladies and gentlemen, thank you for standby and welcome to Medtronic second quarter earnings Conference call. At this time, all participants are in listen only mode. After the speaker presentation, there won't be a question answer session.
You asked a question during this I shouldn't you will need to press star one and your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to Brian Weispfenning, Vice President Investor Relations. Please go ahead Sir.
Thank you good morning, and welcome to Medtronic fiscal year, 2022nd quarter Conference call and webcast. During the next hour Omar Ishrak, Medtronic, Chairman and Chief Executive Officer, and Karen Parkhill, Medtronic, Chief Financial Officer will provide comments on the results of our second quarter, which ended on October 20 to 29 team.
After prepared remarks, we'll be happy to take your questions.
First a few logistical comment earlier. This morning, we issued a press release containing our financial statements in the revenue by Division summary, we also issued an earnings presentation that provides additional details on our performance and outlook.
During today's earnings call. Many of the statements made maybe 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 FCC and we do not undertake to update any forward looking statement.
For this call unless we say otherwise rates and ranges are given on a constant currency basis, which compares to the second quarter fiscal year 2019, after adjusting for foreign currency.
References to organic revenue growth exclude the impact of our Titan spine acquisition and currency.
Reconciliations of all non-GAAP financial measures can be found in the attachment to our earnings press release or on our web site at Investor Relations stop Medtronic Dotcom.
Finally, our EPS guidance does not include any charges or gains there wouldn't be reported as non-GAAP adjustments to earnings during the fiscal year.
With that I'm now pleased to turn the call over to Medtronic, Chairman and Chief Executive Officer, Omar Ishrak Omar.
Thank you Ryan.
Thank you everyone for joining us.
This morning.
Reported another quarter of solid results with organic revenue growth any BS both coming in how to street expectations, reflecting a continued focus on executing toward commitments across medtronic.
You do revenue grew 4.3% constant currency and 4.1% organic an acceleration from the first quarter, we don't performances in our TG am I to GE and diabetes.
Also delivered another quarter of double digit growth in emerging markets.
Adjusted operating margin expanded approximately 20 basis points inline with expectations and included investments ahead of several major new product launches, our enterprise excellence initiatives, where we leverage our size and scale to improve effectiveness and efficiency continued to benefit up you know, particularly on.
This junior line.
On the bottom line, our diluted EPS grew 7.4% or 9% at constant currency. Despite the headwind on EPS growth from increasing on non-GAAP nominal tax rate.
Overall, our broad based performance this quarter demonstrates the consistency of our execution the string to find innovation and the benefit of our business and geographic diversification.
Let's take a look no other drivers of our quarterly performance, starting with a restaurant therapies group.
Our DG delivered a particularly impressive performance.
Hosting 6% organic growth, which was 150 basis points ahead of our expectations.
Strong sales in spine and bring therapies more than offset slower growth in pain therapies.
Our surgical synergy strategy for spine surgery, which combines to enabling capital equipment to bring therapies division would imply onto our spine division is having an exceptional and sustained impact on OCTG growth.
Our spine division grew 5.5% organic in the U.S. and 3.5% organic globally.
This excludes the early contribution from our tightened spine acquisition, which is off to a good start.
Organic revenue growth in spine and its highest level into an off yours, but strong double digit growth and infuse bone graft sales as well as 3% organic core spine growth both globally and in the U.S.
This was driven by our surgical synergy strategy precision use of our capital equipment in particular armies. All robot is resulting in increased sales of our core spine implants.
In fact, when you combine our spine division sales with the sales of our capital equipment from our brain therapies division that are used in spine surgery, which is how our spine competitors reported results our spine division grew a robust 6.7% organic.
Without us spine business growing 7.7% organic well above the market.
As I just mentioned our surgical synergy strategy is also benefiting our brain therapies division, which sells the capital equipment used in spine surgery.
Britain therapies delivered another above market quarter of 11.3% growth.
In neurosurgery, we had double digit growth at all three or four offerings robotics navigation and imaging.
Leidos Srecs powered surgical instruments also grew double digits.
Fully launched the new Midas Ricks MRT system in the U.S. during the quarter.
In Britain therapies, our market, leading neurovascular business also had a very strong quarter with high teens growth, reflecting strength in both the ski making hemorrhagic stroke.
Our scheme extra business grew in the high Twentys and strong adoption of our solitaire extrinsic retriever riptide aspiration system and react catheters.
Hammered Andrew stroke, we grew low double digits as expanded indications of our pipeline flex flow diversion system.
You need to drive growth.
This was just Martha's last quarter, leading our TG before taking over as president of Medtronic earlier this month.
Well there is for your tenure, Jeff revitalize the group.
Lamented the strong strategy Blizzard, a bus management team and invested in an innovative pipeline.
And there's also noteworthy that in named success in from within our TG.
Brick wall has done an outstanding job, leading our brain therapies division.
Played a vital role in the turnaround of RPG.
We look forward to his leadership of the group.
In the minimally invasive Topias group, we had another very strong quarter growing 6.1% and ahead of expectations.
Even by very good performances in both surgical innovations and RJR.
In surgical envisions, we grew mid single digits in both advanced Stapling and advanced energy.
Advanced Steepened growth was driven by new products and outcry staple line, including our EA circular steeper and Tri staple 2.2, a reloads.
Advanced energy growth benefited from continuous innovation in our legal sure franchise.
During our legal short exact to sector.
Risk for jury Jain renal delivered another exceptional quarter growing 6.1%.
The GE solutions business grew high single digits led by strong sales of Bravo calibration for you reflect systems Endo flip imaging systems and become systems.
Respiratory ambition monitoring also grew high single digits strengthen nellcor pulse oximetry.
Micro Scream could progress again this spring monitoring consumable.
Puritan Bennett, Nineeighty ventilators and Mcgraw video Laryngoscopes.
And our cardiac and vascular group grew 1.3% this quarter, which was in line with our expectations.
Good years going through a series of below trend quarters, which we believe are coming to an end.
Cpgs growth this quarter reflects the challenges of the last few quarters in L. vads in Dcbs as well as the sustained headwind and CRM replacement devices, given the longer life factories, we launched several years ago.
In addition, during the quarter, we implemented a number of changes to our manufacturing processes for our direct product line, which temporarily limited supply and affected our revenue growth and share HF highpower.
We're seeing clear signs of overcoming these headwinds.
US Dcbs and Thats, both grew mid teens quarter over quarter.
We have not passed the one year anniversary of the step done Inova ads and we expect to anniversary the DCB challenges in March.
With us your him replacement devices, both pacemakers and CRT replacement implants grew sequentially for the first time in several years.
Expect CRM replacement devices to be a net neutral impact to judge of growth next fiscal year. After several years of being a headwind to grow.
Regarding TYRX.
We launched our new manufacturing process late last month and expect production volumes in Q3 to return to normal levels.
Despite these areas of pressure and CVG growth, we're seeing strong performance in other CPG businesses, including facing tougher, which combined represent over 25% of CVG revenue.
Our piecing business grew mid single digits globally and high single digits in the us as our micro single Chamber Transcatheter piecing system continues to take share and expand the market.
Beyond micro our global pacemaker share is benefiting from unique feature differentiation in our conventional pacemakers, including our reactive ATP feature which resulted in differential reimbursement in Japan.
As well as increasing popularity of his bundle and left bundled branch pacing well Medtronic offers unique lead and lead delivery products that enable such procedures.
And our tavern business, we grew in the low twentys with mid Twentys growth in the U.S.
Driven by expansion into the low risk patient population.
We launched our absolute proved plus diver system in the US late in the quarter and this drove some of the highest procedural implant volumes that we've ever had and the final two weeks of the quarter.
We see an accelerating growth profile for CVG over the back half of our fiscal year with anniversary of feel that challenges improving sequential growth in dcbs improvements in pacemaker and CRT replacement volumes and the benefit of multiple important new product launches.
In diabetes, we grew 4.3% slightly ahead of our expectations. Our us business declined in the high single digits, which was anticipated and resulted from competitive challenges, while we await our new products.
At the same time, our international business, which represents just under half of our diabetes revenue grew 19%.
The minimum 70 June which drove strong growth in the US last year is experiencing that seems strong consumer demand as we launch in Richie reimbursement and select international markets.
This demand is not only driving double digit growth and insulin pumps, but it is also resulting in double digit growth and recurring revenue from CGM and other consumables.
Late last month, we announced a chance Hammond with successfully led our coronary and structural heart division is taking over leadership of the diabetes group.
Sean has an excellent track record in developing and executing competitive business strategies, including the successful launches of several important new technologies for Medtronic.
Sean is actively engaged and we look forward to the impact if you will make on the business.
Now turning to emerging markets, which represents 16% of our revenue.
In Q2, we grew emerging markets, 12% with contributions from geographies around the globe.
China grew 13% South Asia grew 14% acid Eastern Europe , which included 20% growth in Russia.
In addition, southeast Asia grew 12% the middle Eastern Africa, 10% and Latin American 9%.
We continue to drive strong growth in these markets as we optimize the distribution channel and in certain markets localize R&D and manufacturing.
In addition, the diversified growth in markets around the World is important we believe the geographic breadth of our business and the rapid expansion of health care across these markets typically insulate us from country specific economic cycles.
As a result, we expect continued and consistent double digit growth in emerging markets.
The first half of this fiscal year has gone well as we've executed toward commitments and delivered better than expected results.
Now as we look forward.
We're even more excited about what lies ahead.
As investments we've made in our pipeline begin to pay off by accelerating our revenue growth and creating value for our shareholders.
And CVG as I mentioned earlier, we just launched our next generation of allude pro plus tougher valve and we expect to see a few quarters contribution starting in Q3.
In addition, we're expecting imminent us approval for impact Admiral Avi fistula indication.
As we look to the fourth quarter and into the start of fiscal 21, we're anticipating us approval and launch of our my Cravey pacemaker. Our next generation cobalt income families of ice Cds and CRT D and our reveal link 2.0 in suitable cardiac monitored.
Outside the US we're also expecting multiple new product introductions, including the European launch of our diamond 10th ablation catheter and Japanese approvals for our Valiant Navios Karasik stent graft, our preceptor Quad CRT P family and that instability quad active fixation CRT pacing lead.
And then my TG as we discussed in September during our event in Hartford, We're starting the global launch sequence of our soft tissue robotic system, but first in human use in commercial sales commencing later this fiscal year.
Next fiscal year, we plan to submit for CE Mark in Q1.
As well as submit for us I'd approval in the first half.
Which when approved will allow for system placements and surgeon training. So we can begin gathering clinical data in the United States.
NRG as I mentioned earlier, the minus Rex MRM drilled platform is being launched now in the us and will be introduced to international markets in the back half of this fiscal year. We're also planning to launch are still to auto guide cranial robotic system in Q3.
In pelvic health refined our PMC supplements would be Usfifty eight last month for our interest Im sure Scana MRI leads and our interest in micro with an MRI, which is preseason volume and rechargeable.
Any and T., we are preparing for fiscal year end launch of our next generation intra operative nerve monitoring system NIM vital.
In pain therapies, we plan to unveil our next generation spinal cord stimulator at announce conference in January .
In diabetes, we continue to prepare for the launch of the minimum at seven hcg, our advanced hybrid closed loop system with Bluetooth connectivity.
We expect our 70 TG pivotal data to be presented at the GTT Conference in February .
Earlier this month to bridge the time before our next generation technology is available in the US we put in place in next Tech pathway program, which allows customers were out of warranty or new to pump therapy to virtues of minimum at 670 Gee why the accessing our next generation pump technology at no additional costs when it becomes.
Visible.
These are some of the highlights from our pipeline.
Of course, several more product launches that we are preparing for across the company. While we continue to invest in building out a robust long term pipeline of continuous innovation invention and disruption.
As I've noted before.
We expect our growth rate to accelerate.
With the second half of Fytwenty growing faster than the first.
We anniversary recent headwinds launch multiple new products.
And then if I 21, we expect our topline momentum to accelerate as we get the increasing benefit of the fytwenty product launches as well as a product slated to launch next fiscal year.
With that let me know askren to take you through a discussion of our second quarter financials Karen.
Thank you.
No more mentioned, we delivered second quarter organic revenue growth of 4.1% and adjusted EPS was $1.31 growing 7.4%.
We came in three cents above the midpoint of our guidance driven by our operational outperformance.
Our adjusted operating margin with 28.1%, reflecting improvement of approximately 20 basis point.
We delivered strong improvement in adjusted EPS DNA of approximately 90 basis point.
As we implement and drive efficiencies and improvements across the company under our enterprise excellent program.
Our improvement in EPS DNA was offset by declines in gross margin, reflecting the negative impact of foreign currency and China Tara.
Below the operating profit line, our adjusted interest expense declined to 32% driven by our successful debt issuance and tender transactions earlier this calendar year.
As you are now our cost of debt reduction is helping to offset an increase in our annual tax rate from us tax reform.
Generating strong free cash flow remains the priority across the company.
Second quarter free cash flow was $1.6 billion up 66% from last year.
We are tracking nicely toward our full year conversion ratio target of 80% plus.
We remain committed to disciplined capital deployment balancing investment in R&D and tuck in acquisition to drive future growth with returning a minimum of 50% of our annual free cash flow to our shareholders.
In the second quarter, we returned over $1.1 billion or 71% of the cash we generated resulting in a total shareholder payout 64% on adjusted net earnings.
Before I turn the call back to Omar I would like to update our annual revenue growth and EPS guidance.
For the year, we continue to expect organic revenue growth to approximate 4%.
With revenue growth accelerating in the back half relative to the first.
While the impact of currency, it's fluid if return exchange rates hold foreign currency would have a negative impact on full year revenue growth of approximately 80 to 120 basis points.
With the strength, we are seeing across several of our businesses from neurosurgery and neurovascular to spine surgical innovations and TAVR, we are raising the organic growth guidance for our three largest business group.
We now expect CVG to grow 2.5% to 3% up from two and a half.
Net Jay to grow 5% to 5.5% up from five.
And our TG to grow 4.5% to 5% up from 4% to 4.5% previously.
These three groups combined contribute 92% of our revenue.
In diabetes, which represents 8% of our sales we now expect low single digit organic growth, reflecting competitive pressures in the U.S., while we await new product approval.
For the third quarter, we anticipate organic revenue growth of 4% plus.
With currency, having a negative impact of 50 to 120 basis points that recent rate.
Hi group, we expect CVG to accelerate to 3.5% to 4%.
Diabetes to be flat to slightly down and mid GE and RTT to grow 4.5% to 5% all on an organic basis.
As Elmore mentioned, we are anticipating either us or European approval on a long list of products.
Starting in the fourth quarter and building into the early part of next year.
Our micra Transcatheter pacemaker.
Percept PC deep brain stimulation.
Interest in micro three Ccs stake will nerve stimulator.
Many med Seveneighty GE advanced hybrid closed loop.
Diamond temp RF ablation catheter.
And Avi fistula indication for our impact Admiral drug coated balloon.
And next generations for our intelligence SCS system linked to point out in sort of all cardiac monitor and cobalt and crown family I Cds and CRT.
I am sure I left some off here, but as you can see we have all that's coming which is why we expect fourth quarter growth to accelerate as we begin to see the early impact of some of these launches.
Turning to margin, we continue to expect our full year operating margin to expand by roughly 40 basis points on a constant currency basis.
Driven by our Enterprise Excellence initiative.
For the third quarter, we would expect slight improvement and operating margin offset by a currency headwind.
Below the operating line, we expect our quarterly non-GAAP interest expense to be similar to the second quarter for the remainder of the year.
In addition, we now expect our third quarter adjusted nominal tax rate to be in the range of 15 to 15 in a quarter.
On an annual range at 15% to 15 and a half.
We remain focused on optimizing our underlying operating tax rate overtime.
We are raising our fiscal year 20, EPS guidance to a range of 557 to 563 to reflect the second quarters outperformance at 3% increase from the prior range of 554 to 560.
This includes a negative nine set impact of currency at recent rate.
For the third quarter, we expect EPS of $1.37 to $1.39, including a two cents currency headwind at recent rate.
Now I will return the call back to Omar.
Thanks, Karen.
As I mentioned earlier, just motto became president of Medtronic earlier this month and at the start of next fiscal year I, We retired CEO and Jeff will take my place.
I'm excited with the board selection of Jeff as the next leader Medtronic, Jeff has proven himself as a leader who can execute and delivered strong financial performance.
Develop our people and enhance our company's culture.
I know he will take medtronic to new levels of performance and growth. We're working together closely to ensure a very smooth transition.
Before we go to the acuity avast shift to shift towards Jeff.
Thanks Omar.
Well first I want to reiterate what an honor it is to have been selected by the board as Medtronics next CEO .
And I'm really looking forward to leading this great company.
Now looking at this past quarter's results I'm, particularly pleased to see our strategies are working in spine with strong growth in that business driven by enabling technology like our mazor robotics.
And the transition with Brett as ahead of our TG has been incredibly smooth.
While he officially took over earlier this month.
Brett really led the execution down the stretch in Q2 for our TG.
Look RTD is in good hands I'll, just say that.
Now they look ahead I'm incredibly excited about medtronics future.
We have several product launches coming up and you can be assured that executing on knees is top of my list of priorities actually the entire Medtronic leadership team is focused and committed to delivering on our pipeline, allowing us to build momentum as we head in the back half of the fiscal year and into the next.
Also during this transition period on connecting with many important medtronic stakeholders and thinking about how our strategy will evolve and how we will achieve that next level of performance.
For starters spending a lot of time meeting with our business leadership and customers beyond our TG.
I also plan to meet with and listen to the investment community over the coming months.
The transition with Omar is going great.
We've worked together for a long time, and we know how to build off each other strength.
Additionally, I am thrilled with the support from the board and my colleagues on the Executive Committee.
Having continuity in a transition like this makes life a lot easier.
While it's still too early to comment on specifics on how our strategy will evolve.
I'd like to share a few initial thoughts.
First one thing that won't change is our focus on the Medtronic mission, which drives us to use technology to alleviate pain.
Restore health.
And extend life.
In fact, we're looking to place even more emphasis on innovation driven growth.
Technology has always been the lifeblood of this company and growth is the name of the game and Med Tech.
We will be laser focused on getting our organic revenue growth rates up.
Getting more aggressive with tuck in M&A and being decisive with capital allocation to the highest growth segments.
All of this will increase our weighted average market growth rate or Lambert.
Reinvigorating our diabetes business is also a priority. This is a rapidly growing market that has huge long term potential.
And I'm confident in our ability to leverage our strength to get back to leading the innovation in this space.
We have a strong foundation with which to work and a really exciting pipeline of innovation on both the pump and the sensor side.
Also I am really confident that Sean along with the rest of the diabetes business will get this right.
Most importantly, he is committed to improving the patient experience.
Now as we do this along with executing on our product pipeline, we expect to return to share taking mode.
In fact, we see opportunities for share gains throughout the Medtronic portfolio and will be measuring ourselves on just that.
I'd like to keep things simple.
Grow anger and measure our business performance on whether we are taking share or not.
You'll hear more on these priorities overtime and I look forward to sharing our full plans with you when we host Medtronics Investor Day next June .
So at this point I'll turn it back to Omar.
Thanks, Jeff.
Let's now move on to QNX.
In addition to guard and Jeff two of our group Presidents, Mike Coyle in Wallboard are also here to answer your questions.
As brick wall and Sean Simon a new to the rules of running our TG in diabetes, respectively. The wound joined the earnings call until next quarter.
And Jeff and I will answer the questions related to those two groups today.
As usual, we want to try to get to as many questions as possible. So please help us by limiting yourself to one question and if necessary related follow up.
If you have additional questions. Please contact Ryan and our Investor relations team off the call.
Operator first question please.
Your first question cash in the line of David Lewis with Morgan Stanley .
Good morning, Thanks for taking the question just a quick ones for Karen if you follow ups for.
Sure.
So Karen just thinking about the back half of your revenue two part related question.
It took about I appreciate the updated guidance for diabetes, but if you look at it back half of you had nice acceleration here in the second quarter at this sort of deceleration apply for cleared the back half so anything out of your diabetes.
You suggest why did business with Decelerates back half it sort of related on earnings great expansion. So far this year, it's that applied much expansion of the back half of the year and you've got your Dadaab tailwinds and interested tax so kind of view into the back half of the year at easy we should think about sort of top or bottom line because it looks a little conservative quicker Mike.
Yes. Thanks for the question, David Let me touch on the comp first because I know Theres no question about that and they add fynineteen comps alone can be a little bit misleading I wouldn't dictated the cadence and Thats why 19 is really what happened in fyeighteen.
Recall in the first half of that Fyeighteen, we faced some significant but that transitory issues. The IP out edge, the Puerto Rico Hurricane and for that reason I would say double stack as F. why 18, and 19 would be a good based comparison.
There are growth by corridor with that double stack with 4.5%, 5.3%, 5.5% 5%.
You know comsys side, what is really going to drive our acceleration in the back half as our pipeline and we have indicated you should start seeing that and for Q and continuing into next year.
It related to EPS, Yes, we were pleased that we are able to raise our EPS guidance.
Total of 13 cents.
So far this year three cents on the heels as of Q2.
And while interest tax and FX little more favorable we do plan to reinvest those benefit to ensure that we can fully support our upcoming launches because they do drive our future revenue growth.
Okay very helpful turn it might just real quickly for me can you just talked about how shares fearing the lowest expansion markets prior to the approvals and any comments you want to make this weekend done on data that suggest a relative differences it of outperformance. Thanks, so much.
Sure in terms of overall growth, we were globally growing in the low twentys and in the US mid mid Twentys. So it was a little slower than the overall market.
Principally because of.
Now with another competitor in the in the space, who has taken some modest here in the us as well as the rate of ramp for the new centers that are coming on stream with the NCD. So we think thats going to bounce around a little bit, but we were very pleased with the growth profile clearly accelerated from where we've been.
Earlier part of the year.
Part of last year, and then in terms of the data that was a shared.
The AJ, we're still digesting those those datasets. These were non randomized data sets that we're coming out of France that basically were concentrated in accounts that were heavily users of the Edwards product wise. So.
We were not sure that propensity mapping that are matching that they did is appropriate to what we've seen but I think the other piece of it is.
There were not using able to pro and they're certainly not using every pro plus in those data sets where the the addition of the the bovine pericardial rap has really improved the PV outperformance and now with pro we have the lowest profile devices and we have those those third party reps into the large 34 millimeter.
Size segment. So we know that there have been multiple randomized data sets a set of.
Done these comparisons than we've not seen that kind of mortality difference. So we're going to continue just to understand digested.
Thanks, David next question. Please RIDEA.
Your next question comes from the line of Bob Hopkins with Bank of America.
Oh, Thank you and good morning, Thanks for taking the question.
Just wanted to focus on the change guidance in diabetes for a minute I guess the specific question would be maybe you could just going a little more detail on what specifically has changed in driven the reduction in the guidance here you know maybe a sense for us so U.S. assumptions in the back half.
And then more broadly on diabetes, just how does this impact your view on the future growth rate of diabetes say in fiscal 2021. Thank you.
Yes. Thanks for the question Bob and we are did talk about the fact that we're facing competitive challenges in the U.S. and diabetes, while we await new product launches, but international growth continues to grow well you saw that in our results than we expect that strong international growth to continue.
In the meantime in the U.S. Omar mentioned, we did initiate a next tech pathway, which you also may have seen advertise and that means that will defer some revenue until we can upgrade those patients to the new technology.
And in terms of future growth for diabetes, we believe that that will follow our robust pipeline and we expect growth acceleration in that business with the pipeline as we do in many of our other businesses.
Yes.
I.
Just want it very clear the we're very excited about this pipeline to 70 DG promises.
To be an outstanding product.
We're making good progress in terms of.
Our enrollment in the in the pivotal trial Weve already submitted for next generation hardware for approval of the FDA until the that whole pipeline is on track and we're going to go through a period of some pressure, especially with new patients in the U.S., but look there should be no doubt about our enthusiasm for this pipeline and what we see into the future.
In diabetes. This as Jeff pointed out earlier this an area of focus for us and one that we will win.
Great and then just one quick follow up Omar for you is just it just wanted to gauge your confidence in the outlook for growth in China.
The reason I ask that you another device company this quarter talked about pricing in China for medical devices being a little more pressured than anticipated.
Well it sounded like a bit of a one off I just wanted to make sure. We got your opinion on the subject in the outlook for growth in China for your business.
Look we're we're.
Very confident about China, we've had consistent results there and one that we expect to continue and continue to depend on in terms of double digit growth coming out of China.
There are some.
Different purchasing processes that are in place and most of these.
Really around more commoditized products.
Some of which we plan.
But the government is we really thoughtful about which products are put into these big tenders.
And we feel that the majority of our product line is separated clinically in any case, even in those situations. There optimizations, we can do in the distribution channels through which we can you can cover that so.
Look we are completely confident about equal to about our growth in China. The the team there's performed in a very consistent fashion quarter after quarter end.
And we're pretty confident we can maintain that.
Okay. Thanks, Bob next question. Please Regina.
Next question comes from the line of Robbie Marcus with JP Morgan.
Thanks, and congrats on a nice quarter.
Karen I was wondering if you could touch on the cadence of growth in the back part at the year you talked about four plus percent third quarter in the press release, you talked about accelerating topline growth in the back half year, what does that imply for fourth quarter.
Yes, so as thanks Robbie for the question, we do expect growth acceleration in the fourth quarter as we continue to launch important new products.
It's hard to sit here in November I know exactly which products will hit when and say and you also the possibility that some doctors maybe holding some patients as they wait approval for some important things in our pipeline like DBS. So it's hard to predict pinned down fourth quarter at this point, but we'll have a better view and we get to the call in February and in the meantime.
I just know that we do expect to see growth acceleration from third quarter.
Got it and I was hoping.
The spine business came in very impressive growth rate here. If you could just talk about it in a little more detail into robotic placements what sort of centers are buying here what percentage of your base has a robot any data points you could give us. So we could think about to pull through going forward. Thanks.
I'll take this is Jeff I'll take this one Robbie well, yes first the the results in the spine business, which the best we've seen.
And I don't know long long long time, it really is a direct result of the of the surgical synergy strategy.
Which has real staying power here and has you know meaningfully improve the intrinsic value of our spine franchises as you pointed out it's the it's the capital equipment, you know the mizzou or Oh arm navigation significant placements, both placements and sales and the pull through of the.
The spine implants, it's created a great competitive differentiation and a really nice business model for us and.
Look we're not giving specifics on how many was or placements, but I can tell you. It's it's like the last several quarters meaningfully more than the competition and so when you stack quarter after quarter after quarter of meaningfully more placements in the competition our installed base has gotten pretty big.
And this is we've got a lot of momentum here and when you have an organization like our TG that that with the resources.
And the capabilities. If you can get somebody organizationally thats focused on something like this with this kind of momentum it's going to its going to continue so we feel very good about it.
Thank you very much.
Thanks, Robbie next question. Please Regina. Your next question comes to the line of Larry Biegelsen with Wells Fargo.
Good morning, Thanks for taking the question one for one two part question for Mike on CVG and one pain Stim question for Jeff So Mike first our micro Avi your confidence in.
Approval based on the Marvel two data.
That's an important product for you, but it's a small data set and second the sustainability of the TAVR growth you saw this quarter. It sounds like based on your comments there could potentially accelerate from here and just lastly, Jeff do you think we've turned the corner on the the pain stim market for your business and the market.
Thanks for taking the question.
Thanks, Larry on the micro JV, we were very pleased with the Marvel two data that were shown it AJ.
Essentially a median.
80, synchrony levels of 94%, which is pretty close to what you would see with a standard pacemaker system. So obviously all the benefits that we will get on competition reduction from no pocket no leave our coming at very little trade off in terms of a baby synchrony. So we think thats going to be very helpful. We believe the dataset is fully consistent with what the FDA wanted to see.
And has seen so we've now submitted and so we have a high degree of confidence of having this product available in the marketplace in the us in the in the fourth quarter and in terms of the sustainability of the TAVR market obviously, we.
We're very pleased with acceleration of growth that we saw as we headed into the low risk dataset I would say, we still maintain an expectation for the overall market growth of the TAVR market through to the in that $5 billion range and in calendar 2001. So we're we're very comfortable that everything is tracking in terms of.
How we would have expected to happen over the last several years and so we feel good about that growth engine for us for the for the next the period of time.
Okay on the lower itself on the pain Stim business I'll split into two pieces here, there's the market and that are far apart our performance in the market. Obviously, it's as you can see from our larger competitors that have reported the markets come down and in the short term I think it's going to be ill call flattish.
Over the medium and longer term, we do see this getting back to mid single to high single digit growth in the space, but it has been I'd say, we're anticipating a flattish market here for the next quarter to and in terms of you know and I do think there's things that can be done to better position.
Space with payers, but but in the short term. It is a innovation driven segment and we're very excited about the our next generation and tell US as you know the first generation did very well over the last a year plus and we already have the next generation, which we'll we'll be talking about we're rolling out a nands a in January .
So we're excited and over the last quarter, we have seen our trailing implants and about valuations have grown the last couple quarters.
As well as our in Telesales, we're seeing strong Intel sales as well. So it is picking up we do see trending in the right way, but.
He and I don't see it getting back to that the high single digits here for a for a bit.
Thanks for taking the questions.
Thanks, Larry next question. Please your next question comes in line of Vijay Kumar with Evercore ISI.
Hey, guys. Thanks for taking my question, maybe one on the TQ guidance here.
Sequentially organic seems to be flattish.
I'm curious why and we achieve would moderate comps don't seem seem to be okay. In that segment and then more importantly on on diabetes, a flat to down how how much of that flat to down as.
Are you assuming a share loss versus.
The new.
The upgrade program.
Which is seamless.
You're deferring revenue recognition.
Maybe parse out the share loss versus this upgrade program impact are you see any up are you seeing any any delays in ft approvals because one of your other compare seems to be having issues on the diabetes side from a regulatory perspective.
Thanks for the questions AJ. So first on met G., you know, we had very strong quarter unmet Gi and Dan and we're not going to extrapolate a very strong quarter into Q onto the back half, we still see strength in met GE and we're pleased with that strength. We did have some share gains from a competitor stapler recall in the second.
Quarter, well see if that continues.
In terms of diabetes and they upgrade program is an impact for us as I'm in the third quarter and in terms of market share you know our installed base is increasing I, particularly as we as we put 670 genes in Europe .
So we're seeing an installed base increase and we're pleased with that.
And then add in terms of product launches.
I'll, let Omar common yes, no I think in deferred lunches look right now as I said, we're on track.
The most important product launch we have is a 70 to GE.
And.
Like I mentioned earlier, we've already submitted our next generation hardware for through the FDA. We've completed the adult enrollment and we expect to see the initial the pivotal trial results of the GTD meeting in Europe in February .
And we expect built approval first and Pete approval will follow that look the exact timing is up to the FDA theres no signal to us the things will be unnecessarily delayed or anything like that so as far as we can see things are progressing as is normal to have their normal questions and we go through this process. So I don't see anything.
Although the ordinary there.
Thats helpful. Omar and just one quick one on SGN. It sounds to comments you made on Opex management enough. It looks like these trends are sustainable. So just curious on on Opex trends going forward.
Yes, Thanks, BJ and we have said that we expect to deliver a 40 basis points of op margin improvement this fiscal year, and and that hasn't changed and you've seen us drive greater improvement in S. DNA throughout this year and that shouldn't change and we've had some gross margin pressure driven mainly by F.
Correct.
We have been offsetting that and continued to deliver the margin expansion that we've committed.
Thanks, guys.
Thanks Vijay next question. Please RIDEA. Your next question comes into line of Matt Taylor with TBS.
Good morning, Thank you for taking the questions.
So the question for Jeff you talked a little bit about some growth priorities that you have and.
Really talked about being more aggressive on tuck in M&A I guess I was wondering if we should view that as a little bit of a pivot and if you could expound on the areas that you think are really kind of right for those tuck ins and what kind of characteristics would you look for in the deals that you'd like to do.
[noise] first first of all I don't what I know if I call it because it was.
Towards a you know more of a focus on innovation driven growth here for the last year or so and.
Building up this pipeline and for an almost got the whole company focused on pipeline execution. So that first and foremost is our top priority is executing on that pipeline that we've built a and then I've been working closely with the group the group before group leaders.
Including Sean and Brett that are new to it or on a capital allocation strategy that moves to the highest segments that isn't done necessarily at the group level. It's done at a more granular level and our goal is to through R&D investments and through using our balance sheet for tuck in M&A to increase that.
The way immigrant company and so when we're looking at tuck in M&A I'm not going to comment on specific segments, but it's going to be those areas that are whether it be within the groups or even adjacent cease to the groups that are going to grow amber.
And so that's the answer that.
And just had a follow up on the scheme extra market you seem to have really strong results. This quarter. When your competitors talked about a slowdown in that market are you seeing any slowdown or are you gaining share can you talk about the dynamics there.
Well the markets still growing pretty strong maybe a little maybe a little bit slightly less than its grown over the last three so the recent few quarters.
But our performance and our performance has been I'd say better than the competition and it's it's coming it comes down to the strategy to the bread and Stacy to put in place that's really having a broad portfolio across both the scheme, Eric aside and the hemorrhagic side, having you know a good products and.
All those areas it matters in the space and that strategy is paying off and you know we recently launched a new stent retriever on top of in these human space and then on top of the new aspiration system with our two catheters you combine that with the breadth of the portfolio, that's what's driving our results and so yes.
The market grew a little bit less than it has in the past we still see this is a very strong market going forward I mean every every everywhere I go in the world.
No us outside the us in the U.S. you get asked about stroke and outside the U.S. These health health Minister is asking about how we can help them build out their system. It's just a very robust ER segment for us right now.
Okay, great. Thanks for the thought.
Question. Please.
Your next question to catch on line of Josh Jennings with Cowen.
Hi, good morning, Thanks for that.
Let me ask the questions.
Just a question for you I think when you took this either.
In years and.
Creating the term economic value creation, if you will and yes, we should we value based healthcare delivery system has been a little bit slower than expected.
Can you give us your view on how.
The trajectory of the trajectory of the evolution, Okay delivery system.
And then just for Mike.
TAVR question.
Asymptomatic data the recovery travelers presented each over the weekend you you've been a little bit less vocal than in one of your competitors on the asymptomatic opportunity can you give us your three read through on the recovery trial data and then any plans for an asymptomatic trial with evolution will be able to platform. Thanks for taking the questions.
Okay. Let me go first on the rather just cocoa stuff you know it's true that.
Our first started Doug was an area that we looked at but really what we are focused on those will people economic value in other words, we knew how to create compelling value with our products and we needed to understand how that translated into economic value for the system and while doing so we quickly.
Understood that a lot of the economic value is created outside of the providers themselves who were purchasing.
Our devices and so we try to understand that and through this process, we realize that.
There's lots of stakeholders here, there's a lot of unknowns in this in the system.
And in the end, we focused in areas with the technology had a direct impact on value creation and those models, we put in place and they've been very successful in the continue to be successful.
Led by directs being the most.
A big biggest example of that and that continues to be good in terms of the broader evolution of.
Of these models.
This needs complete stakeholder alignment there is not something that Medtronic can do in its own. That's that's just not possible and it needs a clear leadership in that direction I've got no doubt that at some point in the future the health care models have to move.
Two one that's based on paying for value.
But like I said that requires a lot of alignment and it's probably going to take some time.
In the meantime, our understanding of the direct relationship between technology and value. We will continue to have and be prepared to go into risk based models, where we have direct control because with clinical evidence. The proves that we can take those risks and those have been successful.
Okay, and then Josh.
In response to your question about the recovery trial, obviously, we view it as good news that there was a.
Positive outcome for intervention earlier intervention in aortic stenosis with the in this case, obviously sever showing them while mortality benefit versus conservative management. So we think thats. Good for the overall space in terms of intervention, we have been a little color on the idea of using a lot of investment into the asymptomatic group just based on.
Experiences we've had over the years with.
For example, I cities, where the market was really driven by incidents pool as opposed equivalents pool and so the availability of the patients.
To come in when they're asymptomatic is a little bit more of a question. So when we've done. This work we viewed it as a relatively smaller driver of overall tighter market growth. In fact, we don't included in our overall estimates for for the market growth. So so again this would only only be good news and we're going to continue to look at as we head into the operating plan period.
Sure it over the the work that we're doing in spaces like mitral replacement mitral repair. These are large clinical trial.
Requirements as well it was this the best use of dollars to go after asymptomatic, we'll we'll make that the call as part of our sort of normal planning process.
Thanks, Josh next question please.
Your next question comes into line of Matt Miksic with credit Suisse.
Hi, Thanks for taking the question is just one on TYRX and just one follow up based on your last comment Mike on mitral. So you mentioned TYRX manufacturing I was wondering if.
Could give us an update on uptake there.
Central plans for guidelines are enhanced reimbursement or any other things it.
That you had talked about a little earlier in the year related to wrap it.
Yes so.
In this past quarter, we were completing the move of the the manufacturing facility from the manufacturing site in New Jersey that we acquired as part of that acquisition of TYRX into the rights Creek facility here in Minnesota, where we have extensive experience in drug device combination as we were ramping that and obviously, we had to ramp significantly.
Relative to the rapid results being out in last quarters Q1 growth of the in the mid Thirtys. We began to see yields are not where we wanted them and so we would reengineering processes associated with that move as you know this this business. So that's that original facility was under warning letter. So we're being very careful about making sure we have very robust.
Station in verification activities, taking place, which to some of our manufacturing capacity offline, while we did that work.
That has now been completed at the end of last month, we have implemented these new processes and we're ramping nicely in terms of production to a point, where I think we're back to normalized production.
Here for the for the full quarter three that's really is our expectation. So so thats behind us and we're now we're driving growth in terms of guidelines, we continue to to work with the professional societies around or around guidelines.
And.
We will have more to say about that as decisions rollout, but clearly the availability of the robust evidence that came for rapid is there has really helped us in terms of being able to drive adoption of the technology as we saw in Q1 and I expect that will continue to be valuable to us here in the in the second half and beyond.
That's great and then Mike you mentioned, you know you're sort of pick your spots investment and structural heart and mitral replacement and repair.
Just any any color update on on either of those fronts. If you want.
Well, obviously, we continue to think we have a leadership position in the mitral valve replacement market and in fact.
We now have our transfemoral system locked down in terms of design and we have.
Approval for the feasibility I'd in that space and so we're going to certainly be.
Prosecuting those clinical trials, we have important investments going on internally in the in the repair space, we're not really prepared yet to discuss those publicly but we do think there are some very interesting opportunities for us.
In that space that would be complementary to where others are investing in that space and then obviously, we continue to to rollout labeling indications in the in the TAVR space for the by customers.
Market for example.
So is.
Got to that enrollment has been completed and we will be pursuing.
Labeling inefficient or removal of labeling restrictions in that area. So as I said, we're looking at a number of other things as part of our units were preparation work, we're going to work we're doing in scrap plan in preparation for next years.
Operating plan and I will probably have more to say about that around the time of the analyst meeting in June .
Great. Thank you.
Thank you Matt next question. Please Regina. Your next question comes from the line is Matthew O'brien with Piper Jaffray.
Good morning, Thanks for taking my questions just to hear together.
Sounds like a lot of the products Ron.
So for introduction as as expected, but the one that seems a little bit aggressive to me is interesting too. So I would just love to hear wire, so confident timing of that product coming out and then secondly, Mike I must have or side of things. You know you mentioned a little bit of impact competitively was that impact level less than you expected more than you expected kind of in mind, just any kind of.
There would be helpful. Thank you.
Right.
Yes amount on the first one I, we have interest into and micro stem I'm I'm not sure did you mean micro stem or under some two oh, yes, hey kroner. Thanks.
Alright, well.
So the micro stem.
It was we we've we've announced we submitted to the FDA and we believe that's on track for a.
Mid calendar.
2020.
You know approval and then also interstim too which is our that's our so micro stem is our rechargeable platform again. This is the this would be our first rechargeable platform it'll be a three threec three cc device fully a full body M.R. labeling with our proven overdrive.
Battery chemistry on there. So this is going to be a great product thats. The micro stem that is mid calendar 2020, and then our interstim too, which will have improved which is our of our primary sell device or recharge free device.
The next generation of or that'll have that'll come out with EMR labeling around the same time. So so we're feeling.
Here, we'll have a a full portfolio both.
Recharge free and recharge in are feeling really good about that based on the timing of our submissions and the normal FTC review.
And then in terms your question about.
Competitive product entries in the average space, obviously was March that the third competitor came into the market.
And so we're now into other third quarter of their presence in the marketplace, we'd estimate they have somewhere between one and 2% or market share and that is in line, maybe maybe a little lower than we had expected when we put together our operating a plan for the entrant there certainly.
Trialing going on of the product and we would expect that to continue but we think we've done a good job.
During our share positions in the face of now at their competitor.
Thanks, Matt take the next question please.
Next question I guess trying to line of Danielle Antalffy with SVB Leerink.
Hi, good morning, guys. Thanks, so much as for taking the question I just a quick question on the U.S. piece of the business. It looks like that was as was pretty strong we're coming to almost 300 basis points of growth acceleration on the comp adjusted basis was wondering if you did talk about how sustainable you think that is as we look.
Over the next few quarters, and maybe you point out what's what's sort of driving that and I have one follow up on CVG. Thanks, so much.
Okay. Let me, let me take the US growth look overall, it's in line with which we were expecting.
You know.
As Weve mentioned many times before.
Growth, particularly in the US is driven by innovation. So when there's a new product that comes in that.
That increases procedures for the right reasons, then we get clear growth and we expect that dynamic to continue the baseline growth. The you know remains pretty consistent the number procedures and all that remains pretty consistent and whenever we have new product entries.
That drives the growth rate up and we don't expect that dynamic to change looking into the future and we expect for the pipeline that we have and they're all on track and we've got lots of exciting products. So all the way from the micro really pacemaker to the.
Seven edgy insulin pump to the interest in micro and all of the other stuff that we've talked about all of those things were launched into us Willow will drive the market up and we'll get a share gains are the result of that so that's the way I look in the U.S. market is really innovation driven.
Okay got it and then on CVG, Mike was hoping you could talk a little bit about what's driving that the modest guide higher in the back half of the year I get that you know it feels like Els adds should start to anniversary some of their tough comps, maybe DCB start to stabilize.
But but otherwise just curious if he could point to what's really driving any upside in the back half of the year in CPG. Thanks, So much.
Sure. They know the headwinds that you talked about the especially the L. bad one.
It is clearly now behind us in that we anniversary that sort of step by step change in the market that happened at the end of Q2, a year ago. So that really helps in terms of overall prior year comps and as you mentioned with the DCB. We have now begun to see the sequential growth that we've been expecting is more data sets are available.
That does that basically help address this question about the safety signal that the that has been raised and obviously the availability of the.
Maybe fistula data, which were shown at the Searcy meeting basically showed we did not see that the that mortality signal in the one year data for those datasets and we saw very significant reductions in re intervention rates more than 50% reduction to me intervention in that 80 issue of patient population, which we think will help not just in Avi Fisher.
As which obviously expense DCB market, but also is going to help us with the confidence in the asset base position so those headwinds.
Basically becoming mitigated is helpful. We also have the headwinds associated with the replacement cycle in especially pacemakers and in CRT D devices that has begun to mitigate and even though we still see.
Pressure in the traditional TV segment CRT D is the biggest single replacement a component of our market and obviously pacemakers.
They are a big component as well so, whereas we've had the last couple of years of very significant headwinds you know as we head into half why 21, we are beginning to see a that turn into a neutral impact on our overall growth market or growth trends, which then allows us to see the benefits of the new products that are that are coming into the market. Obviously, we talk.
About the I believe pro plus and the low risk indication. We also will we're expecting imminently the officially indication for for the impact Admiral we'll be introducing our new I see the family Yamal Galxc platform, which the cobalt chrome product lines, which are going to numerous feature set benefits.
I will talk about as we launch the product. We also have a link to moving into the market here as we get to the end of the year, but probably the most important are those products is the micro Avi, which we expect to have in the fourth quarter and that should help us with that.
Fourth quarter acceleration that that Karen was talking about.
Thank you so much.
Neil will take one more question. Please Virginia. Your final question will come from the line of Raj digitally with Jefferies.
Thank you good morning.
Maybe a couple questions first for Karen you know the I think you described the decline in gross margins was because of currency, but also because of trying to tariffs and I'm curious if you could maybe parse out what is.
What what each of those is contributing to the decline in gross margins and is there any any view to any improvement in that could end the tariffs get reduced or any any relief there.
Yeah. Thanks for the question Raj and we did see a the most significant impact from FX. It was about 70 basis point on the gross margin and then the China tariffs was a smaller impact and in terms of gross margin going forward, we expect gross margin to be relatively stable to where it is today.
In the second quarter going forward and we anticipate in a continuing to offset that with SGN a improvement as we further drive margin expansion.
Okay helpful and maybe just lastly on diabetes me I appreciate the.
The confidence in recovery there returning to growth as you move into next year, but I guess you don't when one thinks about the competitive landscape in diabetes, there's going to be some developments from your competitors on.
Automated insulin delivery systems as well. So the question is really you know how how confident you are the Seveneighty G get you where you need to go and whether you still need to have improvements on the CGM side of that business in particular in order to see improving results.
Yeah, I think there's so many digi would take us a long way and actually differentiates us in terms of algorithm or anything that anyone has our from what we can see projecting.
So the advanced hybrid closed loop system is really going to separate us from that dimension I think with the sensor area, we still have work to do.
And I think thats going to take a longer.
In reducing the number finger sticks to we continue to make progress, but that's going to be an area of pressure.
Even going into next year, but we expect that the they did there are many other benefits for the 70 to GE in terms of not only the algorithm, but in terms if its capabilities.
That said that we would benefit from.
So that's the way I look at into since areas going to take a little longer to completely resolved will make incremental progress, but that's going to go just a little longer.
Great. Thank you.
Thanks, Raj Omar any final word.
Well listen thank you all for your questions and on behalf of the entire management team I'd like to thank you again for your continued support and interest in Medtronic.
We look forward to updating you on our progress in our Q3 earnings call, which we currently anticipate holding on Tuesday February 18th So thank you all very much.
Ladies and gentlemen, this does conclude today's call. Thank you all for joining can you may now disconnect.