Q3 2021 Medtronic PLC Earnings Call
Good morning, and welcome to Medtronic fiscal year 'twenty 'twenty, one third quarter earnings video webcast I'm, Ryan why spending vice President and head of Medtronic Investor Relations.
Before we start the prepared remarks, I'm going to share with you a few details to keep in mind about today's webcast. Joining me today are Jeff Martha Medtronic, Chairman and Chief Executive.
And Karen Parkhill, Medtronic, Chief Financial Officer, Jeff and care and will provide comments on the results of our third quarter, which ended on January 29th 'twenty 'twenty. One after our prepared remarks, we'll take questions from the sell side analysts that cover the company and today's event should last about an hour.
Earlier. This morning, we issued a press release containing our financial statements and divisional and geographic revenue summary, we also posted an earnings presentation that provides additional details on our performance as well as changes to our future revenue reporting structure, given our new operating model, which will go into effect next quarter. This presentation can be accessed from our earnings press release.
<unk> or on our website at Investor Relations that Medtronic dotcom.
During today's webcast many of the statements we make may be considered forward looking statements and actual results may differ materially from those projected in any forward looking statement additional information concerning factors that could cause actual results to differ is contained in our periodic reports and other filings that we make with the SEC and we do not undertake to update any forward looking statement.
Unless we say otherwise all comparisons are on a year over year basis, and there are given on an organic basis, which adjusts for foreign currency. There were no acquisitions made in the last year that had a significant impact on total company or individual segment quarterly revenue growth.
References to sequential improvement compared to the second quarter of fiscal 'twenty and 'twenty, one and are made on and as reported basis.
All references to share gains or losses on our revenue and calendar quarter basis, unless otherwise stated finally reconciliations of all non-GAAP financial measures can be found on the attachment to our earnings press release or on our website at Investor Relations not Medtronic dotcom.
With that.
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Hello, everyone and thank you for joining today.
The Q3 results that we reported this morning reflect that our business is well on its way to returning to growth with a sequential improvement and both revenue and earnings.
And this happened despite the impact of the Covid resurgence on procedure volumes in late December and January.
We're also outperforming our markets as our new products are driving share gains and an increasing number of our businesses.
In fact, we outperformed the market, even if you exclude our strong ventilator sales.
And when you consider that we're going up against a number of our competitors ear and pushes and our results include the month of January when Covid was having a increased impact on procedure volumes.
Our performance is even more impressive.
We're also seeing signs that our hospital customers are preparing for a robust recovery.
For example purchases of our capital equipment this past quarter have been notably strong.
Use of our capital equipment, such as energy consoles robotics and navigation systems is tied directly to procedures. So it's telling the hospitals are prioritizing spending on this type of equipment.
Now as we head into our fourth quarter, we're bullish on the recovery and our ability to return to growth and outpace our competitors.
We feel that the momentum we have is going to build over the coming quarters.
Driven not just by the Covid recovery.
But by the strong new product flow that we expect to bring to the market.
And we're supplementing this pipeline with an increasing cadence of tuck in M&A.
We've also implemented our new operating model and we're enhancing our culture with a sharpened competitive focus.
Through the actions we've taken over the past year.
We're emerging from this pandemic as a stronger Medtronic and I'm confident that we're well positioned for both the short and the long term.
Now as we've done on the past couple of earning calls I'm going to lead off with a discussion of market share, which has become an important focus across the company.
I acknowledge that the COVID-19 impact on procedures, along with the timing of our quarter does mask some of the underlying market dynamics, but.
But I hope that you're now seeing a strong trend of share gains from Medtronic.
And there are multiple drivers for our improved market performance or.
Our prolific pipeline is key.
But also the transformation of our operating model and culture is beginning to drive results.
And the changes we made during the pandemic moving from simply serving as a supplier to our customers to becoming a true partner has driven stronger customer relationships and improve business performance.
Our consistent and sustained flow of new products is our engine for growth.
In the past quarter alone.
We've received an additional 46 product approvals bring.
Bringing our total to over 220 regulatory approvals and the U S Europe, Japan, and China since January of 'twenty and 'twenty.
Let's start with the businesses, where we are gaining share and our cardiac and vascular group.
We continue to outperform our competitors and cardiac rhythm.
And we gained another point of share this past quarter on the strength of our micro family of Leila's pacemakers, and our cobalt and Crome high power devices.
Micra continues to perform extremely well with 64% growth globally, including 76% growth and the U S.
And coronary while we're dealing with the financial impact of the China drug Eluting stent national tender, we're still winning share globally.
We estimate that our D. S unit share is up three points year over year and two points sequentially led by strong share gains and the U S. On our one month dual anti platelet therapy labeling and expanded indication for high bleeding risk patients.
And in China, We believe that being one of the winners of the D E S.
National tender strategically positions us to maintain our leadership and the China cardiovascular market not only do we expect to pull through other products, but we expect to leverage our scale and reach to drives the successful future rollouts of our tavern and Rd and products.
And drug coated balloons, we're growing well above the market despite increased competition.
We gained a couple of points of share on the strength of our market leading impact family.
In fact, we're seeing continued strong adoption of our D. C. B for EV fistula maintenance for dialysis patients driven by the publication of our data and the New England Journal and Medicine.
Next turning to our minimally invasive therapies group, our surgical innovations business had a good quarter against our primary competitor J&J, we gained nearly a point of share year over year, driven by our energy and under stapling product lines.
Our respiratory intervention business had a great quarter growing over 75%.
And this was driven by the importance of our airway and ventilator products and treating COVID-19 patients.
And as expected our ventilator sales were down sequentially, but nearly tripled year over year and our PV 980 gained share in the high acuity ventilator market.
We also gained share and airways driven by our impressive growth of over 60% and video laryngoscope.
Looking ahead, our ventilator revenue should normalize as pandemic related demand decreases and we anticipate year over year headwind starting next quarter.
Our patient monitoring business also had a strong double digit growth quarter.
Our nellcor pulse oximetry product lines grew double digits as we one share sequentially from Massimo.
And gastrointestinal and we had some modest share gains driven in part by our partnership with the NHS in England and.
Jeff is using our pill cam colon to help reduce large patient backlogs for colorectal screening.
And our renal care business grew and the high single digits with share gains and renal access.
And our restorative therapies group, we're seeing share gains across several businesses and cranial and spinal technologies, while share was stable year over year, we do believe we're up sequentially we.
We had a we had a strong quarter and large capital equipment sales with a record number of Missoula robotic system unit sales and near records for our O arm imaging and stealth station navigation systems and.
With Mazor, we estimate that we continue to meaningfully outsell, our nearest competitor globus and the spine robotics space.
And Neuromodulation, a recent product rollouts are leading to share gains and both brain modulation and pain stim.
And brain modulation, our percept PC launch has led to nearly a point of share gain year over year and several points of share gains sequentially from Boston scientific and Abbott.
Now given our technology differentiation, and we expect DBS share gains to be a multiyear trend.
And pain stem, we're gaining strong momentum from our D. T M launch with nearly a point of share gain year over year, which is even more impressive when you consider that this business is facing a replacement headwind.
Our D T and trials surge this quarter after the release of our 12 months data and late October and overall, our trials were up 10% year over year, which is a really good leading indicator for the health of our pain Stim business.
And pelvic health not only is the market growth accelerated over the past couple of quarters, but we continue to win share back from Exxon X based on the differentiation of our Interstate and micro device.
Since last quarter, we gained another point of share in Europe, and three points of share and the U S.
We've now taken back nine points of share from Exxon X over the past two quarters and when you look specifically at the U S. Rechargeable market, we gained back 14 points of share sequentially this quarter.
So there are a number of businesses, where we are gaining or holding share, but there are still some businesses, where we've got some work to do.
And our cardiac ablation solutions business, we believe we lost about a point of share year over year and sequentially, primarily to J&J has broad EP product portfolio.
And we expect the share performance to turnaround and the quarters ahead due in part to our Diamond temp cardiac ablation system, which just received FDA approval.
And cardiac diagnostics customer response to our link to system has been outstanding.
Even given a remote programming capabilities enhanced feature set and a four and a half year longevity that said, we estimate we lost a few points of share sequentially to Boston scientific as they enter this market.
We continue now to ramp our unique wafer scale manufacturing for lung two but expect to be supply constrained for the next few quarters.
However, we are confident and the competitive differentiation of our link to device and.
And we expect to maintain our strong leadership position and this market that we created and have innovated for the last 20 years.
And neurovascular, while we held share year over year with strong growth and aspirations and and coils we.
We lost a bit of share sequentially and this was primarily in Florida voters as new entrants, specifically trumeau and Stryker pick up some share.
We have a series of new product launches coming and narrow. The later this calendar year. So I'm confident that after the initial impact of competition and flow diverse that we'll get back to taking share.
And diabetes, we're making considerable progress and our turnaround efforts and we actually returned to growth this quarter.
While were still not growing with the market.
We're gaining momentum with the successful launches of our seven and 70 G system in the U S and the seven and Atg, which is now available and 26 countries across four continents now as a result of all this we estimate we picked up several points of durable insulin pump share sequentially.
Next let's turn to our product pipeline.
We're at the front end of a number of large opportunities to win share and create and disrupt big markets all aimed squarely at accelerating our growth.
A number of these catalysts are on deck this calendar year and the long term pipeline also remains full.
Starting with C V G. We're expecting to present, our unmanned renal denervation pivotal trial results later this calendar year likely at the TCT Conference in October.
This could be one of the most important events and med Tech this year, given the multibillion dollar addressable market and hypertension.
And now depending on the results of her on Med trial, we're planning to submit for FDA approval. Later this calendar year and we've already been granted breakthrough device designation.
And our cardiac ablation solutions business we.
We are expecting a first line therapy indication for Arctic front cryo balloon in the first half of this calendar year.
We also continued and make good progress on bringing our disruptive pulsed field ablation system the market.
And structural heart, we expect to roll out our next generation Evolute FX Havre valve later this calendar year with its enhanced deliverability and ease of use we continue to enroll the pivotal trial for our intrepid transcatheter mitral valve as well.
And we're pleased to see that have medical which is our partnership with the foundry completed the first in human procedure of its differentiated transcatheter mitral repair technology.
This unique device has the potential to be very disruptive to current mitraclip technology.
And M. I T. G. We're really excited as we're nearing some very important milestones for our Hugo soft tissue robot system.
We remain on track to submit for CE, Mark and to file for U S. IDE approval next month.
And our T. G, we're investing heavily and growth opportunities and neurosurgery, we're expanding the capabilities of our Missouri spine robotic system and pain stem, we're expecting to launch our recharge free device. Later this calendar year. This is a big opportunity from Medtronic to dramatically increase our share and the recharge free.
Lori a pain stem.
We also expect to submit our <unk> device to the FDA later this calendar year, he caps could be a very disruptive technology and pain stem and we intend to bring it to market combined with all the advantages of our D. T M therapy, and our Intel us device platform.
And brain modulation and we expect to launch our sense sight directional lead later this calendar year, which will close a key competitive gap and fact, when you combine since site with our percept PC device art deep brain stimulation system will be far ahead of the competition and we're not stopping there we're now enrolling.
Our adapt PD pivotal trial.
Which is studying our closed loop adaptive technology that will further extend our leadership position and DBS and no.
And our vascular and addition to the flow divert a launch as I mentioned earlier, we have five additional products that we plan to launch this calendar year now we haven't disclosed the details of these launches for competitive reasons.
But we're excited about the innovation that we're bringing to the stroke market.
And diabetes, we have now submitted the adult and the pediatric seven atg insulin pump and Zeus sensor to the F. D. A to provide them with an efficient means to simultaneously review.
Our multiple submissions approve.
Approval timing, well, that's going to be dependent on the fda's bandwidth as the branch of the FDA responsible for diabetes product reviews has focus their resources on Covid diagnostic submissions.
Regarding our synergy sensor, which is disposable easier to apply and half the size of our current sensor.
We've completed our pivotal trial and intend to submit it to the FDA once we complete our manufacturing module this summer.
I'll now have Karen take you through a discussion of our third quarter financials, and our outlook and then I'm going to come back with some concluding remarks before we go to Q&A.
Karen over to you.
Thank you.
Our third quarter revenue declined 1% organic and adjusted EPS declined 10%.
As Jeff mentioned, we're well on our way to returning to growth and sequentially. Our revenue increased 2% and adjusted EPS grew by 26% on the strength of our new products and execution.
While the resurgence of Covid did impact our performance across several businesses.
We continue to view this impact is temporary.
It's worth noting that our average daily sales in the third quarter, we're tracking higher than the second quarter through the latter part of December.
However, we saw a step down driven by the Covid resurgence starting in the holiday period and continuing through the end of the quarter.
Procedure volumes were light and many geographies and specifically impacted our surgical innovations spine and many of our cardiac and vascular businesses.
As Jeff mentioned, despite the slowdown and procedures sales if our capital equipment were strong and point to a turn soon.
Well, our third quarter revenue was in line with Street expectations. We came in 14 cents ahead of consensus on a P. S with an 11 and scent bead and better operating margins and three cents on tax.
FX, which was a greater than expected tailwind to revenues was a headwind to EPS to sense more than our November expectations.
We continue to see strong sequential improvement and our adjusted margins.
180 basis points on our gross margin and 430 basis points on our operating margin.
Our operating margin improvement with faster than expected driven in part by expense controls and SG&A.
Down the P&L, our tax rate came in lower than we expected as we finalized taxes owed on certain prior years returns during the quarter.
Turning to our balance sheet, our cash position is strong and we remain focused on investing both organically and inorganically through tuck in acquisitions and minority investments to drive our long term growth.
We recently announced another acquisition and the radial artery access portfolio from privately held risks neurovascular.
And now have eight tuck ins since the beginning of last calendar year.
With a combined total consideration of approximately $1 $7 billion.
We expect these investments to fuel revenue growth acceleration and create strong returns for our shareholders.
And we continue to supplement these returns with a strong and growing dividend.
We are and S&P dividend aristocrat, having increased our dividend for 43 years, and our yield of 2% places us and the top quintile of all S&P 500 health care companies.
Now turning to our outlook.
While we expect the impact from the Covid resurgence to diminish the effects from the ongoing pandemic to our business remains challenging to predict.
So we will continue to not provide our typical guidance.
That said I do want to give you our sense of the trends ahead.
We continue to see a lag and our average daily sales and the first couple of weeks of February.
But we expect that to steadily improve.
Not only as we exited the month, but throughout the quarter as Covid hospitalization decrease.
And I see you capacity increases and hospitals returned to more normal procedure volumes.
Set a different way, we expect march to be stronger than February and April to be stronger than March.
As we look at fourth quarter Street expectations and from where we sit today, we are comfortable with street consensus on revenues and EPS.
Within this it's reasonable to think about organic revenue growth in a range between 30 and 34% if the recovery trends follow our expectations.
And that case by group RTG organic growth would be around 50% C.
C V G around 40% and mid year around 15%, reflecting the continued ramp down and ventilator revenues and a tough year over year comparison.
And diabetes organic growth would be and the high single digits.
On the P&L, while we continue to invest and our product pipeline and launches and we do expect sequential operating leverage as our revenue improves.
Therefore, we would expect around a point to a point and a half improvement on gross margin.
And a point and a half to two points improvement on operating margin.
On a sequential basis.
Regarding currency, assuming recent rates hold constant the tailwind to revenue would be roughly $250 million.
On the bottom line, we expect an approximate four cent headwind.
I'd like to and by reminding you that our new operating model became effective earlier this month and I'm excited by the impact it will have on our culture and our ability to drive growth acceleration.
It will have minimal impact however, on our external reporting and you can refer to the slides and our earnings presentation for details on a minor changes going forward.
Back to you Jeff.
Okay. Thank you Karen.
Now to wrap up.
We're continuing to put points on the board with strong execution across the organization.
We're winning share and an increasing number of our businesses.
We're executing on a record number of product launches.
We're accelerating our growth.
And markets are coming back.
And we have exciting opportunities ahead of us and importantly, we're positioning the company for long term success as we continue to invest and our pipeline enhance our culture and execute our new operating model.
We're empowering our 20 operating units, we've de layered and decentralize the organization give.
Giving us greater visibility into our and markets and increasing our speed.
Decisiveness and competitiveness, while at the same time, leveraging the strength of our enterprise and areas like manufacturing and core technology development.
And we're able to accomplish all of this because of our talented organization.
I want to thank all of our employees for another great quarter and their continued hard work and commitment to the Medtronic mission.
So with that lets now move to Q&A.
We will now turn and to the Q&A session with the Medtronic executives answering live questions from the sell side analysts that cover the company and Francesca Demartino from the Medtronic IR team from.
For the sell side analysts that would like to ask a question. Please select the participants button and click raise hand.
And if you're using the mobile app pressed them more button and select raise hand. Your lines are currently on mute when called upon and you'll receive a request on mute your line, which you must respond to before asking your question. Lastly, please be advised that this Q&A session is being recorded.
For today's session, Jeff Karen and Ryan are joined by Sean Salmon, EVP and president of the cardiovascular portfolio and the diabetes operating unit, Bob White, EVP and president of the medical surgical portfolio and Brett wall, EVP and president of the neuroscience portfolio, we will pause.
For a minute to assemble the queue.
Yeah.
And we'll take the first question from David Lewis from Morgan Stanley David. Please go ahead.
Hey, Good morning can you hear me okay.
Yes, we can hear you fine David.
Great. Thank you for taking the question just two from me I'll start with financials. So the care and I appreciate all the detail David I just wanted to a couple of clarifications here one.
You talked about March better than February and some of your peers have talked about February and beginning to bounce a bit or improved relative to January have you seen February began to turn and is there anything about fiscal 'twenty, two and no we're not going to get our full guidance for the full year, but anything about street models and the full year, but you call out at this time that we should be focused on and and I had a quick follow.
Sean.
Hey, Thanks, Thanks for the two questions David and <unk>.
In February so far if we look at our average daily sales rate by week, and we have not yet seen a turnaround, but we really do believe that it is due to the tough weather and the United States.
And and so we do believe that we will see that turnaround very soon we think we're already seeing it in terms of procedures and hospitals and again, we're focused on March being much better than February and April much better than March.
And if we if we think about FY 'twenty two.
Bill early we are still and our planning period, and and while I'd love to give some guidance on FY 'twenty two it's premature given the fact that the Covid is still uncertain and we're and we're still and our planning period.
Okay, and then just and my follow up your exclusive and shot him and Charlotte diabetes business, obviously was the standout versus non strip malls here. This quarter. Just wondering if you could talk about and what youre seeing and seven atg relative to what we had seen historically was 670 G. The.
The guidance for next quarter, probably doesn't seem as strong as average that given the momentum and diabetes. This quarter. So is there anything to think about their engine.
And just any.
Any sense of cash use versus synergy and shows a relative timeline does it make sense to launch those products independently, if theyre going to be sort of right on top of each other for volume strategy should just a general diabetes update very helpful. Thanks, So much.
Yeah. Thanks, David So I'd say, we're at 700 atg.
And what people are really enjoying about that is getting stay and automotive a lot longer and that leads to better glycemic control with the early reports people are and the.
And the 90 from the post market.
For for question that control, but more importantly, they're not getting interrupted you take blood sugars, that's cut down and house.
They're able to switch and night was really good blood sugar control and we measure things like net promoter score on them on a product level swell and that's up about 10 fold from what we saw from experience of 670 cheat.
A very very big improvement and we're also seeing and 670, <unk> I think transmitter which connects CGM to the pump.
It seems to function better than the way, we used to connect that and 670 chiefs and that's more reliable and that that coupled with being able to see your numbers and the phone has led to a better experience as well and of course that pipeline is upgradable to.
Not just to sell and ADT, but also new sensor pipeline you asked about it and they can.
And where infusion set.
With regard to the synergy and we've already filed suit that was filed in November and synergy will be filed upon the completion of the manufacturing validation and the summertime.
So they will be separated.
Probably enough to make a difference where we're going to want to have both products and the market, but bill sort that out we don't need to launch if we don't need to launch it but I think could have a period of time, where Producible proceed synergies for both pump integration as well as standalone years.
Great. Thanks, David Let's go to the next question. Please Francesca.
The next question and comments from Bob Hopkins at Bofa Securities. Please go ahead.
Oh, great and good morning.
So two quick things and and thanks for taking the questions and first one just to follow up on David's question on 'twenty and 'twenty two.
If you assume.
And third or fourth grade of Covid and I.
Realize there's and uncertainty, but if you just assume that doesn't happen.
Karen is there anything about the street consensus and sticks out to you and that scenario.
Yeah, I would say and Bob it is.
Is early to tell from our planning process, but and you can expect very strong growth off of a depressed base next year and you know the street is expecting that so heart harder for me and it give guidance beyond that when we're still and our planning process.
Okay.
And then for Sean or for Jaguar and CVD, They always do.
The one division and the quarter, there was a little bit weaker than you originally thought.
And I was wondering if you could just comment on that broadly and how much of that was simply a worse than expected on the COVID-19 side.
You know versus you know other things that surprised you during the quarter and you know and and I asked the question because I want it and understand what sort of turnaround momentum and that division relative to your expectations. Thank you.
I'll, let Sean Sean you'll go in and take that one.
Yes, sure well so first of all I would say that you know we got affected by a few things in the quarter, mostly coming out of the holidays and that's with January and we saw the more electric art CVT.
Slow down.
Due to Covid and also where we had more concentrated kind of hospital clusters, where.
And so you heard a tertiary care setting for like caviar or cardiac surgery procedures. When you had cities shutting down because of Covid and we've just had more of an impact on volume and it's come back a little bit.
But for some weather here in the February time frame as chair and described.
I'd say generally the things that we're moving to a quarter, where we're micra also tarek server, both silica dcp's coming back and the CRM portfolio.
Exceptional from taxi, which still has its replacement headwinds, what's moving and the right direction.
And as I said choppy with a little slower than we had hoped quarter on quarter, but we think it's going to pick up momentum as we go forward into the next quarter and a.
Of course from CT coronary and while we gained share and we did have a $45 million headwind due to the China E S tender, which is going.
Recur every quarter and so it annualize this.
Okay.
Thank you.
Thank you Bob.
So I'll take the next question please Francesca.
The next question comes from Robert Marcus with JP, Morgan and Ravi.
Oh, great. Thanks for taking my question congrats on a good quarter.
Maybe two questions I'll, just ask them upfront.
Both for Karyn one on margins.
Margins that you did great Opex control and the quarter SG&A was down sequentially, which we typically don't see.
How are you thinking about coming out of Covid going into fiscal 'twenty two how much leverage can we see how much. It is spending that's been held back versus needs to be put into place once and.
Procedures come back and then second if you could touch on free cash flow trends continue to look pretty encouraging how should we think about free cash flow conversion going forward. Thanks.
Yeah. Thanks, Robbie for both questions and we did see good and continued expense control this quarter and.
Particularly in SG&A and we would expect that to continue now that has helped drive our sequential margin improvement and it's not the only thing obviously revenue growth helped drive it to and we talk about the fact that we expect sequential margin improvement both in growth and operating margins for Q4, you know as we think ahead I would just.
And keep in mind that our fourth quarter operating margins tend to be our highest margin and so I wouldn't necessarily extrapolate those onto the full year for next year, but we do again expect to have continued and good expense control.
And in terms of our free cash flow, yes, we.
We have seen very encouraging things with free cash flow, both on and you know better than I expected profit from the beginning of the year, along with better than expected collections on accounts receivable.
Despite the pandemic and so we've got we've got good momentum, particularly in both places and and you've seen our free cash flow at least year to date be above that 80% conversion I would say that in a free cash flow is more of an annual metric because cash flows can be lumpy and and while we may be under that.
80% conversion rate for the full year, just because of Covid and the pandemic. You know we are clearly committed to that conversion rate and being above the 80% going forward.
Great. Thank you.
Thanks, Robbie next question please Francesco.
The next question comes from Larry Beatles' fan at Wells Fargo. Larry. Please go ahead.
Good morning, Thanks for taking the question one for Bob One for Karen can you hear me Okay Ryan.
We can yes, thanks, Gary Great just so so Bob on the surgical robot and other filings seemed like it's on track.
Can you talk about how you're feeling about the 100 to 150 basis points of contribution and growth in fiscal 'twenty two.
It seems it seems like a lot at this point at any any reaction to the J&J system and and I'll ask my question for Karen Karen and I apologize Zhang from fiscal 2022, I know, we're going to get a lot of questions on it.
And so by my math your guidance implies about 3% to 4% underlying growth in Q4, you know.
Should we be thinking about is there any reason why we shouldnt be thinking about fiscal 'twenty two underlying growth of about 5% or you know theres ventilator, you have headwinds by banner later sales about the Valeant recall and the extra week and 21. So does that make you know, 5% underlying challenging and it and is there any reason.
And why are the margins in 'twenty, two and it won't be in line with 2019, you're exiting this year and about 29%. Thanks.
Thanks for taking the questions guys.
Great. So I'll go first Larry.
Thanks for the question and we continue to expect Covid.
Those same revenue contributions Larry I gave you and Hartford, right, which was less than 50 bps in 'twenty. One 100 day 150, and 22 and then in FY 'twenty three 200 to 250 and looked at feedback on our system and our approach to building out the digital ecosystem with you and I talked about around pictures year enterprise, it's been really part.
Positive, we feel confident and our portfolio is competitive and and we're really expand the marketplace that I've talked about a lot going forward. So I think we're on track.
Larry with what I told you and of course as Jeff mentioned in his comments a few minutes ago. We've got some really important milestones coming up but we're really excited about where we're at.
And as you'd anticipate I wouldn't I'm not going to comment on the J&J system, Larry other than to just say, we feel really great about our platform. The feedback we've got the open council the modularity the upgrade ability to leverage of our surgical instrumentation and so we feel great about the competitive most of our system and we're excited to hit those milestones we talked to.
About us here in March so with that our loans.
And back to care and I think.
And Larry I appreciate the questions on FY 'twenty, two and recognize that you guys are getting those questions.
And so I would love to be able to give you a lot more color, but I really you know, we're really and this planning phase and so its very difficult for me to give you more color than I've given.
Expect a strong growth off of a depressed base and.
You know, we're very excited about our pipeline and our launches ahead, and we've talked about you know revenue growth and being strong and accelerating into the future. So you know just will give you color when we can or official guidance. If if the pandemic layers on FY 'twenty two but in the meantime.
And we're just gonna have to wait until until our fourth quarter call and I look just to emphasize we are bullish about.
And just.
2022, but it is we're just it's too early for us to give.
And specific guidance.
Understood. Thank you guys.
Thank you Larry next question please Francesco.
The next question comes from Vijay Kumar Evercore ISI P. J go ahead. Please.
Okay.
Uh huh.
I have two questions, maybe first one and diabetes.
And I guess.
You look at the timelines here on 780.
Subject to the FDA based on and desktop.
How and seven eight and launches Dawn and Europe.
Do you now feel more confident about getting back to market growth, just with 784 spheres and <unk>.
Curious on synergies and the trial will be.
And we've seen the guide at Ibs D day.
The product and getting riskier.
And I P. J. So seven day yesterday, the device is very competitive and I think we'll do well with it when we get into the marketplace. So the sensor experiences continue to be what we need to improve and of course, we have the pipeline work Tibet.
With regard to the synergy data, we will be filing the abstract.
And as well as the Zeus data hopefully it should be up from 88 presentation. So you'll see the data and that is available if the abstract is accepted.
Gotcha, and then one I guess on <unk>.
And I'm curious art.
The Bill White has breakthrough designation and the new NCIC and ruling.
Other than adoption here.
I'm curious on.
How we should be thinking about the revenue ramp and others.
Absolutely.
Yeah.
Yes, I figured that.
That would give us four years of reimbursement and if it survives the administration changed of course within the Medicare population and that's about if I look at the trial population and we studied so far that's about a third of the population there was and the study so that means that the rest of the work needs to be done for for.
For commercial payers and that's going to be a street fight and a state by state payer by payer, we're already beginning that work, but that that would be the bigger work to do within reimbursement and of course that has to be repeated at the country level all around the world, where we have regulatory approvals. So.
The availability of and reimbursement is a critical part of that adoption curve.
And just to remind you we think that we can get that to a $3 billion mark with just the 1% penetration. So it's a huge opportunity for us and reimbursable will be important but the speed of that ramp.
Thanks, guys.
Thank you Vijay next question please.
The next question is from Peter Chickering and Deutsche Bank. Please go ahead.
Good morning, guys. Thanks for taking my questions. Karen a question for you on Robbie's question on operating margins.
Talk to you Bill had a very strong SG&A, but can you give us color on how gross margins were able to grow sequentially by 180 basis points. Despite negative organic revenue growth and is ready to begin to normalize while it can be more tailwind and the fourth quarter versus.
With the guidance you gave us.
Yeah, so on and on gross margins.
Those are clearly impacted by price and mix and.
Other things like tariffs and that can come into play. So we do expect we've had sequential improvements and we expect continued sequential improvement as we talked about and where you see it mostly showing up so far is and the operating margin and.
And because we are driving a greater expense efficiencies on the SG&A line in particular and you can expect that to continue.
Okay.
But in his script.
You did talk about and strength of capital markets and in your press release, you highlighted Missouri, and the O arm and many hospital spend whatever they casually habits and everybody and of the year.
And they lose it and Kishore talk and walk us through what you're seeing and capital markets in January and through February.
And you're seeing or hearing from the field of calendar 'twenty one.
Excellent.
We're just saying you know what.
Look this is the capital equipment that obviously that we sell is directly tied to procedures right.
Elective procedures that are tend to be and and the United States and particular high profit margin for the hospitals and.
And where we're tying this to one the value proposition and the and this equipment right, which we've invested and over the years and now and enhances the procedure and.
And the outpatient outcomes, but it is a I think and our minus signal to a snapback and and patient volumes.
And you know that we expect over the coming over the coming months and and that's consistent with the conversations we've had with hospital Ceos over the last two weeks I don't know Brett do you want to add to that.
Yeah really the same Jeff we're seeing it.
And we haven't seen the turn yet and procedures after the January resurgence, but the capital markets remain.
Strong and the.
Hospital, Ceos and others are really preparing for that and then upgrading their existing fleets.
And of of navigation and imaging and then.
And then we've seen the strong robotics quarter. So we think that portends well for the future here as we get through this time period and.
Research and some cases.
Great. Thanks.
Thank you Peter next question. Please Francesca.
Okay and the next question from Matt O'brien Piper Jaffray. Please go ahead.
And thanks for taking my questions I guess, John just for starters again on the product side of things you know micron had another great quarter.
Getting tougher on the comp side of things I'm, just curious between E R and D where youre at in terms of penetrating those two indications and especially on the AAV side. What are you seeing in terms of adoption.
And that indication and and how much room do we have to go there.
Yeah.
Yeah, I'll have to get back to you with the specifics, but just in general and the the D. R.
Penetrating within that single chamber market little bit more and that's a phenomena that we see deeper and the U S. We see outside the U S and.
And the Ava is driving growth for the most part except for China, where we introduced the VR and that's starting to tick up slightly there as well as and Japan. We only have the VR version. So we have the AAV coming and the third quarter of next year.
Japan, So we think that that's going to be a big growth driver for us.
And Microsoft penetration, but there's there's headroom to grow and of course, we haven't we.
And we haven't touched the other market, which is the 80 block market and we have a future product for that May trail personal mitral yet to go.
Got it and startup agenda spot there just given how short you been in net seat.
Jeff a question for you just on the new products side, there's just been just mentioned along with.
List of new products that youre, introducing which is great to see I'm, just curious how potentially you could be impacted negatively because of COVID-19, because the hospital and ability to adopt new technology in this environment and and how you're kind of how that could potentially slow down.
Some of these new products as we get into fiscal 'twenty, two and how you kind of guard against that.
Actually I'm actually what we've seen is despite obviously, the COVID-19 overhanging us and back to all elective procedures and has been a a.
A headwind for us and total, but where we're launching new products even in you know this.
The backdrop of these market conditions, we're seeing adoption would it be better without COVID-19, absolutely, but we are still seeing adoption I mean.
Sean was just talking about the micro I mean, it's it grew again, another great quarter at 75% and the U S and 64% or something like that globally.
You know and.
And and.
And our neuroscience and RTG.
And the Neuromodulation space, whether it be our new technology, and pelvic health or our.
Our deep brain stimulation, our percept PC deep narrow stimulator.
Or and you know and pain.
And the pain products.
T M.
The product all of those are getting a.
Disproportionate share.
Share versus the competition and and yeah, I mean, it would be better and a non COVID-19 environment, but we are seeing.
Products and get adopted and we are seeing some price improvement, where we have differentiated technology that warrants. It. So I'm looking forward for COVID-19 to be behind us here, but it really hasnt stopped hospitals from adopting.
Maybe not at the scale, they otherwise would've been adopting new technology.
Thank you.
Thank you Matt next question please Francesco.
And the next question from Joanne Wuensch with Citi and please go ahead.
Good morning, and thank you for taking the question two pieces. One there are a couple of headwinds and and relief will call. It next year is there a way to quantify the ventilator headwinds and the Valeant headwind and then can you remind us when the China tenders annualized.
Yes, sure Joe and thanks for the question and in terms of the I think you meant the navient headwind.
And we and.
We do expect our Q4 revenue to be impacted by roughly $40 million from that headwind and then if we look going forward into next year, we're going to be focused on introducing our prior product the captivity, a product and ramping that up throughout the year. So we expect that to help offset that.
And that headwind from from Navient, and so we expect about $25 million to $30 million per quarter and fiscal 'twenty two.
Little bit higher at the beginning of the year as we're rolling out the product and a little bit less toward the end of the year and then you had a second question and I need to remember what that was.
It was part of quantifying the ventilator headwind and when the China tenders annualize Yep.
Yep. Thank you so on ventilators, and obviously sequentially, we're seeing ventilator growth come down as we expected and we expect that to continue into next year, but keep in mind ventilator is a is a small part of Medtronic and and so we recognize we've got certain headwinds and.
And we're gonna be focused on offsetting where we can and in terms of the China tender in and we expect the China tender along the day S National tender along with the balloon multi provincial tenders to impact is about 45 million a quarter.
And that will start to anniversary and the second quarter of next year, and then fully anniversary and the third quarter of next year.
Terrific. Thank you so much.
Thanks Joanne.
Next question please Francesco.
Okay next question from Josh Jennings at Cowen Josh they'll have to.
Oh, hi, good morning and slot.
And just focus on the structural heart franchise and the pipeline.
Mike Coyle his departure.
And we've been surprised at Medtronic hasn't pursued and edge to edge.
Repair solution.
But it's in place, but post coapt data and.
It's a prudent.
Therapies for degenerative and functional mitral regurgitation.
He came and tell them right now are there any internal plans outside of the past and to pursue.
And being a different technologies and are there any internal plans to pursue hedged and repair internally and also.
So wanted to ask about the intrepid enrollment pace.
P series and shared expectations from what enrollment completed and then laugh.
Yeah Ali.
Any new thoughts or strategy to pursue that market, which are.
And is building nicely thanks for taking the questions.
Yes.
Yes, Josh and I guess I'll start with the.
And the edge to edge repair that's based on a Uh huh.
Surgical procedure that is done as a standalone surgery anymore and the reason for that is because you cut a leaf sort of trade one disease for another right.
And he goes I, just together and you'll leave you fixed the leak of the valve, but you'll be behind basically.
Stenotic valve, which continues.
Continues to partially leach and you know the idea of replacement valves or in the case of like a half zone, where you're basically replacing the back leaflet.
You can eliminate emaar.
Clearly and also leave open the future options to fix that valve, which you're cut off from and eclipse technology. So it doesn't really make sense to us to pursue something that has a couple of players and it already and has some residual limitations. It makes more sense to go for repair switch that that creates more options and does a better job of eliminating EMR.
With regards to the Intrepid trial, we did change the endpoint and that trial and.
<unk> picked up a lot it's a bayesian design and so the enrollment will be dependent on entrepreneur and looks down the road.
Enrollment did pick up we could you know which day.
And to have some challenges whether our COVID-19 hotspots of the individual center level, but it is continuing along.
And then.
Your last question on left atrial appendage, I guess kind of like the first one unless you have a really differentiated technology that brings more to the party.
Not something that we're Gonna proceed just me too products and we.
Obviously, some interest in that space, but it has to be a technology that really matters and brings a difference to patients.
Patients with the clinicians.
Okay. Thank you Josh let's go to the next question. Please Francesco.
Our next question from Matt Taylor UBS. Please go ahead.
Alright. Thank you for taking my question. So I wanted to go back to this and I'll.
Commentary that you made about investment in productive capital and in hospitals.
Gearing up for the snapback and procedures.
Could you offer any thoughts on whether you think there's pent up demand and the system and do you think that that's going to lead to.
Elevated levels of utilization as we go through calendar 'twenty one.
What do you think the hospitals are gearing up for or any more color on those.
Oh sure Collins would be helpful.
And then I'll take that one look I can go back to what we experienced in 2020 right. After the initial.
Initial wave of Covid hit.
Back in the spring timeframe are there.
There was a fairly you know, especially and in the U S, but all over the world.
Quick a fairly quick recovery I think much faster than people anticipated.
And we feel that prior to the this latest wave its latest spikes of Covid that really hit us and in late December we have worked through the majority of that backlog right. So call that over six seven month timeframe and so.
We would expect something similar here right. So a new backlog is built up.
And we expect to be able to work through that over the over the next six months or so.
Okay and then.
And as a follow up I was hoping you gave a nice slide and the presentation.
On the performance by a number of different geographies and and there was pretty good recovery across most of them.
Could you offer any thoughts on how you see the trends by charter developed versus emerging over the next couple of periods here and theyre going to be similar in terms of recovery in your mind.
Well first of all.
I'll start with China, China is pretty much back to normal right you know and.
And that's it for us if you back out the impact of the China tender, we had a really strong.
And China, and and don't expect that to change so China is back to normal then I'll come over the United States and we talked about that I think the you know the.
The worst is behind us with the second wave and as Karen indicated earlier, we expect to see the recovery and it was a little delayed I think by the some of the weather we had here over the last week.
And just start to see a procedural recovery and we do think that's gonna go fairly robust recovery fairly fairly quick like we saw the first spike.
And then in Europe, I think will be will trail the United States by a couple of months, it's just not going to move I don't think it's going to move quite as fast in terms of recovery and then if you look at other parts of Asia.
Asia Pacific and and in Latin America, they are back to growth and I think they'll continue to steadily improve so.
And that's the way I'd sum it up and we're really watching you know the U S recovery and and the Europe one.
And and like I said, we think Europe will trail the U S by a couple of months.
Thanks, Jeff.
Thanks, Matt.
Francesco I think we have time for maybe two more questions can we go to the next question. Please.
Okay and the next question from Matt mixed sick and credit. Please go ahead.
Hi, and thanks, so much for taking our questions.
So.
And follow up on some of the questions you've had on 'twenty and 'twenty, two and as we think about sort of the major.
Drivers of very strong pipeline, obviously as you've talked about but if you could call out maybe some of the some of the T Bill.
Business lines are and where you're gonna have continued momentum into 2022, and maybe some of the some of the larger launches or product lines, where we should expect those to be kind of the big bulk of the tent to get to that whatever it is that you land on mid single digit growth for 'twenty, two and I've got one follow up.
Well look I expect our I know the comps get a little harder with with micro but a strong continued.
Our cardiac rhythm of growth and of the year.
And and neuroscience and RTG.
And all of the the Neuromodulation related therapies, there with a D. B S. I think we're going to see a multi year.
Share gain and and growth and DBS because we are following up our percept DBS launch with our new set of site leads which enhanced the sensing and provide us your ability and we're launching a new clinical trial for closed loop adaptive DBS and pain are you know.
And we've got the new D. T M. A product from the <unk> acquisition that sits on top of her and tell us platform and and that's got a lot of momentum and.
And I think the physician community is excited about the idea of us are bringing each apps to market. So that's.
Yeah. So we've got a lot of momentum there and of course and and our overactive pelvic health business you know our neuromodulation for overactive bladder you hurt and the commentary we've got a lot of momentum there as well.
And then of course, you've got the and the soft tissue robot launching.
I've already articulated the and the impact there.
And my TG level of about 100 basis points or so.
So those are those are some big ones and I, you know and cardiology, we've got a lot going on as well art.
Or a <unk>.
Perfect relation business with with Diamond Diamond Temp launch is another one and our first line indication for our cryo product line and.
Are also exciting I think growth drivers for us I don't know Sean did I.
Leave anything out there and you've got quite a bit going on and cardiology.
And you got a lot of Jeff and we also have the official market setting so little ones that are there the replacement <unk>.
Headwinds within <unk>, and I've mentioned and go away and the coming year, which is good and of course PFA is a disruptive deflation technology for.
And what Scott coming the Linq device linked to as it expands its availability and moves into heart failure as a growth driver Teva will continue to be a great growth driver for us.
And then of course, we've got the mitral and Rd and franchise longer term for us.
I think the message Matt I think the message here is you know, whether it's FY 'twenty two or beyond.
We are really focused on.
Not just launching the products and the pipeline, but keeping the pipeline full and and really managing this business.
And balancing the short and the long term here and and I know that.
Morale within Medtronic is high despite all the things going on and the world. Despite some of the changes we made and it's because of the investment, we're making in and and our pipeline and so that that is something we're going to keep going across the company that we're hyper focused on that.
Great and the and the follow up I had and just what are the stories around the pandemic, obviously, we'd all talked about over the last year, there's been a digital and sort of the leveraging of digital technology sales and support and.
And patient interaction et cetera. So I'm wondering if you could talk a little bit about.
Those the way that if theres any additional initiatives worth, noting like what you've done with this AI and stroke.
But also you know.
How we should think about that.
And the productivity of the P&L of operations, and and a world where you'll be leaning more I suppose on digital and 'twenty, two and 'twenty three and then you were in 19 and and and early 'twenty.
Yes, I mean, they are two two categories right. The how digital is impacting our ASO I'll call it our offerings to to.
Our customers and patients.
And you mentioned viz, AI, which is helping expand the the stroke market and and the way, we and our partnership with them has helped differentiate medtronic and and drive share. That's that's a good example, but I think another one that's a big one that we've talked about is is remote capabilities and our cardiac and our and.
And <unk> businesses, and I'll highlight our cardiac rhythm business.
Correct me from wrong, Shawn and I you know even.
Theres remote programming this remote device management and Theres remote patient management and it is really picking up some of this technology was there before COVID-19, but the uptake was slow and then during Covid timing worked out we are with our pipeline, we launched some additional remote capabilities, but we're seeing things like for example.
Right and when patients have to go back to to get and it would go into the hospital and they have and implanted cardiac device they need it and MRI that used to be more of a manual intervention and Medtronic field representatives.
And actually going to the hospital to meet with the patient and make some programming changes that now.
Is up to 25% or more of those are done now remotely and it was pretty.
Low single digits prior to Covid, so the uptake on and that's just one example of how.
Digital is changing workflows, and providing I think mark and this case better patient outcomes and more you know a lot of efficiencies. So we're seeing.
And the digital piece take off and and it will provide also productivity for our company and we believe we can provide we learned how to do like medical and medical education.
Remotely and now you can't do all met and remotely I mean, Theres exchange and scientific data and there's you. There's some ability to train remotely and obviously at some point you. You know these physicians are and want to get the cadaver lab or are you now and things like that and and we haven't figured out how to do that remotely but.
We're amazed at.
And when our backs against the wall and you couldn't meet with physicians, how digital came to the rescue and provided a high quality experience and now physicians you know they are now on board with this so I think that will one speed up adoption of new technology, which is a good thing but to provide efficiencies.
For us.
Great. Thanks.
Thanks, Matt.
Let's take the final question. Please Francesco.
Okay. Our final question comes from Danielle and coffee at Seabee, Larry Danielle go ahead. Please.
Good morning, everyone and thank you so much for squeezing me in and I really appreciate it and I just have one question and that's around capital.
Capital deployment, and how you're thinking about M&A and I appreciate you've talked about more tuck in type of deals you've been pretty successful there very active but I guess, just digging a little bit keepers and sort of where where are the areas that you see white space is from a technology perspective, and where do you feel like you need the scale from.
And technology or geographic distribution perspective, and that we should be thinking about medtronic potentially being most active over the next call. It one day two years things from us.
Well thanks for the question Danielle you know look the M&A. These.
I call them.
And I won't call and by size, but smaller tuck in deals where we're getting at the at these companies at a relatively early stage.
Most cases before commercialization.
It seems to be something that's working for us. So we can do more of these we add more value.
And we're getting them at values that make sense and we're getting good returns on these and we're spreading our risk across a number of these deals and I would expect that.
Two to continue and I think the most of the work of these tuck ins most of their volume rather will come around.
Our existing our existing therapies and existing markets to augment them.
And and really we I look at it as an extension of our organic growth strategy, because we're not buying growth here, we're buying technology, and and and then and and then kind.
Kind of adding to that whether it be additional technology or clinical science and and then and then making these standard of care around the world.
And so that's going to be the lion's share of it terms of white space.
This is something we haven't signaled where you know we're always looking at new markets to better position the company.
To optimize our portfolio for growth.
You start looking at white space truly outside of their you know then you kind of move outside of the tuck in.
And these tend to be a little larger.
And and this really is something we're always looking at if we think it's the right move to help our portfolio, but the focus is the tuck ins.
Thank you.
Thanks Danielle.
Jeff. Please go ahead with your closing remarks.
Well look thanks, everybody for the great questions and and really appreciate your support and and the continued interested and and Medtronic, We hope that you'll join US again on our Q4 earnings webcast, which we anticipate holding on may 27th.
And we will update you on our quarterly progress and look ahead to fiscal 'twenty, two and others a lot of questions on 22 today. So we'll get out that are in our Q4 call. So thanks for tuning in today and please stay healthy and safe and vaccines on the way and have a great day. Thank you.
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