Q2 2021 Boston Scientific Corp Earnings Call
Good morning, and welcome to the Boston Scientific second quarter 2021 earnings call all participants will be in listen only mode should you need assistance.
Please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then 1 on your telephone keypad to withdraw your question. Please press Star then 2 please note.
Note. This event is being recorded I would now like to turn the conference over to Lauren Tingler, Vice President Investor Relations. Please go ahead.
Thank you Andrew Good morning, everyone and thanks for joining US with me on today's call are Mike Mahoney, Chairman and Chief Executive Officer, Dan Brennan Executive Vice President and Chief financial.
<unk>.
We issued a press release earlier this morning.
21 results, which included reconciliations of non-GAAP measures.
We have posted a copy of that release as well as reconciliations of the non-GAAP measures used in today's call to the Investor Relations section of our website under the heading financials and filings the duration of this call.
Ultimately 1 hour Michael focus his comments on Q2 performance largely compared to 2019 Q2 'twenty.
Little impact from Covid, as well as future catalysts and the outlook for our business, including Q3 and full year 'twenty 1 guidance, Dan will review the financials for the quarter Mark.
More details regarding our Q.
3 in full year 'twenty, 1 guidance and then we'll take your questions. During today's Q&A session, Mike and Dan will be joined by our Chief Medical officers, Dr. Ian Meredith and Dr. Ken Stein.
Let me begin I would like to remind everyone on the call that operational revenue growth excludes the impact of foreign currency fluctuation and organic revenue growth.
Excluding acquisitions and divestitures for which there are less than a full period of comparable net sales relevant acquisitions for organic growth versus 2020. In 2019 include preventive which closed March 1.2021 and work left in BTG Interventional medicine, which closed in May in mid August of 2019 was rapidly stay best.
Picture thing could be.
Further specialty pharmaceuticals.
Close on March growth 2021.
And the global Embolic microspheres portfolio.
Franchise, which were divested in mid August 2019, second quarter 2020 expenses.
Guidance excludes the recently announced Lumina surgical acquisition, which is expected to close in the second half.
<unk> 21, and third pulse acquisition, which is expected to close in Q3, 2021 which are subject to customary closing conditions, including antitrust nurses for more information. Please refer to slide 9 of our financial operating highlights which may be found on our Investor Relations website on this call all references to sales and revenue unless otherwise specified are yeah.
2020 growth goals of 6.8% ex COVID-19 represent comparisons between time periods in which sales.
Our net materially impacted by the COVID-19 pandemic of note. This call contains forward looking statements within the meaning of federal Securities laws may be identified by words like anticipate expect believe estimate and other similar words. They include among other things.
COVID-19 pandemic upon the company's operations and financial.
And it's about our growth and market share new product approvals and launches acquisitions clinical trials cost savings and growth opportunities, our cash flow and expect our financial performance, including sales.
Mark just attorney as well as our tax rates R&D spend and other expenses.
Factors.
The impact cause such differences include those described in the risk factors section of our most recent 10-K and subsequent 10 Qs filed with the SEC.
Only as of today's date, and we disclaim any intention or obligation to update that at this point I'll turn it over to Mike for his comments Mike.
You to everyone for joining us today <unk> reported very.
Does that mean Q2 financial results.
Elective procedures strength of the U S.
EBITDA for all of our regions across the globe.
Our position for the second half of 'twenty, 1 and beyond as we continue to execute our category leadership strategy driven by our innovative pipeline expansion into faster growth markets globalization efforts and enhanced digital.
Strong capabilities.
Total company second quarter operational sales grew 50% versus 2020.
Sales grew 52% of our 2029% versus 19.
Excuse me our expectations is recovering from the pandemic occurred more quickly than expected, particularly in the U S.
Currently 6 of the southern business unit.
Digital grew double digits organically versus 2019.
We estimate that 5 of our business units grew faster than their respective market.
I'm pleased with our ongoing and new product launches and we're now enrolling.
Is that pre COVID-19 brokerage.
Q2, adjusted EPS of <unk> 40.
378% versus 2020.
3% versus net.
You can add net guidance by <unk> <unk>, primarily due to sales outperformance and lower spend.
Adjusted operating margin of $25..1 was slightly ahead of our expectations as we continue to balance the best fit with our sales recovery.
Turning to be pleased with our free cash flow second quarter free cash flow generation.
<unk> of $541 million and adjusted free cash flow of 800.
Given the second quarter outperformance, we are increasing and narrowing our guidance ranges for both sales and EPS, which assumes a manageable level of COVID-19 impact in the second half of the year.
Compared to 2020, and we're targeting in the third quarter 'twenty 1 organic.
<unk> revenue growth of 12% to 14% in full year net 10 to 20 per cent compared to 19, we're targeting a third quarter 'twenty, 1 organic revenue growth of 5 to 7.
For the full year growth of 6 to 7.
Our third quarter 21, adjusted EPS estimate is 39% to 41.
And when you're operating.
Our full year adjusted EPS commitment a revised range of $1.58 to $1.62.
David will provide more details on both sales and EPS performance, excluding the revenue contribution.
We continue to expect a third quarter close for purples and our second half 'twenty, 1 closing will do in the surgical.
Now I'll provide additional highlights in the second quarter 'twenty, 1 results along with comments on third quarter end of 'twenty 1 outlook.
Within the regions on an operational basis versus second COVID-19 U S grew 22%.
Good Middle East Africa grew 9 Asia Pac before in emerging market sales grew 11.
We're directly in the U S.
S. U S grew 12% versus 2019 strength supported by faster than anticipated recovery of procedure volume levels.
With ongoing new launches.
Operationally EMEA delivered an excellent second quarter with broad based growth across nearly all major markets and franchises, even though some countries experienced COVID-19 related.
Related lockdowns and procedural delays.
EMEA region also had double digit growth in IP.
IP, sorry, P E B Endo and neuro Mod.
Net product such as accurate neo to persevere polar X X deals and we brought her out.
Strength in Middle East and Africa.
And Asia Pac although second.
Quarter results included approximately 600 basis points of negative impact.
The tender pricing versus 2019 Arthur.
All of our businesses grew double digits with strong growth in China, Australia and Korea.
Japan second quarter results were impacted by Covid.
Access with ongoing and new product launches such as <unk>.
ECB stable point and Watson flex.
Net sales grew 16% versus 2019.
Double digit growth within all business units the exception of interventional cardiology.
The negative impact of the tender price.
It seems to be pleased with our strong growth in complex PCI and imaging.
Simplify our most innovative portfolio and by the tender win.
We continue to expect full year 2021 double digit growth, China versus about 19 and 20.
And I'll provide some comments on the business units.
If I could with your old public health sales were very strong growth organically, 16% versus 19.
Balanced growth across our stone.
So Paul franchises Stein.
All of which is the largest franchise grew double digits as enthusiasm continues to have a little bit to acquisition.
We will expand our category leading portfolio this differentiator laser technology.
Health franchise grew strong double digits with continued.
Growth and resume and space businesses.
<unk> was driven by further traction of this drug to patients efforts.
Global expansion and appreciation of the long term durability.
Benefits of this and there will be a bit.
Sir.
With respect to our business growth was supported by the ongoing launch of our next generation expansion hydrogel.
In the U S and our recent launch in Europe, Mr views visible under Cte negates the need for physicians to use MRI <unk>.
An important step to optimize their treatment planning patients undergoing prostate radiation therapy.
Alright can be team delivered excellent second quarter with sales per inorganically, 15% versus 2000.
Did you sales grew double digits across all major franchises with notable strength in biliary EBIT.
Thesis and infection.
Thanks to our portfolio, including key products, such as axial spyglass and resolution hemostasis clips.
During the quarter, we complete the CE Mark for adult B, we're pleased with the early launch.
19.
Olivia differentiated visualization and selection.
On track to launch in the U S. In the second half of 'twenty.
We continue to make progress with Exalt D.
This is pure premium program, what's the second quarter as well as the resumption of <unk>.
The development activities.
The hospitals.
For the management sales were down 6% organically versus 19.
We believe that our CRM performance was slightly below the overall market inclusive of a temporary impact from the recent emblem S. ICD physician advisory.
Importantly, we recently began launching our enhanced S ICD electrode interest.
Anticipated.
We had improved performance in overall Sia revenue second half.
We expect S ICD revenue to rebound.
Domestic franchise or Lux Dx implantable cardiac monitor continues to perform very well.
Sure. The U S. We're also pleased with the strong growth and execution of the Ventas team.
We anticipate.
That business sort of at least 20% on a pro forma basis versus 20.
Well, that's your physiology sales were up 10% versus 19.
Strong international sales growth of 29% were driven by the ongoing success of <unk> in Europe stay up deploying the <unk> catheter in Europe and Japan.
Adjusted EPS sales will likely.
<unk> lagged market growth until we receive approval for these therapies.
Currently enrolling in the respective U S IDE trials.
Also exercised our option to acquire <unk>, which is a leader.
Ablation, which is an emerging field that has the potential to improve safety.
Efficacy and ease of use for cardiac ablation procedures.
We reported the only company with a commercially approved.
Product in Europe.
Actually enrolling and as U S IDE trial.
Decided to bring this differentiated therapy into our E&P portfolio.
'twenty 1.
In Neuromodulation organic revenue grew 14% versus 19, our pain management franchise.
Accelerated growth in the second quarter supported by the ongoing launch of our Nexgen waybright or ALP SCS system.
I need a digital solutions and continued clinical evidence generation.
Midyear meeting, we're moving 1 year follow up data from the combo study demonstrated a sustained high level of clinical and puzzle on channel success.
At 84% responder rate also started reporting on the real world results of the fast therapy.
To improve.
Did you provide for final and immediate pain relief.
The other bets and outcomes for existing solutions, we're pleased with progress of our solar study just focusing on non surgical back population.
<unk> started in the first quarter of this year reported.
Get into our diabetic peripheral neuropathy study.
By the end of the year.
And depot stimulation that business continues to gain share globally and deliver strong growth driven by the launch of the precise genus platform.
The expansion of our commercial infrastructure and partnership with.
In interventional cardiology organic sales grew 10% versus 2019.
Double digit growth in structural heart valves watchman and complex PCI.
Most of the watchman franchise accelerated sequentially.
Growth was driven by primarily by the increase in hospital and physician utilization rates in the.
So share gains in Europe.
Nearly all U S up accounts transitioned from watchman Pi.
We're using the flex exclusive.
Additionally, we're pleased with the 2 year results.
This features a late breaker at TVT, which reinforce positive 1 year primary outcomes.
And then secondary affected per se.
We remain excited about the outlook for the watchman franchise, our next generation flex device global expansion.
Kidney and work towards the indication expansion go into clinical trials that will be the option trial period, and watchman flex to first line oral anticoagulants.
With net valvular afib.
Also undergone project completion procedure.
Recently, we completed enrollment ahead of schedule.
Might have challenges presented by the pandemic.
In Canada, our accurate near to launch continues to do well in Europe.
By real World data presented Europe, PCR, which demonstrated.
Accurate and you ought to keep yellow rate, that's comparable to contemporary tabby devices.
Continued low permanent pacemaker.
Okay.
These outcomes reiterated that early Neogen registry.
Also presented last week at T V T as a late breaker.
Sentinel cerebral embolic protection.
Cash and devices.
Quarterly sales per day slightly new account openings globally continue to enroll in the protective cover randomized clinical trial.
1 of our therapies declined mid single digits versus 19 attributable to drug Eluting stents, which included the impact of the China tenders global price pressure.
Can you see strong.
Our growth in complex PCI and image.
The strength of <unk>.
Our global complex PCI and imaging business.
A few percent larger yes.
Yes, it does.
We are advancing opportunities for future growth drivers within the quarter began enrollment in our agent.
Trial.
First in the.
A U S study of coronary in stent restenosis.
Peripheral interventions delivered organic sales up 10% versus second COVID-19, interventional oncology.
There are share grew over 30% versus 2019 on a pro forma basis in its first full quarter post PMA approval.
That's fair.
To grow double digits and gained share in regards to a C Corp.
But an arterial of drug eluting portfolio achieved record sales in the second quarter supported by global expansion along with the sector is continuing.
We've just started enrollment on the Allegheny registry study that will gather clinical evidence on the risk.
P J D.
Sleep underrepresented patient populations.
We will also look at long term outcomes of patients being treated with ILUVIEN.
We're a ranger DCP.
I'd also like to highlight bustle scientific reached a conclusion on the adjusted capital Top 100 list of the companies, which supports healthy families communities along.
With technicians, the best place to work for disability inclusion.
Mark I wanted to be recognized 500 employees.
And the proof of the supportive environment remain committed to global sustainable practices.
Overall, we're pleased with our performance in the first half of the year, we remain bullish on the long range.
Outlook for Boston Scientific we look.
With our share in our strategic plan objectives, and our hybrid Investor day net timber.
<unk> 2000 <unk>.
Mark to extend a big thank you to our employees for the contributions and when the spirit I will turn the call over to Dan. Thanks, Mark.
Second quarter consolidated revenue of $3.077 billion represents 53.
Look forward to 6% reported revenue growth versus the second quarter of 2020.
So the $81 million tailwind foreign exchange.
On operational basis revenue growth was 49, 6%.
Sales from the prevent attack.
240 basis points.
Offset Brian.
Specialty pharmaceuticals, resulting in 52, 4% organic revenue growth.
Our guidance range.
8% growth versus 2020.
Compared to the second quarter 2019.
Growth was 8.9% of our guidance range of 3.6% this 8 million.
Net growth excludes $15 million in 2019 sales.
Oh and embolic beads.
Well, it's $178 million in 2021 sales of acquired businesses, which consists of 2 months of <unk> and a full quarter BTG interventional medicine and.
Preventive.
<unk> results drove Q2 adjusted earnings per share of <unk> 40 cents reps.
Representing 378% growth versus 2023% growth versus 2019, and exceeding our guidance range of 36 per share.
Yes.
Adjusted gross margin for the second quarter that would be 5%.
Slightly above our expectations driven by sales outperformance and higher margin business.
We have materially works through the Covid driven negative manufacturing variances capitalized balance sheet in 2020, and as a result expect slight improvements in second half gross margin compared to the first half, but still not at full year 2000.
19 level and other headwinds remain in particular and the lingering costs running plants with Covid specific measures.
There was some impact from inflation or deflation.
You need to us this inflation.
Items like increased freight costs.
Selected wage pressure, that's a price increase on direct.
Cereals.
Second quarter adjusted operating margin was 25, 1% slightly above our expectations driven by sales outperformance and balanced investment also includes a reserve for a legal settlement that we expect will improve access to additional markets for some of our cardiovascular technology.
GAAP charges within the quarter.
Additionally.
$98 million in litigation related expenses.
For incremental costs.
Paul newly estimable clients as well as known claims corresponding legal fees within our legal reserve materially all U S claims remain settled at the final stage settlement our reserves assumptions.
Quarter based on full global resolution in 2023, given recent claim activity and expenses.
Our total legal reserve of $617 million net.
<unk> increased $162 million versus March 31, driven by the medical reserve increase in cardiovascular settlement.
Partially offset by payments to close substantially all of the state attorneys general mesh settlement as well as continuing cash product liability claims.
Moving to below the line.
And interest net other expense totaled $107 million in line with expectations.
Our tax rate for the second quarter was 11, 1%.
On an adjusted basis also in line with expectations.
Adjusted free cash flow for the quarter were $838 million.
Free cash flow was 541 billion, Paul $643 million from operating activities less $102 million net capital expenditures.
Remains to deliver.
Free cash flow in line with 2020, approximately $2 billion and we continue to expect increase working capital headwinds inventory and accounts receivable.
Under a per year.
At June 32021, net cash on hand, $2.7 billion.
Our top priority for capital deployment named Tuck in M&A.
And we continue to expect to close the acquisition of surgical second half of the year Dara pulse in Q3.
You have capacity to pursue additional business development opportunities.
Going to remain active with our venture capital.
And consider opportunistic share repurchases.
Ended Q2 with 1 billion 400.
<unk> hundred 32 million fully diluted weighted average shares outstanding.
I'll now walk through guidance for Q3 and full year 2002, Michael.
For the full year, we expect 2021 operational revenue growth to be in a range of $18.5 to 19, 5% versus 2020, which includes an approximate net 50.
50 basis point headwind from the divestiture of our intrauterine health franchise, and specialty pharmaceuticals, partially offset by the acquisition.
Excluding the impact of acquisitions and divestitures.
And revenue growth to be in demand.
To 20% versus 2026% to 7% versus.
Okay.
Organic comparison to 2019.
For 2019 sales, excluding $50 million net sales of our volume.
<unk> portfolio.
Paul franchise, as well as the $11 million in specialty pharmaceutical sales and at the midpoint of guidance 2021 sales exclude.
$20.400 million sales from our recent acquisitions.
Okay.
<unk> made.
Mitchell medicine through mid August.
As of March.
$30 million of specialty pharmaceutical sales prior to Covid.
Q3, 2021, we expect operational revenue growth.
Approximately.
Moving to 13% versus 2020, which includes an approximate net 100 basis points headwind.
Specialty pharmaceuticals, partially offset by the acquisition.
Excluding the impact of acquisitions and divestitures, we expect organic revenue growth to be in the range of 12 to 14.
<unk> 2020.
5% to 7% growth versus 2009.
This includes a 300 basis points sequential comp headwind.
Q2 to Q3.2019.
Therefore, the midpoint of guidance is in line with Q2, but a continued manageable level.
For the Q3 organic comparison to 2019, 2019 sales exclude $35 million and sales of our Apollo B portfolio, Intrauterine health franchise, and specialty pharmaceuticals and <unk>.
At the midpoint of guidance 2021 sales exclude approximately $110 million net sales on the acquisitions.
BTG interventional medicine through mid August.
Yes.
Our adjusted operating margin, we continue to target an average of 26% in the back half of 2021, while simultaneously investing to normalized operating expense level in the first half of 2021 and below what we would expect Brian.
So near term run rate.
We continue to forecast our full year 2021 operational tax rate to be approximately 11% and our all in tax rate to be approximately 10%.
We continue to expect adjusted below the line expenses, which include interest payments dilution.
From our venture capital portfolio.
Costs associated with our hedging program.
Good day.
Approximately $400 million to $425 million per year.
We expect fully diluted weighted average share count of approximately 1.437 billion shares for Q3, 2021.1.435 billion shares for the full year of 2020.
We are raising full year.
Program 21, adjusted EPS guidance to a range.
Sure.
$1.62, which includes our updated sales guidance considers Q2 results, which remove additional uncertainty from our previously wider range third.
Third quarter adjusted earnings per share is expected to be in a range of 39 to 41 net.
Tony Please check our Investor Relations website for Q2, 'twenty, 1 financial and operational highlights.
All lines more detailed Q2 results.
I'll turn it back tomorrow.
Our newly appointed Vice President of Investor Relations, Congratulations, Laura and very well deserved moderate.
Thank.
Thank you, Dan and Andrew Let's open it up for questions for the next day.
35 minutes or so in order to enable us to take as many questions as possible. Please limit yourself to 1 question and 1 related follow up Andrew. Please go ahead.
Okay.
We.
I will begin the question and answer session to ask a question you May Press Star then 1 on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.
Any Sean your question has been addressed and you would like to withdraw your question. Please press star.
And then 2 at this time, we will pause momentarily to assemble our roster.
Our first question comes from Bob Hopkins of Bank of America. Please go ahead.
Oh, great and good morning.
Can you hear me okay.
Hey, Brian.
Morning.
That's on the strong.
Starter and congrats to Laura.
So first question for Mike and Dan.
Just wondering if you could talk a little bit more about your back half of 2021 assumptions you mentioned that you assume a manageable level of Covid I'm wondering if you could help us understand what that means does that mean, specifically that you assume things.
Sean the worse from what Youre seeing today or do you assume things stay about the same.
I think if you look at the numbers, Bob and I think a lot of it has to do with the comps right. If you look at our comps from 2019 quarter by quarter. There are 6697, and so we put up.
Effectively a 9 in Q2 versus 6 in 2019.
If you look at our guidance for Q3, it's 5% to 7%. So just take the midpoint at 6 that's against the comp of a of a fix which is benign which is 300 basis points harder. So in theory. The 6 effectively becomes a 9 when you adjust for comps, which is kind of what we did in Q2.
And as Steve.
<unk> go through the whole process, but the implied Q4 ends up in a similar range. So I think what youre hearing us say is that.
Q2, the impact of Covid was manageable you heard in Mike's comments that the recovery was very strong, particularly in the U S and.
What our guidance would imply is that for the most part continues in the back half so.
I won't bore COVID-19 impact would be a quarter similar to what you saw in Q2.
Okay. So it sounds like things sorry go ahead Mike.
Does that does that is that.
Track It makes sense for you.
Yeah, It sounds like Youre, assuming that things would basically stay the same they don't get worse from what you just said, which.
Correct.
We'll manage okay, great and then just a quick quick follow up question is I was wondering if you could talk just a little bit more about watchman trends in the quarter. It sounds like things went really well, but just curious if you maybe.
Maybe you could provide a growth rate over 2019.
Just curious for kind of Flushing.
Flushing out the experience with watchman in the quarter.
Brian if you can quantify it at all it that'd be that'd be helpful. Thank you.
Yes sure.
Yeah, we won't be providing a growth rate of 19, but overall the plants with watchman flex has gone exceedingly well as we mentioned the U S has really been fully converted at this point.
What's happened ahead.
Mitchell.
We enrolled the option trial ahead of schedule, but the big benefit we're seeing is with the with the ease of use and the safety profile of flex the utilization.
I've watched reflects in the U S accounts in particular continues to increase so we do have some small.
New incremental account openings.
Net of scatter far and away the bulk of the growth in U S is being driven by increasing physician utilization and penetration rates and we recently have some approval in Japan.
So are you starting to get some minor impact from Japan, which will get more so in the second half as well as in 2022.
It's really.
Being driven by.
The utilization rates and safety profile.
Physician comfort with the device and training new physicians at existing facilities. So at current doctors are doing more watchmen and new doctors at the same facilities are being trained on watchman and the referral based the physician community is becoming more and more comfortable and aware as our patients.
Patients with this treatment. So we pegged this growth of this segment to be likely plus 30% growth.
And we continue to expect to do well in it but it's exciting platform force.
Great. Thank you.
The next question comes from Robbie Marcus.
With Jpmorgan. Please go ahead.
Great.
I'll add my congratulations on a really nice quarter.
Yes.
2 for me.
First it.
It looks like you had great growth in the U S with 12% organic over 2019.
I was wondering.
Maybe you could just give us an overview.
Of where you're seeing the recovery are you seeing any lagging trends from from Delta Varian and is there any discrepancy in inpatient versus outpatient and you're 1 of the the first 2 to report here with such a global covering.
And diverse offering I think it would be really struck Paul as we are as we think about the rest of the year in the guidance.
Yes, so just broadly.
We saw terrific results in the U S. A.
Very strong results in Europe, despite the Lockdowns in Europe, and it was nice to say.
More COVID-19 impact in Europe that.
That business grew 9% organic and we had the most of the most significant COVID-19 impacts and in Asia.
And the ASEAN countries and Japan in particular.
With.
Korea, Australia doing well as was China. So we saw more COVID-19 impact broadly.
Broadly in Asia Pac.
And the strong recovery in the U S. And then in terms of the U S per your question. There we had really with the exception of EP. We think every business globally in the U S grew.
Digit organically versus 19, and likely gained share in their respective markets with the exception.
Potentially EP and CRM.
But EP grew share international markets.
And.
If you break down if you look at Euro and Endo picky.
Also pie.
We have a more substantial ASC business and outpatient business, you saw 15% 16% growth.
In Europe, 15% in Endo, and 10% organic NPI with strong growth in their sphere.
I would say in the U S. We saw a nice rebound both in the hospital setting, which I think has been verified by many of the.
Public Company Hospital changed reported prior to us and we saw strong growth in the outpatient ASC centers.
Center as well.
Great and.
Maybe a follow up for Dan.
Suggestion, Dan I think some of US had a little trouble hearing the nuance guidance. You gave if you guys want to send out your prepared remarks, I think that'd be really helpful for all the investors.
But maybe just as a.
A quick follow up you mentioned, a higher input cost in Cogs, so improving in second half versus first half, but maybe not all the way quite up to 2019.
How are you thinking about the company's ability to absorb and pass on some of those costs and do you think that's going to be an issue going into 2022.
As we exit the year here because you did have great expense control down the P&L just thinking about the cost component.
Sure. Thanks, Robbie relative to gross margin. So we were we averaged 69.8 in the first half and I think we feel comfortable that we'll improve upon that here in the second half of 'twenty 1.
2 specific to what's going on in gross margin.
We will have the tailwind of.
The COVID-19 related variances that we put on the balance sheet. During 2020 those are amortized over to your inventory turns and so effectively as of 630. This year. The end of Q2 those are gone so.
That's good news.
We do still have some COVID-19 specific.
Lingering costs running plants in a COVID-19 environment. So COVID-19 is not completely done obviously as you know.
And so we do have those and those are adding cost and then as I mentioned in the prepared remarks, not unique to us we do have some pockets of inflation in.
Particularly with freight where we just need more commercial airliners to be flying than are flying today.
Wage pressure in certain locations and then direct materials, particularly precious metals and things like that we're seeing inflation. There. So we do have some some headwinds but overall as we look at the back half of 'twenty 1 we.
We would assume we would improve versus that 69.8 average in the first half and then as it.
Related to 'twenty, 2 and beyond.
Envision will give you a more detailed review of that at Investor day on the 22nd in September.
Great appreciate it thanks, a lot thanks Rami.
The next question comes from Larry <unk> Olsen.
With Wells Fargo. Please go ahead.
Good morning, Thanks for taking the questions and congrats on the quarter and congrats to Lauren just 1 follow up on the Investor meeting in September maybe Dan or Mike just level set us kind of what we should expect.
Will you provide an update to your financials.
Annual goals and pipeline and any reason to think the algorithm of 6% to 8% sales of 50 to 100 basis points margin improvement with double digit EPS growth has changed and I had 1 follow up.
Oh My Gosh, if we give you all of this and you're not going to show up.
We'll be there Mike.
We expect to.
As we've done in previous years.
Provide an update on our on our portfolio across the company.
Give some visibility to the long rate strategy and financial goals.
Similar to what we've done historically, so we would look to provide some more updated 3 year <unk>.
<unk> guide.
<unk>, what we think margin improvement will look like but more importantly.
You hear from the business unit presidents on the portfolio and innovation across the company.
Alright, and just for my follow up Mike on aluminum and for pulse why was this the right time to acquire both whats the outlook.
Look for Illumina as that $200 million you said for sales in 2021 does that net after your distribution.
Agreement, Thanks for taking the questions.
Yes, I have to verify that number.
We'll get the each day.
And the number of in the past in terms of the luminous net numbers so.
Well, let's circle back on that 1 but.
Timing just strategically.
It makes perfect sense and I think that the group is aware of this we had distribution agreement illumina as the U S distribution agreement with them China.
Which was effective but therefore, we werent getting the same level of gross margin benefit that we wanted nor can we innovate on the.
Platform and.
I guess tie it more comprehensively into our stone smart platform.
So by owning it we obviously improve our gross margins, we can drive a more robust product roadmap within our stone smart ecosystem and then we can expand our direct coverage in Europe, and especially in China, where they have a.
A very big business.
That makes sense and what do we say here.
The full year growth number of 200 million for 2020, 1 we do not disclose them that Larry.
<unk> Mike.
So a fair Paul.
We expect that to close pretty soon.
Soon here early in the third quarter.
I won't go too far on it we're really excited about is the only <unk>.
<unk> platform in Europe, and the pulse yield ablation field and they are enrolling ahead of schedule and our U S clinical trial the.
The physician community and Doctor signs on the phone he can comment on cash.
Dr. Stein here in the <unk>.
Steve you want to provide a quick update in parables, yeah, absolutely Mike.
I think yes.
The pulse field ablation had particularly it was a ferret pulse approach to pulse field ablation is maybe the most exciting things to come along and ablation.
Since ablation.
You know what.
What fair pulses demonstrated in a wealth of clinical data to date over 100 patients in clinical trials that have been reported out publicly.
Is it a very high expectation that this is gonna be safer than others thermal approaches do ablation and because of the safety it's much more straightforward procedure.
Procedure for physicians, so quicker procedure for physicians and is that again likely to be at least as effective and probably more effective than other technologies. So given that we were extremely excited and optimistic about their approach and as Mike said.
Given that they are the only approved technology in Europe, given that they're actually shooting so well on their clinical trials.
By exercising the option now and again hopefully closing in the near future. We have the opportunity to now to help them scale up distribution production and again the.
The ability to help them and continue to execute their clinical trials and.
And get to U S approval in a timely fashion.
Thank you.
Yeah.
Youre welcome.
The next question comes from Vijay Kumar with Evercore ISI. Please go ahead.
Hi, Mike Congrats on the quarter here, Brian Thanks for taking my question 1 on a high level.
If I just look at the <unk>.
Our performance and not the back half implied guide.
<unk> 9 <unk> per.
<unk> and <unk>, which is a pre pandemic 2019 back half implied is that 7 and 9.
9.
We're already running if I look at the 2 beautiful to your performance.
We're already running well north of 8 per cent.
Prevent us luminous once these deals become organic there should be incremental plus you have these pipelines.
I guess when I look at the L. A P of 6 to 8.
So shouldn't these results provide.
High degree of confidence in upper end of that <unk> on the top line going forward.
Yes, I mean I think.
I'm going to comment specifically within the range of 6 to 8 obviously will as Mike said, probably tee that up for an investor day conversation relative to the portfolio and the overall result.
I don't think it would serve us well to comment relative to the specifics in there, but the strength of the portfolio and the pipeline is what's giving us the confidence to.
To to put up the numbers that we put up in the past and obviously looking forward give us the confidence in the revenue growth trajectory for the future.
So but specific to where in the range I don't think I'll go there.
Understood Dan just 1 on that margin maybe.
When should gross margins get back to pre pandemic levels or perhaps.
On operating margins just given the commentary around.
Free and no inflationary pressures.
So 22 operating margins be at 2019 levels.
Yes, I mean, if you think of the back half of this year, that's what we're calling for Vijay. So we're calling for an average in the back half of 'twenty 1 to be at our full year 2019 level, which was call it around 26% so.
Paul is to do that in the back half of 'twenty, 1 and set us up for 'twenty, 2 and beyond gross margin as we said it was 69.8 in the first half it'll be.
Improving on that in the second half so when does that get back to the specific 2019 levels.
We'll again, we'll give more details at Investor day, but if you.
At the at the overall operating margin level. The thing that we've proven time and time again over a over history is that we make the effective trade offs through the P&L. So if you think back 456 years ago gross margin was growing very nicely in.
As a percentage of sales and we were investing in places like.
The go markets in other areas, so SG&A was and sometimes actually increasing as a percentage of sales, but still delivered a very solid operating margin progression through that timeframe. So it may shift a little bit as we go forward, maybe gross margin doesn't pay as many of the bill so to speak but SG&A potentially was left with lower travel spend in other tradeoffs that we'll make.
In addition to more efficient R&D spend.
The goal is always to have operating margin increase year over year, and I think our track record speaks for itself on that.
Thanks, Dan.
Thanks Vijay.
The next question comes from Cecilia furlong with Morgan Stanley. Please go ahead.
Ahead.
Hey, good morning, and thanks for taking my questions I wanted to ask about S. Yes, Charlene tens and really just what you've seen from a relative recovery versus other more elective procedures in the quarter and then kind of tie in also just greater flex what type of traction you've seen recently.
Sure Yeah, we have.
Haven't had all the competitors report in that field. So we're not exactly sure how we grew versus the competitive set but we had a strong.
Acceleration into Q.
U S a.
Overall in the quarter and I think part of it is.
Combination of the unique.
<unk> portfolio that we have with the new launches.
The new fast algorithms and I detailed in the script that may have had a difficult hearing is we're going to send that out to people.
The combination of the new fast algorithms as well as the the clinical work that we're doing so SCS overall improved versus first quarter and then it was augmented as you've mentioned.
But virtu flex.
Growth in the quarter as well as continued growth in our RF portfolio, the RF portfolio, although a bit smaller continues to exceed expectations and then the other really big growth driver for Neuromodulation in the in the quarter was our deep brain stimulation business and it's really impressive what that group has done.
And when do you need to gain market share or really the number 1 de novo player in Europe.
Close to that now in the U S and they continued to accelerate.
Market share gains through the innovation of that business. So the DBS, probably had the largest snapback of any business.
In the second quarter with the Covid impact wind in the U S.
But overall, the SCS market and the pain side did quite well as well, but we'll see.
Other competitors report, but we are impressed with the sequential growth that we saw and happy overall with the 14% growth versus 2019 for all of that neuroma business that Mike just detail.
And you also.
Also caught out with your own in your prepared remarks could you just comment a bit more just what you've seen from recent procedure trends in procedure recovery trajectory coming out of Covid.
Yes, so I think with our resume business.
We continue to drive increased growth there.
The overall.
Europe business had a big bounce back in the quarter growing 16% and the big things that we're focusing on with the resume as we're continuing to drive improved reimbursement rates with some of some of the specific payers, which is helping but it's also the long term durability data.
And that's giving physicians more confidence.
And the product that's driving the growth and we are also expanding our international footprint with resume particularly in Europe and also some additional DTP direct to patient.
And directed physician marketing campaigns to drive more awareness. So it's really a combination of all of those things that's improving the growth.
Paul will resume.
Okay. Thank you and congrats on the quarter. Thank you.
The next question comes from.
Excuse me Peter Chickering with Deutsche Bank. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions and congrats on.
Nice quarter and also congrats to Lauren.
Follow up on Bob's question I understand the comps versus 2018 for <unk> is challenging at 9%.
We also heard from the public hospitals that June was the best month of the quarter and strong June trends continued into July. So just curious as you look at your third quarter guidance.
Protein normal <unk> seasonality or are you simply assuming that you will see at some point during the quarter.
Yes, I appreciate the question.
It's not going to comment kind of intra quarter as we sit here in the in the third quarter I think the answer to Bob's question.
Hi.
The short answer is we're expecting the trends that we saw.
In the second quarter to continue we're not going to parse it month by month, we're expecting the overall trend of that growth rate to continue comp adjusted in the back half of 'twenty, 1 but specific to a month versus months, we're not going to get into that those specifics.
Okay fair enough.
Quick question on Exalt D I understand the markets have been pretty dynamic.
Are you for last 2 years, where due to COVID-19. Mr..2 questions how are you.
He counts you're selling <unk> into at this point.
And those accounts, what does the market share and reorder rate of those accounts and as you watch exalt D. How much revenue contribution should we assume in the back half of the year. Thanks, So much.
Yeah, we're probably frustrating.
We're not prepared to share that information with you on Exalt D.
As you've heard in previous calls.
Paul do you updates the team continues to make progress as Covid impact is improving although hopefully they'll bavarian isn't too much but it is approved in the U S. We have seen more of an uptick in traction with <unk>.
D.
As physicians are becoming more comfortable with it.
Raining and the capital placements have gone well, so youre seeing a uptick in exalt D usage and then in the second half of 'twenty, 1 you will see a enhancements.
Next released or net next generation release, if you will of exalt D to further improve.
Prove the platform. So we expect to see continued momentum with that the big news for US is the recent approval of Exalt D.
And some some sites that are tried it for the first time in Europe, and we're really bullish on that platform. That's a net.
Stablish market with a few competitors, but we think we have some differentiation.
<unk> capabilities with Exalt D.
So in the second half of 'twenty, 1 and much more so in 'twenty, 2 youll see the impact of that platform as well so.
It's all going to plan, but where we're seeing some improved momentum with exalt D. In the U S. As Covid is improvement.
Thanks, so much.
Yes.
Your next question comes from Joanne Wuensch with Citi. Please.
Hi can you hear me, Okay, Hey, Kenneth.
Good morning, Brian excellent good morning, and thank you for taking my question it.
It looked to us like when they compared the delivery versus consensus there's 2 areas.
That might be lagging a little bit R. E T in CRM, but I also remember that there are a number of key products in those on those sections can you highlight 1 or 2 that might bring you back into sort of the market taker or gain position.
Yeah, well you nailed it.
We think each and every 1 of our businesses with exception.
<unk> EBIT grew double digits first 19, but likely globally that's below market.
CRM, we think we're a little bit below market with the exception of those 2 we think every other 1 grew faster than market on E. P.
I think you'll see a similar trend likely for the next couple of years and that we expect the R. E T results.
<unk> in the international markets to exceed market growth, which we think they did in second quarter.
On the heels of our cryo platform, where we're.
Now the only competitor to it of the established player in Cryo and we're taking share there and then our stable point, which is our force sensing catheters approved in Europe.
And as a previous question, we will be closing the <unk> deal.
Early third quarter and there are commercial in Europe. So the 3 distinct technologies that are quite differentiated will be our Irish platform, a thorough pulse upon closure, our cryo and stable point in Europe, and we also expect to see benefits of cryo.
<unk> in Japan.
Towards the second towards the end of 'twenty, 1 and full year 'twenty 2 so our international business, which is now bigger than our U S business any P will grow faster than market in our U S business will likely lag market until we get those products approved and all of those products are in clinical trials.
Right now and thankfully as Covid has improved the clinical trial run rates of those platforms have increased significantly over the past 100 days.
That'll be the balance and any P. A really strong outside the U S less so in the U S likely.
For the coming earnings calls and CRM.
Our performance in the second half of this year will improve versus what you saw in second quarter.
And the primary reason for that is the S. ICD adviser S. ICD advisory that we had which caused sales to lag a bit and S. ICD in the S. ICD segment for US, which is a big segment force globally and now we have a new lead.
With being implanted now.
Across in Europe, and the U S and we expect our third quarter and fourth quarter S. ICD results to improve quite a bit versus second quarter, which will improve the overall growth rate of our CRM business and likely take us closer to market growth rates for all of CRM.
That is.
Thank you and my second question also is product related if I had to say to you what are the 3 products you want us to focus on over the next 6 to 12 months what would your answer be.
If I only a pick 3.
Watchman.
Number 1 given the scale of it.
The growth profile, we see in this enthusiasm.
I would say within Pi the BTG acquisition has exceeded expectations and the fear sphere segment with <unk> in particular in <unk> doing extremely well.
And then if you give me a third 1.
It's a different areas to speak through I think.
Yes, I think just overall in the.
I know it's Super early we are very bullish on the combination of cryo and fera pulse, although not in the U S. Yet that market is so large and the growth profile of EPS. So good that will be the only company.
There's a lot of that will have IRB, and cryo and <unk> and <unk>. So all of those smaller dollars now.
Lighting opportunity for us.
Thank you so much.
You bet.
The next question comes from Travis Steed with Barclays.
Company. These go ahead.
Hey, there Travis excuse me sorry.
Sorry, I was on the line is open hi, good morning.
Thank you for the question.
I appreciate some of the longer term comments you gave on operating margin just curious what the base we should be using.
For that 50% or 50 basis points of margin expansion per year, or if we should think about that 26% in the back half here. So thinking about the street somewhere in 2006, 5% next year would be a reasonable place to be at this point.
I wouldn't comment on 'twenty, 2 but for 'twenty, 1 I think the reasonable basis.
As a starting point would be that 26, that's what we're kind of resetting to here in the back half is where we were in 2019 and it should be a nice jumping off point for 2022, Yes, I would agree with you there Travis Okay, Great and then I just wanted to make sure. The message was clear on the full year guidance and the guidance raise so youre going from 2% to 5% for the full.
<unk> $2019, 6% to 7% is that all coming from the Q2 beat and so basically the back half expectations or staying the same or are you actually seeing more confidence here in the back half versus your original expectations.
If you go back to the original guidance back in February and for the most part reiterated.
Full year, Mark It was COVID-19 impact in Q1.
Less COVID-19 impact in Q2, and then a more of a return to more normalized procedure volumes in Q3, and Q4 I think we got a little bit of that early.
Our results would.
0.2 versus our guy.
In April for Q2, and then if you take what we're saying about the back half, which we say is the same type of COVID-19 impact and pretty much. The same type of results in Q3 and Q4 as in Q2.
It's a broad based story of Q2 Q3 Q4, it's not just Q2.
Okay, great. Thank you.
<unk>.
Okay with that.
Another question.
Now Andrew the and with that we would like to conclude the call. Since it was difficult to hear some of the prepared remarks, we will be posting the transcripts or prepared remarks to our investor Relations website. Before you disconnect. Andrew will give you all the pertinent details for the replay.
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Using access code 10156890, again 10156890, and so August 3rd 2021 at 11.59 P. M. Eastern time. The conference has now concluded thank you for attending.
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