Q4 2022 Medtronic PLC Earnings Call
We have largely mitigated their financial impact.
However, this quarter one of our largest businesses surgical innovations was adversely affected by certain raw material shortages and this resulted in large back orders and caused our si revenue to come in well below our expectations.
Several of our other businesses also faced supply challenges in the quarter, but to a lesser extent.
Now we're down the path of improving our supply chain capabilities and we're leveraging the expertise that Greg Smith, our new global ops and supply chain leader brings from the retail consumer products and automotive industries.
Greg and his team are making progress addressing the areas, where we can improve including the management and resiliency of our critical suppliers and manufacturing network.
The recent stress of these global supply chain issues has further eliminated the need for the enhancements.
We have a new global structure in place that consolidates operations and supply chain functions, which were previously fragmented throughout the organization.
Now this is a big move for us and there is still a lot of work to be done, but I am confident we will come out of this with a more resilient end to end global supply chain that we believe will be a competitive advantage in our industry.
While some of our Q4 challenges will persist in the near term, we expect strong improvement in the back half of our fiscal year and we remain focused on delivering our long term strategies. We've made significant changes over the past two years to position the company for accelerated and sustained innovation driven growth.
Our pipeline is robust and continues to advance with a number of upcoming catalysts and fast growing med tech markets.
We're committed to creating strong returns for our shareholders and we're making progress with our enhanced portfolio management and our capital allocation processes.
We're investing in future growth drivers while at the same time, returning capital primarily through our meaningful and growing dividend, which we just increased again today by 8%.
Regarding portfolio management, we are continuing to advance the robust process, we began talking about earlier this year.
And within that and has a smaller initial step we're pleased to announce that we've reached an agreement where we will contribute our renal care solutions business into a new company, which we will jointly owned with Davita.
And in return, we will receive up to $400 million in value from them and we expect this transaction will close in calendar 2023.
The new company is going to develop a broad suite of novel kidney care solutions, including Homebase products.
I'm excited about this for a couple of reasons first this business is going to have the focus that it needs.
Second Davita is a global leader in kidney care and will be a great partner to commercialize and scale. This innovative technology.
And finally, both Medtronic and Davita will participate in the expected upside.
Now turning to market share product availability affected our performance in the quarter with our overall company share down about a half a point.
On the bright side, even with our challenges half of our businesses held or gained share and.
And as you know market share is an important metric for us at Medtronic as it is a driver of our annual variable compensation, along with revenue growth profit and free cash flow well.
Well I won't go through market share business by business in the interest of time, we'll be happy to take questions in Q&A.
Now, let's cover our product pipeline, where we're advancing several meaningful technologies that can create new markets disrupt existing ones and accelerate the growth profile of Medtronic.
We made great strides with organic pipeline in fiscal 'twenty to conducting over 300 clinical trials and receiving over 200 regulatory approvals in the U S Europe , Japan and China.
Our recent product launches are starting to make an impact across our businesses and as we look ahead, we have increasing visibility to upcoming catalysts in the back half of the calendar year that we expect will help accelerate our growth as we go through fiscal 'twenty three and beyond.
Starting with our cardiovascular portfolio in cardiac rhythm management recently launched Lela pacemakers, including our micro avian, Japan and micro VR in China led to above market growth again this quarter with.
We just received approval for Micra Avi in China earlier, this month, and we expect geographic expansion to continue to drive strong micro growth.
Icd's, we're preparing to disrupt the single chamber market with our Aurora Extravascular ICD.
We continue to drive towards CE Mark approval for Aurora later, this calendar year and U S approval next year.
With Micron EV ICD, we expect continued strength in CRM.
In cardiac ablation solutions, we've been assembling a number of technologies to increase our impact in the $8 billion EP ablation market building on our leadership in Cryo ablation we're.
We're continuing the rollout of our Diamond tempt RF system and exclusive Cryoablation first line indication for <unk>.
We're advancing our pulsed field select anatomical pulse field ablation system, having fully enrolled our global pivotal trial.
We're also expecting to fill competitive gaps in cardiac ablation with our recent announcements to add a differentiated mapping and navigation system and left heart access portfolio, including a trans septal access system that can perform both mechanical and RF crossings.
In renal denervation data from our spiral HCN on Med pilot study were presented last month at ACC and simultaneously published in the lancet. These.
These data demonstrated durable and clinically significant blood pressure reductions through three years.
And last week additional data were presented at Euro PCR, which showed those receiving already and spend significantly more time and target blood pressure range, adding to our robust body of evidence.
In Q4, we also announced that we completed enrollment in the full cohort of patients in the on Med study, which we expect to complete the six month follow up in the second half of this calendar year.
We'll then look to present, the data and submit for FDA approval as Ahmed is the final piece of our submission.
In structural heart differentiated durability data for our tavern valves were presented as a late breaker at ACC last month.
The data showed that our tavern platform is the only one to outperform surgical valves and durability at five years as measured by SPD or structural valve deterioration.
And less SPD was associated with better clinical outcomes, including mortality in heart failure hospitalization.
Additionally, durability data were presented from a separate U K registry. The first to look at tavern data past 10 years.
And it showed core valve had one third the rate of structural valve deterioration compared to SAPIEN and SAPIEN XT.
And data at Euro PCR last week reinforced our excellent clinical outcomes with our customer overlap implant technique.
Including one day hospital discharge.
Single digit pacemaker rates and the absence of moderate or severe PDL.
In the quarter. We also continue to launch Evolute Pro plus in Europe and began the launch of Evolute Pro in China. Our first entry into this large and underpenetrated market in the U S. We're planning to start the limited market release of our next generation type of valve Evolute FX here in our first fiscal quarter.
And move into full market release later in the fiscal year.
We're also looking to expand our tavern locations. We had first enrollment earlier this month and our expand tavern two pivotal trial evaluating our tavern platform in patients with moderate symptomatic aortic stenosis.
Overall Teva represents a large growth driver for Medtronic as we expect this roughly $5 $5 billion market to exceed $7 billion within the next three years and reached $10 billion in the next five years.
Moving to our med surge portfolio and surgical robotics, we remain focused on the limited market release of our Hugo robot, while we scaled production.
We completed Hugo installations in Denmark, France, and Italy.
We also continue to increase our installed base of touch surgery enterprise, our AI powered surgical video analytics platform.
And our patient monitoring business, we just received FDA clearance earlier this month for our next generation Nellcor Oxy soft pulse ox sensor.
Now this sensor includes a special silicon adhesive designed to protect fragile skin, while enhancing adherence.
It's low profile and brighter Leds improve accuracy and responsiveness for the most challenging neonatal and adult critical care patients.
Now turning to our neuroscience portfolio, and our cranial and spinal technologies business.
Seeing strong adoption of our unit AI enabled surgical planning platform with a mid 30 sequential growth in our U S user base.
The ongoing launch of our catalyst expandable titanium interbody system.
And the rollout of our enabling technologies continues to differentiate us in spine.
Customer demand for our capital equipment remains strong and.
And we had record quarters for our Missouri robotic system and stealth station navigation system.
In Neuromodulation, we are building our commercial teams and have started the initial launch of our entellus advanta spinal cord stimulators to treat diabetic peripheral neuropathy.
We believe VPN is one of the largest opportunities in med Tech and we expect the market to reach $300 million by FY 'twenty six within an annual total addressable market of up to $2 billion.
And we're also excited about our Inceptive E caps closed loop spinal cord stimulator, which we submitted to the FDA late last calendar year.
We expect incentives closed loop therapy, which optimizes pain relief for patients to revolutionize the SCS market.
And brain modulation, our ongoing launch of the percept PC neuro stimulator and send site directional leads is driving new implant share in both Europe and the U S.
And this is the only system that can stimulate and sense brain signals.
In pelvic health, we received FDA approval of our Nextgen Intersting recharge free device <unk> and that was happened in the fourth quarter. <unk> features our proprietary fifth generation battery chemistry that provides 10 to 15 years of battery life without the need to recharge.
And in E&P, we announced earlier this month that we completed the acquisition of intersect anti <unk>.
And we're excited to add their attractive high growth complimentary products into our existing business.
We believe we can grow intersex products in the double digits over the next several years as we expand use of both the propel and <unk> sinus implants globally.
In diabetes or mini med <unk> insulin pump combined with our Guardian for sensor continues to be extremely well received in markets, where it's available.
Now this system has a very positive user experience with no finger sticks and more time in range. This is due to its near real time basal insulin and auto correction bolus is every five minutes to address underestimated carb counts and occasional Miss Neill doses.
Very strong data on <unk> and Guardian four were presented at <unk> last month, showing improved time in range with less user interaction.
Additional datasets on this differentiated system will be shared at Ada next month.
We also announced that Germany, and France began reimbursement of our system in the quarter, which helped drive high teens sequential international growth in diabetes and in the U S. We made substantial progress in meeting our observation and warning letter commitments and continue to have regular communication with the FDA.
And our CGM pipeline, we expect to submit our next generation sensor <unk> for CE, Mark and FDA approval. This summer.
In addition, we are advancing multiple next gen sensor and pump programs, including patch pumps were making considerable investments in our diabetes pipeline with line of sight to restoring strong growth in this business over the coming years.
And with that I'll turn it over to Karen to discuss our fourth quarter financial performance and our new guidance for the next fiscal year Karen.
Thank you, Jeff our fourth quarter organic revenue increased one 4% below our guidance and consensus.
Compared to consensus about 15% of the difference can be attributed to China <unk>.
Given recent COVID-19 shutdowns and slowing distributor purchases in spine ahead of a potential national volume based tender.
About 10% of the difference is a result of changes in foreign exchange rates over the course of the quarter.
And the remaining difference and the largest driver is due to supply chain issues that Jeff discussed.
Despite revenue coming in roughly $350 million less than we expected we reduced the impact that this would have had on our bottom line.
Resulting in EPS of $1 52, four cents below our guidance range.
From a geographic perspective, our U S revenue declined 2%.
Non U S developed markets grew 4%.
In our emerging markets grew 7%.
Within emerging markets, China declined 10% given the impact of the Covid lockdowns.
But we had very strong growth in many other emerging markets, including high teens growth in eastern Europe .
Low twenty's growth in Latin America.
Low 30 as growth in the Middle East and Africa, and mid Thirty's growth in South Asia.
In fact, excluding China emerging markets grew in the low twenties.
Turning to our margins.
Our fourth quarter adjusted gross margin improved by 30 basis points year over year.
Driven by product mix with lower sales of ventilators and higher sales of products like micra.
While we were impacted by inflation with increased freight expense, it's worth noting that the full impact from inflation on raw material and direct labor costs will be realized over the next couple of quarters as our inventory rolls off our balance sheet negatively affecting our gross margin.
<unk>.
Moving down the P&L, we also drove additional and continued improvement in our adjusted operating margin, which increased by 40 basis points, excluding the benefit from currency.
We also ended the year with free cash flow at $6 billion, representing year over year growth of 22% and meeting our goal of 80% conversion from adjusted net income.
Our balance sheet remains strong and we continue to allocate our capital to investments that we expect will generate solid future growth and shareholder returns.
We're investing heavily in R&D with programs, especially targeted for faster growing med tech markets or where we have an opportunity to create new markets.
We're also using our balance sheet to complement our innovation driven growth strategy with tuck in M&A utilizing our very active capital committee process that was developed as part of our new operating model.
In fiscal 'twenty, two we announced four acquisitions totaling over $2 $1 billion in total consideration.
As Jeff mentioned, we closed our acquisition of intersect anti earlier this month.
And also announced our intent to acquire a left heart access portfolio last month.
At the same time, we're investing in promising early stage ventures to keep our fingers on the pulse of new products and technologies.
Incubated by companies that one day could become future acquisitions.
We're also actively providing strong return to our shareholders returning five $5 billion in fiscal 'twenty, two through our dividend and net share repurchase.
And this morning, we announced that we're increasing our dividend by 8%, reflecting the confidence we and our board have in our financial strength and future earnings power.
We are an S&P dividend aristocrat, having increased our dividend for 45 years now and our dividend is an important component of the total return we generate for our shareholders.
This past year, we paid $3 $4 billion in dividends.
And we're supplementing that through opportunistic share repurchase, particularly in periods, where we see share price dislocation.
In fact, we repurchased over $2 5 billion of our stock in fiscal 'twenty, two including $1 4 billion in the fourth quarter.
Now turning to our guidance and starting with revenue.
We continue to expect our recent launches and product pipeline to make a difference in many of our businesses and.
And Jeff covered many of them earlier.
We expect organic revenue growth in fiscal 'twenty three of 4% to 5%.
While the impact of currency is fluid if recent exchange rates hold foreign currency would have a negative impact on full year revenue of one to $1 $1 billion.
By segment, we expect cardiovascular to grow five 5% to six 5%.
Medical surgical to grow three and a half to four 5%.
Neuroscience to grow 5% to 6% and.
And diabetes to decline, 6% to 7% all on an organic basis.
While we are hopeful that we can receive approval for 700, Atg and Guardian for sensor in the United States. We've elected not to include it in our guidance.
In the first quarter, we would have your model organic revenue to decline in the range of four and a half to five 5%.
Which conservatively assumes no near term improvement in our supply chain and no major change to underlying fundamentals.
Assuming recent exchange rates hold the first quarter would have a currency headwind between 350 and $400 million.
By segment, we expect cardiovascular to decline 1% to 2%.
Medical surgical to declined seven five to eight 5%.
Neuroscience to be down 5% to 6% and.
And diabetes down 8% to 10% all on an organic basis.
Moving down the P&L I provided early color for fiscal 'twenty three on our last quarterly earnings call.
Where I talked about the expected impact of inflation wages acquisition dilution and foreign exchange headwinds.
These still hold but we've also seen environmental changes since late February .
Inflation and foreign exchange rates have become larger headwinds.
And we're now factoring in continued supply chain challenges early in the year.
Inflation and FX pressures also create near term challenges on our margins.
Although we continue to look for opportunities to offset them.
At the same time, we continue to prioritize our long term investments in organic R&D.
With a focus on large opportunities in future growth markets like renal denervation robotics, diabetic peripheral neuropathy and Transcatheter mitral valves.
Taking this all into account on the bottom line, we expect non-GAAP diluted EPS in the range of $5 and 53.
To $5 65 in fiscal 'twenty three.
Which includes an unfavorable impact of 20 to 25 from currency at recent rates.
For the first quarter, we expect EPS of $1 10 to $1 14, including an FX headwind of about five at current rates.
Before I send it back to Jeff I want to thank our employees around the globe, who are working hard to overcome the macro challenges we face.
Thanks for all you do to fulfill our mission every day.
Back to you Jeff Thank you Karen.
While we spend a lot of time covering the fourth quarter, it's worth briefly reflecting on what we've accomplished in fiscal 'twenty two.
It's certainly been a difficult environment and our organization is enacted big changes in such a short period of time and under unique circumstances to better position the company.
It was our first full year in the new operating model and with our enhanced Medtronic mindset of acting boldly competing to win moving with speed and decisiveness fostering belonging and delivering results the right way.
We've also made strides to becoming a more diverse and inclusive organization.
He was very proud that Medtronic was recognized earlier this month as number 10 on diversity Inc's top 50 U S companies for diversity.
Even with that we're committed to improving through innovative programs to attract develop and retain top talent from all gender and ethnic backgrounds.
Along those lines. We've made notable hires in fiscal 'twenty, two recruiting great talent from health care technology industry and beyond.
While we've implemented a number of changes this past year has been choppy than I would've liked with some of our growth drivers being pushed out and the impact from the pandemic quality challenges and supply chain affecting our results.
But we have a clear direction.
Clear direction, where we're headed as we transform the company.
Let's start with the topline we remain laser focused on accelerating the growth through robust capital allocation and portfolio management.
We're seeing our efforts to enhance our future growth through greater investment in organic R&D as well as portfolio moves we've already spoken of the organic growth catalysts in front of us many coming later this fiscal year.
We're also executing a healthy cadence of tuck in acquisitions in faster growing markets and we're focused on reducing our footprint in lower growth and lower margin businesses.
We continue to work on additional portfolio moves with the goal of creating a portfolio, where we have distinct expertise.
Synergies across the company and ultimately higher growth and higher margins.
To aid this effort we've assembled a dedicated team that is 100% focused on our integrations and divestitures.
At the same time, we have the opportunity to improve our global supply chain and operations by centralizing these activities, allowing us to leverage our scale invest in new technology and ensure we have a world class supply chain experts responsible for our global operations.
And this isn't something new that we're just starting now.
Although recent challenges have given us a greater sense of urgency we've been on this journey for over a year.
And while it will take time I fully expect our efforts to drive lower cost and lead to consistent and reliable quality, along with greater product availability all on a sustainable basis.
No well beyond health care.
Our world is facing a lot of economic uncertainty with questions around inflation global supply chain challenges and continued impacts from the pandemic in a potential recession.
But our business the business of healthcare and the delivery of our Central Lifesaving technology is something that continues in good times in uncertain times like these.
And demand for our products continues to increase with the aging and growing of our global population.
When you look at health care technology, Medtronic is uniquely situated particularly in these uncertain times, given our diversified businesses with leading market positions in growth markets are.
Our robust product pipeline.
Solid free cash flow.
Strong balance sheet and.
And a very attractive and growing dividend to add to our return to shareholders.
We have near term challenges that we are overcoming and the opportunities in health care technology and at Medtronic are immense.
We are fully focused on continuing on our transformation journey and making our opportunities a reality as we alleviate pain restore.
Restore health and extend life for millions of people around the world.
Finally, I want to thank our exceptional Medtronic employees.
Get to see the outcome of their efforts to fulfill our mission every day.
It's inspiring.
In addition, their willingness to lean into our new operating model and embrace our new culture have been key to the ongoing transformation of the company.
I also want to thank our partners in health care, the frontline workers, who are at that final step ensuring patients get our therapies and are dedicating their lives day in and day out.
Their incredible efforts to continue care delivery and get us all through the pandemic will be noted as one of the great accomplishments in history.
Now, let's move to Q&A.
We're going to try to get as many analysts as possible. So we ask that you limit yourself to just one question and only if needed a related follow up.
If you have additional questions you can reach out to Ryan in the Investor Relations team after the call.
With that Brad can you. Please give the instructions for asking a question.
For the sell side analysts that would like to ask a question. Please select a participants button and quick raise hand.
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For today's session Geoff Karen and Ryan are joined by Sean Salmon, EVP and president of the cardiovascular portfolio and former head of the diabetes operating unit.
White, EVP and president of the medical surgical portfolio, and Brett wall, EVP and president of the neuroscience portfolio, we'll pause for a few seconds to assemble the queue.
We'll take the first question from Vijay Kumar.
Evercore ISI Vijay. Please go ahead.
Hi, guys.
For taking my question.
Yes.
Maybe.
Two part question.
I'll ask <unk>.
No.
When I look at that sort of 5% organic guide for fiscal 'twenty, three perhaps came in slightly better than expected.
Can you talk about some specific assumptions around.
He noted supply chain.
There were some backwards is there some contribution from supply chain back orders.
Further disruption from supply chain.
What are you assuming for diabetes robotics and China EVP.
Something that investors have asked and Jeff relates to that I think if I take a step back.
Chronic these mid singles.
High singles earnings.
Consistent it's been something that people are question.
We've had some moving parts over the years.
As you look at all the changes that have happened.
Maybe talk about what gives you the confidence that this consistency of mid singles on the top and high singles on the on the EPS line.
It should be something that investors should look forward too.
Sure well, let me thanks for the question Vijay.
Maybe I'll take the second part of that question.
And then Karen can take the first part of the details behind the 4% to 5% for FY 'twenty three but on the on the second part in terms of the confidence of getting back to getting to that you know.
Costs at mid single digit currency top line and high single digit.
EPS growth or double digit total return to shareholders I do think where we're putting the right things in place. So so first of all just over.
Over the next Carrington detailed us but over the next year, you'll see the the acute back order issues that we faced in Q4 that those those abate over the next quarter or so and we can get into the details of that in addition, we are definitely.
Definitely anniversarying a lot of things that are that hurt us in FY 'twenty two.
Like exiting the <unk> business the Navy on recall, some tough tough comps on a ventilator business during the height of the pandemic. So these things abate over these things go away over the course of the fiscal year and you are starting now actually and then and then finally, we have a lot of growth catalysts, we've talked a lot about the pipeline and I can go through that.
There's a long list I went through a lot of it on the.
On the in the commentary, but it's much broader than like the Hugo or soft tissue robot and and and.
Rd, and those are big ones, but there's a whole host of whole lot of other ones as well and then so.
Those those things kick in in the second half of this year, and then get even bigger and in FY 'twenty four and then find out we've got some portfolio moves it over the next year.
Ear, so I think that's.
That's a that will add to this so that's how we get from where we are too to back to that the numbers that you quoted and then the second part of your question gets to.
Kind of the confidence in the consistency and I would say there are two things one is having a robust pipeline.
Spread across all of our businesses and we've been working hard over the last couple of years to double down on our our innovation, putting more into R&D and the new operating model that we have the 20 operating units we have clear visibility into their end markets are competition people are getting evaluated on their pipeline and we're putting more.
R&D and as well as some meaningful tuck in acquisitions like we just mentioned intersect ent's closing in.
In the cardiac ablation solutions space or the Afib space you know they are fair acquisition. These are meaningful ads, so I get that gives us diversity.
And more growth on the top line, but the piece.
We really have been focusing on over the last year and is important for our future in terms of consistency is the global operations and supply supply chain changes that we made.
These are we coming into this this role myself and the team identified this as a opportunity for us.
And Greg Smith, as we've mentioned in the commentary over a year ago.
And really already centralized our supply chain.
Our global Ops and supply chain was really set up for a different era.
Passed there and we had to make those changes and unfortunately, I haven't fully taken hold yet any more time to mature.
I'd like to have this those moves done earlier definitely would've helped in Q4, because the supply chain issues came out as fast and hard and especially in the back half of the quarter more supplier decommit than we've ever seen but the good news is that we're not just getting started on the on this transformation of supply chain I'd hate to be starting it now in the middle of this.
We're well down the path.
And and to building and that resiliency. We've made these moves and we're confident that these changes will.
Give us that resiliency that we need and that dependability. So the combination of the innovation.
Plus some portfolio moves and just a more resilient global ops and supply chain. That's how we're confident that we get to the the.
The LR long range forecast that we talked about a consistent mid single digits that 5% plus including the plus and the the high single digit.
Etfs when you add in the dividend to the double digit return, but in terms of.
I hope I answered that question, Karen can add to it but in terms of the the FY 'twenty three guide and the details below that I will turn that over to Karen yeah. Thanks, Vijay for the question and you know I'd love to take this in pieces.
Because I want to walk you through Q1, and then also talk about the full year, because we expect improvement each quarter as we move through the year.
So just starting with Q1, given our recent challenges we've elected to take a conservative approach with our Q1 guide.
We're assuming underlying fundamentals are pretty similar to last quarter to Q4.
And we built in some conservatism in the supply chain.
If you look at the year over year view, it's influenced by Covid.
And so to remove that noise I think it's really good to look at it on a COVID-19 comp adjusted basis.
And when you do that our guide really just implies a slight deceleration from Q4 to Q1, that's not out of line with what we've seen historically and again I would just emphasize that we've included conservatism data and supply chain.
Some puts and takes that we've got in Q1.
In addition to the supply chain impact that we factored in we've also assumed some incremental pressure in spine in China ahead of a potential national are volume based purchasing tender.
And Jeff already mentioned on the plus side, we anniversary some of our headwinds like the navvy on a recall and the <unk> shutdown.
If I move beyond Q1, and then into the full year guide of four 5%.
And then I mentioned, we do expect improvement as we progress through the quarters with our back half much better than our first half.
But I'd also talk about the puts and takes that we've got on the full year, we talked about.
The fact that we continue to actively work with the FDA on the diabetes warning letter, but for conservatism, we have elected not to assume the approval of the 780 <unk> in this guidance.
And also it's manageable, but we've got volume based pricing in China that we believe will have a bigger impact in this fiscal year primarily in spine.
And at the same time, Jeff talked about and we have a number of positives as we think about FY 'twenty three.
First we've got headwinds that are going to go away. They all that business and navient recall that reduced ventilator sales that Jeff mentioned and then we also had some volume based pricing on drug Eluting stents in China that will anniversary and combined all of those headwinds had a 200 basis point impact.
In FY 'twenty two.
Second we expect these supply chain challenges to improve.
Starting in Q2, and obviously continuing to improve from there.
And then thirdly, our year over year comps get easier.
Particularly in the back half.
And then lastly, we've got a number of really important product launches throughout the year and just to name a few of them. We've got evolute FX. We've got <unk>, we've got diabetic painful neuropathy and again I'm just naming a few so I hope that that's helpful and shows what our guidance implies as we move throughout the year.
That's helpful color. Thanks, guys.
Thanks, Vijay next question Brad.
The next question comes from Travis Steed at Bank of America Travis. Please go ahead.
Okay.
Hi, good morning, Thanks for taking the question I'll ask a two part one as well I guess first on the elective procedure recovery.
Various how may is shaping up versus April .
But around the world both in the U S and China as well and then the second part was going back to the kind of some of the supply chain issues.
The impact this quarter is a little bit worse than some of your peers I don't know if things got a lot worse in April or there was something specific with surgical innovations I just want to make sure. We have the confidence that that's going to start to improve here in the next quarter or two.
Sure I'll take the second one first the supply chain issues, yes. They did.
Look.
No one is more disappointed by our Q4.
On this than I am and and.
We got we believe we understand the root cause of that Miss.
And it really started hitting us in the second half of Q4, and I would say that 75% of the Miss is due two of the 300 340 $350 million Miss is due to supply chain.
15, and I'll get into that in a second maybe about 15% is due to the China Lockdown and then maybe another 10% is FX getting worse and Karen can talk about that.
But in the end I missed the supply chain mess it hit us across a number of businesses, but it was definitely the most pronounced in our surgical innovations business and it was it was it was three things it was.
Conductors, which is affecting everybody that affected a number of businesses, but particularly in our Si business.
It also was.
Resins particular resin that we use in our in our energy business and sort of MSI has been a major source of the problem for us and then packaging our trade packaging there was a catastrophic explosion in our in our supply chain and so those two last two ones the packaging and the.
<unk> what are the biggest issues the biggest supplier decommit and I'd say the biggest surprise in and most of that was an Si we see this.
Getting better over the next.
Cy one overall for the company, we see the supply chain.
The issue is getting.
Abating over the next quarter or two met the ESI issues, probably it will take.
More than a quarter or so put it on the to the first half of the year to get through those issues, we factored all that in.
Into our guidance.
I mentioned China.
We have remember we have April this really hit us in April we have April in our Q4 that represented roughly about $60 million of the shortfall.
The combination of the Covid Lockdown and Karen mentioned some of the volume based.
Procurement.
So other than China, and emerging markets Karen mentioned in the commentary.
20%, China was actually down.
10% or more in the rest of emerging markets grew grew 20% and so these like I said these acute issues.
I mentioned in.
In the commentary and in one of my answers were well down the path of remaking, our global ops and supply chain to provide that resiliency that we just haven't had.
And we started that over a year ago centralizing the function and bringing in.
Some building a very strong leadership team under Greg bring in new people from different industries investing in all kinds of whether it be tools and technology and operating mechanisms for this and I know I'm confident.
We're going down the right path, there and I'm glad that we started when we did I wish we would have started even earlier, but.
The long term.
Building those fundamentals will take some time, but the the acute issues, which hit our.
Our numbers will go away or get better over the next quarter or two.
I'll turn it over to Karen answer the first part of the question, Yes Travis.
Travis. Thank you. So just in terms of the month of May It's still early and we're obviously focused on managing through some supply issues that we've got in some of our businesses. So the numbers are a little cloudy, but but when we look at our operating units that are not impacted by supply issues just through the first three weeks.
It may we're trending largely in line with where we were first quarter last year.
And I would note that elective procedures for the most part were back to pre COVID-19 levels for us last.
Last quarter.
Okay.
Okay. Thanks, Travis pick the next question Brad.
The next question comes from Larry <unk> with Wells Fargo Securities. Larry. Please go ahead.
Hey, good morning, Thanks for taking the question.
Jeff on the kidney company.
The news today.
Should we expect more like this or could there be more significant than just kind of remind us of what the overarching goals are and Bob maybe unusual out just.
Help us understand what the expectations are for fiscal 'twenty three.
<unk>.
The supply constraints.
And the pre op setup error and when you expect to start the U S. Pivotal trial. Thanks, so much guys.
Okay nice to hear formulary. Thanks for the question.
On the renal care solutions joint venture with Davita. This is what I would characterize as a smaller initial step.
In terms of our portfolio management.
Work that work continues and we do anticipate that there could be more portfolio moves over the course of FY 'twenty two I'm not going to comment on the size of those but I would characterize this as a smaller initial stuff that's been under consideration for a while and like I said in the commentary I am excited about this is this technology that we've been working on for years.
Yes.
I think the Vita this joint venture will bring more focus to that the finishing up the development and then and.
Obviously, davita as a leader in kidney care and will be a great partner as we commercialize and scale. This.
Innovative technology, they bring a lot to the table there and I think we bring a lot to the table on the technology side and looking forward to it but as we move forward.
Know that I'm not.
Other portfolio moves would be JV or anything like that for this one. This one was made the most sense.
No.
There's a lot of upside of this technology in the way we structured this deal both davita and Medtronic will share in that upside so looking forward to that.
In terms of the goals of the portfolio work.
They remain unchanged.
<unk> durable growth durable growth without taking a step back on margins and free cash flow and we just want a higher level of growth and so we want to remake the portfolio.
<unk>.
For a higher <unk>.
And more consistency in growth so that's the goal.
And I think the other secondary goal would be just to simplify the company.
A bit so that's those are the goals thats, where were headed and more to come.
Thanks, Jeff and Larry Good to hear from you and thanks for the question. Let me provide you a good update on Hugo.
We're still in limited market release, we're making good progress on the supply chain issues were currently.
The countries, we've had a number of installed this past quarter in France, Italy and Denmark.
We did receive regulatory approval in Brazil, and Saudi Arabia, and Youll recall, this followed Canada and Australia, we've begun general surgery cases in Panama in Chile in India, and now we've done procedures across urology, gynecology and general surgery, including our first Bariatrics case, which was a nice miles.
The second part of your question was related to the <unk>, we expect to begin the IV relatively soon we're working closely to train the site personnel and gain IRB approval. So we'll certainly keep posted on that but hopefully that helps on a good thorough update for you where we stand on Hugo.
Thanks, Larry next question please breath.
The next question comes from <unk> <unk>.
<unk> capital markets. Please go ahead.
So lets begin the question I was just wondering if you can give us an update on your portfolio management initiatives.
What are you assuming for Hugo sales.
FY 2020 guidance and can you elaborate on the magnitude of China will be the impact in FY 'twenty three and lastly, if you can just comment on the capital environment. We've heard some puts and takes Q1 has been a little soft just what your outlook is for the full year. Thank you for taking my questions.
Okay.
Okay.
Okay, Alright, well get some some good music there for a second but I'll start.
It was a couple of others a list there so maybe Karen can help me out, but I'll stop on our sorry on the Hugo one.
We have quoted Hugo numbers for FY 'twenty, three but I'll I'll, just say, we expect a strong ramp we get the order book is really strong.
You heard Bob just give an update of all the countries, we've got approvals in and the different type of procedures that we're now doing.
Various type of procedures, including general surgery procedures.
So we're moving up the food chain there so so.
So really gained a lot of confidence that we have something in Hugo on and we see a nice ramp in FY 'twenty three but we haven't quoted exact numbers in terms of the capital environment.
Capital for Us in Q4 was a bright spot.
And.
A lot of our capital that we sell are tied directly tied to specific revenue producing procedures profitable procedures I think that helps.
And we had record.
Record numbers in the neuroscience space in our spine business, we had record number of sales of our substation navigation O arm in Missouri is that capital equipment is at record highs for us in and really excited as we place those or we sell those that are capital equipment, such as further building out our eco.
System, which is our differentiating strengths in the spine business.
And portrays our optimism for the future of that business.
I'll turn it over to Karen for the other parts. Thanks, Jeff. The other two you had a question on portfolio management, which I know Jeff shared when he answered Larry's question, So I'll cover China EVP.
With with Bae VP, we've been dealing with a variety of regional and national tenders already.
And just from a national expected, we expect the government to continue to focus on the top 10 medical device products by public insurance spending.
So we've been through stent already and some of our other industry players have gone through large joints and we see two more potential tenders on that list, where we've got exposure spine and surgical stapling.
And I talked about the fact that we expect spine to it.
Impact as this fiscal year.
And and to likely happen in the second quarter, but ahead.
I had a.
Tenders distributors do pull back on their purchases. So we built that into our first quarter guide as well.
Just to remind you, though our growth exposure for both spine and stapling in China somewhere between one to one 5% of our total company revenue.
So it is it is small and based on what we experienced with the coronary tender. We do believe there could be offsets to the ultimate net impact number because we have pull through of other product lines and we'll be working on those.
Yeah.
Okay. Thanks, Jamie Let's go to the next question please Brad.
The next question comes from Josh Jennings with Cowen and company Josh. Please go ahead.
Yeah.
Okay.
Hi, good morning, Thanks for taking the questions.
I wanted to ask on the diabetes use pump business I know, there's a lot of moving parts, but just with the further deceleration.
In fiscal <unk>.
Hoping you could share some insights in terms of why you think thats occurring as well.
Letter in place kind of painting endocrinologist.
Ascription pattern.
Or or patient sentiment are there youre seeing incremental.
Renewal.
Sure.
Wanted to get a better sense and then how you see that U S pump business trending over the course of the year and then any any other incremental details you can share just on interactions with the FDA.
I know you pulled it out of your guidance for fiscal 'twenty, three any 700 atg or regarding four approvals, but what gives you hope that you could still see those approvals occur in this fiscal year. Thanks for taking the questions.
Alright, Thanks, Josh for the questions.
Im going to turn it over to Sean here in a second.
Although he has officially moved on from that role to focus exclusively on our cardiology portfolio.
Well, we have them on the call answering the diabetes questions this quarter.
And I'll just say a few words about <unk>. She joined the company here a couple of weeks ago has taken over our diabetes business.
Business unit, and we couldn't be really excited about having <unk>.
Diving right in shoes are at ATT.
Sure.
Other upcoming diabetes meetings that youll get to see her and she will be on our next.
Our next earnings call to to field these questions.
She is getting settled in and.
We should move moving her family or to our Northridge, California site and really excited youll get a chance to hear from her shortly in the meantime, I'm going to field. This question to Sean So Sean can you answer the question that Josh post.
Sure Josh Thanks for the questions.
The dynamics on the revenue side of things are really all about the competitiveness in the United States, we grew sequentially quarter on quarter.
In EMEA by 20% high <unk> and that's really based on the strong demand for that combination of 780, and the Guardian sensor, which is now in 40 different countries. So everywhere. We go it's really picked up a lot of steam this past quarter that was driven by favorable reimbursement, we had no reimbursement of either France, or Germany, we picked up that <unk>.
<unk> that really help us drive that continued growth so within the U S dynamic for us obviously.
People waiting for.
The new technology to come before prescribing it for new patient start some patients.
Wanting to wait for it and moving on to competitive therapies.
With regard to the warning letter progression.
As Karen said, we did certainly leave that out of the guidance I think thats prudent.
The most important thing we have to do is to improve and sustainably improve the quality system, which was outlined in those items that were in the 43.
Subsequent warning letter and we've made excellent progress against those commitments for more than 80% of the way through.
Fulfilling all those commitments and it's also important to note that the 700 avian Guardian for sensor are under active review at the FDA right now.
We don't want to get ahead of the FDA on timing or predictions and Thats really the reason for the conservatism, but no.
Suffice to say, there's huge interest from patients the technology continues to prove itself in real world applications.
See the numbers.
Going up for both revenue as well as you know.
The data we shared at the <unk> meeting that's coming up.
It's really a robust solution a unique solution, where we're getting kids to time and range.
It has never been seen before and.
During the day overnight and of course, it's worked great for adults to the highest time in range that reported.
So we're very confident that when we get Smooshed I will turn the boat around but.
I think for conservatism, because we can't predict it.
That's what's in the guidance.
Okay.
Okay. Thanks, Josh next question please.
The next question comes from Joanne Wuensch at City Joanne. Please go ahead.
Hi, how are you this morning.
Good Joanne good to hear from you.
So when I take a look at your guidance you've got what in your words are is a pretty conservative first quarter, and then ramped pretty aggressively throughout the remainder of the year.
I know you don't like to give quarterly guidance, but just to sort of level set us. So that we're not resetting the quarters as we go along talk us through how you ramp and what improves.
And if you're going to sort of give a classic like X percent in the first quarter Y in the second quarter etcetera that would be really helpful.
So to build out from here.
Yeah. Thanks, Joanne for the question.
I'm going to not give specific guidance for the other quarters, but I will let you know.
But we've got these days.
These things that anniversary through the quarter. So ventilator sales was up and down in the quarter and I know Ryan can take you in the after call about those changes that.
That happened in ventilator sales and then obviously, we expect our biggest supply challenges this quarter and starting to improve in second quarter. So think about a ramp.
Revenue growth, just getting better and better every quarter.
And by the time, we get to the back half our year over year comps, obviously get easier.
And particularly in the fourth quarter, particularly in med surge.
Given the fourth quarter that we had so think of strongest growth obviously in the fourth quarter as you ramp.
And that is in line with how we think about our product launches to going through the year.
We've got some product launches that are helping us earlier in the year and then more that will ramp as we as we go through the year.
So I know that in Orion can easily take you through some more of the detail too.
I appreciate that and then for my second question renal denervation, you've completed the enrollment of the last piece of the puzzle Sao.
It sounds like data won't be presented in the fall, but we may get data in the spring are you thinking FDA approval mid next year calendar year.
Sean you want to take that one yes, John we will file that last piece of the PMA, which that last bit of data when we have it and that would dictate the timing for the review clock start it's important to note that we have done a modular PMA. So every other part of this device characterization of manufacture modules.
Those have already been reviewed and closed so it's really this last piece of it that would go into the review.
Okay.
Excellent. Thank you and have a great day.
Thanks, Joanne Thank you Joanne.
We have time for one more question Brent.
Our final question comes from Peter Chickering with Deutsche Bank.
Please go ahead.
Hey, Joe.
Are you on mute.
Can you guys hear me now.
Yes, we can.
Great. Thanks for taking my questions here.
This question is for is probably hard to answer but also it anyway.
We further U S hospitals are getting to deferred procedures to the lock.
<unk> Diversifies.
For individual cardiology any chance you can let us know what you're seeing hearing what youre assuming for them in your first quarter guidance and what if any impact there is from outside the U S. Due to shortages from GE.
Yeah. Thanks, Peter for that question. So contrast, die and we believe it's a transient issue, it's mostly contained to the U S.
It is something that we're closely watching because it can impact our cardiovascular and neuroscience as portfolios.
But we do expect it to resolve within the quarter just based on what we're hearing.
Many many health systems in the United States have already instituted conservation measures and we're working with them. This year, we can help support them through thoughtful allocation, but at this stage, we built our view of it into the into the guidance for the first quarter and we do believe that the transient issue getting better after the first quarter.
A quick follow up on the transaction with Davita today, what was the organic growth rate of renal care solutions.
And kind of what is what is the strategic value do you guys foresee davita, adding to the portfolio. Thanks, so much.
Well I'll answer thanks for the question Peter I'll answer the second part of it the strategic value I mean look I think we both.
The transaction revolves around a big piece of the value creation will be us, bringing some innovative home dialysis technologies to the market.
That is the inherent in that technology has some has some.
Something that we picked up from other businesses and Medtronic in the IP around it and the Knowhow and we're building that into this home dialysis technologies will be a couple of different products.
It drives up access it lowers cost and there is a better patient experience.
And we bring that to the table.
But.
Just in even just in the United States context, the dialysis market, it's pretty unique and.
And the go to market.
Channel is not something that we have any kind of synergies with and so davita brings one that that channel that access to these customers.
And they have a lot of obviously, they're a leader in kidney care. So they bring a lot of clinical expertise as well. So I think it really is.
Regarding.
The home dialysis technology. It is a one plus one definitely equals more than two here and we're excited about it we think it's going to have a big impact in the way it like I said before the way we structured it.
We get to share in the upside with Davita.
Terms of the other question the organics about the the growth in renal care Peter.
And it was low single digits for us last fiscal year. It is a lower growth lower margin business for us.
Okay.
Okay. Okay. Thanks, Pedro Jeff. Please go ahead with your closing remarks sure. Thanks, Ryan Okay, well, thanks for the questions everyone and as usual we appreciate your support and your continued interest in Medtronic and Eric I realize there's a lot to sort through here, including the the macro issues or supply chain in China.
Surprises this quarter, but as we've talked about we've considerably factor these into our guidance going forward, but I think more importantly.
I hope you see that there is a clear direction of clear direction of travel for the company, where we're headed and.
When it gets back to some of the questions.
Earlier like Vijay posed.
In terms of us getting to that mid single digit 5% plus in the double digit shareholder returns on a consistent basis.
Things that we're doing the new operating model, that's driving more innovation driven growth.
The capital allocation and portfolio management to reposition our portfolio for higher growth and finally, the global operations and supply chain changes that we've been working on to provide that resiliency and provide that.
That consistency that we need these are the right things to do.
I'm confident that the macro environment has made it sharp year to execute on these things, but we're heading in the right direction, we're making the right moves.
And just again this will this flow.
This is that this will benefit the company and get to get us where we need to go. So we're looking forward to update you on the progress in our Q1 earnings program, which we anticipate holding on August 23rd and so with that thanks again for tuning in today and please stay healthy and safe and have a great rest of your day.
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