Q1 2022 Boston Scientific Corp Earnings Call
March one 2021 for more information please refer to our financial and operating highlights deck, which may be found on our Investor Relations website on this call all references to sales and revenue unless otherwise specified our organic this call contains forward looking statements within the meaning of federal securities laws, which might be identified by words like anticipate expect may believe estimate and other.
They're similar words. They include among other things the impact of COVID-19 pandemic upon the Companys operations and financial results statements about our growth and market share new product approvals and launches acquisitions clinical trials cost savings and growth opportunities, our cash flow and expected use our financial performance, including sales margins and earnings as well as our tax rates R&D spend and <unk>.
Other expenses.
Factors that may cause such differences include those include those described in the risk factors section of our most recent 10-K and subsequent 10-Q s filed with the SEC. These statements speak only as of today's date, and we disclaim any intention or obligation to update them at this point I'll turn it over to Mike for his comments, Mike. Thanks, Lauren. Thank you everyone for joining us today.
We're very pleased with our first quarter performance and our outlook for the full year. Despite the impact of the ongoing pandemic and the macroeconomic headwinds.
In the quarter was fueled by improved procedure volume, our innovative portfolio and strong execution across our global team and.
In first quarter 'twenty, two total company operational sales grew 13% versus prior year, while organic sales grew 10% above the high end of our guidance range of 5% to eight.
Importantly, this performance was strong across all regions and we anticipate that most all of our businesses grew at or faster than their respective markets.
First quarter adjusted EPS of <unk> 39 cents grew six 5% versus prior year, achieving the midpoint of our guidance range of 38 to 40.
And despite continued macroeconomic headwinds and result in supply chain pressure first quarter. Adjusted operating margin was 25, 8%, which was higher than anticipated due to the over achievement of sales and lower spend.
While we continue to anticipate less of a global COVID-19 impact on underlying procedure volumes for full year 'twenty two versus 21, we're continuing to provide a wider guidance range to account for uncertainty related to COVID-19 wave staffing challenges and supply chain pressures.
We are increasing our full year 2022 operational growth to 9% to 11% and organic growth to six 5% to eight 5%.
For second quarter 'twenty to revenue, we're guiding to operational growth of six to nine and organic growth of three to six.
We're also updating our full year 2022, adjusted EPS guidance to $1 74 to $1 79.
And our second quarter, adjusted EPS estimate to 41% to 43.
Despite increased macroeconomic pressures, we continue to target adjusted operating margin expansion of 10% to 50 basis points or 26% to 26, 4% for the full year and Dan will provide some additional details.
I will now provide additional highlights and first quarter, along with comments on our 'twenty two outlook.
Globally, the impact from Covid varied by region during the first quarter and within the quarter, we experienced a more significant COVID-19 impact.
In both the U S and Europe in January and early fab.
With significantly improved volume growth during the remainder of first quarter.
Regionally our businesses in the U S delivered operational growth of 13% versus prior year, which includes an approximate 400 basis point tailwind from acquisitions.
First quarter performance in the U S was particularly strong in watchman.
Hi, Cardiology endoscopy.
In Europe Middle East Africa, we grew 12% and operational basis versus prior year, while all businesses in the region experienced strong growth. We saw particular strength in structural heart, including tavern watchman and other interventional cardiology therapies as well as electrophysiology.
In Asia Pac, we grew 14% operationally versus prior year with new product launches fueling the region's growth, notably polar auction Ranger in Japan and wave rider Alpha in Australia.
The China team delivered another impressive quarter with double digit growth in the first quarter with broad strength across the region enabled by a diverse portfolio.
Given the current Covid wave in China, we do anticipate more pressure on underlying procedural volumes in the second quarter. However, we remain confident in our team's ability in China to continue to drive toward double digit growth for the full year of 2022.
Now some additional thoughts on our business units.
Urology and pelvic health grew sales, 7% organic and 16% operational.
The global integration of the luminous acquisition is going extremely well with the innovative Moses laser platform complementing our category leading stone portfolio.
Globalization remains a big opportunity in this business and we're pleased with the approval of resume in China. After a successful pilot and we look forward to launching later this year. Additionally.
We received approval in Canada for Lithia view elite, which is our next generation flexible single use ureteroscope with advanced imaging and ensure arena pressure sensing capabilities.
Turning to our endoscopy business sales grew nicely, 9% organic versus prior year. The underlying business remains very strong and we continue to innovate with new product offerings supporting continued above market growth.
We're seeing momentum across our franchises, including biliary hemostasis and our single use imaging franchise is a spyglass DS visualization system <unk>.
To have strong growth, while our newer single use scopes are gaining scale.
Beyond products, we're also enhancing our digital capabilities with the recent launch of ecommerce platform to all endoscopy customers in the U S based ambulatory surgical centers to enable easy online ordering from any device at any time.
In Neuromodulation first quarter again grew faster than the market at 8% versus prior year.
In pain, we continue to see positive momentum in spinal cord stimulation as physicians continue to be pleased with the performance of the wave rider Alpha system with fast therapy, and our cagny either practice optimization suite of solutions.
And brain. We continue we received FDA approval in the U S for the neural navigator software with Stim view earlier. This month. This was developed in collaboration with brain lap and enables more streamlined programming for clinicians with integrated visualization for lead placement and stimulation field modeling.
And cardiology organic sales grew 11% versus prior year and operational sales grew 16 with all business units growing high single digit or better in the quarter.
Within cardiology or interventional cardiology therapies business had organic sales of 8% versus prior year coronary franchise grew mid single digits fueled by new product launch launches and globalization.
And within the quarter, we received FDA clearance of the expanded portfolio of emerge Ptca dilation catheters makes it the only complete portfolio of balloon sizes in the U S for the treatment of large vessels and long lesions.
We really had another strong quarter with double digit growth in our structural heart valves franchise led by accurate Neo two in Europe , we continued to take market share in our existing accounts, while also continuing to gain new accounts exceeding our sales expectations in the first quarter.
Additionally, we have initiated or and also are currently enrolling patients in our early feasibility study called accurate Prime XL, which is evaluating additional sizes for the accurate neo two valve.
Turning to watchman organic sales grew 33% versus <unk>.
Prior quarter.
Prior year Watchman is on track to deliver full year double digit growth with sustained momentum from the second generation watchman watchman flex ongoing clinical evidence globalization and commercial execution.
Within the quarter the ongoing surpass analysis of the NC Dr. L. A O registry was presented at CRT include.
Including more than 16000 patients with real world results that reinforce the differentiated safety and efficacy data seen in our pivotal clinical flex trial.
In cardiac rhythm management organic sales grew 7% and operational sales grew 14 versus prior year.
In core CRM, we anticipate that our growth was in line to slightly above market with our low voltage business growing high single digits in our high voltage business growing low single digits aided by stronger S. ICD sales.
We look forward to the presentation of further clinical evidence at HRS later this week.
Within the diagnostics franchise, we continue to be pleased with the performance of our differentiated portfolio with both the Lux Dx implantable cardiac monitor and prevent us ACG portfolio outpacing the market in first quarter.
Electrophysiology sales grew 11% and organic 47% operationally versus prior year.
International strength continues driven by our innovative portfolio and continued success of Ferro pulse with late breaking clinical data from the manifest PFS survey presented the EHR a highlighting their real world performance of the system.
And more than 1700 patients investigators reported 99, 9% success in achieving acute pulmonary vein isolation and excellent procedure times.
We continue to further the body of clinical evidence elsewhere in the portfolio with real world outcomes data from the polar ice study, which was presented at <unk> <unk>.
And demonstrated a strong safety and efficacy of the polar ex cryo ablation system.
We also closed the balas acquisition in mid February and we're excited to bring a novel category, leading technology and commercial synergies to our broader portfolio.
In peripheral interventions organic sales grew 10% versus prior year. The arterial franchise was led by double digit growth within the drug Eluting franchise.
Courted by ongoing clinical evidence and more broadly our category leadership portfolio.
And within venous <unk>, they had another quarter of double digit growth driven by a strong underlying market and penetration and new accounts.
Our interventional oncology franchise continues to do very well led by <unk>, which grew double digits in the quarter and earlier. This month, we received FDA approval to initiate the frontier study, which will assess their sphere as a treatment option for patients with glioblastoma and aggressive cancer occurring in the brain or spinal cord.
We also received FDA clearance for them bold, which is a fibroid embolization coil that further enhances our portfolio of embolization technologies.
Boston Scientific's dedicated transforming lives through innovative medical solutions, while also minimizing the impact of the environment and making measurable contributions to the world.
Corporate responsibility is core to our values and helps inform our priorities at advanced progress and aligned to our business goals. So we're excited to share our progress in 2021 performance report, which we expect to release in May.
Also in 2020 , one we announced five acquisitions strengthening our underlying market growth with innovative technologies and accretive growth markets. In 2022, we evolved our leadership structure to enhance customer focus and further enable our strategies.
<unk> Gerald now leads the cardiology segment, including interventional cardiology therapies, watchman, CRM diagnostics, and electrophysiology and art Butcher now leads the med surge segment, including Endoscopy, urology and Neuromodulation, while continuing to oversee Asia Pac.
This new structure supports agile business practices and drives collaboration and innovation across our similar call points. While also empowering our leaders to maintain our deep customer focus.
We're excited about the outlook for 2022, and our long range plans. Despite the macroeconomic challenges we continue to face we remain committed to our financial goals growing sales faster than the market continuing operating margin expansion and double digit adjusted EPS growth with strong adjusted free cash flow.
I'm extremely grateful to our employees for the resiliency the strong results and their winning spirit and I will turn things over to Dan to review our financial performance in more detail. Thank you Mike.
First quarter consolidated revenue of $3 $26 million represents 10% reported revenue growth versus the first quarter of 2021 and reflects a $74 million headwind from foreign exchange higher than our expectations driven by the strengthened U S. Dollar. Excluding this 270 basis point headwind from foreign exchange operations.
Revenue growth was 12, 6% in the quarter quarterly sales from the acquisitions of Ferro pulse luminous and prevent us through February and Balas post. The February 14th close date contributed 340 basis points, partially offset by the divestiture of the BTG specialty pharmaceuticals business in 2021, resulting in nine.
7% organic revenue growth exceeding the high end of our guidance range of 5% to 8% growth versus 2021.
We saw a steady improvement in Q1 procedural volumes as Covid waned in most geographies throughout the quarter with a strong finish in March April procedural volumes have continued to see minimal COVID-19 impact with the exception of China in line with our expectations.
Top line results drove Q1 adjusted earnings per share of 39, representing.
Representing six 5% growth versus 2021 at the midpoint of our guidance range of 38 to 40 <unk>.
Included in the 39.
It was a <unk> <unk> headwind from tax and below the line.
Adjusted gross margin for the first quarter was 73%. We expect Q2 adjusted gross margin to be in line with Q1, as we continue to face macroeconomic headwinds and resulting pressures on the global supply chain. Despite our expectation that these macroeconomic headwinds will continue throughout 2022, we anticipate a <unk>.
Slight improvement to adjusted gross margin in the second half with the full realization of standard cost improvements and less unfavorable manufacturing variances. We now expect our full year adjusted gross margin to be in line with the second half of 2021, adjusted gross margin of 78%, which reflects an approximate 300.
Headwind versus pre COVID-19 levels with nearly half of this headwind related to increased freight costs and the remaining headwind, resulting from unfavorable manufacturing variances driven by the availability of direct material and the increased cost to procure them.
First quarter adjusted operating margin was 25, 8% slightly higher than our expectations driven by top line revenue performance and disciplined spend management in the quarter. We continue to anticipate our full year adjusted operating margin to be within a range of 26% to 26, 4% given the magnitude and level off.
Persistence of the macroeconomic headwinds it likely makes the high end of our adjusted operating margin guidance range less certain but we still believe the range is achievable and on a GAAP basis first quarter operating margin was 15, 4% moving to below the line adjusted interest and other expense totaled $110 million in Q1.
Slightly higher than our expectations and based on the timing of our debt refinancing within the quarter included minimal benefit from the debt transaction, which I'll provide further detail on in a moment.
Our tax rate for the first quarter was 14, 3% on an adjusted basis, including unfavorable discrete tax items and the benefit from stock compensation accounting. Excluding these items, our operational tax rate was 13, 9% higher than our expectations driven by differences in the treatment of interest expense and the issuing.
<unk> of our Euro denominated bonds. We ended Q1 with 1.438 billion fully diluted weighted average shares outstanding our adjusted free cash flow for the quarter was $70 million and free cash flow was an outflow of $171 million with a $58 million outflow from operating.
<unk> and $113 million of net capital expenditures.
For full year 2022, adjusted free cash flow, we continue to aim to be at or above 2021, adjusted free cash flow of $2 2 billion as of March 31, 2022, we had cash on hand of $325 million. After closing the acquisition of Baylis medical in February our top priority for <unk>.
Capital allocation remains high quality tuck in M&A, and we will continue to assess opportunities in conjunction with our financial goals.
Within the first quarter, we completed an opportunistic transaction refinancing approximately $3 $3 billion of U S bonds funded through an offering of 3 billion euro denominated bonds.
The transaction was that neutral and we remain committed to our long term leverage goals of two in a quarter to two five times leverage and as of March 31, our leverage was 276 times.
I'll now walk through guidance for Q2, and full year 2022, we expect full year 2022 operational revenue growth to be in a range of 9% to 11% versus 2021, which excludes an approximate 200 basis point headwind from foreign exchange based on current rates and includes 250 basis points.
Contribution from the acquisitions of preventive <unk>, luminous and balas and $13 million of pre divestiture specialty pharmaceutical sales in 2021.
As a result of our strong Q1 performance, we are raising our full year 2022 organic revenue growth range to six five to eight 5% versus 2021, excluding the impact of closed acquisitions and divestitures.
We expect second quarter 2022 operational revenue growth to be in a range of 6% to 9% versus 2021, which excludes an approximate 300 basis point headwind from foreign exchange based on current rates and includes a 300 basis point contribution from the acquisitions of <unk> pulse luminous and balas.
Excluding the impact of acquisitions, we expect second quarter 2022 organic revenue growth to be in a range of 3% to 6% against a much tougher Q2 comp.
We now expect our full year 2022, adjusted below the line expenses to be approximately $360 million down from the $400 million guidance issued in February due to lower interest expense as a result of our debt refinancing transaction, partially offset by the cost to manage our VC portfolio and execute.
Our hedging program as a result of the difference in tax treatment of interest expense related to our debt refinancing transaction. We now expect our full year 2022 operational tax rate to be approximately 14% with an adjusted tax rate of approximately 13%, including the benefit of the accounting standard for stock compensation, we expect.
A fully diluted weighted average share count of approximately 1.443 billion shares for Q2, and $1 445 million shares for the full year of 2022, we now expect full year adjusted earnings per share to be in a range of $1 74 to.
The $1 79.
And for the second quarter expect to be in a range of 41 to.
40, <unk>. Please check our Investor Relations website for Q1, 2022 financial and operational highlights, which outlines more detailed Q1 results with that I'll turn it back to Lauren who will moderate the Q&A.
Thanks, Dan Andrew Let's open it up to questions for the next 35 minutes or so in order for us to take as many questions as possible. Please limit yourself to one question and one related follow up.
Andrew Please go ahead.
We will now begin the question and answer session.
Ask any question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
At any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Please limit yourself to one question and one related follow up.
At this time, we will pause momentarily.
Okay.
We will pause momentarily to assemble our roster.
The first question comes from Robbie Marcus with Jpmorgan. Please go ahead.
Good morning, and congrats on a nice quarter.
Thanks Robyn.
Maybe to start.
It's great to see the outperformance in a tough quarter and the organic sales guidance raise.
I was hoping maybe you could just walk us through the thought process of coming up with the second quarter Guide, which came in maybe just a hair below where.
Where the street was I imagine the China.
Lockdowns are impacting Matt if you could comment and just how youre thinking about the balance of the year on what's assumed.
Thanks, Rob Yeah, we're really excited about our start to the start to the year and increasing our full year organic guidance a bit as you mentioned.
And in terms of second quarter.
We mentioned, we want to provide a little bit wider range. There is certainly some impact now we're going to see throughout the second quarter in China and as Dan mentioned, our comps our toughest in second quarter I think it is important to note.
At the second quarter. If you just look at the midpoint of the guide comp adjusted it does show sequential acceleration versus first quarter.
So we're comfortable with that we have.
Slightly more favorable comps as well the second half of the year in a strong first quarter and at the midpoint sequential growth through Q over first quarter comp adjusted so I think that's all.
Really reasonable guidance and reflects the momentum that we've had some first quarter as well as the comps with some of the impact in China, but as you saw in the report really across every business unit and every region.
The business has grew most business grew faster than market and some grew at market. So it's really consistent strong performance.
And a heavy pipeline that's coming with the company. So we're pleased to increase our full year guidance range a bit.
Great and maybe as a follow up.
It's great to see I appreciate the watchman growth it at over 30%, it's well above what I was expecting coming into first quarter and very robust given that competition is starting in the U S. I was hoping you could spend a minute on what youre seeing in the competitive landscape where that growth is.
<unk> really coming from is it U S is it global and what the reception is to flex so far thanks a lot.
I'll make a couple of comments and.
It's really consistent with previous quarters, we've been really putting up strong numbers for watchman for many quarters in a row now and it just continues to build on our momentum I think first of all and Dr. Steiner Dr. Meredith can comment.
You've seen lots of data about 16000, I think it was 16000 surpass data just which is real world all comers.
First time doctors using this device and the safety profile of the devices just proven to be excellent.
And so the primary growth driver of this business continues to be the U S. In a significant way, there's some small growth in Japan.
Small growth in Europe and <unk>.
And in China, but.
The big lever here as the U S and it's.
Occasionally some new account openings, but is just driving increased utilization and current accounts more physicians using the device more referring physicians seeing excellent results and more confidence being built really every day.
And then supported with.
Clinical trials and excellent results in new clinical trials that we have and as we've talked about before.
In addition to clinical trials, which you know about champion and option, there's a really strong cadence of new products coming behind watchman.
Over the next three years. So we think we have a differentiated product today, a stronger commercial and clinical organization.
And a portfolio that's.
It makes it a terrific product for us.
Yeah.
Dr. Stein, yes, and just to add to what Mike said I think flex is clearly a game changer.
Clearly the safest device on the market safer than get the competitive device even in trials with competitor sponsored like Swiss Amparo better seal better long term results.
I, just don't know anyone who's doing implants, who hasnt really fallen in love with flex.
Yeah.
Yeah.
Yeah.
Thanks Robby.
Yeah.
The next question comes from Rick Wise with Stifel. Please go ahead.
Hey, Rick Good morning can you hear us.
Yes, I can yes, again, sorry about that.
But come off.
I was hoping perhaps just a larger picture question you could talk about.
Integrating the deal.
England.
ROE apparel pulse aluminum to prevent this et cetera.
It seems like it's going well where are you in your mind.
Integration going smoothly.
For example, <unk> had to go through a pretty significant production ramp just where are we how are you feeling about it and is that part of your Sunday.
Foundational part of your optimism for the second half et cetera.
Yeah.
Sure happy to the in terms of the <unk>.
Slight increase of our full year guide is really unrelated to the impact of the acquisitions because it really with the exception of prevent us.
Everything else won't go organic until.
It varies by Dave, but primarily 2023 is where you'll see the bigger impact of the organic impact with the exception of prevent us.
I'm really pleased overall I'm really excited about the class of these acquisitions, we did last year and as we've talked about there is there really is balanced across our business units.
We had a pretty good process internally to integrate these tuck in deals.
Prevent us went organic and that provides excellent complementary nature to our Lux Dx loop recorder, and we really enhancing the turnaround time and AI capabilities of prevent us and leveraging our CRM and neuroma team to do that so thats doing quite well.
Luminous was a complicated transaction to pull off that we've.
Really pleased with the capabilities that we have in Israel with that deal and having that full portfolio now and owning the laser platform improving margins in owning the channel.
We'll be really successful for us and it gives us R&D capabilities in Israel that quite frankly, we didn't have that we can leverage outside of even our urology business.
Then you look at the bailiffs, we disclose that once that's quite early but as you know thats a pretty very established highly reputable company with plus site access and we can.
We've also just done our first patients using balas and watchman to further improve the procedure times with that product. Then we have two earlier deals in earlier deals always have more variability in them.
Farrah pulse, we acquired that company about six months before our option.
Before we could have I guess, so we did it early because we knew the supply chain ramp.
And the nature of their outsourced manufacturing would take us more time. So we've made great progress with that some of the supply chain issues at hindered some of the progress, but we anticipate a really strong second half ramp is consistent what we've said in the past.
In Europe this year with fair pulse and that trial is enrolling incredibly well and then the one that's the earliest one is tomorrow and.
Thats, a prime R&D topic for our.
Team and we expect to be have our first patient has done in the second half of this year.
With our clot removal device and we will initiate the <unk> trial hopefully in 2023.
So.
A lot of work that is being done on them, but.
Really excited about this class of deals that we did in 'twenty one yes, it sounds great and just to follow up on third pulse, specifically I have to say that in my career.
I can't.
Call out many.
Doctors are excited about the technology. That's on its way can you talk just a little bit about.
The early European experience, given the limitations that you talked about with manufacturing, but what's your experience in terms of utilization and some of the initial centers can you talk to us about how many centers or give us any incremental color or detail about that early experience.
Et cetera in parables, thanks, Mike.
Yeah, I'll just mentioned on some of the sites, but Dr. Stein will give them more important information on what they're seeing clinically. So it's really I would say limited sites.
Through call it year to date.
Because of the supply chain challenges that we had and really us wanting to bring in all the manufacturing and supply chain capabilities internally, which were previously all outsourced which were a little bit more challenging in the order. It challenging just from the respect to be able to scale. It to the level that we think this product will demand.
And so that team has made great progress there. So again in the second half of the year really third quarter and fourth quarter Youre going to see significantly increase the number of accounts that are open which today has been more limited Dr.
Dr. Stein, if you want to comment again, I'm not going to talk to just the actual number of centers that we're at.
Do you believe we've done over 3000 commercial cases in Europe already.
It's the only approved PSA technology in the World right now is what we have in Europe . So.
They're going to be well ahead of any competition in terms of commercial clinical experience by the time anyone else comes to market and as Mike mentioned in his prepared comments Vivek already presented the results of the manifest PFS survey at the European Heart rhythm meeting.
Last month, and so that was a survey that reported in over 1700 commercial cases post launch.
As Mike said.
99, 9%.
<unk> success in pulmonary vein isolation, obviously, you don't have the long term data, yet and I think equally important outstanding total procedure times in terms of efficiency and outstanding safety results with.
<unk> type complications that you get with any type of left sided access comparable to what you see with with RF, our cryo, but again.
The promise of PSA no essential GL injury no.
Chronic phrenic nerve palsy, no pulmonary vein stenosis so to.
To sum up in our commercial experience really seeing farrah pulse living up to the promise of high degree of efficacy high degree of safety high degree of efficiency in the lab.
Thank you.
Yeah.
The next question comes from Joanne Wuensch with Citibank. Please go ahead.
Good morning, and thanks for taking the question can we go back to gross margins. Please I want to make sure I understood. Your language correctly on what to expect for the year.
And then the remaining three quarters, and then trying to Peel apart a little bit.
Factors, which you mentioned freight.
Unfavorable manufacturing cost a penny materials et cetera. Thank you.
Sure Joanne So let me, let me kind of walk through the year and make sure that everybody is clear on the commentary. So the actual for Q1 adjusted gross margin of 73% for Q2 in line with Q1 for the second half improvement versus the first half and for the full year in line with.
Second half 'twenty, one which was 78% so that's a run through the numbers in terms of what we're seeing and what drives those numbers.
Maybe I can be helpful and just give you a little more detail on some of the things that I mentioned in our prepared comments, so we talked about.
We've talked about direct materials availability and cost and we talked about unfavorable manufacturing variances. So for freight and I mentioned, there's about a $300 million headwind versus our pre COVID-19 kind of that 72, 4% that we were in in 2019, our freight makes up nearly half of that and Thats just simply moving our products around the world as you would expect.
Higher costs.
A bit more of a challenge there the direct material availability and cost.
As you would expect we have thousands of products with that with components. We don't have any outsized risk on any one material.
But not unique to us certain materials and inputs into our process has been harder to source and more expensive to procure so that creates a bit of a hiccup in the manufacturing process and it also creates unfavorable purchase price variances.
As well and then on the manufacturing variance side as you know we detailed on our last call. We saw increased variances driven by the omicron unrelated absenteeism in our plants, mostly late Q4 and early Q1 those were capitalized on the balance sheet and will be recognized over six months. So majority of those we've worked through by the end of Q3 and we.
Spec to generate less unfavorable manufacturing variances over time and then the why does it get better in the second half those are mostly micro wishes, we're not forecasting a lot of macro relief here in the rest of 'twenty two on the micro side.
We have the full recognition of our standard manufacturing improvements that we have a year over year. We have that every year. It is very very consistent with prior years. So that's one of the big drivers of why it gets better over the second half. So hopefully that gives you a good walk through of the numbers and why the numbers are what they are.
Thank you and a product like could you give us an update on what you're seeing in Neuromodulation.
Thank you.
Sure.
Our first quarter.
Were slow out of the gates given the.
The surge that we saw it really in U S and Europe and they had a really strong second half of the quarter and for the quarter.
Our pain business grew it looks like about 8%, which.
We're pretty conference faster than the peer groups faster than some that have reported and it's really again, it's just a combination of.
The portfolio innovation with our fast algorithms.
And the digital capabilities that the team has continued to develop and also that business continues to get.
Larger in Europe in particular, where they continued to do an excellent job with our deep brain stimulation products as well as SCS. So.
It's a pretty dynamic market we're in.
Investing in new clinical trials always investing in new capabilities.
I'm pleased with the quarter.
Yeah.
Thank you.
The next question comes from Larry Eggleston with Wells Fargo. Please go ahead.
Good morning, guys. Thanks for taking the question so on margins I'm just curious on the.
Mike If you could comment on your ability to take price in this environment.
And then on the operating margin does the guidance imply I didn't hear the same kind of cadence through 'twenty. Two that you gave for gross margin.
Does the guidance imply Q2 is down sequentially and if so why and then is that the right way to think about it and then with a stronger second half and I had one follow up.
Thanks, Larry.
The biggest strategy that we continue to focus on quarter over quarter for since I've been here almost 11 years now 10 years.
Is improving the growth profile of our end markets and you've seen that every quarter you saw that with five acquisition, we did last year as well as organic focus.
And although this here at core CRM and core <unk> are great businesses for us to generate a lot of cash flow and capabilities of the company. They are in markets that are.
Less strong than our others.
And each quarter the size of those businesses get smaller as a net as our portfolio continues to shift in our addressable market and that we think is about a 6% growth market used to be flat because of that shifting the portfolio. So as that portfolio shifts we still are.
We still have negative price, but that negative price impact is actually improved each.
Each year because of the weighting of the portfolio. So it's.
Sometimes it's difficult to take price depending on what the segment is.
But our overall are kind of.
Portfolio mix continues to get better each quarter and in products, where we have unique differentiation and we can show to customers the economic value because we know they are under tremendous pressure with staffing shortages in labor costs, as well, where it's appropriate where we have unique value and economics to support it we do our best to have appropriate price increases.
But overall in the mix, we're still a slightly negative.
Negative.
Rice give.
<unk>, but that overall impact improves every year.
And then relative to your question on the cadence of <unk> through the year, Larry. So as you know we don't provide quarterly operating margin ranges, but I think I would support your thesis that I would expect Q2 to be lower than Q1. So think of our gross margin commentary, we said that it's likely in line with Q1.
We will see a little bit of an increase in SG&A. That's a normal trend that we see every Q2, each year, where we have a particularly heavy industry trade show and.
And travel quarter with things like PCR DWA HRS all those types tend to be heavily concentrated in Q2, So I think likely to see lower than the Q1 operating margin in Q2, and then an improvement in the second half to hit that range of 26 to 26, four and again that aligns with our gross margin commentary, which says you should see an improvement in gross margin.
In the second half so I think it all it all holds together and I think that thesis makes sense alright.
Alright, guys I'll leave it there thanks, so much for the color.
Thanks Mark.
The next question comes from Vijay Kumar with Evercore ISI. Please go ahead.
Hey, guys congrats on <unk>.
Two one points here.
First question on guidance here.
Dan.
Q1 organic beat by 200 basis points. So it looks like the guide raise for annual.
Just annualize the Q1 beat any reason why.
The Q1 standpoint assist in what's best scale, you're assuming for China impact Similarly on EPS.
<unk> was raised by <unk> <unk> at the low end given the debt refi.
It looks like operating margin is in line ish, maybe talk about the guidance for a second.
Sure.
Take both of them I think I would probably just.
Reiterate what Mike said on the Q2 guidance, which as we talked about in the prepared commentary April trends are favorable I think it's an appropriate range given the you know whether the it staffing or China or places, where COVID-19 is still not gone within Q2 and at the midpoint of four and a half it shows comp adjusted sequential growth versus the $9 seven.
7% organic growth we had in Q1, so I think it's a I think it's a solid range there on the full year range.
The midpoint of where we were for Q1 guidance and the beat there and we basically added that to the high end of to the low end the high end to get to that six five to eight now so I think that that's a a solid range for the full year with a 50 basis point range and I think a solid range for Q2 with sequential comp adjusted growth versus.
Versus Q1.
And then.
Relative to.
<unk> EPS. So let me let me give you a quick bridge on that probably so I would imagine you sit there and say $1 73 to $1 79 guidance in February you did the valence transaction you told us that is a penny favorable and then you did the <unk>.
Debt refinancing transaction, you told us that was two penny favorable so so, whereas the <unk> and the <unk> basically is.
There are three one penny each items.
On the other side of that debt.
US at $1 74 to <unk> 79, and the reason we didn't raise III. So below the line is a penny overall and that's just again I mentioned this cost of managing our VC portfolio and executing the FX hedging program and then tax is a penny for the year, it's immaterial to each quarter. So you probably won't hear us talk a lot about it and.
In each of the next three quarters, but it just slightly less.
Expectation of the benefit of stock comp versus our prior expectations and that FX I think the team has done a great job with the hedging program. Obviously you have seen.
The changes in FX rates and what that's done to the top line, we do have a penny for the year again, it's immaterial for each quarter, but it does add to a penny full year. So if you net the balas and the debt refinancing transactions against a penny of below the line a penny attacks and a penny of FX, we're kind of left where we where we were which is which is that $1 74 to <unk> 70.
And we did raise just we are a quarter behind us. So we did raise the low end up a penny given we've got one quarter behind us and we achieved that at the midpoint of the range.
That's helpful Dan and Mike.
Maybe one big picture for you when you think about the last cycle post op <unk> away.
How do you see the metric pricing environment has the industry become more rational reason I ask is hospitals talk about labor pressure. If there was some pushback on hospitals on pricing environment is the industry more rational this time around to hold the line on pricing.
Okay.
Well, that's a tough question to ask because theres, so many different segments within the within Med Tech.
Most companies are feeling the same macroeconomic pressures very few aren't feeling the distribution impact the raw materials impact labor and <unk>.
Our customers are feeling the same thing so.
Around the world. So that's really the previous comment I think holds true is where you have differentiation and you can prove clinically in economic value and also it's supportive.
It's also.
Oftentimes profitable hospitals.
We have to build better muscles to take appropriate price in those areas and the teams are working on that now.
As I am sure. The competitors are given the inflation environment, where their products are more commoditized and less differentiated it's tougher.
And you still see price erosion in those in those segments are people more rational with that one I don't know it depends sometimes.
But our overall price mix is still a bit negative, but it's improved significantly over the years.
Thank you guys.
The next question comes from Travis Steed with Bank of America. Please go ahead.
Hi, good morning, Congrats on a good start to the year.
Question on the $300 million.
Or are the headwind that you bolt on freight and direct materials versus pre COVID-19 levels. How much of this is incremental versus the prior guide three months ago I'm, just trying to get a sense for the rate of change on some of these inflationary pressures and also trying to get a sense for how much of this is actually locked into the P&L for sure versus the potential for some things to actually improve versus what you built them.
Yeah, I won't specifically quantify how much was in guidance and how much is now it's clearly $300 million in total versus where we were and the incremental piece. Since February is not insignificant. It is not like it was.
It was $2 90, and now it's 300 I mean, it's a pretty significant piece that's.
That's increased since then.
And then as we do with all guidance range as we try to put in.
Uh huh.
Our motor come off.
Of prudency against being able to achieve the high end and the low end of of each of the of the range. So how much is baked in and how much isn't baked in.
Theres more that comes can we offset it in other areas of the P&L I mean, that's what we do all the time is managed.
It's not all about gross margin, we have the entire P&L to manage so.
I wouldn't specifically say how much is baked in and how much isn't we still feel comfortable with the 26 to 26 four.
Adjusted operating margin range for the year, and we feel comfortable with $1 74 to $1 79, alright.
Alright, that's fair and on China, I don't think I heard your expectations for when you expect a recovery there I think some companies have said a pretty quick rebound in the second half of Q2 love to hear your thoughts on.
And any sense for how much China is down right now other companies is that down 15% to 20% just curious if you could offer any comments on China.
Yes.
We printed a really strong first quarter, there and we expect double digit for the full year, it's going to be a tougher second quarter Forum.
Given you see all of the Lockdowns and impact on procedure volume and you also have some challenges some time with shipping.
Another.
Operational activities in China, and supply chain, but we do anticipate a tougher second quarter, there thats baked into the guidance and we expect a really strong second half out of China.
I'll comment on how much they're down but we've got a very talented team. There. So we baked in the tough second quarter for China into that guidance range, which is still sequential growth over our first quarter comp adjusted and we know the China team will deliver strong double digit growth for full year.
Great. Thanks for taking the question.
The next question comes from Danielle healthy with SBB Leerink. Please go ahead.
Hi, good morning, everyone. Thanks, so much for taking the question and congrats on a really good quarter.
Thank you.
Yeah no. Thank you I just wanted to get a sense of the recovery within the quarter and I just wanted to bounce something off you and see how.
We will translate to the rest of the year so far.
From reports today from talking to some other privately held companies is that the first half of the quarter. You saw surprise procedure volumes that a quick rebound and everything got compressed into the quarter within itself.
Compressed procedure trends I'm, sorry suppressed received your trends and then the recovery, whereas previously it was like down one quarter. The recovery. The next quarter do you guys think you saw that is my first question and then as we think about the rest of the year and sequential LIBOR Covid. We do you think the recovery from here is going to look more like that.
There is risk.
Any of the volatility that we saw previously I guess, what I'm getting at is is there still a backlog of patients number one number two do we think this is going to be more consistent more linear going forward sorry that was a long question.
That was that's a good question Danielle.
Just I would just general trends, maybe similar first quarter.
We were lighter out of the gate for sure. It wasn't a trough like we saw in some of the others cycles, but were certainly later the first five six weeks and we're very strong in the second.
Six seven weeks of the quarter.
As I mentioned in the comments, we do expect a.
Significantly less COVID-19 impact in 'twenty, two versus 21, and we're going to see it in China here in second quarter and I don't know if things are tough to predict but outside of pockets in Asia. The rest of the world appears to be pretty strong right now.
Tough to predict what might happen in the future here, but overall.
We expect a more consistent.
Performance.
And our top line throughout the year with less variability, we talked about some of the comps, but if you just neutralize the comps.
We see less variability and more consistent durable performance in growth.
Throughout the year.
As part of our guidance.
Thank you that's it for me.
Thanks Danielle.
The next question comes from Cecilia furlong with Morgan Stanley . Please go ahead.
Hi, good morning, and thank you for taking the questions I wanted to follow up a bit on Daniels question, but really you're asking specifically about deferrable procedures, whether no matter what else in your portfolio, but how are you.
Case with comps in the quarter and then you talked about no, but just as you think forward as well.
Deferred will proceed or procedures deferred that youre able to recapture.
Some staffing potentially eliminating the rebound I'm just curious how you're thinking about that trajectory.
In <unk> and beyond.
Yes.
Some of those headwinds are baked into the guidance and I would say the most significant one there really staffing the whole backlog questions are really difficult one to quantify because our physicians are super busy.
Many times there is wait time to get in to get these procedures anyway, and so we're very comfortable I would say with the demand.
And it's always difficult to say as backlog then captured or not.
These hospitals are busy and there was a very strong patient volumes. So we don't expect really any spikes or troughs in that area. It for my comments with Danielle we expect more consistent durable continued.
Procedure volume, except maybe in China second quarter here, so that's kind of baked into our topline guidance.
And then.
I don't know anything else Dan on that no I think.
As you saw they were the slowest growing in the first quarter, which makes sense given that our <unk> and the acuity of the procedures. There as Mike said pain was was eight and urology was seven so the most COVID-19 impacted.
At the most COVID-19 impact obviously in January and probably that first half of February .
So I think I think it tracks.
Okay, great and if I could follow up as well just on your side of your personal business. What you saw in the quarter with ethos in Angio jet and then as you think about tomorrow.
Starting to ramp in the back half of this year can you just talk about your expectations for that business.
Late 'twenty two 'twenty, three and really how you think about the mix across your portfolio. Thank you.
Sure.
Our overall <unk> business, you saw through the 10% arterial and interventional oncology, where the strongest leaders of the segments and Venus was the weaker one.
Within Venus Barathea is the shining star within that category and he goes.
Is doing well outside the U S. We're running trials.
Hi, Pedro or something like that is being is being run.
Ron.
And we are we are giving some share in the U S.
That's where that <unk> platform, we think will be the gap filler with new innovation with that so youre going to see it.
It really is putting it.
Yeah.
Implanting tomorrow or using that implant, but using the world in the second half of this year and so we expect to see Venus to be continue some under pressure throughout the second half of this year and hopefully we can launch the ROE and a more significant way in 'twenty three because really that's the only segment where we have.
Some some lighter spots within the portfolio within the overall <unk> business meeting tomorrow is the fill for that.
We expect to Venus business to perform quite a bit better in 2023 and beyond because of tomorrow, but then the interventional oncology and arterial segments are the bigger segments for us and they continue to grow double digits.
Okay. Thank you for taking the question.
And last question today will be from Matthew O'brien with Piper Sandler. Please go ahead.
Good morning, Thanks for taking the question I'll stick with ones that are getting a little bit late here.
And it's starting to beat the dead horse here, but just on gross margins $300 million couple of hundred basis points of a headwind.
From all of these freight issues et cetera.
We headed into the end of the year I know labor is not going to get a lot better than that cheaper anyway. It seems like branch had come in a little bit seems like raw materials should get better cannot be.
Pressure on the gross margin line use the $100 billion as we head into 'twenty three and then when do you think we can kind of get back to pre COVID-19 gross margin levels around 72%.
Yeah, So I wouldn't I wouldn't comment on the specific dollar amount that we think it is going to ease, but I think overall qualitatively.
We do believe that it will ease over time right. So as you go through the end of this year and start heading into 'twenty three.
Labor for US is not a big it's not a big driver of that but the drivers I mentioned relative to direct materials and the availability and the cost there and some of the.
The freight challenges, that's really what's driving the majority of that $300 million and if I look it at that I don't believe that that all of those things are going to come back to pre COVID-19 levels, but they don't necessarily have to for us to continue to expand gross margin and operating margin because we have that gap.
I quantified as you said in that 200 basis point range from where we once were so I'm optimistic that as we head into 'twenty three and beyond that gross margin can be a.
A driver of continued margin expansion for the company, which it which it has been for many years prior.
Thank you.
Thanks, Matt Thank.
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