Q1 2023 Medtronic PLC Earnings Call
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[music].
Good morning, and welcome to Medtronic <unk> fiscal year 2023 first quarter.
Earnings broadcast I'm, Ryan <unk>, Vice President and head of Medtronic Investor Relations.
I'm inside one of our Medtronic mobile labs, which is making a stop you heard our operational headquarters in Minneapolis. These.
These high Tech mobile classrooms will give about 5000 U S. Clinicians every year the opportunity to train on some of our most advanced state of the art technology, including our alarm and sell station.
As you can see it's an 18 wheels.
Our fleet of mobile lab trucks allows us to play big literally is a traverse the United States in fact with over 200 stops plan. This fiscal year, there are likely coming to our hospital near you now.
Now before we go inside to hear our prepared remarks I'll share a few details about today's earnings broadcast joining.
Joining me are Jeff, Martha Medtronic, Chairman, and Chief Executive Officer, and Karen Parkhill, Medtronic, Chief Financial Officer, Jeffrey and Karen will provide comments on the results of our first quarter, which ended on July 29, 2022, and our outlook for the remainder of the fiscal year.
After our prepared remarks, the executive VP for each of our four segments will join us and we will take questions from the sell side analysts that cover the company.
Days program should last about an hour.
Earlier. This morning, we issued a press release containing our financial statements and divisional and geographic revenue summary, we also posted an earnings presentation that provides additional details on our performance. The presentation can be accessed in our earnings press release or on our website at Investor Relations Dot Medtronic Dot com.
During todays program many of the statements we make may be considered forward looking statements and actual results may differ materially from those projected in any forward looking statements additional information.
Information concerning factors that could cause actual results to differ is contained in our periodic reports and other filings that we make with the SEC and we do not undertake to update any forward looking statements.
Unless we say otherwise all comparisons are on a year over year basis and revenue comparisons are made on an organic basis, which excludes the impact of foreign currency and revenue from our recent acquisition of intersect E&C.
References to sequential revenue changes compared to the fourth quarter of fiscal 'twenty, two and are made on an as reported basis and all references to share gains or losses referred to revenue share in the second calendar quarter of 2022 compared to the second calendar quarter of 2021, unless otherwise stated.
Reconciliations of all non-GAAP financial measures can be found in our earnings press release or on our website at Investor Relations got Medtronic Dotcom and.
And finally, our EPS guidance does not include any charges or gains that would be reported as non-GAAP adjustments to earnings during the fiscal year.
With that let's head into the studio and hear about the quarter.
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Hello, everyone and thank you for joining us today.
We reported our Q1 results this morning, and the quarter played out largely as expected.
Our organization executed to deliver revenue ahead of our guidance and EPS that was in line with our guidance.
Macro factors that we discussed with you in forecasted over the past few quarters like supply chain inflation and foreign exchange along with difficult comparisons to the prior year caused our revenue and EPS to decline at the same time, there were several bright spots in the quarter across our businesses, including strength in pacing car.
React surgery U S core spine neuro vascular diabetes in Europe , and strong overall growth in many emerging markets.
And as we look to the future we have several near term pipeline catalysts approaching that will accelerate growth.
We're also making progress on our initiatives around quality and operating improvement.
And in an uncertain economy, our business is well positioned with a robust balance sheet strong and growing dividend and leadership positions in many secular growth health care technology markets.
So taking a closer look at our Q1 results as expected acute supply chain disruptions impacted our performance.
Most notably our surgical innovations business.
We saw improvement in areas like packaging and resin supply as we progressed through the quarter.
We also continue to manage semiconductor shortages across our businesses to minimize their impact on product availability as well as our financial results and we're expecting these chip shortages to linger throughout our fiscal year.
Overall, our operations teams have executed and work closely with our suppliers to minimize impact improving our order backlog as we exited the quarter, we expect our overall supply chain issues to continue to improve as we move through the fiscal year.
On the demand side, we're still seeing impacts to procedure volumes due to health professional labor shortages and Covid is still causing procedure cancellations and deferrals in some pockets around the world.
We see our hospital and physician customers are doing all they can to manage these dynamics. So while procedure volumes in most of our markets remain at pre COVID-19 levels, we do have certain procedures or geographies where volumes are still lagging.
Turning to market share. This is an important metric at Medtronic and as part of our annual incentive plan.
Along with revenue growth profitability and free cash flow.
And when we look at our quarterly market share performance acute product availability challenges impacted our share capture opportunities in certain businesses, including surgical innovations in high power CRM implants.
We're also facing some competitive pressures in pelvic health and in diabetes predominantly in the U S.
We're making good progress on the acute product availability issues and have pipeline plans in place to address competitive pressures over time.
Now, let me highlight some of our bright spots in CRM, our pacing business continues to outperform the market as our micra <unk> pacemaker family is driving strong growth around the globe as we enter new geographies and expand penetration in existing markets.
Micro grew 15% in the quarter, including high Seventy's growth in Japan mid teens growth in Western Europe , and high <unk> growth in emerging markets.
CST, we had a good quarter in U S core spine, which grew 4%.
We won market share on the strength of our overall portfolio, including our unit AI enabled surgical planning platform and patient specific implants, which had strong double digit sequential growth in our U S user base in.
In addition, our recently launched catalyst P. L spinal system designed to target the T lift and cliff markets drove meaningful results in Q1.
And the breadth of our enabling imaging navigation and robotic technologies is a key differentiator.
In our Neuromodulation business, we are gaining initial implant share in both pain, stim, and DBS and pain stim. The market continues to gravitate toward our van to recharge free and Intel us with TTM rechargeable neuro stimulators and.
And in DBS customers value the differentiated sensing capabilities of our percept PC system with our sense sight directional lead.
In diabetes, we continue to see significant growth in markets outside the U S. Due to the increasing user base of our mini med seven atg insulin pump combined with our Guardian for sensor the.
The increase in this user base over the past couple of years is now driving significant recurring revenue growth for our CGM sensors and other supplies.
In markets outside the U S were launched the seven Atg and our Guardian for sensor has a very positive user experience with no finger sticks and more time in range.
Now this is due to its near real time basal insulin and auto correction bolus is every five minutes to address underestimated car counts and occasional Miss Mealtime bolus is.
Now, let's move to our product pipeline, where we're advancing several meaningful technologies that can create new markets disrupt existing ones and accelerate our growth. We continue to execute on our pipeline having received over 200 regulatory approvals in the U S Europe , Japan, and China or.
For the past 12 months and looking ahead, we have several near term pipeline catalysts approaching that we expect will enhance the weighted average market growth rate of Medtronic.
Now starting with our cardiovascular portfolio in Transcatheter valves.
The limited U S market release of our Evolute FX valve is receiving an overwhelmingly positive customer reception and we're excited about the impact. This nextgen valve can have as we move to full market release. This fall.
Absolute effects enhances ease of use and provides an planners with greater precision and control during the procedure.
And it maintains all the industry, leading hemodynamic and durability benefits of the evolute platform.
When you combine the FX launch in U S Pro plus launch in Europe , and Evolute Pro launch in China, We feel really good about the opportunities in our Teva franchise around the globe.
<unk> is one of the largest growth drivers from Medtronic and we expect the market, which is roughly $5 5 billion today to exceed $7 billion within the next three years and reached $10 billion in the next five years.
In cardiac rhythm management, we're really looking forward to disrupting the single chamber ICD market with our Aurora Extravascular ICD.
Now as you May know one of our competitors has had a subcutaneous ICD in the market for many years.
But its remaining niche device given its limitations compared to conventional icd's.
With Aurora, we've created a true game changer, where the electrophysiologist and the patients don't have to make tradeoffs.
It will deliver the benefits of a traditional ICD, including having the same size battery longevity and the ability to use proven anti tacky pacing in lieu of delivering a painful shocked determinate life threatening arrhythmia.
Or does all of this without having to place leads inside the heart.
Our EV ICD global pivotal data will be presented this weekend in a late breaking session at the ESC Congress in Barcelona.
We're also awaiting CE mark approval for Aurora, and we expect U S approval next calendar year.
In renal denervation, our breakthrough procedure to treat hypertension, we're nearing completion of the six month follow up for the full cohort of patients in our spiral HTM on med study.
We will then analyze the data and plan to present the findings in the next few months.
This data will complete the final piece of our clinical module submission to the U S. FDA as every other module has been submitted reviewed and closed.
The data on our simplicity blood pressure procedure is robust, including strong pivotal trial results and compelling real world registry data from over 3000 patients and more recently data has been presented that show already inpatient spend nearly double the time and target blood pressure range through three years than those who received.
Sham procedure.
This could have a profound effect on public health through the reduction of cardiovascular events, including stroke heart failure and CV mortality.
And we expect to be a leader in this market, which we project to exceed $500 million by calendar year, 2026, and $2 billion to $3 billion by 2030.
Moving to our medical surgical portfolio, which includes surgical robotics, we continue to execute on the limited market release of our Hugo robot.
We're installing new systems, and collecting clinical data and approved geographies enhancing the system based on surgeon feedback improving supply chain resiliency and scaling manufacturing production feed.
Feedback and demand continue to be very strong.
We've made progress over the last quarter and we're nearing the start of the U S. IDE clinical trial for our urology indication. We also continue to increase our user base of touch surgery enterprise, our AI powered surgical video and analytics platform.
With touch surgery Enterprise Surgeons can now easily review film from their surgeries to continuously improve and advance patient care.
Overall, when it comes to surgical robotics, we're investing heavily to become a major player in the market for the long term leveraging our decades of experience and leadership and Middleby invasive surgery now turning to our neuroscience portfolio and Neuromodulation, we submitted our Inceptive E <unk> closed loop stimulator.
We expect incentives closed loop therapy, which optimizes pain relief for patients to revolutionize the SCS market. We're also continuing to ramp our commercial activities to go after the diabetic peripheral neuropathy opportunity with our first cohort of DPM market development reps now trained.
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 with an annual total addressable market of up to $2 billion.
In diabetes, we're in active dialogue with the FDA on a regulatory submission for the mini med seven atg with the Guardian for sensor and we remain focused on resolving our warning letter were.
We're making good progress on our warning letter commitments, we've completed more than 90% of the actions we committed to the FDA.
This represents substantial progress towards resolving the warning letter and preparing for re inspection.
And our CGM pipeline, we submitted our next generation sensor some plethora for CE Mark some player as disposable it's easier to apply and it's half the size of Guardian for.
The Sinclair files ready to submit to the U S FDA and we're waiting to submit it as we're prioritizing the seven AG Guardian for review.
And with regards to our overall diabetes pipeline, we're making considerable investments well above our corporate R&D average.
We have a comprehensive pipeline of multiple next gen sensor and pump programs, including patch pumps.
This pipeline gives us confidence that we can restore strong growth to our diabetes business over the coming years.
With that I'll turn it over to Karen to discuss our first quarter financial performance and our guidance Karen. Thank you Jeff.
Our first quarter organic revenue exceeded guidance decreasing three 6%.
Adjusted EPS of $1 13 decreased 17% in line with our guidance range.
As we outlined on our last earnings call, we faced acute supply chain challenges in the quarter, particularly in our surgical innovations business.
We also faced tougher underlying growth comparisons.
Including both strong ventilator sales and good procedure recovery following the third wave of Covid last year.
Looking at our results from a geographic perspective, our U S revenue declined 9% and our non U S developed and emerging markets both grew 2%.
Our emerging markets growth was impacted this quarter by China, which declined 9% given COVID-19 lockdowns and volume based procurement.
However, our teams drove strong growth in many other markets, including high teens growth in South Asia and Latin America.
Mid teens growth in the Middle East and Africa, and low double digit growth in southeast Asia.
And when you exclude China, our emerging markets grew 13%.
Turning to our margins.
Our adjusted gross margin declined 230 basis points.
The impact of the strengthening dollar drove 50 basis points of the decline.
And the rest was primarily due to inflation on labor and materials as well as freight given fuel surcharges and increased expedited shipments.
As we said at the beginning of the year, we expect the impact from inflation and currency to continue to negatively affect our gross margin in the quarters ahead.
I want to remind you when you look at our R&D line, we had a recast of last year's IP R&D that we told you about last quarter.
Without that recast adjusted R&D expense would have grown 4% as we continue to prioritize investment into development programs across our businesses.
While our operating margin declined 320 basis points on lower revenue and gross margin pressures, we do expect to show sequential improvement as our revenue growth accelerates through the year.
And our balance sheet remains strong, allowing us to invest in future growth and return capital to shareholders.
We continue to target returning a minimum of 50% of our free cash flow to our shareholders, primarily through our strong and growing dividend.
And we supplement these returns through opportunistic share repurchases.
This past quarter, we repurchased $336 million, which is on top of the two and a half billion, we repurchased last fiscal year.
We also continue to put the cash on our balance sheet to work investing in tuck in acquisitions and minority investments that help fuel our near term and future growth.
We closed intersect anti in the quarter.
And we also began the structured acquisition of the acuity is left heart access portfolio.
And expect to begin distributions by the first half of calendar 'twenty three.
Theyre advanced Trans septal access systems will be an important part of our broad offering to electrophysiologist and interventional cardiologists.
Last month, we announced a co promotion agreement and path toward acquisition with Kath works well.
We're excited to partner with Kath works and promote their innovative F F. Our angio system, which we believe can disrupt the traditional F F. Our market.
We believe that Medtronic can add a lot of value to the technologies that we acquire.
And we expect tuck ins to supplement our organic R&D investment and long term growth acceleration.
Now turning to our guidance.
With one quarter behind us we are maintaining our full year revenue guidance at 4% to 5% organic which excludes currency movement and revenue from our intersect Ent's acquisition.
If recent exchange rates hold foreign currency would now have a negative impact on full year revenue of $1.4 billion to $1.5 billion.
An increase of $400 million over the past quarter.
We expect organic revenue growth to improve each quarter.
With the second half of our fiscal year much stronger than the first driven by our expectation that many of the acute supply chain challenges subside and new products drive our growth.
It's worth noting that we also face increasingly easier comparisons as we go through the fiscal year.
Okay.
By segment and on an organic basis, we continue to expect cardiovascular to grow five and a half to six 5%.
Medical surgical to now grow three quarters, two and three quarters percent.
Given increased volume based procurement and many of the Chinese provinces.
Neuroscience to now grow 4.75% to 5.75%.
Given us slightly lower outlook for the Neuromodulation market.
And diabetes to now declined 3% to 6% given stronger growth in international markets.
On the bottom line, we continue to expect non-GAAP diluted EPS in the range of 553 to $5 65.
Inflation and currency are still creating near term impacts on our margins and we've seen inflation on raw materials and freight become larger headwinds over the past quarter.
We also continue to execute on initiatives to partially offset these macro impacts.
As well as prioritize our R&D investments to drive future growth.
Given these dynamics.
And the fact that we are still early in our fiscal year.
We would suggest you model closer to the lower end of our EPS guidance range.
Our EPS guidance includes an unfavorable impact of foreign currency, which is approximately 17 to 22 cents at recent rates.
In the second quarter.
We expect organic revenue growth in the range of three to three 5%, implying a strong sequential acceleration drew.
Driven by improved product availability and the cadence of our launches.
Assuming recent exchange rates hold the second quarter would have a currency headwind between 365 and $415 million.
By segment, we expect cardiovascular to grow five to five 5% men.
Medical surgical to be down a quarter point to up a quarter point.
Neuroscience to grow 5.5% to 6%.
And diabetes to be down 3% to 6% all on an organic basis.
And we expect EPS of $1 26 to $1 30, including an FX headwind of about two cents at current rates.
While our markets are facing challenges, we're focused on identifying ways to offset their impact to our financials.
And we are optimistic about our future.
As we prepare to create markets and realize new opportunities.
In addition, I want to take a moment to recognize and thank our employees at Medtronic.
Who are unwavering in their commitment to deliver life saving treatment to people around the world.
Back to you Jeff.
Thank you Karen.
Now this last quarter, we made a lot of progress on our aggressive agenda of underlying changes that are needed to ultimately accelerate our growth.
With supply chain, it's getting better and our back orders are coming down not just because of the external environment, but because of the actions, we're taking under great Smith's leadership and I expect these improvements will continue.
We've co located our employees with suppliers and are also working closely with sub tier suppliers.
We're managing through the acute issues and making progress on improvements that I'm confident can enhance the resiliency of our end to end supply chain.
On quality, we've been conducting a large transformation of our quality system over the past couple of years, we're advancing quality and innovative ways working very closely with our regulators and this is leading to important progress.
We're also making progress on our pipeline and portfolio as these two strategies come together to create meaningful growth drivers, we're talking new products into dependable higher growth businesses like we did by adding intersect ent's to our E&P business.
So broadening the product portfolio of some of our businesses. So they can become more meaningful growth drivers for the total company like our strategy in cardiac ablation solutions.
Overall, the path has not been easy.
But I'm confident that these fundamental enhancements that we're making to the company.
Combined with our op model change culture changes in incentive changes.
Our positioning us to deliver a higher level of growth that can be sustained.
And as we overcome the near term issues and start to put points on the board with the pipeline I believe the underlying transformation of Medtronic all.
All the work that we've been doing over the past couple of years will become increasingly apparent setting up a durable value creation engine to fully capitalize on the megatrends in the healthcare and technology markets, which will benefit all stakeholders.
So to close I want to join Karen and thanking our employees.
It's never easy going through change, especially in a challenging macro environment, but our teams have stayed focused airplane critical roles in helping to alleviate pain restore health and extend life for millions of people around the globe.
Now, let's move to Q&A.
We're going to try to get to 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 teams after the call.
With that Brad can you. Please give the instructions for asking a question.
For the sell side analysts that we'd like to ask a question. Please select the participants button and quick raise hand.
If youre using the mobile app pressed them more button and select raise hand here.
Your lines are currently on mute when called upon your receiver request to Unmeet airline, which you must respond to before asking your question.
Lastly, please be advised that this Q&A session is being recorded.
For today's session, Geoff Karen and Ryan joined by.
Sean Salmon, EVP and president of the cardiovascular portfolio.
Bob White, EVP and president of the medical surgical portfolio.
Brett Wall, EVP, and president of the neuroscience portfolio and cute Alara EVP and president of the diabetes operating unit.
We'll pause for a few seconds to assemble the queue.
Yeah.
We will take the first question from Robbie Marcus of Jpmorgan Robbie. Please go ahead.
Okay.
Good morning, everyone and congrats on the quarter maybe I'll.
I'll ask both my questions upfront in wine.
Okay.
The quarter came in a little better than expected, but second quarter guide is lower than where the street was thinking by maybe half a percent three quarters of represent an organic sales growth.
So maybe you could walk us through.
How youre thinking about the cadence of the year. It includes a pretty material dollar step up each quarter, what's driving that.
And then also it looks like you.
Narrowed or lower and a lot of the product segment organic sales growth guidance with.
With diabetes, the big offset.
Maybe talk to if youre seeing any impact to share from some of the supply issues you had in what's driving those those moderated outlooks on a segment basis. Thanks a lot.
Hi, Ravi Thanks for the question Theres, a lot there too to unpack, maybe I'll start and then hand it over to <unk>.
Karen I mean look I think.
Yeah look the quarter played out largely as expected managing through these macro headwinds and making progress on supply chain issues like resins and in packaging.
And.
B.
Procedures largely remain at pre Covid levels, and we are seeing.
Month over month improvement and had a pretty good exit coming out of the quarter.
Getting to the the remaining three quarters of the year I mean, one you see.
Coming out of this first quarter Youll see some tough comps anniversarying.
We grew like 19% in Q1 last year, and and we have events and eldad certain tough comps anniversarying, there and as I mentioned earlier some of these acute supply chain issues will start to put them behind us I mentioned resins and packaging, we've semiconductors that were still dealing with across many businesses that will be with us for a little longer.
But a lot of the acute issues, we're starting to put behind US and then we've got a number of it we'll get it all I can't get into specifics of the Q2 versus the second half, but we have a number of nice growth drivers in the second half of the year like the full market release of absolute FX in an EV ICD coming.
<unk> as well and it's and there's a whole there's a number of other launches as well or even existing products that are out there that pick up momentum and it's the cadence as they go through the three quarters, maybe I'll turn it over to Karen to provide a little more details on that yeah. Thanks, Jeff and good morning Robby.
So I would add on Q2 that we do also expect some modest improvement in underlying procedural fundamentals for.
For example, we expect China procedures to come back and we had some some cardio procedures that were slightly impacted from contrast supply last quarter that we expect to come back.
We also continue to factor in the potential for incremental pressure from volume based procurement in China, including a potential national V. P tender in spine and continued provincial tenders MSI, but just an important reminder, in Q2.
We do have much easier comparisons versus the prior year, we grew only 2% last fiscal year and that was given the impact of the Delta variant and some labor shortages on on procedure volumes.
And so then as we move into the back half of the year you know Jeff mentioned, the exciting product launches that we have.
And the continued improvement in our acute supply chain challenges and then I would also just note that our year over comparisons continue to get easier from where they were in Q2, we had roughly one 5% growth in Q3 and Q4 of last year and we also have the vent heads.
And easing in.
In the back half.
And in terms of.
What's going on with our with our.
Our portfolios and the diabetes offset yes, we did see greater strength in diabetes.
And this quarter, particularly in international growth and we expect that to continue and then we're just being overall prudent with our guidance and we think it's early in the fiscal year, we still got a lot of macro uncertainties, and particularly with inflation and freight and so again, we just wanted to be prudent.
Hope that helps.
Yes, thank you very much.
Thanks, Ravi take the next question Brad.
We'll take the next question from Vijay Kumar Kumar of Evercore ISI.
Jay Please go ahead.
Hey, John .
Thanks for taking my question, Jeff I had two.
Two product related questions, maybe one on <unk>.
And then one on the robot.
<unk>.
Can you just talk to us and.
When can we expect this data I think you said it's in the upcoming months is that going to be a headline press release will be a formal presentation of the conference.
Is there any chance.
But the FDA looks at the data and could hold an AD com or any sense on that.
What we can expect from <unk>.
Sure. Thanks for the question well I'll start by saying I think I might hand over to Sean here for the the answer on this one.
But.
Were as <unk> seen over the last couple of months in a number of conferences.
More and more data is coming out.
Saw you did.
Interview or whatever a session with the kols in this space.
It was good to hear his feedback so there is a lot more and more data emerging more and more our position.
Excitement and confidence is as they've been.
Our our sites our trial sites are working with these patients for quite a long time and the data continues to build a new super positive. So we're optimistic and Shaun pointed this out before the FDA has done their own.
Kind of patient preference studies, and it's clear to them that patients prefer this to medical management. So I.
I know that they're there they're looking for this to hit the market as well, but the specifics on your questions I'll open up to Sean here to answer those on the timing of the data and where we have an AD com or what have you.
So Vijay we finished enrollment and then six months endpoints, which we'll be wrapping up very very shortly that we target.
Whatever comparable.
This fall, which is most likely and Jason.
We will submit to AJ and if it gets accepted that would be the place. The results. We'd also publish those results.
Top line available.
Election period of time.
And that is just a reminder that as the last part of what we've submitted rates every other module.
We didn't close is just the clinical data.
That's outstanding so we're as close as we've ever been.
Gotcha, and then maybe one on <unk>.
Surgical robot.
The prepared remarks, the commentary was.
Pretty bullish and correct me if I'm wrong.
Healthy order book momentum with installations key supply chain.
<unk> challenges have been addressed U S IV about the store.
This feels like a change in tone versus that of the last calls that perhaps can you comment on what changed in the last three months.
Sure and I'll have Bob chime in as well, but yeah. This quarter was a big quarter for us.
As we made I think.
A bit of progress on some of the supply chain.
The concerns that we had in some cases some specific issues that we had to resolve and building our manufacturing capacity as well ahead of the U S. A and more importantly expanded.
Sales in Europe , we made and I've made a number of installs and continue to get good feedback.
The surgeon feedback continues to be really strong and I actually had a chance to meet with a number of our surgical innovations reps sales reps and I was asking them. What are you hearing from your surgeons in yeah.
I was pleased with what I heard there's a lot of.
The word is out they like the design are they like the approach, we're taking to the market and the.
They realize that when we launch we won't have all of the indications yet.
And we're going to be building out our instrument.
The number of instruments, we have with it but they want to be part of this journey with us. So I think the expectations are appropriately set.
Built out some manufacturing capacity and like I said on the commentary you know we are we are real close to this the <unk> and so Bob what.
What do you want to add to that yes, thanks, Joseph and Vijay. Thanks, a lot for the question I think you are right to characterize it we're making solid progress with our surgical robotics ecosystem and we really do think about it as an ecosystem with really good progress type surgery as well as just mentioned our Q2 installations continued in the quarter and we'd like to be accelerated as we closed the <unk>.
<unk> as well and as I've spoken on previous calls we were really focused on hardening, our supply chain and our operations performance and we've seen progress there and then third we continue to train surgeons across the globe and across multiple specialties and sort of solid progress. There. So we near the start of our IV.
So we believe we continue on track so thanks Vijay Thanks, Jeff.
Thanks, guys.
Yeah, Bob mentioned, the touch surgery, that's another big piece here with this ecosystem, that's something we learned in the in the spine space. How important it is to have not just the robot, but the all enabling technologies around it we're starting to use.
Customers are starting to use touch surgery with Hugo now and.
Surgeons are impressed with the kind of analytical capabilities and the benefits of the secure video storage and sharing for case review and training and whatnot and so the ecosystem for our soft tissue robot is coming along nicely as Bob mentioned, so there's definitely some.
Excitement on our end.
Thanks, Vijay next question please Brad.
Our next question comes from Travis Steed at Bank of America Global Research Travis. Please go ahead.
Hey, Thanks for taking the question so Jeff I'll start with the portfolio manage about portfolio stuff. Its been about eight months since you started highlighting that.
Didn't know if that was something we could see in FY 'twenty three and it seems like youre highlighting solving for your weighted average market growth rate more than other variables at this stage of the process and then Karen a quick follow up on something you said earlier I think you said exiting the quarter with better momentum so.
Curious if you could comment a little bit on some of the the August trends, there's been some concern with investors about vacations and stuff like that so would love to get any color on that in August .
Okay.
Okay. Yeah. Thanks for the question Travis Yes, we are definitely continuing to look at the whole portfolio more intently and we've been doing that for several months now as you mentioned in <unk>.
I'll start by saying look we're.
Really deeply committed to doing the right things for shareholders and all Medtronic stakeholders.
And when we're looking at this portfolio and capital allocation, we are talking about both the buying and the selling side and actively looking at as you pointed out portfolio management to really improve.
Our weighted average market growth rate, whether it be through addition, or subtraction and to make sure that that.
The growth is more durable.
So look we're making we've made a lot we're making a lot of progress on the on the approach here to look strategically at each business in last quarter. We I'll remind you. We did announce an initial step on the subtraction side of things with the renal care solutions JV with Davita.
But this process will be a continuous process.
So set that expectation and will play out over time.
So the goals are unchanged the process continues and like the goal is this durable growth.
Well, that's a lot easier to grow in your weighted average market growth rate is increasing as well.
And I'll leave it I'll leave it at that and turn it over to Karen for the the other question yeah. Thanks, Travis we did exit the quarter with better momentum with a reduction in our in our backlogs.
We saw continued improvement each month of the quarter and as we look at August it's still early.
And we do have we're still managing through some supply issues in some of our businesses. So the numbers are.
Little cloudy, but when we we took that into account in our guidance and when we look at.
The operating units that are not impacted by supply issues for the through the first three weeks of August .
We're trending largely in line with the second quarter of last year, So seeing continued momentum in improvement.
Okay.
Yeah.
Thanks, Travis next question please Brad.
The next question comes from Cecilia furlong at Morgan Stanley Sir. Please go ahead.
Good morning, and thank you for taking the question.
Wanted to ask about the diabetes business and the updated guidance sitting here, obviously U S. O U S came in stronger, but just what youre expecting now both in the U S. But then also in the U S to competitive pressures and then I wanted to follow up it sounded like your timing for submission of some <unk> shifted your strategy.
Just if you could comment on how youre thinking about the cadence of submission.
Yes.
Sure well thank.
For the question, so, yes, I mean look diabetes.
<unk>.
As mentioned in Karen mentioned in her comments I mean, we're seeing really strong.
Growth.
And outside the U S Europe in particular and more even more importantly than the quarterly growth.
The clinical results we're seeing.
And patients and the feedback on the patient experience is really positive with the <unk>.
700, <unk> plus Guardian sensor for system, so that we think bodes well for.
The franchise and what we'll see when we get it into the U S. Because we are competing with everybody there in Europe and.
Had a couple of specific questions.
And the other thing I'll say is look we this is a business that.
It's a lot of questions. When I first became CEO two years ago about what we're gonna do we we double down on investment.
We believe that the integrated insulin delivery system that we have with the SEC.
<unk>, the insulin delivery device and right out for us to durable pump.
Down the road it depend in and hopefully patch, we think as we've got in our in our <unk>.
Leading algorithms, we think we've got a very sustainable position and a high growth market that has high barriers to entry.
And we've been powering through and these results in Europe are very encouraging on.
On top of that we recently had a transition from Sean to queue in Reno.
Sean did a great job stabilizing this business and really focusing it where we have a competitive advantage.
And helping.
Really focus our product roadmap Qs picking it up from there they had a great transition and with that maybe ill introduce our Q tomorrow.
He has been with us now.
A 14 15 weeks in.
He is already having a big impact on not just diabetes, but but.
On.
The leadership team at Medtronic, and and it's delighted to be working with her and one I introduced Q and welcome her to her first earnings call Q.
Jeff.
Yes, I would say the transition is showing is gone really well and I'm really encouraged with the.
The the progress we're making on restoring this business to growth as well as innovation Road map.
To address your specific questions around.
What we see in the U S as well as <unk>.
Around Sinclair I would say that look our short term focus is.
Re mediating the warning letter and also making progress with the FDA around approval of the semi atg and guiding for the system.
We continue to be encouraged by that making good progress and so our hope is that.
We can remediate that.
Secure approval in the near term.
Now, but we're not standing still in the in the U S. We do see growth in our 770 <unk> system.
As well as our <unk> technology and not only that we are very close to launching any extended extended way infusion set which has been approved by the FDA for up to seven to eight win and this is a game changer patient is probably the biggest innovation we've seen in the last 20 years in this area and allows patients to be able.
To synchronize if you like there.
Sensor.
CGM changes with the infusion set changes.
Leading to better site recovery income fitful for your customers. So.
That is happening, we obviously anticipate 700 atg, but we're not standing still with respect to the.
The products that we do have approved in the U S and with regards to <unk> I mean, we're very excited about this product it's half the size of the guidance for that center, we submitted a CE Mark in July as we said we would.
It is ready to go for submission in the U S. But we are.
We remain focused on prioritizing the efforts around the warning letter as well as 700 Atg approval.
Okay.
Okay.
Okay. Thank you queue. Thanks Cecilia.
Next question please Brad.
The next question comes from Larry <unk> Wells Fargo Securities Larry. Please go ahead.
Good morning, Thanks for taking the question.
First on supply constraints I think in Q4, you said it was about a $260 million impact how much was the impact in Q1, what are your expectations for Q2.
And are you assuming some catch up from lost sales.
Just lastly, Karen maybe talk about the <unk>.
<unk> hedging game.
In the guidance now for 'twenty, two I think it was 410 to $4 40.
And how that rolls off in fiscal 2020, or how we should think about that thanks. So much.
Well look.
Thanks for the question Larry I'll start.
The expectations for Q2 and beyond on the supply chain stuff like I mentioned.
Q4, Q1, where the most acute.
For us on these supply chain issues and I'm definitely glad and we're.
Looking at the rear view mirror on those quarters.
We're not out of the totally out of the woods, yet, but but our back orders are coming down we're seeing particular.
The improvement in areas like resins and packaging across the company a lot of this is a result of of US taking you know well over 100 of our employees and co located in with their top suppliers.
To help them prioritize medtronic, but more importantly kind of work through and make sure that communication is tight the planning is tight.
And.
And that's really making a difference the macro market is getting a little better I mean, some of it in these areas in particular.
Mentioned earlier that semiconductors are still going to be with us for a while.
Step back order.
We're working directly with the.
The semiconductor companies on this and just across the board also in one of the things. We've done in addition to the co locating our employees with our top suppliers is going out to.
Directly to the commodity raw material suppliers.
Versus the supplier thats between us and them, if you will the finisher or the distributor of the middleman and.
Locking in contracts and getting prioritization, especially given that these products.
Go into a medical products in our lives preserving life saving in some cases, those raw material suppliers more aware of that so all of this is definitely helping and will continue to see this backlog will go down overtime, but I said I think we're starting to quit the most acute piece of it is behind us.
Terms of catching up on lost sales kind of like Covid you know.
We don't put a bolus of lost sales coming through into our into our guidance.
And right now in particular.
<unk> <unk>.
As you've seen and heard is there is a kind of a little bit of a governor out there on on procedures with the healthcare worker shortage.
Which has gotten better but it's still hard for customers to run at 110, 120% of pre COVID-19 levels. So so because of that we haven't really baked a catch up on sales into the guidance.
You had some specific quantification questions on and I'll turn those over to Karen and carry on anything else you want to add to the qualitative comments. Thank you I think you covered it well on supply chain. We did say that we expect it to get a little worse before it got better and that's what happened in the first quarter, but we expect it to get better from here.
Do have you know the supply chain improving.
But again not necessarily a bolus of catch up built into that into the guide.
In terms of FX.
As you've seen we've had the strengthening dollar.
<unk> to impact our reported revenue just like it has for many of our peers.
We do have foreign currency based cost of sales and overhead and now we have foreign currency based interest expense as well and those are all provided some offset.
And as you know Larry we also have the benefit of our multi year, our currency hedging program, which did produce significant gains and that resulted in a smaller FX impact.
The bottom line in the quarter.
As we look ahead for FX I would say keep in mind it is.
Only Q1 now we've got foreign exchange rates that are continually volatile. So we know theyre going to move from here.
But if we look at next fiscal year based on recent rates.
We would expect the headwind next fiscal year to be similar to the headwind. This fiscal year again, if rates stay the same.
Hope that helps.
Thank you.
Thanks, Larry next question please.
Yep.
Next question comes from Joanne Wuensch with Citi Joanne. Please go ahead.
Good morning, and thank you for taking the question briefly.
Briefly the.
If revenue is improving quarter over quarter throughout the remainder of the year.
Our operating margins and gross margins also improved and I'll just throw my second one quickly Hugo what does it take to bring that into the United States and is there a parameter or a thought process on the timing.
Yeah. Thanks, Joanne on margins, we do expect margins to improve sequentially through the year as revenue improves so the answer to that one is yes.
And then Jeff for sure on Hugo what does it take to get that states. Obviously, we've got to start our USAID E which is setup here.
Bob has mentioned in the past getting are our customers our.
Trial sites ready for that.
And physicians trained which we've been working on but Bob do you want to give some more specifics on that.
Youre exactly right Jason begins with our U S E that'll start the U S processors, we mentioned July we're nearing the startup I think that'll be the key milestone and we will certainly update our investors on.
Okay. Thanks, Joanne next question please.
The next question comes from Jayson Bedford Raymond James Jason. Please go ahead.
Yeah.
Good morning, just a couple of diabetes questions.
As mentioned that you hope to remediate the warning letter and secure approval for 700 Atg in the near term do you have clarity on if you can get approval for 700 AVG, while the warning letter is still outstanding.
I think.
Thanks for the question I think that the various parties is.
As an option.
But as I said earlier I think our primary priority is too.
Is to work with the FDA and remediate the warning letter and now focus entirely on an on.
Doing that.
Obviously.
We'd love to.
We're very eager to launch the product.
We will focus on.
Patient safety, making sure that we're a.
Our remediation plans are robust.
It's really the first and foremost in our mind that.
We make those corrective actions so that so our primary focus in parallel to that.
We are engaged with the FDA on.
Getting disseminated gene guiding for Cintas system approved those both those things continue to make progress. It's obviously very hard for us too.
Be completely predictive around when those things will happen, but im really pleased with the progress that we're making on both of those.
Okay.
Okay, and I apologize if I missed this earlier, but when will you submit sinclair up to the FDA.
We we.
We would do that as soon as we feel confident that we've made sufficient progress on the warning letter remediation as well as progress on the 700 <unk>. So as you know we submitted for CE Mark in July as we said we would.
And we just want to make sure that our focus remains on those immediate short term goals of warning letter remediation and approval for the <unk>.
Thank you.
Yeah. Thanks, Jason next question please.
Yes.
The next question comes from Steve Lichtman Oppenheimer and co. Steve. Please go ahead.
Thank you good morning, Jeff thinking a little longer term how far along would you say are Greg Smith and his team in making the more durable changes in operations you've talked about in prior calls and when do you think we could start seeing margin benefits from those initiatives.
That's a great question, thanks for that Steve.
They're they've made.
Progress in a in a relatively short period of time, Greg started in April .
2021.
So it's been a little over a year at that time, we have.
Working with the executive team, we've centralized if you will.
The global operations and supply chain function.
As one of those opportunities in our new model.
We're trying to play small and play big at the same time.
Certain things that have been.
Decentralized into the businesses and the businesses are more empowered refer to them as operating units and then certain things are limited list.
We levered will leverage our scale or drive <unk> drive standards and supply chain is definitely one of those so we've made that change the organizational change which is probably the biggest organizational change we've made even.
Even more than go into the 20 operating units and so a significant in addition, we started to invest in new capabilities hiring people from.
Outside the company outside the industry and in many cases that are best in class in the various.
Uh huh.
Sub.
Functions, if you will and capabilities within the global operations and supply chain things like planning things like factory automation et cetera, and we've been hired quite a few and I think the majority of Greg's team is new.
And the last year and <unk> been making investments in technology.
Various different systems on planning and supply planning demand planning et cetera.
And in the <unk>.
Number one focus has been resiliency and quality are there's three things we're looking at from this function.
Resiliency.
Quality, because they have a big impact on quality.
And over time, our cost of goods sold productivity that youre getting to that would be.
To X or more of what we've seen historically at Medtronic and <unk>.
So that will take that will that will play out over time, we haven't seen that yet the other thing you've got a lot going on in there you've got.
So you've got inflation.
And.
And things like that that are kind of masking any kind of are overshadowing. If you will any kind of cost of goods sold productivity that we're that we are seeing so.
But we will see that over time, and we're confident we haven't quantified the exact timing of it and like I said, it's been a little.
Hard to decipher here in the short term because of the inflationary impact on our cost of goods sold Karen do you want to.
Thanks, Jeff and thanks for the question, we are making a lot of progress in the ops front and our short term goal is going to be a focus on.
On driving enough cost offset.
To offset the impacts that we've got either in pricing or inflation.
We're not ready to give guidance for next fiscal year, but that's the initial goal is to offset and then over time to hopefully more than offset.
And I would say, Jeff mentioned too that that this work in operations is not just going to help on the cost of goods sold line, but also on the revenue line as we can more predictably.
<unk> products available and.
<unk> quality issues.
In better stead, So I think that'll help on both.
Okay. Thanks, Steve next question please.
The next question comes from Rich <unk> at tourist Securities Rich. Please go ahead.
Hi, Thanks for taking the questions.
Just on spine I think you guys called out navigation and robotics.
I was hoping you could talk a little bit about what youre seeing there.
Funnel and the pipeline and the capital environment more.
More broadly any changes that are taking place in the way you are selling these types of capital items, especially robotics and then we did see one of your orthopedic robotic competitors talk about changing business models more rentals. Meanwhile, your direct spine robotics competitor actually saw.
Sequential pickup in capital purchases.
It'd be great to get your color on the capital environment, specifically, what's going on in spine robotics. Thanks.
Sure. Thanks for the question, Richard I'm going to have a brick wall with or neuroscience portfolio.
Field that question sure rich.
Looking at overall.
The capital we have a very extensive ecosystem in capital.
Assistant within within our CST business and what we saw was extended purchasing times, particularly as we move through to the end of our quarter now specifically as it relates to the technology and the selling models, we have a variety of different approaches that we use and so we're well positioned however, the market seems to work of hospitals.
We're in a mode of preserving cash we have more opportunities to put forth.
Different models, where we actually utilize the implantables and other disposable products as a way of financing this particular capital and that works very well.
We didn't see a significant uptick.
And our own arms or sell stations during the time at this time with that model, but we saw a little bit of an uptick with <unk> in that particular model and we think during these times, we will probably see more of that the.
The competitor you referenced there.
If you look at calendar Q2.
Per our calculations, we continue to outstrip them.
Actual placement and sales of robots.
So.
So we continue to do that in our procedural base. There is is nearing almost double the amount that they reported in their last.
Earnings call. So we are very well positioned there and then the underlying spine business remains.
Pretty attractive we saw a 4% increase in our core spine business. There. So we're pleased with how that's recovering.
So we're real real excited about the positioning of our spine business with the <unk>.
The recent.
Product launches in the implant side, but the ecosystem that we've built over the last.
A decade at.
How that's coming to bear and how the market shifting to that ecosystem approach. So we're feeling good about the spine as we move forward here.
Yeah. Thanks, Rich I think we've got time for one more question Brad.
Our final question comes from Rick Wise with Stifel Nicolaus <unk> Company Rick. Please go ahead.
Thanks, and good morning, Geoff Hi, Karen.
I was hoping Jeff just in closing you would expand on two.
Two of your exciting I think pipeline and opportunities.
You highlighted Aurora.
Devices.
And I was hoping you'd.
Share your latest thinking in terms of the opportunity there and when you talk about U S approval next year Youre, saying next calendar year next fiscal year.
This seems like a major opportunity I was hoping you could talk about that in just last.
You didn't talk as much risk come about the opportunity and pulse filled deflation.
Maybe just update us on your internal Medtronic program and referral programs.
Some timelines on.
U S trial.
Follow up submission and approval timing.
Any of that would be that'd be great. Thanks, so much sure.
Yeah. Thanks, Thanks for the question Rick.
Two topics, we'd like to talk about.
And I'm going to hand, it over to Sean here to give you some details but on our Aurora like I mentioned in the commentary I mean this we think we can take this segment and shifted from what up to now has been what we would define as somewhat nishi to a bigger segment, we're talking about $1 billion by 2030.
We just don't think you're with our Aurora, We don't think you are making.
<unk> of the patients have to make trade offs here.
And you get that traditional.
The impact that we had from Attritional ICD.
But much much less invasive approach here and so.
So I'll turn it over to Sean on that and then on PFA you mentioned, a fair trial will give you the details between our internal program on PSA and a farah, but again, a fair plus circuitous, it's that whole cardiac ablation solutions business, our <unk> business.
We think this really rounds out that business.
We're anticipating an approval on from from FTC on the Ferro acquisition here.
And we'll move forward on that aggressively because it really is a high growth market, where we've been a little bit Nishu I would say and this would round out that.
And make this business a real growth driver for the company, but on your specific questions. Sean do you want to dive into the specifics so Rick as Jeff mentioned the commentary today's subcutaneous ICD market is.
That's a nice round three of $350 million $350 million annually, we think that within 10 years this could be $1 billion segment.
And the reason that it expands all those limitations.
The current device, where we can sort of the benefits of traditional IC smaller devices longer battery life.
The pace of the arrhythmia, rather than having a shocker leukemia, that's really.
Both.
Can I expand the market like we saw it leaves us patient and wait for that we'd start to get new patients that weren't being treated because it.
The disease and leads to that strong growth with regard to timing. We're seeing next calendar year to kind of put a finer point on that is the first half of next calendar year is what we're targeting for approval in the U S.
Post integration, we have completed the trial as you know last November and Thats been and its follow up period.
So that would put us for the availability of data in the springtime.
It's probably one of the most likely to be presented and of course the.
Filing.
Of our technology at that point in time as Jeff mentioned, we're waiting the regulatory closure of Sara and that really expands out the fuller bag. It gives us within both RFS pulsed field no point by point ablation.
And what we have got our own internal.
PSA is relates to the isolation of Paul remains.
Please go ahead.
More anatomically base and then the other catheters.
Come with.
<unk> would be for point by point ablation or for lines of production. What do you do with the linear catheter, so really nice complementary sort of technologies, the PSA, but more importantly, we've been restrained from being able to participate in the whole market because we don't control the mapping navigation systems as well.
Our strong monopoly between two players Biosense Webster.
And Abbott.
We control the dominant that field, so that a thorough.
Acquisition allows us to have all of our catheters mapping navigation royalty expense the opportunity into that.
$8 billion market should.
It should be by the time, all the stuff rolls out continues to grow robustly close to $10 billion and will be fully participating in that market. So.
Two really important growth drivers, we're excited about them and we're making meaningful progress on both of them.
Thanks, Sean Thanks, Jeff Yes.
Yes, I'd just Rick on this.
One in the short term, we will see a pretty nice uptick in sequential growth going from our Q1 to our Q2 and then and then.
See more sequential improvement from there, but it's the reason we're confident is things like these two.
Two areas that you mentioned.
Along with a host of others right Micro continues as Sean mentioned micro we just we just hit.
PFA and what's coming there and.
<unk> ICD in the cardiac space, but on the call and then down the road Ardian and see the data the economic impact of that will be a little bit out there.
Beyond this year, obviously, but our this fiscal year, but there is another and then that's just in the cardiology area, we hit on Hugo South.
Soft tissue robotics side.
I forgot to mention mitral and tricuspid on the cardiac side Theres a lot on cardiology, you got the soft tissue robot and that whole surgical ecosystem that were surrounding that with its way more than the robot.
You've got a lot going on in neuroscience, we mentioned the spine surgical ecosystem.
We didn't get any questions on DVS. This time with the sensing and the person the person product and the <unk>.
The leads that go with it and the close of the trial that we're doing there and we talked a little bit about <unk> and pain.
And then shifting to talk about diabetes.
What we're seeing in Europe with the system now the seven atg and just sending in the some player.
Submission into the EU and she gave you the dynamics on what we would do it in the us, but there's a lot going on here.
And we're excited about it and the operational issues that we've gone through.
Not all of them are completely in the rearview mirror like I mentioned semiconductor shortages, but it's made us stronger.
And and.
All of this the changes that we made will become more apparent.
In the quarters.
The benefits of those changes will become more apparent in the quarters ahead here.
And we're looking forward to it for sure.
So with that I think that.
<unk>.
All for Q&A also at the time, we have and I just again want to thank you for the questions the engagement.
As always we appreciate your support.
And your continued interest in Medtronic and we look forward to updating you on our continued progress with what you've talked about here on our next earnings call. Our Q2 earnings broadcast, which we anticipate holding on November 20, <unk>. So just before Thanksgiving those here in the U S.
Just before Thanksgiving and so with that.
Thanks for tuning in today, and please stay healthy and safe and have a great rest of your day.
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