Q2 2023 Medtronic PLC Earnings Call
<unk> performance the presentation can be accessed in our earnings press release or on our website at Investor Relations that 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 concerning factors that could cause actual results to differ is contained in our periodic reports and other filings that we make with the SEC and we do not undertake to update any forward looking.
Statement.
Unless we say otherwise all comparisons are on a year over year basis and revenue comparisons are made on an organic basis, which excludes the impact of foreign currency and revenue from our Q1 acquisition of intersect Ent's.
References to sequential revenue changes compared to the first quarter of fiscal 'twenty three and are made on an as reported basis and all references to share gains or losses referred to revenue share in the third calendar quarter of 2022 compared to the third calendar quarter of 2021, unless otherwise stated.
Reconciliations of all non-GAAP financial measures can be found on our earnings press release or on our website at Investor Relations not Medtronic Dot com.
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 as we discuss our Q2 results and outlook.
Q2 organic constant currency revenue growth of two 2% came in about a point below expectations due to a slower than expected recovery in both procedure volumes in certain markets and in our supply chain.
In terms of reported revenue the continued strength of the dollar over the course of the quarter drove over half the difference to expectations.
Despite the topline results, we were able to control expenses and deliver EPS at the high end of our guidance range.
We also issued guidance for the back half of our fiscal year. This morning.
We expect continued acceleration in organic revenue growth in the second half, although less than previously anticipated and this partially flows through to EPS.
Now this is something that I don't take lightly dill.
Delivering on our expectations is important to building and maintaining trust and credibility with you.
Karen will walk you through the details, but some of our markets in some of our supply constraints recovered more slowly than we expected in the quarter and that along with incremental China volume based procurement.
Led us to reduce our expectations.
While the current operating environment remains challenging we had strong growth in several businesses in geographies, where our strategy our operating model and execution are yielding solid results, we have near term product catalysts in our pipeline we.
We are decisively allocating capital internally and selectively making focused acquisitions.
We're making improvements to the operational health of the company and we're streamlining the company structure and taking cost out.
All of this gives us confidence that we're on the path to creating durable growth and shareholder value.
Now diving deeper into our Q2 results for.
Our reported revenue as I said earlier currency drove over half the miss to consensus.
Organically the Miss was primarily split evenly between two challenges.
One procedure volumes in some markets have been slower to return to normal levels.
And to some of our supply challenges have persisted longer than we anticipated.
With regard to procedure volumes. In addition to an incremental China Pvp, we are still seeing lower volumes in elective coronary PCI Gi procedures.
Havre spinal cord stim, and some less emergent surgical procedures.
The slower than anticipated recovery in procedure volumes, primarily occurred in developed markets as healthcare systems continue to work through staffing and other challenges.
Now with regard to supply we've made meaningful recovery and many of the most acute issues are now behind us, including the acute packaging issues, which we highlighted last quarter, but some of the improvements did come later than we expected in Q2 and as a result, we mis cases in businesses like surgical enough.
Patients it has delayed our expected momentum of focusing beyond challenges impacting our markets and product availability, we have a number of businesses, where our strategy and execution are yielding results.
Recall that we moved to the new operating model two years ago, we created highly focused accountable and empowered operating units that could move with greater speed and decisiveness.
And today, we're clearly seeing the benefit of this model across many of our businesses.
Starting with cranial and smiled technologies.
<unk> grew 5% and this is despite a large negative impact from China Pvp in fact.
Our U S core spine business grew 15%.
Additionally, this quarter, we launched our spine technology ecosystem, which we call able at the NASS conference.
From planning to our best in class implants to navigation and robotic assistance to inner operative imaging and surgical tools.
Up to and including patient follow up.
It will bring spinal surgery together in one seamless and connected platform and another highlight was our structural heart business, where our tavern business grew 15% globally, including 17% in the United States.
The launch of our evolute FX valve drove 18% sequential revenue growth in our U S tower business.
Despite being at full market launch for only the last month of the quarter.
So we expect evolute FX to drive momentum for us over the coming quarters.
Our cardiac rhythm management business continues to execute and win share with 4% growth in this quarter.
Within CRM, our pacing business grew 6% well above the market with 18% growth of our micro family of Leila's pacemakers.
And we're looking forward to the commercial introduction of our Aurora EV ICD in the back half of this fiscal year.
So while we have businesses, where the changes we've made over the past couple of years are clearly having a positive impact. We're also focused on ensuring these efforts translate into improved performance in all of our businesses.
It's worth highlighting a few businesses, where we're making strong progress to drive future growth over the near to mid term and some that already have immediate momentum.
Let's take cardiac ablation solutions, a business that we expect to be a strong future growth driver.
Wholesale ablation represents a large market opportunity and we're looking forward to seeing our pulsed AF pivotal trial results in the first half of next calendar year.
Putting us on the path to be one of the first companies with the PSA catheter in the U S market.
Which we think is underappreciated.
This is a meaningful growth opportunity for Medtronic in the next 18 to 24 months.
And as you know we closed our acquisition of a fair in August and affairs differentiated mapping and navigation system gives us the breadth and differentiation that we need to win share in cardiac ablation.
And we expect to complete enrollment this quarter in the pivotal.
This fully integrated system will be the first of its kind to offer unique catheter that can perform high density mapping.
And deliver both pulsed field and radiofrequency ablation in a single device.
Now in diabetes, we remain focused on resolving our warning letter.
We've now completed 100% of our warning letter commitments and have informed the FDA that we're ready for re inspection.
We also remain in active review with the FDA on our submission of the mini Med seven AG system with the Guardian for sensor.
And outside the U S. We continue to receive positive customer feedback on the performance of the seven Atg, which is now available in over 60 countries.
In Q2, seven atg drove mid teens growth for our diabetes business in international markets.
And across diabetes, we're investing heavily in the development of multiple next generation insulin delivery and sensor technologies.
And we remain focused on restoring strong growth to this important franchise over the coming years, turning to our Hugo surgical robot.
Now I'm sure we're going to get into this in Q&A, but we saw a lot of positive momentum this quarter as we scale manufacturing production expand regulatory approvals and ramp installations. In addition, we just received FDA approval last week on our product enhancements now.
Now this allows us to start our U S. Urology clinical trial by the end of the calendar year and as a catalyst for continued progress with our international sales.
Now before I talk about our capital allocation and portfolio management.
Let me share my thoughts on the <unk> opportunity.
Despite the impact we believe COVID-19 and medication changes had on the ambulatory endpoint and on med.
The totality of the data is compelling.
The large drop in office blood pressure in the <unk> arm was impressive and it was consistent with what we've seen in our other trials importantly, the current standard of care for reducing blood pressure. It just isn't working.
Which was evident in the long term sprint trial results published just last month in Jama cardiology.
Patients don't seem to stay on multi drug therapy for long periods of time and eventually just stopped taking their medications.
And that's the advantage of already and it's always on.
We've demonstrated that are already in procedure, it's safe, it's effective and it's durable.
Physicians are excited and already is preferred by patients now.
We've submitted our PMA to the FDA and we're looking forward to working with governments and payers in the U S and around the world who are searching for improvements to control high blood pressure and avoid the costly and devastating consequences of this disease.
In addition to advancing our pipeline, we're focused on decisively allocating capital and streamlining the company to deliver durable growth, we're freeing up resources to invest more in R&D feeding.
Feeding our fast growing businesses in areas, where we can see the strongest returns.
Cardiac ablation solutions and diabetes are two clear examples of this.
We're also making moves with our portfolio to focus our company and our capital on opportunities that are better aligned with our long term growth acceleration strategies.
Over the past two quarters, we've announced our intent to separate three businesses that we believe will thrive outside the company.
With our renal care solutions business, we're progressing on the separation, forming a new kidney health technology company together with Davita.
We continue to expect this transaction to close in calendar 2023 and.
And last month, we announced our intention to separate our combined patient monitoring and respiratory intervention business.
We remain focused on active portfolio management evaluating both potential additions and subtractions to further accelerate our growth and create value for our shareholders.
Now with that I'll turn it over to Karen to discuss our second quarter financial performance and our guidance Karen.
Thank you Jeff.
Our second quarter organic revenue increased two 2% up significantly from Q1, but below our guidance range given the challenges Jeff mentioned.
Yeah with a focus on expenses, our adjusted EPS of $1 30 landed at the upper end of our guidance range.
Currency had a significantly unfavorable impact of five 8% on a reported revenue growth.
Our FX hedges mitigated that impact on the bottom line with.
With EPS down only one cent.
Or 80 basis points from currency.
Looking at our results from a geographic perspective, our U S revenue grew 1%.
Our non U S developed increased 3%.
And emerging markets grew 4%.
Our emerging markets growth continued to be affected by China.
Each declined 9% given the impact of a national tender in our spine business and several provincial tenders in certain other businesses.
However, we continue to see strong double digit growth in our other markets, including mid Twenty's growth in eastern Europe , and mid teens growth in Latin America.
In fact, excluding China, our emerging markets grew 15%.
Turning to our margins are.
Our adjusted gross margin of 67, 6% declined 120 basis points from inflationary pressures in materials direct labor freight and utilities.
We expect these inflationary pressures to continue and to impact the back half of this fiscal year more than what we experienced in the first half.
Our adjusted operating margin of 26, 6% declined 40 basis points, including 120 basis point benefit from our currency hedging program.
Compared to the first quarter, our operating margin improved 270 basis points given accelerated revenue growth.
We expect sequential improvement throughout the fiscal year.
We continue to maintain a strong balance sheet.
I would note that the vast majority of our debt is fixed at low rates as we move into a higher rate environment.
Regarding our capital allocation, we continue to balance investing for the future with returning capital to shareholders.
And we remain committed to our dividend and to returning a minimum of 50% of our free cash flow to our shareholders.
Now turning to our guidance.
Today, we set our second half revenue guidance at 3.5% to 4% organic.
Which excludes currency movements and revenue from our intersect Ent's acquisition.
If recent exchange rates hold foreign currency would now have a negative impact on our back half revenue of $930 million to 1.03 billion.
Our back half guidance translates into a reduction of our annual guidance.
Driven by a slower pace of market and supply recovery.
On market, we are expecting incremental provincial tenders in China, particularly in stapling and cardiac ablation.
And Jeff referenced earlier that some procedure volumes in the second quarter didn't recover as quickly as we were expecting.
So at this point, we are assuming no incremental improvement in the back half.
On supply.
While we have had a meaningful recovery it came later than anticipated.
Particularly in <unk> and cardiac diagnostics.
And that's simply delays or pace of recovery ahead.
By segment in the back half the majority of the reduction is in our medical surgical portfolio.
Which we now expect to be flat to up <unk>, 5%.
We expect cardiovascular to grow five in a quarter to five and three quarters.
Neuroscience to grow six to six and a half.
And diabetes to decline in the low single digits, all on an organic basis.
Our total company revenue guidance does assume continued revenue growth acceleration.
Which we saw in each month of the second quarter.
We expect the third quarter growth rate to be better than the second.
And the fourth quarter better than the third.
We will have easing comparisons and ventilators improving supply in certain businesses like cardiac diagnostics and S. I.
And the benefit from product launches like evolute, FX and EV ICD.
In the third quarter, we expect organic revenue growth in the range of 2.5% to 3% an acceleration from the second quarter.
And assuming recent exchange rates hold the third quarter would have a currency headwind between 460 and $510 million.
By segment and on an organic basis, we expect medical surgical to be down two to two 5%.
An improvement from the second quarter, given lesser event headwinds and the impact of the flu season.
Cardiovascular to grow four and three quarters to five in a quarter on the continued rollout of evolute FX and link to.
Neuroscience to grow five and three quarters to six and a quarter improving.
Improving from the prior quarter with less Pvp impact in spine.
And diabetes to decline in the low single digits.
On the bottom line, we are driving significant expense reductions throughout the company to help offset the lower revenue and continued inflation impact.
And now expect fiscal 'twenty, three non-GAAP diluted EPS in the range of $5 25 to $5 30.
That range includes an unfavorable impact of currency of approximately 18 at recent rates.
For the third quarter, we expect non-GAAP diluted EPS to be in the range of $1 25 to $1 27.
Including an FX headwind of about five cents at recent rates.
Amidst the macro environmental headwinds, we face from inflation, China, EVP software procedure volumes in certain markets and currency.
We are laser focused on driving operational and expense efficiencies.
We are also committed to invest appropriately for the long term.
Allocating capital to our most promising growth drivers and executing tuck in acquisitions designed to reach more patients and create value for our shareholders.
As we approach Thanksgiving.
I want to share my gratitude to our employees who have been committed.
Particularly during these challenging times.
To deliver on our mission to alleviate pain restore health and extend life for millions of people around the world back to you Jeff. Thank you Karen.
Now before we open the lines for questions I want you to know that our growth rate in our consistency are not where we want them to be.
That's why I shared with you our aggressive agenda to transform this company two years ago, when I became CEO .
We embarked on a plan of implementing a new operating model, eliminating the bureaucracy of our groups and forming more nimble operating units.
At the same time learning to leverage our scale.
We set in motion, a new performance driven culture, and we changed our incentive plans to reward new behaviors and performance.
We brought in new leaders to inject new ways of thinking in the organization and we implemented new capital allocation and portfolio management processes.
Now these changes take time, and we face setbacks, along the way that have slowed us down some or environmental like COVID-19 recovery rates raw material shortfalls and Chinese procurement policy, while other setbacks are of our own doing like our quality and operational challenges and the pace of improvement we anticipated.
Look I know, we have more work to do here, but we understand the root causes that led to the years of underperformance from this company and our aggressive transformation agenda is designed to fix these issues.
I know, we will get this right choosing the right markets being more efficient and productive with our resources empowering businesses and increasing accountability improve.
Improving our quality, our manufacturing and our supply chain.
And turning our size and scale into an advantage.
And I know we're on the right path. The progress we've made so far gives me that confidence we have experienced leaders are compelling pipeline and positions of strength in some of the most attractive med tech markets, which address significant unmet needs for patients.
We will execute on our plan to deliver durable growth that we began two years ago and as we do we will create tremendous value for all of our stakeholders.
So now let's move to Q&A, we're going to try to get to as many analysts as possible. So we ask you to limit yourself to just one question and only if needed a related follow up if you have additional questions you can reach out to Ryan in the Investor Relations team after the call.
With that Brad can you. Please give the instructions for asking a question for the sell side analysts that would like to ask a question. Please select the participants button and quick raise hand.
If youre using the mobile App press them more button and select raise hand youre.
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 are joined by <unk>, EVP and president of the diabetes operating unit.
Sean Salmon, EVP and president of the cardiovascular portfolio.
Brett Wall, EVP, and president of the neuroscience portfolio, and Bob White, EVP and president of the medical surgical portfolio.
I'll pause for a few seconds to assemble the queue.
Okay.
Yeah.
Alright, we will take the first question from Robbie Marcus Jpmorgan Ravi. Please go ahead.
Great. Thanks for taking the questions.
Maybe I'll ask a two parter upfront.
The missing in the topline in the quarter.
<unk> down was pretty significant for the second half of the year.
A point to slowing procedure growth or not a recovery that you were hoping for it yet it's different from what we're hearing from most of your peers in terms of stabilizing volume growth. So I was hoping you could spend more time walk us through what Medtronic seeing and maybe why it's a little different relative to peers.
In terms of the recovery and the stabilization in volumes and then as we think out to next year in fiscal 'twenty four.
Just some rough thoughts on the last call about FX and how we should be thinking about growth for next year any update to that growth into the change with the.
Updated second half guidance range. Thanks, a lot.
Great. Thanks Robby.
Okay <unk> three parts there.
I'm going to ask Karen to chime in to help me here on this one but provide some details but on the mess like we said in the commentary. The primary issue is is the pace of the recovery and there's the two buckets, there's the Ah <unk>.
Pace of our supply recovery.
Which we did make quite a bit of progress there and in the.
Got over the most acute issues that were.
That were plaguing us, but what happened a little it happened late in the quarter and pushed out our momentum which gets to the second part of your question, which is the <unk>.
That's the Guy down the other bucket is part of your second question as well as in the markets. Many of our businesses are back.
The majority of them are back to that pre COVID-19 level their markets, but there are some that are not and I'll, let Ken walk through those in and we.
Yes, we just overstated, what we whether that market recover beam will walk you through those and how those impact the second quarter or the second half are Karen you want to yeah. Thanks, Geoff and thanks, Robby and so let me talk about it more broadly than your question Ravi because I know you asked a specific.
Question on on procedure growth, so I'll talk about that and a little bit more broadly. So just on those two buckets first on our markets.
Some of our markets have not returned to normal growth levels and this does account for about for over half of the reduction in our in our second half guide.
You talked about competitors you have heard from from some of our competitors about a slow recovery in the neuro mind market and the tavern market and we're also seeing a slow recovery in basic coronary PCI and some general.
Surgery procedures that we mentioned in the commentary.
And because these markets have not accelerated as quickly as we had anticipated.
We've decided to assume volumes in the back half remain at Q2 levels.
You know if those volumes improve in those markets that would be upside.
And we also talked about related to markets that were expecting additional provincial tenders in China.
And those were ones that we believed would occur next fiscal year and are occurring sooner, particularly in stapling in cardiac ablation.
And then on the second bucket of supply that Jeff mentioned, it we obviously did see meaningful improvement over the second quarter.
But some of that happened late in the quarter as we said and that pushes out our some of our assumptions for share recapture.
For example in particularly in S. Die, while we were short on supply our competitor benefited they stepped in to fill the shelves with our customers.
We're under long term contracts with those customers. So we will gain our share back there is just a lag while the shelf inventory comes down.
So hopefully that gives you some context on our on our guide this morning, but just to summarize you know in addition to our assumptions on market growth, we assume incremental contribution from products that we've recently launched and supply that has recently improved.
On your question on FY 'twenty four.
It is still early we.
We have two quarters to go and we're at the beginning of our planning process. So we're not we're not going to give FY 'twenty for guidance on this call, but I will say a few things including currency because that was your question.
First on the top line you can see that we expect to exit the year with mid single digit growth and that's a great place to start the following year.
Second down the P&L, we are still in a challenging operating environment with inflation interest rates and currency as you mentioned.
And on currency, we now estimate that to be at 36 cent headwind on the bottom line in FY 'twenty four and that's obviously worse than the 18th.
I mentioned for FY 'twenty three.
And third we're purposely driving significant expense reduction given these headwinds.
And and given our focus on continuing to drive our.
Long term investments for the company. So we've got several puts and takes for next fiscal year and we plan on giving you more on FY 'twenty four as we move through the back half.
Great. Thanks for all the color.
Thank you Ravi will take the next question. Please Brian . The next question comes from Travis Steed at Bank of America. Travis. Please go ahead.
Yeah.
Hey, good morning, everybody I'm, a little bit more color on FY 'twenty four as it relates to China, EVP and if theres any way to think about how much of the China, <unk> and FY 'twenty three versus FY 'twenty four given some of the new ones like EP and even neuro and then I did want a little bit more color on power as well.
Given the strong U S result, there curious if you could kind of comment a little bit on the copper market and also share aren't you can say how much share. You think you took this quarter and in U S hover.
Yes. So thanks for the question Travis on the why don't we start with the Teva one because you know.
The market didn't grow quite as much as we had hoped but it still was a strong growth driver for us and we did do well from a share perspective.
Sean maybe comment on that and then we'll come back and health care and talk about the Pvp.
Part of the question Sean.
Yes, Charles I think we took about a half a point of share for that for the full quarter and it was really driven by the late last month of the quarter, where we picked up.
Some of that momentum in October with the launch of the episode FX. We're in about 400 accounts with us so far so we're.
Got some room to run there for the back half of the year.
It's very strong I think the underlying market is still in the kind of high singles area.
But that's really as you know.
Just conspired against by the resource intensity that that's required because this whole chain of events, where you have to have a patient groups with imaging prior to their professional procedure and theres a lot of hand offs, along the way. So those those dynamics continue to play out around the world.
Probably more in Europe in France, and Germany that we see in other countries.
We have a little bit of slowness or on our own throughout.
So Japan, Japan had us.
Plenty of coverage through the summer, which which was difficult and we also had a problem where there was a shift that we use for the procedure that we don't make that became unavailable because supply challenges.
To some share loss in Japan, but overall.
With tavern remains really strong for us with FX launching and we're excited about back half to get to a full release of that product into all the accounts.
And on your China of EVP question Travis.
About 15% to 20% of our back half guide down is due to the incremental China EVP being pulled forward from next year from our perspective from what we had assumed.
China declined 9% in the second quarter and that was because of an impact of GBP in spine.
For the rest of this fiscal year, we don't expect them.
Ana to be a material growth driver for us and in fact for the full year, we're expecting low single digit declines in China.
And that said as we look forward into FY 'twenty four we will continue to have some GBP, but I think the vast majority will be behind us and China should be a contributor of growth again next fiscal year.
Just a little bit more color on the Pvp I mean, we had visibility to these national tenders and we factored that in earlier in the year, but what we.
So we didn't have real good visibility to some of these provincial tenders that they came out here in the last couple of months.
And Thats.
Part of the change in the guidance to Karen's point.
Longer term, we still think trials a growth market, but it's not right now and we've factored that into our into our guidance.
Okay.
Great. Thank you. Thank you Travis.
Thanks next question. Please the next question comes from Vijay Kumar of Evercore Evercore ISI TJ. Please go ahead.
Oh, Hey, guys. Thanks for taking my question, Jeff My first question was on that.
Guidance when you look at <unk>.
Second quarter organic slightly north of five 2%.
At the back half guidance of.
4%.
So you have the 4% can you give us a bridge of what gets easier at least have some easier comps etcetera, and I think related to that.
Is this why is Medtronic talked through this is not from your share loss in surgical.
Innovations.
Yeah.
Okay. Thanks for the question Vijay, let me take the well I'll take the the share loss question first in that side, and then I'll get to the back half and maybe I'll care and talk to that one as well, but in Si surgical innovations.
This is first of all this is a contracted business with health systems in May.
Mainly us and our main competitor in that space and.
In the past.
Ben circumstances, when the shoes on the other foot when our competitor had us.
Recall and have had recalls and we did the same thing where we.
Got picked up some incremental revenue and some share.
Because the two big competitors are makeup the majority of what.
The hospitals are buying in the surgery space, but these hospitals do honor these contracts theres lots of goes enrolment and.
That revenue went back after the supplier situation was resolved and so we've seen that over the years on a multiple times. So we these are contracted.
Like I said contracted business for us and based on our dialogue with the health systems.
We're confident this is going to come back.
As our supply, which we mentioned we did get pass the most acute part of our supply issues in the surgical innovations business was a packaging issue. It did come later in the quarter and slower momentum, but we do have momentum now and you should see that business recover.
On the back half I'll ask Karen.
Jay you know when we look at our back half ramp.
We have new products, we've got tavern with evolute FX that Sean mentioned was only in the market for a month in Q2. So we expect continued growth from that we've got Hugo starting to ramp we've got our harmony valve returning to the market.
We've also got our diabetic painful neuropathy opportunity that will be driving more in the back half.
And we've got supply returning we've got supply returning for our linked to product in our cardiac diagnostics and also better supply and ESI in ICD.
And we've got reduced headwinds in our sale events and aortic grafts are normalizing.
So all of those things really lead to.
The back half ramp, but hopefully that's helpful. Yes, so I mean beyond the supply returning the back half as you know Karen walked through a lot of it is really powered by.
Very very tangible things beyond supply product related.
They are tangible and compelling.
That's helpful and then maybe one related.
I think in the past Mechanicals.
Thought about itself as a merchandising a coffee company in light of these results, which is that mid single digit.
<unk>.
It does medtronic do to supplement this growth with them.
Thank you.
I didn't hear the very last part of it is medtronic.
But the answer to your question is yes, I mean, the mid single digit growth.
We will exit the year at.
At mid single digits, you see throughout this year.
Youre seeing the acceleration from the first quarter, which was the.
The depth of our supply issues were really in a tough spot.
Down minus four than this past quarter on organic basis up to and then Karen walks you through the back half guide, but we exited the year.
At mid single digits, and we believe that's a that's durable like I said based on these product launches that are here now so.
Immediate drivers and then.
Karen brought up a list of things that are already kind of tangible in the back half, but you know theres a number of other things that that are still coming you know the Aurora EV ICD.
PFA.
And in Afib, and Inceptive with E caps in our SCS business.
And then there's the whole diabetes discussion with those products coming on in the U S. In the next year and the Hugo ramp who will go on for a while so theres a number of things that keep us going.
And so that's why we feel good about the mid single digit.
Okay.
Thank you Vijay next question please Brad.
Next question comes from Larry <unk> of Wells Fargo Berry. Please go ahead.
Yes.
Can you guys hear me okay.
Yes, Hey, Larry Hey, good morning, Thank you for taking the question maybe on diabetes.
For Q.
So just a multipart question here did you ask for a variance on <unk> and Atg and if so what was the response or when will you know.
If you don't get a areas.
You need reinspection for 700 atg clearance into how long do you expect that to take and just lastly on 700 AVG.
We expect it to have the same impact in the U S. As you've seen outside of the U S. Thanks for taking the question.
Thanks, Larry.
Your first question.
No we did not ask for a variance we've been focused on.
Lifting the warning letter I am pleased to say that we are 100% complete on the warning letter commitments and we have welcomed the FTA.
Into SaaS Alcon status so.
So I think thats forward progress and Thats, the clearest path because obviously, it's not the 780, but it is a.
A whole pipeline of innovation that we care about.
From a growth perspective, so this progress there.
It's very hot.
<unk> timing on that and I think that's up to the agency.
They are working very hard on that.
So we anticipate.
Yeah.
Progress there as well.
On your question around.
<unk> progress in international markets, we're very pleased with the double digit performance there when do you expect.
To see something similar in the U S market once approved we.
We are actually doing.
We've been really happy with how 2017.
<unk> has performed in the U S market is helping to stabilize attrition here.
And as you know.
Our customers have a free upgrade.
Option with 770 <unk> once approved in the U S market and sorry their emission initiative said your second part of your question.
Yes.
I guess why didn't you asked for a variance in the U S. It seems like a kind of a no risk.
No.
Option here, so why not ask for it. Thank you.
Yes.
Primarily because as we stated we've been focused on.
Really the long term lifting up the warning that is critically important.
It's.
It's not just about 700 atg its fill of the pipeline.
Submitted Sinclair is for CE Mark this year, we just submitted.
So, Matt and Jean with Sinclair IV last week.
So theres a long line of innovation that.
Yeah.
We are.
Interested in.
When we were also very pleased with the progress we're making on.
Correcting the warning letter commitment so with those things progressing at the pace.
We don't feel it was necessary to seek a variance.
Alright, thanks, so much for taking the question.
Thank you Larry next question. Please the next question comes from Matt O'brien of Piper Sandler. Please go ahead.
Yes.
Okay.
Yeah.
Sure.
Matt.
Okay.
Okay.
Uh huh.
Okay.
Okay. This seems to be a problem that with your with your audio.
We will take the next question Brad and then.
Try to come back to that.
The next question comes from Josh Jennings with Cowen and company Josh. Please go ahead.
Josh you there.
Yes, Hi can you guys hear me okay.
Sure.
Can you guys hear me.
Yes, we can hear you Josh.
Okay, great sorry, I, just want to make sure.
Just one.
Thanks, Jeff and maybe Sean as well just on the renal Denervation program.
Understand I think it's well understood that with <unk>.
Ali as evidenced.
Google I believe.
Your team has had preliminary discussions with payers and it might be helpful. Just in terms of underpin understanding your optimism not just approval could be in hand in the next six to 12 months, but but payer decisions will ultimately be positive and then and then the follow up is just on supply.
And just wanted to make sure I'm clear on.
The dynamics here and just the recovery and regaining momentum is what's left but as the supply chain.
Headwinds are gone.
And just should we be expecting I know you and your team has executed on the streamlining or consolidation of operations and supply chain functions and we start to see a benefit from those efforts in fiscal 'twenty four thanks for taking the questions.
So maybe I'll start with the.
The supply.
Yeah.
Situation.
Are the supply chain issues gone not completely but the biggest.
Biggest pain.
Pain or if you will is behind us.
Especially in surgical innovations with the packaging as I mentioned issue.
But you know what lingers a bit would be like we've talked about before some.
Semiconductor I'd.
I'd say constraints, but the changes that we've made.
Two our supply organization with the new leadership under Greg the new structure.
Bringing in new people to help us with capabilities, where we thought we weren't where.
Where we needed to be implementing new systems.
And new processes.
And in these changes.
I believe our.
Our durable I mean, they are so we're going to get we're getting through this the worst is behind us we factored in.
The our update into the guidance.
But there are some I mean, there is some issues that are outstanding like semiconductors, but all of that's factored in.
And we feel good about going forward, not just FY 'twenty four but beyond that.
Regarding ardian.
Look I'll ask Sean to chime in here.
But look the we as you look at the data.
We believe it's very compelling.
And you see that the sham arm.
And the trial and increased the there their medication in the already an arm reduced and the differences is 10 ask I mean, it's a significant.
Different so when you when physicians look at it.
We understand this and are excited about it.
And why we're optimistic with Payors.
Is because health systems in.
And governments are really focused on.
And payers are focused on hypertension.
Rich.
The current standard as I mentioned in the commentary just isn't working in more data came out to substantiate that.
In September and physician to substantiate what people already know and so now there's a new option.
And I think payers are going to be compelled to take it seriously.
Especially with the public health epidemic that we're facing here, Sean do you want to chime in and add some more color to this set of wells just for them.
Josh you're right. The totality of data is really is the strength of this program compared to just about any other new therapy I can think of there's really not a lot of.
Comparisons there just how much good.
Data, we have here 3000 patients in the real world data on top of the Sham controlled randomized studies and importantly did a patient preference study, which is getting more and more considered by by payers because they know that patients have a say in what they want to go do and Theres, a large majority of patients that prefer.
Having a procedure versus adding just even one more drug and of course, we can we can get their blood pressure down without the addition of trucks, which is a huge benefit.
I'll remind you also that it already was a breakthrough device designation in the world of <unk> ruling that would have matched automatic coverage. We don't know yet what the pathway is going to look like we will find out more about that in the fall timeframe I suppose or in the spring timeframe, but we do think that the.
The novelty of this therapy, the desire of patients and of course, the public health benefits that this can provide is going to be compelling to both our public and private payers around the world.
Okay.
Thanks, Jeff.
Take the next question. Please yes, we will try that again.
Our next question will come from Matt O'brien of Piper Sandler battery there.
How about now.
Yes, we can hear you now.
Yes.
Good morning, Thanks for taking the question sorry about that.
I guess.
Just to follow up a little bit on Josh is question and I know how.
Thank you still are about already in but you know I.
The ambulatory number is one that I was a little bit more robust than the office base number so why why would clinicians and payers piece, though.
I'm interested in doing these cases or paying for them given the ambulatory feedback that we've seen and you guys still thinking about the market is $500 million by 'twenty, six and $3 billion by.
At the end of the decade.
Yes.
Sean you want to get into the specifics on the ambulatory versus the office.
Yes, Matt I think if you just recall how that study was done but patients will witness taking their blood pressure medicine in the morning and.
Whether they were taking that to the full six months or not or if they just took it that day you saw this change in blood pressure that that was during the daytime not what we've seen before and this required trials.
But at nighttime there was still a production ambulatory.
So I think the simple story here is that patients aren't taking their medications except on game day.
And their blood pressure drops now we don't know that for sure. We do test blood and urine every day, we just tested on game day.
And we know that there were more medications and the and the patients that were in the control arm then in the treated arm and as Jeff said, the changes increasing medication decreasing medication, taking even medications for blood pressure that werent, even prescribed maybe from their medicine cabinet maybe from there.
Spouses partners Medicine cabinet.
There is a lot of changes in medicine, which we know we're in we're present different than the prior studies, we actually have that proof now.
We can measure drug metabolites. So cleaner. If you will measure is that morning blood pressure, we took the office blood pressure.
That blood pressure is the one that's used for all the epidemiology of.
Studies that show what the reduction in blood pressure means for the avoidance of events and reduction of cost and it's also the primary endpoint that Scott just about every I think maybe every pharmaceutical approved.
Treatment of high blood pressure. So it is the robust standard.
In fact ambulatory is not even reimbursed in this country. So I'd say its not used routinely in clinical practice. So it is a robust measurement that was consistently performed throughout this trial and across the other trials that we thought we have done so I'm confident that shot.
That part in terms of the market size, we're very confident in this therapy, there's 1 billion people with slight pressure problems around the world, even though very small amount gets you to two kind of market growth.
We think it's going to be meaningful for the company.
So we're very confidence therapy, and that's about as approval and ultimate uptake.
Okay that makes sense I appreciate that and then just unrelated follow up but.
Turning over to predict rhythm for a second.
You know I'd love to hear about the competitive dynamics that are going on with micros competitor. There now and then what the expectation is with.
With <unk> ICD.
Given the long standing presence of another one of your competitors in that market what should we be expecting between those two is progressing over the next 12 months. Thanks.
Okay.
Super Micro we're continue to growth you saw 18% globally, 40% of that was from international sales and really Japan, and China in particular really drove that.
<unk> continued success and we will see continued penetration in international markets and in the U S and <unk>.
Shift between single chamber to the to the AAV.
Device, which can pick up a larger proportion of patients is about 30% of the market. There in the next 12 months, we're going to refresh both VR and the eight <unk>.
<unk> in the coming year around the world. So while we have some competition in the United States.
Got it pretty well I think the ease of use of our micro device in the long term.
Data that we have as well as just the.
The familiarity with our system has made a pretty durable.
Aurora EV ICD as you know, we've got CE, Mark coming up that's a little bit of a different technique, you've got to put a lead underneath the breastbone, which takes some some training to learn and wont be very meticulously we roll that out.
But make no mistake that is a product that really offers a huge benefit getting leads out of the heart.
Having half the size and Mccann and twice the battery life.
Compared to the other device that that realm, and being able to shop. The voice shocked by pacing people out of their failure arrhythmia as opposed to having to have a painful shock. Those are all really really welcome improvements and we're excited to roll that technology out first in Europe and in the United States next year.
In our cardiac rhythm business has done well and we expect it to continue to do well with products like micron. The EV ICD, but also pioneering conduction system pacing and we've got a nice pipeline there and in a really strong leadership team and strong position.
So thanks for the question Matt.
Thank you Matt next question. Please Brad Yes. The next question comes from Matt Taylor at Jefferies.
Please go ahead.
Okay.
Hey, guys. Thanks for taking my question you can hear me okay.
Okay.
Yes.
Sorry, guys can you hear me okay.
Yes, we can Matt.
Okay sorry.
So I wanted to just explore you talked about the slower recovery with some of these elective in developed markets and obviously there is staffing.
When you said other challenges I guess, maybe can you just give us some insight into two things. One is could you talk a little bit more about procedure trends through the quarter did you see any any improvement and then what gives you the confidence or what intelligence do you have to point to whether this is really staffing or I think investors are worried about lack of pent up demand.
Could you just address that.
Yes.
Sure.
I'll ask Karen to comment on the.
Procedure trends through the quarter, then we can talk to the staffing issue.
Yes, so I would say through the quarter, we did see particularly in the markets that we had mentioned you know not as robust recovery, but some recovery.
But as we ended the quarter with less robust recovery, we're just assuming that that and those areas. Those those procedure stay where they were in the back half, we'll see if that.
A good assumption or not.
As we look at the first.
A few weeks of our current quarter or the third quarter, we are seeing improvement.
From the second quarter.
So that that's pointing to some good things, but we'll see.
Yes, so just to.
Highlight with Karen, saying, there I mean, we.
We are disappointed that we missed the call on this one for the for the Q2.
So now in our guidance, we've assumed a prolonged recovery here for especially for those those those segments that we called out not all of the segments. Like we said many of the segments are back to pre COVID-19, but there are a handful and those electives in developed markets that we've called out and can walk you through the key assumption for the back half of the year in terms of the of the <unk>.
Staffing.
I hear that dynamic in some of the cardiology spaces.
More than others, and maybe I'll have Sean comment on that.
Yes, I'd say a couple of things that Jeff first of all there is take a therapy like <unk>, where there is multiple handoffs you have to have pre imaging to get worked up they get their procedures done.
And then there are sometimes even post imaging. This time, so a lot of handoffs and the patients tend to be elderly so there's that.
You want to make sure you scheduled out in a way that's okay.
But they can get it all done in an efficient way you want them exposed to the health care environment for a long time and.
I think that's that's challenging is also true that you can't wait forever, you've got you've got with severe aortic stenosis, there's about 80% mortality rate. So two years from their diagnosis.
So it's more lethal than cancer for example, most cancers.
So it's not something you can put off forever, but it is resource intensive and I think the other thing we're seeing with staffing just in general is.
There's a prioritization for patients so you can get in and out.
Relatively quickly.
So they can make downstream staffing available so whether it's ICU recovery or you've got even transport to Jakarta moves and I think there is some arbitrage in some countries even on the margin that they make on those procedures cardiac surgeries will grow like five 5% for us so very robust theres a lot of margin that comes off of cardiac surgery patients they tend not to be as deferral.
Paul.
So you have like a PCI patient for example, so we hear it in pockets.
I've mentioned before France, and Germany seem to be some places that are really struggling with with staffing in Europe , and we see it just in pockets around the United States and other places. So it is a dynamic situation and we think it has gotten better certainly a lot of places, but not everywhere yet.
Okay.
Okay. Thank you Matt next question Brett Yes. The next question comes from Peter Chickering with Deutsche Bank. Please go ahead.
Hey, guys. Thanks for fitting me in here.
The credit exposure here, but there has been a healthy debate around hospital demand for capital equipment. This year can you give us any color on what youre seeing from a behavior changes in the hospitals for capital ordering in two <unk> you guys assuming for the back half of the year.
Our capital first of all is it isn't a huge piece yet of our of our revenue.
But it is it is it tends to be tied to profitable procedures, and we actually had a strong capital performance.
And last quarter, and especially in our supplier.
Cranial and spinal technologies business CST.
Our capital there we had a number of our whether it be navigation interoperable imaging.
It had record capital quarters for us so so we're.
So we definitely see a bit of a takes a little longer to close the deal but the demand is.
As Youre working with the hospital on how theyre going to pay or finance. This.
But.
We're having strong demand in those areas and then of course, we mentioned.
Hugo Hugo's still new for us, but we are very happy with the placements, we've been able to make on Hugo here.
Of course, those are outside the U S.
But very pleased with that.
Great. Thanks, so much.
Thank you Peter we've got time for one more question. Please Brad our final question comes from Joanne Wuensch City Joanne. Please go ahead.
Hi can you hear me.
Yes Joanne.
Good morning, and an early happy Thanksgiving.
This slide straight into my Hugo question could you give us a little bit of an update on how you feel about the market potential for the product the timing of U S approval and at one stage several years ago, you were talking about.
The potential contribution is there a way to start thinking about that again. Thank you.
Sure well thanks for the question Joanne Yeah like I said, we have good news on Hugo kicking off the U S. <unk> with our first cases scheduled for December .
Just on you know getting these instruments enhancements.
Approved and like I said <unk>, we are pleased with the system placements in terms of the other color commentary on that I'll ask Bob White to China.
Yeah, Thanks, Geoff and thanks, John and good morning, a couple of thoughts here first on the overall market for Hugo we continue to be.
Really excited about it remember there is around the world still 95% of eligible cases are not done that could be done robotically assisted <unk>. So we believe this is a true market expansion opportunity.
Feel really excited about the continued long term health of the market and excited to be the number two player in the space with respect to the timing of U S approval as Jeff mentioned, we expect to begin our U S E.
By the end of this calendar year, so that's exciting.
Actual approval in the U S of course depends upon the agency and the process there so I really can't.
Comment on that and overall with respect to the contribution.
As you mentioned I think it's early to call that but.
Given our system is now installed around the world and markets in APAC EMEA Latam, we just received regulatory approvals and indication expansions in Japan, which is the third largest robotics market in the world.
Oral surgery approval in the EU, Canada, and Australia, which opens up the hernia market for us and we're starting to see really strong presence at some really key congresses in Europe were livestream cases et cetera, So a little early to call. It contribution Joanne, but we're starting to see the momentum and the acceleration that we talked about so thank you.
Thanks, Joanne Yeah. Thank you Joanne Jeff. Please go ahead with your closing remarks, okay. Thanks, Brian well first of all thank you everybody. Thank you everybody for the questions and we do really appreciate your support and continued interest in Medtronic and we look forward updating you on our progress on our Q3 earnings broadcast which we anticipate.
<unk> on February 21.
So with that thanks again for tuning in today, please stay healthy and safe I understand there's a lot of people traveling this holiday.
And for those of you in the U S. I'd like to wish you and your families a very happy Thanksgiving.
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