Q3 2023 Medtronic PLC Earnings Call
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Speaker 1: Hello everyone and thank you for joining us today.
Speaker 1: We reported our Q3 results this morning and we executed to deliver a top and a bottom line that were ahead of our guidance and street expectations.
Speaker 1: We are urgently forging the path to durable growth and there are many proof points of our progress in these results.
Speaker 1: Our cardiovascular and our neuroscience portfolios had strong, high single digital organic growth as we launched new products and demonstrated continued strength in our established market leading cardiac rhythm management and spine franchises.
Speaker 1: And at the same time, some of the recent revenue headwinds that have held back our growth are subsiding, including product availability in businesses like surgical innovations, cardiac diagnostic, aortic, and DNT.
Speaker 1: The aggressive transformation at metronica is advancing.
Speaker 1: We're focused on reducing complexity, enhancing our culture, improving cap allocation and portfolio management, and upgrading our global manufacturing operations and supply chain capabilities.
Speaker 1: At the same time, we're progressing on our plans for significant cost reductions. These are aimed at partially mitigating the continued impacts from macro conditions such as inflation and effects on our profitability in cash flow.
Speaker 1: These cost reductions also create room on our PNL so that we can increase our growth investments.
Speaker 1: And I'm very encouraged by the rebound in our revenue growth, despite procedure volumes remaining a little softer in a few markets and volume-based procurement in China.
Speaker 1: We are confident in delivering durable revenue growth over the coming quarters as recent revenue headwinds continue to dissipate and we execute across our businesses.
Speaker 1: So let's take a closer look at our Q3 results. As I highlighted at an investor conference last month, we're thinking about our portfolio of businesses in three groups. Highest growth, synergistic, and established market leaders. So let's take a closer look at our Q3 results.
Speaker 1: So I'll start with our established market leaders, a group of our largest businesses that make up about half of our revenue.
Speaker 1: Both our cardiac rhythm and spied businesses had really good quarters growing 8% and 5% respectively.
Speaker 1: In CRM, we continue to see strong market adoption of our micro-lea-less pacemakers, which grew 14 percent, and our defibrillation solutions business grew 7 percent, as replacement headwinds are moderating. And just last week, we received CE Mark for our Aurora Extravascular ICD.
Speaker 1: In Cranial and spinal technologies, we delivered another strong quarter, with 6% growth in core spine, including 12% growth in the United States, and 8% growth in neurosurgery. This is driven by our market leading ecosystem of able, enabling technology and the associated pull-through of our best-in-class spinal implant.
Speaker 1: From our AI-enabled surgical planning platform to our patient-specific and differentiated spine implants to our imaging, our navigation, and robotic technologies, we're differentiating ourselves with spine surgeons around the world.
Speaker 1: Turning to our surgical innovations business, SI grew sequentially as we made solid progress recapturing the share that we lost due to supply challenges over the last three quarters.
Speaker 1: Year over year, SI declined as a result of expected stapling VBP tenders in China, but excluding China sales, SI grew 5% in Q3.
Speaker 1: Look, surgeons around the world prefer our advanced surgical products, and we expect them momentum we're seeing an SI to continue.
Speaker 1: In particular, in our leading advanced energy franchise, we're seeing strong adoption of our recently launched Cordless Sonsision 7, and we're preparing to launch our recently approved Ligashear XP.
Speaker 1: So we're on the right path with our established market leader businesses.
Speaker 1: And at the same time, we're advancing our position in high, secular growth med tech markets. These businesses are contributing about 20% of our revenue today and collectively growing above our company average.
Speaker 1: We're investing disproportionately in these businesses and expect them to become an even bigger part of our growth over time.
Speaker 1: So starting with structural heart, while the tavern market continue to be impacted by healthcare staffing challenges and COVID in Japan, we drove 11% growth in Q3, including 12% growth in the United States.
Speaker 1: We're seeing great position reception for our Evalute FX system, which just completed its first full quarter of launch in the US.
Speaker 1: Evelute FX combines industry leading durability with enhanced and predictable valve deployment.
Speaker 1: In addition, data was presented during the quarter at PCR London VALS, showing elude effects's commissary alignment has improved significantly, which is important for coronary access and valve hemodonamics.
Speaker 1: Now looking ahead, we will continue to bring Evalued FX around the world, and we are currently seeking approval in the Japanese and European markets. We are currently seeking approval in the Japanese and European markets.
Speaker 1: In cardiac ablation solutions, we grew 3% globally, as provincial China VVP tenders weighed our results.
Speaker 1: Outside of China, Cas grew in the high single digits, including low double digit growth in the United States, on the continued strong adoption of our leading Arctic front cryoblation technology.
Speaker 1: We're also advancing what we believe will become the leading Paul Sultiplation portfolio.
Speaker 1: And in two weeks, highly anticipated data for our Pulse AF Pivotal trial will be released in the Late Breaker session at ACC.
Speaker 1: The trial is evaluating our pulse select PFA catheter in both paracysmal and persistent patients, and this will be the first result from an IDE trial in the PFA space.
Speaker 1: And we're on track to be one of the first companies with a PFA catheter in the US market.
Speaker 1: We also continue to make progress on bringing our Affera Mapping and Navigation platform and Steer 9 catheter to the market as we completed an enrollment in our pivotal trial during the quarter.
Speaker 1: Sphere 9 can perform high density mapping and deliver either PFA or RF energy all from the same catheter.
Speaker 1: And given to your nine as a focal point PFA catheter, it is highly complementary to our pulse select anatomical PFA catheter.
Speaker 1: Finally, our cast business just launched the AccuCross Transceptile Access System with the Zero Exchange Workflow and the only system approved for both Mechanical and RF Crossings.
Speaker 1: So when you think about our Arctic Front Crafts solution,
Speaker 1: Our Diamond Tempt RF catheter, our PFA catheters.
Speaker 1: our left heart access solutions and our fairer map nav system.
Speaker 1: We're assembling a leading ecosystem of technologies to meaningfully increase our participation in the fast growth 8 billion EP ablation space.
Speaker 1: In surgical robotics, we're making good progress as the second major player in this exciting space.
Speaker 1: We continue to see positive sales momentum with the rollout of our differentiated Hugo Robotics system in many international markets.
Speaker 1: And we started our US IDE trial for a urology indication during the quarter.
Speaker 1: Given less than 5% of surgical procedures globally are done robotically, we expect our surgical robotics business to become a meaningful growth driver for metronik.
Speaker 1: In neurovascular, we grew 9%, and would have grown a couple of points more if not for the China VBP. We continue to see very strong growth in several categories, including float diversion, aspiration, and stent retrievers.
Speaker 1: Given stroke is the number two cause of death globally and there is still very low therapy penetration. We see a long runway for high growth in this market that is approaching 4 billion.
Speaker 1: And in diabetes, we continue to see strong international growth offset by declines in the U.S. where we lack our latest products.
Speaker 1: We remain focused on resolving our FDA warning letter and are ready for re-inspection.
Speaker 1: We also remain an active review with the FDA on our submission of the Mini-Med 7-AG system with the Guardian Force sensor.
Speaker 1: Outside the U.S., our diabetes business grew 18 percent on continued strong sales momentum of 780G and Guardian IV. The 780G is now launched in over 90 countries, up from 60 last quarter.
Speaker 1: We're seeing strong CGM attachment rates which drove CGM growth of 34% outside the US.
Speaker 1: We continue to invest heavily in assembling our ecosystem of durable pumps, smart pens, patch pumps, sensors, algorithms, and customer service with multiple programs under development.
Speaker 1: All with the intent of restoring strong growth of our important diabetes franchise over the coming years.
Speaker 1: And in our synergistic businesses, we also had strong performances across several businesses.
Speaker 1: We grew double digits in cardiac diagnostics as we ramped up production of link 2.
Speaker 1: In neuromodulation, we grew 12% in paint stem and the market continues to recover.
Speaker 1: In our GI business grew high single digits on strong adoption of GI genius, which uses artificial intelligence to help positions detect polyps during colonoscopies.
Speaker 1: With that, I'll turn it over to Karen to discuss our third quarter financial performance and our guidance. Karen, thank you, Jeff.
Speaker 2: Our third quarter organic revenue increased 4.1%.
Speaker 2: exceeding our guidance and representing a significant acceleration from our first half results as we begin to put the acute supply chain challenges behind us.
Speaker 2: Our non-GAP EPS of $1.30 landed above our guidance by three cents on higher revenue growth and increased interest income.
Speaker 2: And six cents if we take into account a larger currency headwind then expected at the beginning of the quarter.
Speaker 2: Looking at our revenue from a geographic perspective, US grew 2% and our non-US developed markets increased 6%.
Speaker 2: even with a 3% decline in Japan as COVID affected procedure volumes.
Speaker 2: Excluding Japan, non-US developed markets increased 8%.
Speaker 2: Emerging markets grew 5% impacted by an 8% decline in China from COVID and VBP provincial tenders in stapling, cardiac ablation and neurovascular.
Speaker 2: Outside of China, emerging markets actually grew to 17%.
Speaker 2: I would also note that China represented 110 basis point headwind on our total company growth.
Speaker 2: which highlights the strength of the recovery in our other markets.
Speaker 2: DBP has affected us more than many of our competitors, given the size and breadth of our business in China.
Speaker 2: However, we do expect that we are now through the majority of the impact.
Speaker 2: Our adjusted gross margin declined in the quarter as we faced impacts from inflation and currency.
Speaker 2: with currency driving about a third of the change.
Speaker 2: These declines were expected and a result of inflationary pressures that occurred two to three quarters ago.
Speaker 2: Our incurred manufacturing variances have continued to be significant in the past few quarters.
Speaker 2: And as they roll off our balance sheet onto our P&L, we expect continued gross margin pressure in Q4 and next year.
Speaker 2: The gross margin impact translated into a decline and are adjusted operating margin as well.
Speaker 2: Although this was partially muted by expense control and the benefit of our currency hedging program.
Speaker 2: Our balance sheet remains strong, and we continue to execute our enhanced capital allocation and portfolio management work.
Speaker 2: Balancing future growth investments with returning a minimum of 50% of our free cash flow to shareholders primarily in the form of our dividend
Speaker 2: We see strong opportunities for organic growth investments internally.
Speaker 2: leading us to target R&D growth at or above revenue growth.
Speaker 2: And we continue to focus on supplementing our organic investments with tuck-in acquisitions.
Speaker 2: We've also announced this fiscal year three businesses we intend to separate that account for about 8% of our revenue.
Speaker 2: and we're making progress towards completing those transactions.
Speaker 2: We expect to close our Reno Care Joint Venture with Davida here in the fourth quarter.
Speaker 2: and continue to progress with the separation of our patient monitoring and respiratory interventions businesses.
Speaker 2: which we expect to occur sometime in the second half of next fiscal year.
Speaker 2: We have also closed on acquisitions that will contribute to our growth in the years ahead.
Speaker 2: including a fairer which expands our presence in cardiac ablation.
Speaker 2: An Intersect E&T, which adds unique sinus implants to our E&T portfolio.
Speaker 2: We have driven these moves to not only focus and streamline our portfolio, but also to improve our weighted average market growth rate over time.
Speaker 2: Now turning to our guidance.
Speaker 2: Given our top and bottom line beat in the third quarter, we are raising our full-year revenue growth and EPS outlook.
Speaker 2: On the top line, we expect our fourth quarter organic revenue growth to be in the range of 4.5 to 5 percent, which is unchanged from what was implied by our second half guidance that I gave last quarter. I would note that our organic growth guidance excludes the impact of currency.
Speaker 2: and revenue from our Intersect ENT acquisition. And it also now excludes revenue from our renal care solutions business as we expect the separation to occur during the fourth quarter.
Speaker 2: If recent exchange rates hold, foreign currency would have a negative impact on our fourth quarter revenue of $165 to $215 million.
Speaker 2: Taking into account currency, intersect the NT revenue, and a partial quarter of Reno Care Solutions revenue, our guidance would imply reported revenue in the range of $8.2 to $8.3 billion.
Speaker 2: We are also maintaining the fourth quarter revenue growth segment expectations that were implied by the back half guidance I gave last quarter.
Speaker 2: We continue to expect cardiovascular to be up 5.5 to 6%.
Speaker 2: Medical surgical to grow 2.5 to 3%.
Speaker 2: Neuroscience to increase 6.5 to 7%.
Speaker 2: and diabetes to decline in the low single digits.
Speaker 2: All on an organic basis.
Speaker 2: On the bottom line, we continue to drive significant expense reductions to partially offset the impact of inflation and foreign currency.
Speaker 2: Given our third quarter, three-cent beat, we raised the lower end of our fiscal 23 non-gap diluted EPS guidance by three cents.
Speaker 2: to the new range of 528 to 530.
Speaker 2: including an unfavorable currency impact of approximately 21 cents at recent rates.
Speaker 2: For the fourth quarter, we expect non-gap diluted EPS to be in the range of $1.55 to $1.57.
Speaker 2: At recent rates, FX is about a 9-cent headwind to 4-quarter EPS.
Speaker 2: While we won't give guidance for next fiscal year until our fourth quarter call in May.
Speaker 2: I did give some color on last quarter's call and will remind you of it today.
Speaker 2: We're encouraged by our recent progress on revenue growth.
Speaker 2: At the same time, current macro factors and are imperative to protect R&D investment are expected to create significant EPS headwinds next fiscal year.
Speaker 2: At recent rates, F-AX is a few hundred million dollar tailwind to fiscal 24 revenue.
Speaker 2: And an approximate 27 cent headwind to EPS.
Speaker 2: which translates to a 5% headwind to EPS growth.
Speaker 2: While inflationary pressures are starting to moderate, we still see significant mid-single digital inflationary impacts on our cost of goods sold.
Speaker 2: As wage and raw material price increases, continue to roll off our balance sheet and into our P&L.
Speaker 2: We are working to partially mitigate these headwinds through significant cost reductions.
Speaker 2: But both inflation and currency and to a lesser extent interest in tax are all looking to be headwinds that reduce our earnings power in fiscal 24.
Speaker 2: I would summarize by saying that as we navigate this period of increased macro headwinds, we will be driving discipline cost reduction.
Speaker 2: And we are committed to investing in our future growth drivers and our turnaround. As we firmly believe these important investments are necessary to drive durable revenue growth and long-term value creation.
Speaker 2: Before I hand it back to Jeff, I want to take a moment to thank the thousands of employees across Metronik who delivered this quarter.
Speaker 2: You are executing with excellence and accountability.
Speaker 2: Leveraging our scale with differentiating capabilities.
Speaker 2: and managing our resources to accelerate innovation.
Speaker 2: It is because of your efforts that we will create a durable growth company powered by our people as we continue our mission-driven work of alleviating pain, restoring health, and an extended life.
Speaker 1: Back to you, Jeff. Thank you, Karen. Now, before we open the lines for questions.
Speaker 1: I'll make a few closing remarks.
Speaker 1: Last quarter I noted that our aggressive agenda to transform this company would take time.
Speaker 1: And that's still true. But I hope you'll take away that we are operating with a high sense of urgency, which you can see reflected in our results this quarter.
Speaker 1: We're reducing our complexity, enhancing our capabilities, and augmenting our management team with new leaders that bring an outside, diverse perspective.
Speaker 1: We're also exercising decisive capital allocation and portfolio management devoting more capital to high growth opportunities and divesting non-core assets.
Speaker 1: There is an intense focus for me, our board, our management, and our employees to create a company with sustainable growth that you can count on.
Speaker 1: We're in attractive markets with growing populations globally that can benefit from our therapies.
Speaker 1: and we fully expect to deliver durable revenue growth and turn our scale into a long-term competitive advantage.
Speaker 1: And through this process, create tremendous value for our shareholders.
Speaker 1: Now, let's move to Q&A. We're going to try to get as many analysts as possible, so we ask 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 and the Investor Relations team after the call.
Speaker 1: With that, Brad, can you please give the instructions for asking a question.
Speaker 3: For the cell side analyst that would like to ask a question, please select the Participants button and click Raise Hand.
Speaker 3: If you're using the mobile app, press the More button and select Raise Hand.
Speaker 3: Your lines are currently on mute. When called upon, you will receive a request to unmute your line, which you must respond to before asking your question.
Speaker 3: Lastly, please be advised that this Q&A session is being recorded.
Speaker 3: For today's session, Jeff, Karen, and Ryan are joined by Q D'Alarra, EVP and President of the Diabetes Operating Unit.
Speaker 3: Sean Salman, EVP and President of the Cardiovascular Portfolio.
Speaker 3: Brett Wall, EVP and President of the Narrow Science portfolio, and Bob White, EVP and President of the Medical Surgical Portfolio.
Speaker 3: We'll pause for a few seconds to assemble the cue.
Speaker 3: We'll take the first question from Robbie Marcus and JP Morgan. Robbie, please go ahead.
Speaker 4: Great. Congrats on a nice quarter and good morning. Maybe I could start and I appreciate Karen you're not giving formal guidance but I was hoping you could discuss where the the op-x cuts are coming from. It sounds like you're going to continue to invest in R&D.
Speaker 4: So what exactly are you cutting? How aggressively are you cutting? Will this prevent any of your competitiveness on the top line? And then I'll ask my follow up as well. You know, the street has you at 3% EPS growth per next year. Do you think that's the right place for us to be based on your comments today? Thanks. Yeah, thanks for your question, Robbie.
Speaker 2: We expect to drive a significant expense reduction to help partially offset, you know, the headwinds that we're facing and the, you know, the investment that we believe we need to make.
Speaker 2: You know, when we look at, you know, next fiscal year, I'll just give you a little bit, you know, more comments on it. I know there's a desire to give EPS guidance early, but we're still working through our plan. And there are more than a typical number of moving pieces.
Speaker 2: So that's why we're sticking to our normal timeline of giving guidance in Q4. You know, but when we look at revenue, we grew 4.1% in Q3. And our guidance for Q4 implies sequential improvement.
Speaker 2: You know, we expect we said that we expect to drive greater revenue growth in 24 than we have in 23 and we said that we're focused on delivering durable mid single digit revenue growth over the longer term.
Speaker 2: So we like the progress that we made recently, both on our recent revenue growth performance and on important things in our pipeline to drive that revenue growth. And we always have said that we believe our WAMGAR is in the mid-single-digit range.
Speaker 2: But as we move down the PNL, we've got this delayed and placenary impact on our growth margin that you've seen this quarter. And that will continue in the next quarter and FY 24.
Speaker 2: We've seen inflation, the pressure on inflation is beginning to improve, but as you know, that's got a delayed impact on our P&L. We also have currency interest and tax.
Speaker 2: that are macro headwinds as well. And obviously we've talked about the fact that we're going to continue to drive investments to drive the long-term growth and turn around with this company.
Speaker 2: We're still in the process of seeing how all that nets out with our significant expense reduction. And obviously we're going to give guidance on our fourth quarter call in May. But we have said that this will be a tougher year on the bottom line.
Speaker 2: where our earnings power will be significantly reduced. Hope that helps.
Speaker 3: Okay, thanks Robbie. Next question please Brad. The next question comes from Larry Beagelson at Wells Fargo. Larry please go ahead.
Speaker 4: Good morning. Thanks for taking the question and I'll let go. My congratulations on a nice quarter here. I'd like to focus on China, which declined high single digits in Q3. Can you talk about what you're seeing there in terms of procedure volumes coming back?
Speaker 4: And the VBP headwind, you gave a lot of helpful color in the JP Morgan slides on the percent of your, but the headwind in the first half and the percentage products impacted in fiscal 23 and fiscal 24. I guess what I'm trying to understand is, what overall China grows fiscal 23 and fiscal 21.
Speaker 5: here because of the VVP headlands. Thanks for taking the question.
Speaker 1: Yeah, thanks, Larry. Good to hear from you and thanks for the question. Obviously China's a big one for us and yet I'll turn it over to Karen to answer some of the details on the headlands we were seeing here recently.
Speaker 2: Yeah, so just you know it's hard for us to parse out this quarter the impact of procedures and VVP so we're not doing that but we have said on VVP that we expect to be 50% done with the impacts of VVP by the end of this fiscal year.
Speaker 2: And as we move into next fiscal year, we still do have some VVP to come, but we expect to be 80 percent done by the end of next fiscal year. So this quarter we had a VVP impact from stapling and cardiac ablation and a little bit in coils from neurovascular.
Speaker 2: And as we look ahead into next fiscal year, we still do have some stapling provincial tenders coming and we've got a little bit more neurovascular and some and some cardio businesses, including cardiac rhythm, structural heart, aortic peripheral vascular.
Speaker 1: But again, you know, we're the majority finished by the end of this fiscal year and we've got a little bit more to go next fiscal year. We just declared for one thing. I mean, we think that 80% of our portfolio, as we've taken a step back, could be impacted by the EVP and that all we're 50% of the way through and.
Speaker 1: you know the remaining 30 will get an FY 24. We don't think the remaining 20 will be impacted certain things that are nuanced or under the radar screen. And you know what we're doing here is taking out some some some of our selling marketing costs in China to offset the lower prices because this business is now more contracted.
Speaker 1: through these VBP, so that the government is living up to the volume commitments from those VBP's at these lower prices. The discounts have gotten lower as they've gone on. I think the Chinese government has realized that medtech's not exactly like farm on. We have more selling expenses. Thank you.
Speaker 1: then maybe Pharma does because I think they modeled a lot of this off of Pharma based on my discussions with Chinese government officials. So that's good and we're basically will reset our business and grow from there and so FY 24 will be another year. We're China's a bit of a headwind. We factor that into our guidance.
Speaker 1: We were taking on expenses and we'll rebate our business and grow from there. So a lot of thought, a lot of conversations with Chinese government, a lot of thought here look, we're comfortable with our strategy.
Speaker 3: Okay, thank you, Larry. Next question, please, Brad. The next question comes from VJ Kumar at Evercore ISI. VJ, please go ahead.
Speaker 6: Hey guys congrats on the print and thanks for taking my question. I had it too far and I'll ask them up front. When you look at Q4, what is changing sequentially their talent? Because when I look at Q, you get proportional organic despite metaturate declining.
Speaker 6: continue to diabetes, high runs, and China high runs. So Q4, what are these three pieces of, what are you as you're calling those three buckets? And I think you mentioned the renal impact of Q4, could you specify that? And Jeff, for you, I understand you not give us this good 24 guidance, but when you think about the incremental changes, right?
Speaker 6: What are the positive, kelvin and negative head runs? Is China still declining in fiscal 24? What happens to diabetes? Is that on the plus side or minus side? And any other, you know, plus and minus at a high level would be helpful?
Speaker 2: Yeah, PJ, let me take the first part of your question. In terms of, you know, our Q4 revenue ramp, when we gave our second half guidance last quarter, we expected sequential improvement from the third quarter into the fourth quarter.
Speaker 2: and obviously we're still expecting sequential improvement. That's going to be driven by continued consistency of supply, which we expect, which has already improved across the portfolio, and will continue to improve. We also have some recent product launches like Evalute FX and Hugo, which will continue to ramp.
Speaker 2: You may recall we have our Harmony Valve, which will return to market as well. And then we've also got some launches into new markets like Diabetic Neuropathy that will begin to take some hold. And we've got reduced headwinds from things like Vence and VBP in the quarter.
Speaker 2: You asked specifically about renal care. We do expect to close that joint venture with Davida in the fourth quarter. So we simply noted that when we guided so that we didn't force you all to change your models mid-quarter. We just we just put it in now. Hope that helps.
Speaker 1: Just to finish off that just to highlight one thing in Karen's commentary there a big one will be continued turn around of our surgical innovations business.
Speaker 1: that was really hit hard, as you guys know, by the supply chain issues. You saw a nice sequential improvement from Q2 to Q3, and you'll see another improvement from Q3 to Q4. And that, that, you know, Karen mentioned supply chain issues subsiding a big area where you'll see that.
Speaker 1: in FY 23 to another 30% that gives us 80% by the end of FY 24. So that'll be a headwind. I don't know that we've said whether China's growing or shrinking, but it's definitely not growing at our historic double digit again next year.
Speaker 1: And look, there's still work to be done on supply chain.
Speaker 1: You know, our supply chain out there is still a bit fragile, although every quarter is getting better for us. But as you look at some of the momentum, you know, like you've seen from us from Q1 to Q2, Q2 to Q3, and then...
Speaker 1: implicit in our guidance as a nice acceleration come from Q3 to Q4. So we're excited about the happy with the momentum. And as we look into FY24, some of the specific businesses, you mentioned diabetes. We're optimistic we're going to get 780G on the market here in the US. And that'll...
Speaker 1: have a nice impact on diabetes, plus continued performance in Europe , so that should be assuming that happens that should help accelerate some of the growth in diabetes. In a surgical robotics.
Speaker 1: is doing really well and as we move into FY24 have a bit more scale and a bit more impact on our numbers. Cardiac ablation solutions, I'm sure we'll get some questions on our mapping and navigation system as well as our various PFA catheters. You know, we'll start that we'll start to feel some impact.
Speaker 1: from them and continued strong performance across the neuroscience portfolio, I think, highlighted the CST or Cranial and spinal technologies business as well as USC continued strength in E&T will anniversary be
Speaker 1: Intersect acquisition at some point that goes organic. So those are some of the things that we look at as an FY24. But there's some, I think, broad supply chain recovery, especially in SI, and then a couple of highlights like I mentioned, CAS, search, globalics, diabetes in the U.S.
Speaker 7: Okay. Thank you, VJ. Next question, please, Brad.
Speaker 3: The next question comes from Joanne Wrench, the city. Joanne, please go ahead.
Speaker 8: Thank you very much and good morning and nice sequential growth there. I have two questions. One is specific to the spine business. It was particularly strong this quarter and I'm just a little bit curious about what you're seeing is driving that and how you think about it going forward.
Speaker 8: And then the other one is a little bit more esoteric. I heard the word urgent or urgently a couple of times throughout the early presentation. What does urgently forging mean? And how does I translate to sort of milestones that we can look forward to? Thank you. Thank you.
Speaker 1: Well, thanks, Joanne, for the question. May, I mean, I'll start with the second one. You know, look, there is, you know, the word urgent. There is a lot of major change that we've got going on across the business.
Speaker 1: And I think it's important for people to understand the depth.
Speaker 1: and breadth of those changes. And I know there's the desire to see things move quicker. And yes, we're in some ways encouraged and we're encouraged by the progress, but we'd like to see it go faster as well. But the speed of our progress of
Speaker 1: getting the top line growth and adjusting our cost base to reflect the new reality with inflation and FX. On a company our size, the impact of these changes take a bit more time than they take some time, but the actions that we're taking are, you know, we are moving quickly on these. And I think
Speaker 1: That's the idea here is we're moving quickly on a number of things whether it be the changes, all the investments and changes to our supply chain to the investors that we're working on to the integration of these acquisitions like a fairer.
Speaker 1: and our cast business forward. There's just a lot going on, and I get, it's just an important understand that we're moving very quickly on these things, and the results are starting, and we're encouraged by that you're starting to see the results.
Speaker 1: When it comes to spine, look, this quarter was strong. Last quarter was strong too. It was just offset by some of the, you know, the last couple quarters offset a little bit by the China VBT. But if you look underneath it, we've been quoting that US implant growth rates that have been in the double digits. I mean, that's, that's.
Speaker 1: very, very strong and something, especially for some of our level of market share by far, you know, the number one market share player to be growing like that. What's driving that is the enabling technology ecosystem. It's something we've been working on, addressed at least in 2015.
Speaker 1: You know, you've got the robot, you've got navigation, you've got interoper imaging, you've got powered instruments. Now you've got this AI-based surgical planning system that basically, it's, you know, you're winning over the hearts and minds of physicians as they see where we're going.
Speaker 1: And actually a real commitment to changing spine surgery with this arsenal of technology. And we've integrated it. And it's starting to help the workflow and move faster and more efficient. All of this coming together, that's what's driving it. And at the same time, we've been able to invest in implants so that the implants are...
Speaker 9: working on for a while in the strategies really coming together with this enabling technology that actually allows for better planning, better execution, better follow-up, and assuming and assuring that you actually get the result that you want in the procedure. That technology, along with best-in-class implants and biologics.
Speaker 9: is providing this ecosystem that's terrific for the physician and actually institutions that want to use it and And actually the strategy's playing out Like we've wanted to do with the significant growth in the large market, which is the US and as Jeff mentioned now We're on the second quarter of double digit growth there in our
Speaker 10: Matt, please go ahead.
Speaker 9: All right, thanks so much for all for digging the question. I had...
Speaker 9: to follow up if I could just quickly on diabetes and tabour. So, Jeff, your comments.
Speaker 9: this morning, I know if it's just tall or my own impression, but it seems like, you know, incrementally, perhaps more confident and committed to diabetes. And I know where you're at with the morning letter, but maybe if he's good.
Speaker 9: You know, talk about whether we're incrementally more confident here than you were a few months ago and maybe talk about what the reentry to that market looks like assuming that you can get, assuming that you can get that.
Speaker 9: You know, the letter lifted and the product back to the market. And then just briefly on tab, as you know, one of your major competitors in that market has talked a lot about staffing and trends in US. Just anything that you would add in terms of sequential improvements or changes in that market or whether you're continuing to see some of the staffing challenges that they've referred to but don't seem to be holding back.
Speaker 1: your growth quite so significantly in the US. Thanks. Sure, thanks for the questions, Matt. I'll start with the diabetes one. I'm not incrementally more committed, because I've been committed since day one. I mean, there's no, have not blinked on diabetes. So committed to the business.
Speaker 1: Yeah, is there more confidence? Yes, and that's because we're continuing to see the impact of our technology when we have our full suite of technology, you know, outside the U.S. we're seeing strong growth, but it's not just the growth that's encouraging it's the patient feedback, the clinical results that we're getting.
Speaker 1: time and range and other important metrics from a clinical standpoint, but it's also the patient experience in terms of ease of use and things like that. And then on top of that, we've got this pipeline of technology that we've...
Speaker 1: that's coming right behind it. New pipeline of sensors, we've submitted our simple error sensor for approval. And we've got more behind that and a lot of development programs that I have of you into. And then finally, the business is just executing better.
Speaker 1: And so all that together is giving me more confidence. I ask you to make a comment. If you want to add to that.
Speaker 11: Yeah, I mean, as Jeff said, we continue to expand access for the 780G system and guiding for sensor. It's in over 90 markets. And wherever we see 780G launch, we also see higher CGM at husband rates because physicians and patients. In this universe, 580G will start shipping and Security to the start of Alimember. technology and our application.
Speaker 11: recognize the value of automation, automated insulin delivery in driving outcomes. And we expect to see a similar trajectory when semi-AG is available in the US market.
Speaker 11: And just to put a final point on what Jeff said about our next generation products, we submitted our next generation sensor, CGM for CE Mark last year, and we have also done that on the standalone basis to the FDA. And we continue to be very optimistic about.
Speaker 11: The progress was seeing in the market. The US market needs new products. We will know that. But I think we're making forward movement on all aspects of the business.
Speaker 1: Thanks, Q. And on the TAVR question, look, this is an area that we've been really focused on. Our seats are...
Speaker 1: a more okay where the therapy has a huge impact on patient outcomes and then financially for us it's an important driver and we've been really focused on this team and this new model. How they really focused on this team and they've done a great job on a number of fronts in terms of...
Speaker 1: training physicians and adding new reps, training new reps and adding the field training physicians on the tech new techniques, but more recently here launching, you know, or evolution effects and the results were getting there. I'm not sure, but I think the team has done a great job and we're starting to make up some ground here with the...
Speaker 3: with the competition globally, but in particular in the US. And Sean, maybe you can add some comments to this. Yeah, thanks, Chuck. We are seeing sort of mid-single digit growth underlying for the US market. And obviously we're moving faster than that 12% growth because of the launch of FX. And I think also this recognition that...
Speaker 3: Our valve human dynamics is really playing out for better durability of that valve over time, which is becoming more and more important. So, that affects really levels of playing field on ease of use, which has been important. But also, you can line the converse yours up, which is great for coronary access. And it's people are thinking about the lifetime.
Speaker 3: Japan, as we said, there was a wave of COVID that impacted us. And also, we're dependent on a particular faster access to that was impacted by supply chain issues last quarter. That's been resolved. So the launch of FX in Japan, returning procedure volumes and no constraint from faster sheets will help us to grow there.
Speaker 3: And of course, as evolution affects roles out around the world, we'll still perform well. The fundamentals at market are still very, very strong. It's just all the multiple touch points to the healthcare system that are required to get a patient in for therapy and through that therapy. But we expect us to start to bathing and get better with time.
Speaker 1: I mean, you know, whether it be, you know, our structural heart business or a tapper or diabetes and Joanne asked about spine and she mentioned in the economy, being by urgent. What I like about the new, the operating model we have is these businesses. We've got, we've segmented them in the right way.
Speaker 1: where we have clarity, a transparency there in markets, we're measuring them on, are you growing above? We have clarity on market growth, we're measuring them on, are you growing above or below the market and comp is tied to that? So it creates this sense of urgency that we think is having an impact.
Speaker 1: We was kind of overwhelmed for a while by supply chain challenges, but those mitigate your start to see the impact of some of the changes we made.
Speaker 10: Thanks again. Thanks, Ben. Thanks for question, please, Brad. The next question comes from Josh Jennings at Coward & Company. Josh, please go ahead.
Speaker 5: Good morning. Thanks for taking the questions. I was hoping that you just asked about the JV, we don't care JV and the patient monitoring respiratory spin, just how we should be thinking about the impact to, I guess, Sanolone, and the tronic earnings and M24, or either from execution of those two.
Speaker 5: moves or just any any headwinds in terms of the earnings power in 24 to just be in the show.
Speaker 5: staging of the beginning to the finish line on both of those arms.
Speaker 2: Yeah, in terms of the impact on total metronic earnings power, you know, the separations are going to have minimal impact. So, and in terms of, you know, staging the moves so that, you know, we have minimal impact or disruption across the company. We have been very
Speaker 2: some of the invest in class and how we do it.
Speaker 5: Thanks for that. Just a follow-up on the patient monitoring respiratory spin.
Speaker 5: Is it possible that an unsolicited
Speaker 5: A shooter could come into play and how should investors think about the kind of potential for a parallel path to open up where you're moving forward to spin, but there could be potential shooters coming into it, taking the tires on that one of those two businesses. Thanks for taking the question.
Speaker 2: Yeah, thanks Josh. You know, we're focused on maximizing shared role in our value with the separation.
Speaker 2: And we've announced a spend. We're moving forward with that. Should something come along that maximizes shareholder value, we'll certainly listen to it.
Speaker 10: Thanks, Josh. Next question, please, Brad. The next question comes from Cecilia Furrellong and Morgan Stanley . Cecilia, please go ahead.
Speaker 12: Great. Good morning and thank you for taking the questions. Just two part questions from me. First on Hugo and the Euro ID in the US if you could provide an update just what you've seen early days and enrollment and then separately. We've heard a lot about Italy impact just curious if you could frame how you're thinking about the potential impact your business going forward and thank you.
Speaker 1: Thank you, Celia. Good to hear from you. On the first one, I'll let Bob White answer the question on the Hugo Eurology IDE enrollment and do the overall progress what we're seeing in the US and then turn it over Karen for the question on Italy.
Speaker 1: Bob? Great. Thanks, Jeff. And Cecilia, thanks for the question. As you've noted, the trial enrollment is underway for Expand Bureau. First patients have been enrolled and proceeding nicely on that. So we're pleased with our progress on that IDE specifically. And then just more broadly, to Jeff's point, you know, last quarter, we saw accelerated accelerated unemployment.
Speaker 1: our general surgery indication on top of urology and gynecology. So now we cover by 80% of robotic procedures in those markets. And what we've been pleased, and you asked a little bit about feedback, we're getting really good feedback. The system's been used now to successfully perform a range of urology, gynecological, general surgery procedures.
Speaker 1: believe that could be done robotically assisted. We remain very excited about the market. And we're pleased with where we are today.
Speaker 2: And Cecilia on the Italy questions. There is a law in Italy that requires companies that are that sell medical devices to make payments.
Speaker 2: to the Italian government if those device expenditures exceed maximum feelings. The law was put in place in 2015 and applies to expenditures from that year onward. You've heard from some of our other competitors on this. The law is obviously applicable to the whole industry.
Speaker 2: We already had in a cruel and we did add to it in the third quarter. That a cruel is a reduction of revenue. For us, it wasn't too significant, but we do have a reserve on our books.
Speaker 10: Thanks to CLA. Let's take the next question, please, Brad. The next question comes from Shagun Singh, REC. Shagun, please go ahead.
Speaker 13: Great, thank you for taking the question. Karen, one for you, could you just elaborate on the components of the impact of the components of the EPS impact on growth next year? You know, you called out inflation, FX, interest and taxes. You know, perhaps you can, you know, talk about how large the impact is this year. Thank you for your time.
Speaker 2: and what the flow truth could be next year and then I have a follow-up. Thanks, Shagoon. So obviously we've said we've got tons of moving pieces on next fiscal year, so we're not ready to give real guidance. And so to quantify the impact from EPS growth is difficult, but what I would say on currency.
Speaker 2: You know, we talked about the fact that that is a headwind. I mentioned that in the commentary. And just that recent rate, currently is about a 5% headwind to next fiscal year. So we did quantify that. We also said that the inflation impacts are about a mid-single-digit impact.
Speaker 2: for us next fiscal year. So those are two that we've quantified. In terms of interest and tax, those are more minor headwinds than inflation and currency, but still headwinds that we need to face. And then obviously we've got investment.
Speaker 2: that we intend to make to drive the long-term growth of this company. And where we see important investments, we're going to make them. And we've said that we think that we're going to drive our indeed growth at least in line with revenue. And when we have important investments to make in some years, that may grow even more than revenue.
Speaker 13: So hopefully that helped. Thank you. That's helpful. Thank you. And I was just wondering if you could talk a little bit about the Pulse AF data readout at ACC. You know, how meaningful do you think it could be? And just maybe broadly talk about the BFA opportunity and how your platform is differentiated. Thank you so much.
Speaker 1: Sure, yeah, thanks for the question. We're definitely excited about the data that's coming out of ACC and the PFA opportunity. I think Sean's best position to answer your question now, Sean.
Speaker 3: Yeah, thanks, Shigun. So we have a trial coming out on the six, which will be the very first IDE trial or done on the rigors of an FDA trial for a study in this field. So it's really the first data set. And it is two patient populations in the single trials, both paracysmal patients as well as persistent patients.
Speaker 3: And the endpoints are a primary safety end point, primary efficacy end point. And the rigorous trial design here under the auspices of the IDE trial mean that you have very thick and minoring in the patients and you get a true, kind of look at the way this anatomical solution performs.
Speaker 3: I say anatomical solution because we have really two things in this bag of AF treatments. One is one where you isolate the pulmonary veins and then the athera system allows you to also do point-by-point ablation with a highly differentiated catheter.
Speaker 3: That system is a automatic mapping system that allows you to kind of map a blade and then validate what you've done and we'll put all of our catheters onto that ecosystem over time including this anatomical catheter, the diamond temp as well as cryocatheters. So you know, we'll have a full array of all energies cry out.
Speaker 3: radio frequency as well as pulse-chill depletion, that to treat a myriad of arrhythmia is that occur across the entire space. So it really does put us on that. With the newest technology early in this phase of that, highly differentiated on both the mapping system as well as the therapeutic catheter side. And there's a lot of excitement among physicians for what we're bringing to the field.
Speaker 10: Thank you. Thanks, Shaggen. Brad, we've got time for two more questions.
Speaker 4: The next question comes from Travis Steed, V of A. Travis, please go ahead. Hi, thanks for taking the question. Karen, I do want to ask on the Q4 margin step up. Q3 was a little bit light on margins from FX and currency. Just curious if there's anything other than the improving revenue to drive the Q4 margin step up. And then I know you're not going to get much on FY24, but curious if you could kind of frame
Speaker 4: the opportunity in the cost side. I don't know if there's enough to offset the mid-single-digit inflation or partly offset that or more than offset. Just a little bit of color on on the cost saving side that would be helpful. Thank you. Yeah, thanks Travis. So on on Q4 margins that will be revenue growth obviously helps. So we'll start there.
Speaker 2: But we also will be driving cost reduction starting, you know, starting last quarter and even more into the fourth quarter that will help as well. And then Q4 typically is our highest margin quarter. So we're focused on that step up and it's typical for us.
Speaker 2: On the cost opportunity for FY24 again, we're not going to size it right now, but we've said that we are focused on driving a significant cost reduction to help partially offset the impacts that we've got from the various headwinds and the investment that we need to make.
Speaker 2: On the cost opportunity for FOI 24 again, we're not going to size it right now, but we've said that we are focused on driving a significant cost reduction to help partially offset the impacts that we've got from the various headwinds and the investment that we need to make. Great, thank you.
Speaker 10: Thanks, Travis. And we'll take our final question, please. Our final question comes from Rick Wise at Steve Lnickolas. Rick, please go ahead. Good morning. Thanks, Ryan. Maybe I'll just, an interesting time here. Just focus on back on one topic. Hugo Jeff.
Speaker 10: You know, it seems like you're seeing a good ramp in Europe , but maybe you could quickly update us on supply chain is that resolved resolving almost resolved. What's your thought about that process and you're able your ability to meet the demand. Last quarter you talked about backlog. Maybe you could do a small corridor there.
Speaker 10: And specifically, just a little more detailed color about once Hugo's in place, the kind of adoption, and maybe pull through of instrumentation you're seeing, just so we have a better sense of exactly where you are with Hugo. Thank you so much. Great to hear from you, Rick. Thanks for the question.
Speaker 1: I'll turn over to Bob for some of the details there, but I'd say just on Hugo, you know, what the evolution of the feedback that we're getting, right? I mean, we felt confident in design. And as we got closer to launch, you know, I was spending more time with, with,
Speaker 1: physicians that were involved with the design that they don't work from a tronic, but they were involved and they were very bullish on it and happy with the way the product turned out. Now we're getting feedback from physicians that are converting from the competition or have both and they're high volume users and they have a high bar for robotic surgery.
Speaker 1: And that feedback's been really, really strong. And that is, you know, I think is very encouraging. And that word is spreading, you know, as I talk to US physicians that don't have access to it yet, because they're not part of a trial. And they have a pretty detailed understanding of the robot. And it's nice.
Speaker 1: features and its capabilities. And so we're getting, and so that thus is driving really strong adoption. Now let Bob talk about the, you know, any kind of constraints or supply chain and any other details on adoption.
Speaker 1: Yeah, thanks, Jeff. And Rick, thanks for the question. A couple of other points I think, Rick, that are be helpful for you is, you know, we're now starting to fulfill repeat orders by customers, which, which is nice. So customers of not just one, they're coming back to buy additional ones. And the other thing is we're seeing a mix really of both early robotic adopters and experienced accounts, which is nice, because you know, we built you go with your regular calculation.
Speaker 1: And then as Jeff and Karen mentioned more broadly for our surgical business, we've seen our supply chains improve dramatically through the year and you see that in the sequential quarter-on-quarter growth in that business. So hopefully that's helpful. Thanks. I encourage you to be here. Thank you. I think the...
Speaker 1: Here I think, you know, on the pull-through, for that pull-through to have an impact, it's going to take a little bit of time. It's a big surgical innovations business we had, you know, $6 billion or so. But I will point to this fine business and, and Joanne asked the question earlier, you know, two quarters in a row of double-digit implant growth in the U.S., which is 80% of the market.
Speaker 1: That is largely driven by pull through of an ecosystem of technology that's hard to match. That takes a lot of expertise, a lot of balance sheet, and a lot of time. And we spent a lot of time on this robot and we've invested a lot into it. And it's not just the robot. It is visualization. It is the digital platform. And we're confident that that ecosystem.
Speaker 1: will be a differentiator from a tronic and pull through instrumentation and be a durable growth driver for the company. And that's why we stuck with it, you know, for the last too many years to admit to, to get it to this point. And we feel like we have something to build from.
Speaker 1: Appreciate that, Jeff. Thank you. Thank you, Rick. Jeff, please go ahead with your closing remarks. All right. Well, thanks for the questions. Some great questions this morning. I really appreciate your support and continued interest in the company. And we hope you'll join us for our Q4 earnings broadcast, which we anticipate holding on Thursday, May 27.
Speaker 1: where we'll update you on the progress and how we finished our fiscal year. And of course, I look ahead at fiscal 24. So with that, thanks again for spending time with us today. Please stay healthy and safe and have a great rest of your day.