Q3 2025 Medtronic PLC Earnings Call
Thanks for watching and see you next time!!!
Good morning, I'm Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations, and I appreciate that you're joining us for our fiscal 25 third quarter video earnings webcast. Before we go inside to hear our prepared remarks, I'll share a few details about today's webcast.
Joining me are Geoff Martha, Chairman and Chief Executive Officer, and Gary Corona, Interim Chief Financial Officer.
Geoff and Gary will provide comments on the results of our third quarter, which ended on January 24, 2025.
and our outlook for the remainder of fiscal year 25.
After our prepared remarks, the executive VPs from each of our four segments will join us and we'll take questions from the sell-side analysts that cover the company.
Today's program should last about an hour.
Earlier this morning, we issued a press release containing our financial statements, divisional and geographic revenue summaries, and non-GAAP reconciliations.
During today's 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 statement.
Additional information concerning factors that could cause our 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 third-quarter revenue in the current and prior year reported as other.
References to sequential revenue changes compared to the second quarter of fiscal 25 and are made on an as-reported basis.
All share references are on a revenue and year-over-year basis and compare our third fiscal quarter to our competitors fourth calendar quarter.
Reconciliations of all non-GAAP financial measures can be found in our earnings press release or on our website at InvestorRelations.Medtronic.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.
Hello, everyone, and thanks for joining us today.
We delivered another quarter of mid-single-digit revenue growth for the ninth quarter in a row.
We had strong performances in several areas, starting with 22% growth in cardiac ablation solutions powered by our PFA portfolio.
leadless pacing, neuromodulation, and diabetes all grew double digits.
and Structural Heart Excluding Congenital and U.S. Cranial and Spinal Technologies both grew high single digits.
We advanced our innovation pipeline and are opening up the largest total addressable market in medtech with renal denervation.
It's an exciting time as we're stacking growth drivers on top of growth drivers with groundbreaking innovation in some of the most attractive markets in medtech.
We overcame a short-term U.S. distributor dynamic and delivered strong earnings power with high single-digit EPS growth coming in ahead of both consensus and the high end of our guidance range.
with strong improvements in both our gross margin and operating margin.
And as we look ahead to our fiscal fourth quarter, we expect our revenue and EPS growth to accelerate.
as we build on momentum in important growth markets and continue to drive earnings leverage.
We expect our formula of delivering durable revenue growth.
leveraged earnings and generating strong free cash flow to create significant value for our shareholders.
Now let's turn to the details of our Q3 business results and discuss our performance.
Starting first with our cardiovascular portfolio, which grew mid-single digits overall.
The highlight was our cardiac ablation solutions business.
Now, we forecasted strong double-digit growth this quarter, and cash delivered meaningful acceleration, growing 22 percent.
Our Pulse Field Ablation products are driving rapid growth. We've hit a new gear on supply and demand for our PFA portfolio continues to accelerate.
We are the only company with two PFA platforms, Afera and Pulse Select, which gives us flexibility. Afera has separated itself from the pack as the most desired workhorse platform with its integrated high-density mapping as well as both PF and RF capabilities in a focal catheter.
This is increasing our revenue per case as we replace competitors mapping and RF catheters.
We also have Pulse Select, and as customers use this single-shot PFA catheter, they want to use it more and more. Pulse Select gives us just a ton of flexibility to grow the market globally and compete.
across both our Affera and Pulse Select platforms. Customers appreciate their ease of use, precision,
durable efficacy, and now increasingly, their differentiated safety profile. We believe the safety profile of our PFA technology is a significant point of differentiation competitively, and it is one of several factors that gives us high confidence in our outlook.
Now, looking ahead, we expect this rapid growth trajectory to continue. For Q4, we expect CAS to accelerate its growth rate and deliver another strong double-digit growth quarter.
This will be a billion-dollar business for us this fiscal year.
And we have line of sight to 2 billion as our PFA portfolio expands into new accounts around the world.
Next, in structural heart, we grew high single digits excluding congenital. We continue to see good adoption of our Evolute FX Plus TAVR system in the U.S.
and the international launch is off to a very good start. As we look ahead, we have some important upcoming data catalysts as we continue to share long-term evidence on the benefits of our Evolut platform.
Our five-year low-risk data will be presented as a late breaker at ACC next month, and two-year data from our SMART trial, which is a head-to-head versus our largest competitor, will be shared later this spring.
Look, we're at a moment now where we've really solidified this business. With product improvements, important clinical data, and strong execution by the team, it's now in a really good spot.
Next, in cardiac pacing therapies, we grew 9%. This business has grown upper single digits for 10 quarters in a row now on the strength of our Lelus pacemaker franchise and conduction system pacing technology.
In April, we will mark the 10th anniversary of our first micro-leadless pacemaker receiving CE mark.
And now, a decade later, our micro-franchise continues to set the standard, delivering outstanding 24% growth in Q3, and we expect this strength to continue.
Now turning to hypertension and our simplicity blood pressure procedure.
We're poised to change the standard of care for uncontrolled high blood pressure.
Medicare coding and payment is now in place and just last month we had a pivotal development when CMS opened a national coverage analysis.
This is exciting news, as we will now have Medicare coverage in place within the next eight months.
We're activating new accounts across the U.S. and helping them set up simplicity clinics and establish care pathways so they're prepared to quickly ramp procedures when coverage is in place.
And upon coverage, this will be an immediate growth driver and will become a significant source of growth for the company.
Nearly half of U.S. adults have hypertension, and 1 in 4 of those with hypertension, they just don't have it under control, despite the broad availability of numerous generic medications.
So if we take a step back, the patient population is large. The current standard of care just isn't working.
Patients want this new therapy. Physicians can easily do the procedure and health systems support it.
The opportunity here is just massive, and we're poised to be the leader in addressing this large and unmet need.
And as we look at the overall cardiovascular portfolio, taking all of these growth drivers together, we expect its growth to meaningfully accelerate in the quarters ahead, starting with Q4.
Turning to our neuroscience portfolio, which also grew mid-single digits this quarter, in cranial and spinal technologies, we had another strong quarter with 5% global growth, including 8% growth in the U.S. as we won another point of share.
Now, I've been saying for some time now that the basis of competition in the spine market is rapidly changing.
And you saw yet another example last month when a major competitor decided to get out of the spine business.
We're causing this disruption. We're causing this disruption with our arsenal of differentiated enabling technology.
including AI driven pre-op planning software.
Imaging, Robotics, Navigation, and Powered Surgical Instruments.
and we recently expanded into pre- and post-op imaging through our partnership with Siemens Healthineers.
Look, surgeons have to make a choice.
Speaker Change: Well, we're seeing them either struggle or just exit the market altogether.
Our differentiated, best-in-class ABLE ecosystem.
is attracting the best spine surgeons.
as well as the best reps and distributors from competitors.
Speaker Change: And as these dynamics continue to play out and we continue to expand our innovation lead, we expect our CST business to deliver sustained above-market growth.
Speaker Change: Next, neuromodulation grew 13%, well above the market. And just like in spine, our game-changing innovation and strong commercial execution is disrupting the competitive dynamics.
Speaker Change: The closed-loop sensing technology that we've developed for both pain stim and brain modulation has been a big engineering feat.
Speaker Change: We now have therapies that can be personalized at scale, which is better for patients and can lessen the load on the healthcare system.
Speaker Change: And it raises the bar on what it takes to compete, which is evident in our neuromod growth. In pain stim, we grew 12%, including 17% in the U.S., on the strength of our inceptive closed-loop spinal cord stimulator.
Speaker Change: On top of being the smallest and thinnest SCS device, Inceptiv instantly adjusts based on neural responses to keep the therapy at an optimal dose.
Speaker Change: And it has the best full-body MRI conditional access on the market.
Speaker Change: which is a very important feature for patients with chronic pain.
Speaker Change: In brain modulation, we grew 15%, including 26% in the U.S., driven by the adoption of our Percept DBS systems.
Speaker Change: Percept and its brain-computer interface technology is transforming treatment for patients with movement disorders like Parkinson's, essential tremor, dystonia, and epilepsy.
Speaker Change: Last month we received CE mark clearance for our brain sex adaptive DBS for people with Parkinson's.
Speaker Change: With this groundbreaking technology, Percept devices, through a software upgrade, can become personalized, fully closed-loop systems with real-time automatic therapy adjustments based on brain activity feedback.
Speaker Change: Now we expect this launch to drive continued above-market growth for our brain mod business in the quarters ahead
Speaker Change: Now, turning to our medical-surgical portfolio, let's discuss our performance in surgical.
Speaker Change: This quarter, we experienced a change in U.S. distributor buying patterns, which had a couple of hundred basis point impact on our surgical performance.
We expect this to resolve as we start fiscal 26.
Speaker Change: Apart from this distributor dynamic, our U.S. hospital customer purchasing, direct from us and through distributors, has been stable. And while we continue to see market and competitive pressures in our stapling franchise,
Speaker Change: We're offsetting this by winning share with our ligature advanced energy products globally.
and by driving strong high single-digit growth in emerging markets.
Speaker Change: With our Hugo Soft Tissue Robotic Platform, we're approaching some important milestones, including entering the U.S. market, expanding indications, adding features, and enhancing system performance. In international markets, utilization continues to increase.
Speaker Change: and we've more than doubled Hugo procedure volume year over year.
Speaker Change: In the U.S., we are on track to submit for FDA approval for Hugo with urology indications by the end of next month. I also have some new information to share with you today. We have finished enrollment in our hernia and benign guide studies.
Speaker Change: Further, we recently received FDA approval to initiate our GYN oncology ID study and are actively moving that forward.
We're also making progress adding features and instrumentation.
Speaker Change: We just completed our first cases using our ICG fluorescent imaging and we expect to add our ligature vessel sealing technology to Hugo later this calendar year. So in total, we are confident in our path forward. Hugo will be a growth driver for our surgical business in fiscal 26.
and a meaningful growth driver for Medtronic in the midterm.
Speaker Change: Finally, in diabetes, we had our fifth quarter in a row of double-digit growth.
Speaker Change: We printed 10% growth on top of 10% growth in the prior year.
Speaker Change: Our growth is driven by, one, the overall move of the market from standalone CGM with MDI to AID systems, and two, the strength of our Mini-Med 780G system within the AID category.
Speaker Change: We continue to grow our 780G install base, and we're seeing very high CGM attachment rates, as well as strong growth in consumables.
Speaker Change: In Europe, we're getting excellent user feedback on our Simplera Sync Sensor, which is half the size and much easier to apply than our previous sensor.
Speaker Change: In the U.S., we've submitted some Players Sync for FDA approval, and we're also continuing to make progress on the integration work with the Abbott-based sensor.
Speaker Change: We expect these two new sensors to really accelerate our U.S. growth when fully launched.
Speaker Change: Beyond sensors, we're also investing heavily in our robust diabetes technology pipeline, including next-gen durable pumps, patch pumps, smart pens, and algorithms.
Speaker Change: We're also seeking expanded labeling for the 780G, including type 2 diabetes, which is a meaningful new opportunity.
Speaker Change: We expect to file this with the FDA here in the first half of the calendar year.
Speaker Change: So, across Medtronic, we continue to drive mid-single-digit growth, and you're now seeing this translate into strong earnings power.
Speaker Change: We're delivering leveraged earnings as we focus on discipline pricing, holding our SG&A growth below sales, and realizing the benefits of our scale, including more than doubling our underlying COGS productivity.
Speaker Change: Gary will now walk you through a deeper look at our Q3 financial performance and our outlook. Gary, over to you. Thanks, Geoff. Our Q3 revenue of $8.3 billion grew 4.1% organic. On the bottom line, adjusted EPS was $1.39, up 6.9%.
Speaker Change: This was three pennies above both consensus and the midpoint of our guidance.
Speaker Change: The EPS beat was driven by better-than-expected operating profit on stronger gross margins and a better-than-expected tax rate.
Speaker Change: We like the shape of the P&L this quarter, with mid-single-digit organic growth on the top line, improved gross and operating margin, strong investment behind our growth drivers, resulting in leveraged earnings growth.
Speaker Change: We continue to see breadth and diversification in our revenue growth, with double-digit growth in diabetes and mid-single-digit growth in cardiovascular and neuroscience, offsetting medical-surgical.
Speaker Change: We continue to see stronger overall growth in our international markets, which grew 5%, including high single-digit growth in Japan.
Speaker Change: Emerging markets grew high single digits including high teens growth in India, mid-teens growth in Eastern Europe, and low double-digit growth in Southeast Asia and the Middle East and Africa.
Speaker Change: Moving down our P&L, our adjusted gross margin was 66.6%, up 50 basis points versus last year, and ahead of our expectations.
Speaker Change: We continue to execute on our COGS efficiency programs and that's helping to drive margin upside
Speaker Change: We also drove the upside with our focus on better pricing and business mix.
Speaker Change: The improved gross margin translated into an operating margin that was also ahead of our expectations.
Speaker Change: Our adjusted operating margin was 26.2%, up 100 basis points versus a year ago.
Speaker Change: The organization remains extremely focused on improving our margins over time.
Speaker Change: We're also prioritizing investments in our pipeline and important product launch capabilities, like hiring hundreds of mappers to support PFA growth and market development specialists in renal denervation to accelerate Ardian growth.
Speaker Change: At the same time, we're returning significant capital to our shareholders, primarily through our strong and growing dividend, and from time to time, opportunistic share repurchases.
Speaker Change: Regarding our portfolio, we've increased our focus on finding tuck-in acquisitions that can enhance our growth and margin profile.
Speaker Change: We're also continuing to actively evaluate our portfolio at the business, product line, and geographic level, all through the lens of maximizing shareholder value.
Now turning to guidance.
We're reiterating our full year revenue and EPS guidance today.
Speaker Change: and both our revenue and EPS growth will accelerate in the fourth quarter.
Speaker Change: On the top line, we continue to expect FY25 organic revenue growth to be in the range of 4.75 to 5 percent.
Speaker Change: For Q4, given the strong trajectory of our growth drivers and expected acceleration in the cardiovascular portfolio, we're comfortable with current street organic revenue growth consensus and expect to deliver our 10th quarter in a row of mid-single-digit revenue growth.
Speaker Change: Based on recent rates, FX would have an impact to Fiscal 25 in the range of $275 to $325 million, including $125 to $175 million in the fourth quarter.
Speaker Change: On the bottom line, we continue to expect Fiscal 25 non-GAAP diluted EPS in the range of 544 to 550 and are comfortable with current full-year street consensus.
Speaker Change: Based on recent rates, our EPS guide factors in a five-point impact from foreign currency, and we will have a significantly smaller impact than that in fiscal 26.
Speaker Change: In Q4, we expect our restored earnings power and strong operating margin expansion to continue, resulting in high single-digit adjusted EPS growth in the back half of our fiscal year, consistent to the commitment that we have been sharing all year.
Speaker Change: Further details on our guidance can be found in the guidance slide in our presentation.
Back to you. Thank you, Gary.
Speaker Change: And I want to thank you for stepping in as CFO over the last few quarters. I know you're going to help ensure a smooth transition as we welcome TIRI, and I look forward to your continued contributions to Medtronic.
Speaker Change: Now, Thierry will be joining us in a couple of weeks, and as I've heard from several of you in the investment community, it sounds like your checks are confirming what led us to hire him.
Speaker Change: He has a very strong reputation for his operational focus and ability to lead organizations to drive margin improvement, portfolio management, and earnings power to create shareholder value.
Now, before we go to analyst questions.
I'll share a few final thoughts.
Look, we've made a number of changes to the company.
Speaker Change: And the turnaround definitely hasn't been overnight. It's been building, it's been building with nine quarters in a row of mid-single digit growth.
And now we're clearly entering a new phase.
Speaker Change: with the growth drivers kicking in, and these are big growth drivers.
Speaker Change: As I said earlier, we're stacking growth drivers on top of growth drivers.
We're in the moment with 780G and diabetes.
Closed-loop technology in neuromodulation
and, of course, PFA in our cardiac ablation solutions business.
Thank you.
Speaker Change: And we're about to start a massive growth driver with our Simplicity Procedure in Hypertension.
Speaker Change: and there's even more to come with opportunities like tibial stem for overactive bladder, our Hugo robot and our transcatheter mitral and tricuspid valves among many others.
Speaker Change: And at the same time, our earnings power is now kicking in with high single-digit EPS growth this quarter and next.
Speaker Change: So look, it's a very exciting time to be here at Medtronic.
Speaker Change: And I want to close by thanking our employees who are listening today and make all of this possible.
Speaker Change: You're making a difference every day for patients around the world.
Speaker Change: innovating and advancing health care technology and improving health care access.
Speaker Change: You're inventing, developing, and deploying meaningful technologies that will change standard of care and create whole new markets.
Speaker Change: I appreciate your dedication to the Medtronic mission, and I'm really looking forward to what we will collectively accomplish in the days ahead.
Speaker Change: With that, let's move to Q&A where we're going to try to get to as many analysts as possible. So we ask that you limit yourself to just one question and only, if needed, a related follow-up. If you have additional questions, you can reach out to Ryan and the Investor Relations team after the call.
Speaker Change: So, with that, Brad, can you please give the instructions for asking a question?
Speaker Change: For the cell site analysts that would like to ask a question, please select the Participants button and click Raise Hand. If you're using the mobile app, press the More button and select Raise Hand. 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 Change: Lastly, please be advised that this Q&A session is being recorded.
Q Dallara: For today's session, Geoff, Gary, and Ryan are joined by Q Dallara, EVP and President of Diabetes.
Speaker Change: Mike Marinaro, EVP and President of the Medical Surgical Portfolio, Sean Salmon, EVP and President of the Cardiovascular Portfolio, and Brett Wall, EVP and President of the Neuroscience Portfolio. We'll pause for a few seconds to assemble the queue.
Thank you for watching. See you next time.
Thank you for watching. See you next time.
Speaker Change: We'll take the first question from Patrick Wood at Morgan Stanley. Patrick, please go ahead.
Patrick Wood: Perfect. Thank you so much for taking the question. I promise I'll keep it to one.
Speaker Change: You know, as you guys are moving into 26 fiscal 26, obviously, there's Hugo cast accelerating, you know, inceptive doing well micro etc. So there's a lot of moving parts.
Speaker Change: I know it's only Q3, but would it be fair to assume that the base algorithm, call it mid-single digits growth and then high singles from the bottom line, that that's a fair assumption moving into fiscal 26? Also given we got that as an exit rate in Q4, is that a fair assumption?
Speaker Change: Patrick, Patrick, thanks for the question. Yeah, you know, we'll obviously like you've been will give FY 26 guidance on our Q4 call.
Speaker Change: But yeah, our our objective is unchanged. We're committed to doing the things that we need to do to drive profitable growth
Speaker Change: and Operating Leverage at Medtronic. So, you know, as Gary pointed out in the commentary, we reiterated our guidance for this fiscal year of 475 to 5% organic revenue growth and.
Speaker Change: high single digit realized EPS growth in the back half of the year. And, you know, so and as we as we look into the future, you know, we think that this we're still committed to that to that LRP that you outlined.
Fantastic. Thanks for taking the question.
Thanks, Patrick. Next question, please, Brad.
Speaker Change: We'll take the next question from Larry Beagleson at Wells Fargo. Larry, please go ahead.
Are you there?
Speaker Change: Hey, I'm here. I'm here guys. Can you hear me, Geoff? Geoff? Hey, can you hear me? Yeah, we can.
Speaker Change: Sorry about that. Sorry, I was on mute. So, thanks for taking the question, guys. I wanted to ask Sean a question on AF Solutions, which was obviously a bright spot in Q3.
Speaker Change: So Sean, talk about the drivers of the acceleration in Q4, and how you're thinking about fiscal 26.
Speaker Change: specifically the ramp of the fair where you are with supply and.
Speaker Change: You know, your ability to get mapping in the field and.
Speaker Change: that $2 billion line of sight, you know, how quickly can you get there? Thank you.
Speaker Change: Larry, let me let me take the first swing at that and then you know have Sean come in on some of the details. You know, first of all, it's great to see how, you know, PFA is, you know, the impact it's having on patients and
and also increasing physician and hospital productivity.
Speaker Change: with its speed and efficacy and safety profile. And we're really excited about our positioning in the market, and you're starting to see that.
Speaker Change: in our last quarter's results, as you pointed out. And so we consider this to be like a hyper growth driver for us, and we're really just getting started. Back to the line of sight question, that's what I wanted to get at, that the 2 billion line of sight
Speaker Change: Here's what what I'll say, you know, first of all the market is super strong and will continue You know, we see PFA as a roughly nine billion dollar market and growing in the high teens
Speaker Change: And we've got strong demand for both of our platforms, PulseSelect and Afera. And this gives us a ton of flexibility as we grow the market globally. And as many of you pointed out, Afera is just getting rave reviews. I mean, it's a high demand.
Speaker Change: and as I've traveled the the globe here in the first couple weeks of the year
You know, everybody seems to know that name of Farah.
Speaker Change: supply and supply is a lot better across the board suppliers are our suppliers are performing well and our Manufacturing Galway is a game-changer with with an immediate impact for a FARA
Speaker Change: And so I'd say, you know, these finances, these are not, you know, like the two billion line of sight, they're not like forward looking statements. This is, you know, in the moment and we're not
Speaker Change: Stopping at the two billion. That's not an end game. That's that's you know line of sight shorter term
Speaker Change: beyond when you get beyond next year don't forget that Affaira will be moving into the single shop space as well and so we still have a lot of confidence about the the near term and long-term opportunity here with with PFA and our two platforms. Sean do you want to...
Sean: I think Larry had a few other things on there as well. Do you want to jump in? Yeah, sure, Geoff. I think you've covered it pretty well. We are aggressively...
Sean: expanding both capacity within the factory and within the field. And it's important that we stay ahead of that as we add mapping in.
Speaker Change: And I think as Geoff said, you know, we're not just seeing strong demand for FARA, it's
You know launched in that in the third quarter
and the United States has driven a lot of growth.
Speaker Change: But we also, when we're in those hospitals, we're getting a lot of the paroxysmal cases with pulse select as well. So it's really a kind of dual platform, multiple use.
sort of penetration to the accounts.
Speaker Change: We also see a lot of utility for, you know, certain geographies that don't use mapping where Pulse Select is a really favorite product too because of its precision and its
Speaker Change: proven and durable efficacy and increasingly that safety profile, which is really a distinguishing feature for it. So as we step into next year, I think we've got lots of growth to look ahead to as we expand out that footprint in the field and have
Speaker Change: capacity really well ahead of the demand and we push it forward. So, you know, things are gonna continue to rock for us within the post-op glacial world. And the team's really excited about it and physicians really appreciate the technology we're bringing.
Thank you.
Thanks, Larry. Next question, please, Brett.
Speaker Change: The next question comes from Robbie Marcus at J.P. Morgan. Robbie, please go ahead.
Robbie Marcus: Oh, hi, good morning and thank you very much for taking the question.
Robbie Marcus: Pulse field ablation and Hugo, especially now with the trials enrolling and submission coming at the end of the month and also renal denervation. How do you think about balancing the spend?
Robbie Marcus: of investing in these programs to make sure they're successful versus being able to continue driving margin expansion like we saw in this quarter. Thanks a lot.
Robbie Marcus: Yeah, well, thanks for the thanks for the question, Robbie. Look, I'd say.
We do have a lot of.
Robbie Marcus: I'll call them, you know, growth drivers that come with investment opportunities.
And, you know, the
Robbie Marcus: The goal here is to be able to do both right is to be able to invest in these things and growth
Robbie Marcus: as well as hit our financial algorithm that Patrick asked about.
Robbie Marcus: and the gross margin improvement is a key piece of that. So over the last, you know...
Robbie Marcus: a couple of quarters and even years, we've done our, you know, we've really, I think, gotten better at being able to grow the sales number, that mid-single digit, without growing the GNA, the SGNA even, nearly at the same pace.
Robbie Marcus: and that will continue. And then adding the gross margin improvement to that gives us a lot more flexibility. So that, and then finally, I would add Tuck and M&A. I think Tuck and M&A, we've got a strong balance sheet.
Robbie Marcus: and Tuckin' M&A gives us an opportunity to, because the tuckins we're doing are.
Robbie Marcus: continuing the margin improvement. Gary, anything to add to that? No, you hit it, Geoff. It's been our focus.
Robbie Marcus: and we'll grow gross margin on an AFX basis in the second half of the year. And that's really what's gonna be key to us being able to deliver the high single digit EPS while we fund the growth drivers like investing in mappers, as I talked about in my prepared remarks.
Speaker Change: Great, thanks a lot. I mean, but the goal here, we've got some, I mean, some of these growth drivers, we've got to continue to make the investment. We want to put the foot play offense at this point in time.
Okay, thank you. Thank you, Robbie. Next question, please, Brett.
Speaker Change: The next question comes from Vijay Kumar at Evercore ISI. Vijay, please go ahead.
Vijay Kumar: Hey guys, good morning and thank you for taking my question, Geoff. I think I had a two-parter, you know, when it comes to large companies, this is exactly what we wanted to see.
Speaker Change: diversified portfolio. You know, we have some moving parts, but would you still have the ability to
Speaker Change: manage the P&L and drive earnings, right? I feel like that's what we got here. You know, when I look at the print here, US Surgical, I think you called out a distributor timing impact.
Speaker Change: What gives you the confidence this is not a share loss? And I think, related to that P&L management, right, this gross margin stood out. Any one-timers in gross margins, maybe talk about what drove the sequential step up in gross margins and sustainability. Thank you.
Speaker Change: Sure, well thanks for the question. You know, I'd say on the surgical question, you know, first like I said in the commentary, the
Speaker Change: The performance there was driven by a couple of our larger distributors stepping down their carried inventory levels of Medtronic inventory below their normal levels.
Speaker Change: Like I said, this dynamic cost us about a couple hundred basis points in Q3 growth.
Speaker Change: However, we do expect these dynamics to resolve as we enter Q1.
Speaker Change: when these distributors reach their target inventory level. So when they get to those inventory levels that they communicated that they want to get to to us.
Speaker Change: That's when this resolves and that's going to be as we enter Q1. Now, your question about share, we do have the ability to see through, we track this very closely, the end customer purchases.
Speaker Change: And one, we know they're stable. And two, you know, we're not losing share. You know, we continue, I think, to, you know, outperform slightly in the non-robotic space.
Speaker Change: You know, robotics in the U.S. obviously is a headwind for us.
Speaker Change: So that's what I'd say to that one. And on the second one, I'll let Gary handle the gross margin question.
Gary Corona: Thanks, and Vijay, thanks for your comments on balancing the puts and takes, you know, as as Geoff and I have talked about, we're really focused on delivering the earnings power. On gross margins specifically, we were pleased
Gary Corona: with the performance, 140 bips sequentially and 50 bips year over year on an AFX basis.
Gary Corona: You know, the drivers, as Geoff talked about, you know, continuing our COGS efficiency programs.
Gary Corona: in really improving our operating efficiencies. We continue to be disciplined.
on pricing.
Gary Corona: and we did see some actually in the gross margin line of foreign exchange favorability.
Gary Corona: I will say our second half gross margins will be up both on a constant currency and on an AFX basis And we're really we're really focused on it to not only drive the earnings power, but also to to fund the investment as as Jeff talked about
Speaker Change: Yeah, I mean, I think that, like Gary said, the focus on the margins and every aspect of them, whether it be pricing, mix.
and, of course,
Speaker Change: are cost down programs and those are having an impact and improving the margin. You know, getting back to surgery, your question on, you know, share loss, I'd also say, you know, the business.
Speaker Change: is doing well outside the U.S. at mid-single-digit growth. In the emerging market, we're seeing high single-digit growth.
Speaker Change: And then, you know, we're gaining share worldwide in areas like ligature and barb sutures.
Speaker Change: And then really what we want to do is get this business back to our corporate average, right? And that, you know, as we look to FY26, Hugo accelerates and becomes more of a growth driver for surgical, at the surgical level. And, you know, as I mentioned in the commentary, Hugo is approaching some
Speaker Change: important milestones, as some of you have asked about these. And we're seeing solid progress on Hugo. As measured by, I say, a comprehensive set of leading indicators.
Speaker Change: And it's these indicators that give us confidence. And probably Mike, you know, maybe Mike Marinaro is in the best position to discuss these. Maybe I'll ask Mike to comment on these leading indicators for Hugo.
Mike Marinaro: Yeah, thanks Geoff and thanks Vijay for the for the question. I think you've
Mike Marinaro: commented on some of these in your in your commentary, Geoff, but when we look at a complex program like Hugo, there's many elements that that come together to really to make it go. The system, the indications, instruments, of course.
Mike Marinaro: and getting into markets around the world. So we're now in, you know, over 25 markets.
around the world.
Mike Marinaro: Our procedure volume has more than doubled on a year-on-year basis.
Mike Marinaro: We're seeing utilization improve in current programs, which is really important.
Mike Marinaro: The market leader and you know what we see is that the commentary is broadly comparable both in procedure times and and functionality So that's you know obviously a great external measure
Mike Marinaro: We're making progress with our advanced capabilities. So we just completed our first ITG cases
Mike Marinaro: Ligature is obviously critical for Hugo. We expect to introduce that this year. And then I think, as Jeff mentioned in the commentary, we are on track to submit to the FDA for the urology indication.
Speaker Change: And I think at the end of next month, but as importantly, we're increasing our capability and driving the clinical evidence to support multiple indications in the U.S. having now completed.
hernia, benign gynecology, moving into
which will then give us a cadence of...
Speaker Change: of indication opportunity to really have a fully, you know, featured product. So, you know, we take all of these things together and you can see that it comes together and really drives the progress and optimism that we see as we're preparing to enter the U.S. market, you know, in FY26.
Helpful comments, thank you.
Yes, thanks, Vijay. Next question, please, Brad.
Speaker Change: We'll take the next question from Travis Steed at Bank of America. Travis, please go ahead.
Travis Steed: Hey, thanks for taking the question. I just wanted to push a little more on the surgical side since it was kind of the one area that was a little bit different this quarter. I guess, Chris, why do you think the distributors destocked in the quarter and, you know, why didn't you have kind of visibility in that ahead of time? And did you talk to the distributors and did they say they would kind of return back to normal buying patterns in the quarter? I guess I'm just looking at this U.S. surgery business, and it's kind of been below the Medtronic corporate average for about five quarters now, and there's been a lot of one-time things going on there, but I just want to kind of get
Speaker Change: I am Gary Corona and my stop is Thank You energy, that was the latest on . . Thank you for staying Cellule. So the last number to see on here is
Thank you for watching. See you next time.
Speaker Change: Yeah, okay, Travis, thanks for the question. You guys mentioned that this distributor issue that came up.
Speaker Change: It is temporary. It came in late in the quarter for us.
The distributors' reasons for bringing down their inventory, it's really...
Speaker Change: to hit their goals. I'm not going to get into that.
specific distributors and.
Speaker Change: two of our larger ones. But that's their own goals. But as they get down to very specific inventory levels, that's when they'll be getting back to that normal trajectory. And like I said, that'll happen as we enter.
Speaker Change: Q1. Now, getting back to your point on the U.S. surgical business, just taking a step back,
You know the competitive issues, you know facing our
Speaker Change: Really, it's our stapling franchise over the last call it, you know several quarters as you've outlined has brought the surgical growth levels down
Speaker Change: below the corporate average, as you pointed out. However, these pressures aren't new.
Speaker Change: and we're committed to returning the surgical business to a stronger growth profile, more aligned with the corporate average.
Speaker Change: You know, Mike walked you through, you know, the, the, the, our confidence in, in, in robotics.
Speaker Change: and that's becoming a growth driver for the surgical business itself and FY26.
Speaker Change: and then beyond it'll become more of a in the midterm a more growth driver at the Medtronic level at the 33 billion dollar revenue level you'll start to feel it.
In addition, you know, we just got to maintain our
Speaker Change: strength in emerging markets where we're seeing the high single digit growth. We need to continue to take share with Ligashare and Barb Sutures on a worldwide basis. And I already talked about Hugo. So we have confidence in this because, you know, the progress, you know, we feel we have confidence in this because the progress we're making and how we're holding in other parts of the business.
Mike, anything you want to add to that?
I think you've outlined it.
Mike Marinaro: Really well, Geoff. We are focused on our areas of growth that you highlighted, where we can gain share, this dynamic that we experienced this quarter.
Mike Marinaro: was a bit unique and it did come in late, although we have had conversations, we understand what the objectives are, we expect that when we hit those levels that we then see more normalized performance moving forward.
Mike Marinaro: So that really should address that issue, and then we get it back into our normal sort of rhythm focusing on the areas of growth that you described.
Mike Marinaro: And then, you know, the guidance that we've given, you know, implies both the top and bottom line acceleration in Q4, even though we still have this distributor issue in Q4, and this is driven largely by, you know, acceleration of CV because, you know, cardiovascular will accelerate
Mike Marinaro: and Drive Upside going forward. So when you think about cardiovascular, we've had about 10 quarters in a row.
Mike Marinaro: of Mid-Single-Digit Growth without much of any contribution from, you know, CAS or Ardian. And let's refer to this as like the CV-based business, you know, without CAS and Ardian. And we'll continue to see.
Mike Marinaro: This performance in the base business driven by above market performance and CRM think leadless
Mike Marinaro: conduction system pacing, EVICD. And again, as I mentioned, the commentary structural heart's in a great place and with strong evidence and that we'll keep building upon and product improvements that have come out and Evolutive X Plus and
Mike Marinaro: You know, I think just better commercial execution against the main competitor there from our team.
I mentioned cardiac surgery.
Mike Marinaro: where we've revamped the product lineup, refreshed it over the last two years, and now it's been growing at high single digits. So you have all that.
Mike Marinaro: in this base business that we don't see changing going forward, that mid-single-digit growth that we've seen over the last 10 quarters, and now you add the contributions from Cass and Ardian on top of that, that you'll accelerate in Q4, and then as you enter into FY26,
Mike Marinaro: You pick up the Aurean piece as well, and Cass keeps going.
Mike Marinaro: Great, thanks a lot for that. Yeah, it does. Thank you.
Mike Marinaro: Thank you, Travis. Next question, Brad. We'll take the next question from Matt Mixick at Barclays. Matt, please go ahead.
Matt Mixick: Thanks so much. So, I wanted to just follow up on on the other sort of soft spot in the quarter here around periprovascular.
Matt Mixick: that went from like a mid-single-digit growth in previous quarters to this low single-digit decline. And I guess similar to the questions around distributor stocking is, you know, timing for turning that around confidence, you know, that that can kind of turn the corner here since that really was
Matt Mixick: The only business in CV that pulled down a little bit on a pretty solid mid-single-digit growth you know portfolio average. Thanks.
Speaker Change: Matt, you broke up a second there. I think you were talking about peripheral vascular, but yeah, that is really a China issue. That is a China VBP issue that we're dealing with there that'll work its way out. China, you know,
Speaker Change: We've worked through most of the DVP, but there is still
Speaker Change: A little bit left to go and it's created, you know, I'd say a little bit of volatility within the China line and we've been able to overall do well there and
Speaker Change: and actually do well profitably as well. But you see volatility that shows up in an individual business, and that's what happened for Peripheral Vascular this quarter.
Speaker Change: anything to add to that Gary or Shawn in terms of
All right, thanks Matt. Next question please Brad.
Speaker Change: The next question comes from Josh Jennings at TD Cowen. Josh, please go ahead.
Josh Jennings: Thanks so much for taking the question. I was hoping you guys talked about the massive global opportunity for the renal denervation franchise and you laid out the path to unlocking the U.S. I was hoping to just get an update on the international opportunity just where where the business stands.
Josh Jennings: should we be thinking or could we be seeing some coverage and announcements in different countries and then what do you expect needs what needs to happen in order for that that international ramp for the spiral unit going forward? Thanks for taking the question.
Speaker Change: Sure, thanks for the question John. I'm going to let Shawn answer the global question, the international question, but before I just got a comment on, you know, look the
Speaker Change: RDN, it's been a journey for us, but as we sit here today, you know, we're really excited.
Speaker Change: The NCA is a huge milestone and you know now we have a you know we're going to be going after the you know basically the we're excited to change the standard of care and the the largest chronic disease issue in health care with hypertension the number one contributor to death
Speaker Change: And this NCA going to an NCD, we have a lot of confidence. You know, we've gone back and looked. Over the last decade plus, we haven't seen an example where an NCA doesn't convert to an NCD.
Speaker Change: And, you know, we've got in the FDA or the CMS has laid out really definitive timing, you know, for the announcement.
Speaker Change: in July and then take effect in October. So that really unlocks this huge opportunity in the U.S. And we think it does create a halo effect.
Speaker Change: not just in the U.S. for commercial payers, but globally. And then that's where your question comes in. So, Sean, you want to talk about the international progress and opportunity?
Sean: Yeah, sure. Thanks, Josh, for the questions. So, you know, like a lot of these reimbursement efforts, you have to do them country by country by meeting, you know, the individual expectations and across Europe, and mostly that's a health technology assessment.
Sean: We've published numerous cost-effectiveness studies which would support those analyses. The other thing that really drives payment decision at the country level is going to be the guidelines that get published. All those society statements have been very supportive.
Sean: to the European guidelines and ESC guidelines. So we're seeing country by country increases, including France, which has established reimbursement.
Sean: And then we'd have to go to the hospital listing process there, so we'll start in big cities and go beyond that.
Sean: and of course the only outstanding country for approval is Japan and we're working on that to gain regulatory approval and then you know typically it's six months from the time of approval to when you get reimbursement for those products so we're making
Sean: you know, a good push in every country where we can. But make no mistake about it, the U.S. is going to be the dominant growth driver for renal denervation given both the prevalence of the disease and the setup we have for both the
Sean: Medicare payment, as well as the building commercial insurers interest in covering this device as well.
Okay, thank you, Josh. Next question, please, Brad.
Speaker Change: The next question comes from David Rescott at Baird. David, please go ahead.
David Rescott: Oh, great. Thanks for taking the questions. I wanted to ask on FX, Geoff, I think you called out the...
Speaker Change: opportunity recently to more actively manage the the FX risk exposure. Maybe could you help us understand exactly how you can do that, maybe the kind of level or magnitude of control these factors ultimately could have on FX and then over what, you know, period you think you could start to mitigate some of that FX risk.
Thank you.
Thanks for watching. See you next time.
Speaker Change: The actions we've taken have already started to mitigate this And it's been something we've been working on now for a look for quite a while a couple quarters And you're starting to see the effects, but I'm not Gary outline exactly what we're doing and the opportunity here
Speaker Change: Yeah, David, I'll start with your second question, and then I'll come back to what we're doing about it And I think your second question was just what are we seeing and you know what we're seeing this year has been very consistent So there's no new news for for FY 25 And and then as I I talked about in my prepared comments, you know as we have visibility into into 26
Speaker Change: will have meaningfully less of a headwind on the FX line than we did in FY25. Thanks for recognizing what we've been talking about. And as Geoff said, we're making progress by really taking a greater level of ownership and proactive measures.
Speaker Change: You know, we're changing our incentive structure to U.S. dollars versus local currency for many of our emerging markets, and it drives commercial changes.
Speaker Change: like dynamic pricing. That might mean, you know, updating our pricing, you know, as often as every month. And this was a big change for us. And as Geoff mentioned, we're seeing the progress, you know, that activity will help our gross margins. And as we, as we talked about,
Speaker Change: earlier, that's the key to driving the earnings power as well as funding the investments and growth while we deliver against our financial commitments. So thanks for the question. I appreciate it. And please know it's a key area of focus for us.
Speaker Change: The only other thing I'd say to that is, and Gary's team has done a lot of work on this as well, is our global operations and supply team.
Speaker Change: is creating natural hedges in our supply chain as well with our suppliers and how we look at supply chain. So it's a comprehensive view, a comprehensive approach, if you will, that is starting to pay off.
Speaker Change: Thank you, David. Well, I think we've got time for two more questions, Brad. The next question comes from Shagan Singh at RBC Capital Markets. Shagan, please go ahead.
Shagan Singh: Great, thank you for taking the question. Geoff, I was very intrigued by your comments around stacking growth drivers on top of growth drivers. And I was wondering if you could put maybe a final point, you know, some of the drivers here, you know, could be pretty meaningful. So anything you can share in terms of magnitude of the incremental growth contribution in year one versus year five, anything there? And then, you know, can you talk a little bit about the specific timing here? So, you know, the line of sight to 2 billion.
Shagan Singh: when do you think you can get there? You said that's a first stop, so where does it go over time? In Hugo, for Hugo, you mentioned growth contributed in FY 2026, as well as meaningful growth in the medium term, so can you define that better? And then just on RDN, you said it'll be an immediate growth driver upon coverage. So just any color or near-term appetite and what that looks like, thank you.
Shagan Singh: Okay. Yeah, thanks for that. That was a loaded question there, Shagun. Thanks for the question. I mean, I, I'd say the way we're looking at the growth drivers, like, look, three.
are, these are, these are
Shagan Singh: We define a growth driver is areas where we it's a little bit we have high confidence
Shagan Singh: in a large, a fast-growing market that's also a large market, and then confidence in our position in that market.
Shagan Singh: So three that are, you know, here now, obviously diabetes, we've talked a lot about we've had a number in several quarters in a row of double digit growth and, and we still have on the basis of 780 g, we still haven't gotten her some players sink and that's in front of the FDA for the US.
And we've got, you know, a pipeline here of.
Shagan Singh: of you know other things like patch we talked about expanded indications for 780G like type 2 which are meaningful so there's a lot
Shagan Singh: in diabetes to come, but it's already been, you know, growing double digits here for a number of quarters. We talked a lot about PFA and CAS and, you know, kind of how we're just moving forward here. And that line of sight comment, I answered that earlier that, you know, let me put a specific timeframe around that 2 billion, but it's in the near term as we've unlocked supply here. I, you know, came to find out that there was.
Shagan Singh: You know, a lot of people had looked at, and this is based on both of our platforms. I know there's a lot of questions around Afera, and there was, you know, I think we've kind of cracked the code, if you will, on supply there. And this new factory in Galway, Ireland has really been a game changer for us. And, of course,
Shagan Singh: NeuroMod, you know, because I think we're one of the few that's that's growing in the teens here. I think we're the only ones.
Shagan Singh: And this is, you know, maybe not quite as big as some of these other markets, but it's still big, multi-billion dollar market.
Shagan Singh: and, you know, we've got a fundamental change in technology here with sensing.
Shagan Singh: that whether it be SC, a pain stem, or DBS, the sensing is
Shagan Singh: is very differentiated and we feel the basis of competition going forward. And that's why we have confidence in this growth profile going forward. And the stories that we're getting on this, on the abilities, what sensing means, and particularly when you get to things like adaptive DBS, where you can close the loop.
Shagan Singh: the impact on the patient and the impact on the health care system, where it's automatically programmed, is massive. And so we see that moving forward.
Shagan Singh: Those are all here right now and contributing and then you know you get into FY 26 Hugo starts to be a meaningful growth driver for a surgical business like we talked about
Shagan Singh: Ardian kicks in. You know, we haven't quantified that. You have to wait for the Q4 call in terms of the short-term impact on Ardian, but obviously the NCD really unlocks that. And, you know, the patients that we're treating right now, the
Shagan Singh: The efficacy is just, you know, better than even we expected. And sure, the physicians are giving us great feedback.
Shagan Singh: But then you get out beyond that, and all these growth drivers are going to keep going, but then you add tibial on that. And tibial is another one that I think we're one of the only ones talking about it for overactive bladder.
Shagan Singh: This is, you know, we think this will double the size of that business over the next, you know, a couple of years, once we launch it, I mean, it, it is, there's such a pent up demand for this. Then it takes, you know, this from a, I call it a tibial for, or a.
Shagan Singh: Stimulation for ovariectomy takes it from, you know, more of a of a medical device, not quite a wearable, but you're getting close to a wearable when you're just going under the skin on the ankle, but above the fascia with a tiny device.
Shagan Singh: that, and I'm not gonna give away all the, it's very compelling story that is gonna open up that market. So you can see, you know, we've got this.
Shagan Singh: We got this flywheel going. Robbie's question earlier about the investments. Keep it going. We feel good about that, especially with the gross margin improvements.
Shagan Singh: and some dry powder we have in M&A to augment that. But that's about the extent of the color I can give at this point. And I probably left one or two out, but those are the ones that are on the top of my mind.
Shagan Singh: Okay, thanks Shane. We've got time for one more question, Brad.
Speaker Change: Our final question comes from Peto Chickering at Deutsche Bank. Peto, please go ahead.
Speaker Change: In general, if you look at your portfolio in that division, is that a potential risk for the future?
Thank you.
Thank you for watching. See you next time.
Mike Marinaro: I'll let Mike answer that question, but I think the short answer is no. But Mike, why don't you tell them why?
Mike Marinaro: Yeah, we we've been given no evidence of that at all. We have very active conversations and and specific agreements
Mike Marinaro: with them around, you know, the products that we sell and that they distribute for us. And, and we're very clear pedo on just how that all comes together in the marketplace. And so there's no, no indication that there's any, any pressure at all from, from that front, just based on our work together with them.
Mike Marinaro: The other thing I'd augment that answer is that, look, we go through distributors because there's a lot of products here in the surgical business, right? But the contracting we do, a lot of it's directly between us and the hospital. So we have very tight contracts that have been tested over time.
You know, like if...
Mike Marinaro: with the end user hospital. So that we don't, you know, it's the first time I've got that question, but that's not something that we're concerned about in the business.
Speaker Change: Okay, thanks Beto. Geoff, please go ahead with your final remarks.
Speaker Change: Okay, well, thanks to all the analysts for the questions and
Speaker Change: and to all that you've joined us today. We appreciate your support and continued interest in Medtronic and we hope you'll join us for our Q4 earnings broadcast which we
Speaker Change: We anticipate we're going to be holding on Wednesday, May 21st, where we'll update you on how we finished the fiscal year, including all of our growth drivers and margin expansion and how that's all tracking and give you guidance, of course, for FY26. So with that, thanks for spending time with us today and have a great rest of your day.
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