Medtronic plc (NYSE:MDT) Q2 2023 Earnings Call Transcript November 22, 2022
Medtronic plc beats earnings expectations. Reported EPS is $1.3, expectations had been $1.28.
Ryan Weispfenning: Good morning. I’m Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations and welcome to snowing Minneapolis. I admire that you’re becoming a member of us as we speak for Medtronic’s Fiscal Year 2023 Second Quarter Earnings Video Webcast. Before we go inside to listen to our ready remarks, I’ll share just a few particulars about as we speak’s webcast. Joining me are Geoff Martha, Medtronic Chairman and Chief Executive Officer and Karen Parkhill, Medtronic Chief Financial Officer. Geoff and Karen will present feedback on the outcomes of our second quarter, which ended on October 28, 2022 in addition to our outlook for the rest of the fiscal 12 months. After our ready remarks, the Executive VPs for every of our 4 segments will be a part of us and we are going to take questions from the sell-side analysts that cowl the corporate.
Today’s program ought to final about an hour. Earlier this morning, we issued a press launch containing our monetary statements and divisional and geographic income summaries. We additionally posted an earnings presentation that gives further particulars on our efficiency. The presentation could be accessed in our earnings press launch or on our web site at investorrelations.medtronic.com. During as we speak’s program, lots of the statements we make perhaps thought of forward-looking statements and precise outcomes could differ materially from these projected in any forward-looking assertion. Additional data regarding elements that might trigger precise outcomes to vary is contained in our periodic studies and different filings that we make with the SEC and we don’t undertake to replace any forward-looking assertion.
Unless we are saying in any other case, all comparisons are on a year-over-year foundation and income comparisons are made on an natural foundation, which excludes the impression of international foreign money and income from our Q1 acquisition of Intersect ENT. References to sequential income adjustments in comparison with the primary quarter of fiscal 23 and are made on an as-reported foundation and all references to share positive aspects or losses seek advice from income share within the third calendar quarter of 2022 in comparison with the third calendar quarter of 2021, except in any other case acknowledged. Reconciliations of all non-GAAP monetary measures could be discovered on our earnings press launch or on our web site at investorrelations.medtronic.com. And lastly, our EPS steerage doesn’t embody any prices or positive aspects that might be reported as non-GAAP changes to earnings in the course of the fiscal 12 months.
With that, let’s head into the studio and listen to concerning the quarter.
Photo by Marcel Scholte on Unsplash
Geoff Martha: Hello, everybody and thanks for becoming a member of us as we speak as we focus on our Q2 outcomes and outlook. Our Q2 natural fixed foreign money income development of two.2% got here in about 1 level beneath expectations attributable to a slower-than-expected restoration in each process volumes in sure markets and in our provide chain. In phrases of reported income, the continued power of the greenback over the course of the quarter drove over half the distinction to expectations. Now regardless of the highest line outcomes, we had been in a position to management bills and ship EPS on the high-end of our steerage vary. We additionally issued steerage for the again half of our fiscal 12 months this morning. We anticipate continued acceleration in natural income development within the second half, though lower than beforehand anticipated and this partially flows by to EPS.
Now, that is one thing that I do not take calmly, delivering on our expectations is necessary to constructing and sustaining belief and credibility with you. Karen will stroll you thru the main points, however a few of our markets and a few of our provide constraints recovered extra slowly than we anticipated within the quarter, and that, together with incremental China volume-based procurements, led us to cut back our expectations. While the present working atmosphere stays difficult, we had robust development in a number of companies and geographies, the place our technique, our working mannequin and execution are yielding stable outcomes. We have near-term product catalysts in our pipeline. We are decisively allocating capital internally and selectively making centered acquisitions.
We are improving the operational well being of the corporate and we’re streamlining the corporate’s construction and taking price out. All of this provides us confidence that we’re on the trail to creating sturdy development and shareholder worth. Now, diving deeper into our Q2 outcomes, for reported income, as I mentioned earlier, foreign money drove over half the miss to consensus. Organically, the miss was primarily break up evenly between two challenges. One, process volumes in some markets have been slower to return to regular ranges and two, a few of our provide challenges have persevered longer than we anticipated. With regard to procedural volumes, along with an incremental China VBP, we’re nonetheless seeing decrease volumes in elective coronary PCI, GI procedures, TAVR, spinal twine stim and a few much less emergent surgical procedures.
The slower-than-anticipated restoration in procedural volumes primarily occurred in developed markets as healthcare techniques proceed to work by staffing and different challenges. Now with regard to produce, we have now made significant restoration and lots of the most acute points are actually behind us, together with the acute packaging points, which we highlighted final quarter. But a number of the enhancements did come later than we anticipated in Q2, and because of this, we missed circumstances in companies like surgical improvements and it has delayed our anticipated momentum. Now focusing past challenges impacting our markets and product availability, we have now a variety of companies the place our technique and execution are yielding outcomes. Recall that we moved to the brand new working mannequin 2 years in the past, we created extremely centered, accountable and empowered working models that may transfer with larger pace and decisiveness.
And as we speak, we’re clearly seeing the advantage of this mannequin throughout lots of our companies. Starting with cranial and spinal applied sciences, CST grew 5% and that is regardless of a big detrimental impression from China VBP. In truth, our U.S. core backbone enterprise grew 15%. Additionally, this quarter, we launched our backbone know-how ecosystem, which we name Aible on the NASS convention. From planning to our best-in-class implants to navigation and robotic help to interoperative imaging and surgical instruments as much as and together with affected person follow-up. Aible brings spinal surgical procedure collectively in a single seamless and linked platform. And one other spotlight was our structural coronary heart enterprise, the place our TAVR enterprise grew 15% globally, together with 17% within the United States.
The launch of our Evolut FX valve drove 18% sequential income development in our U.S. TAVR enterprise, regardless of being at full market launch for less than the final month of the quarter. So, we anticipate Evolut FX to drive momentum for us over the approaching quarters. Our Cardiac Rhythm Management enterprise continues to execute and win share, with 4% development on this quarter. Within CRM, our pacing enterprise grew 6%, nicely above the market, with 18% development of our micro household of leadless pacemakers. And we’re wanting ahead to the industrial introduction of our AURORA EV-ICD within the again half of this fiscal 12 months. So whereas we have now companies the place the adjustments we have now remodeled the previous couple of years are clearly having a optimistic impression. We are additionally centered on making certain these efforts translate into improved efficiency in all of our companies.
It’s price highlighting just a few companies the place we’re making robust progress to drive future development over the close to to mid-term and a few of that have already got fast momentum. Let’s take cardiac ablation options, a enterprise that we anticipate to be a robust future development driver. Pulsed Field Ablation represents a big market alternative and we’re wanting ahead to seeing our PULSED AF pivotal trial leads to the primary half of the subsequent calendar 12 months, placing us on the trail to be one of many first firms with the PFA catheter within the U.S. market, which we predict is underappreciated. This is a significant development alternative for Medtronic within the subsequent 18 to 24 months. And as you already know, we closed our acquisition of Affera in August and Affera’s differentiated mapping and navigation system provides us the breadth and differentiation that we have to win share in cardiac ablation.
And we anticipate to finish enrollment this quarter within the pivotal. This totally built-in system would be the first of its variety to supply a novel catheter that may carry out high-density mapping and ship each pulsed subject and radiofrequency ablation in a single gadget. Now in diabetes, we stay centered on resolving our warning letter. We have now accomplished a 100% of our warning later commitments and have knowledgeable the FDA that we’re prepared for reinspection. We additionally stay in lively overview with the FDA on our submission of the MiniMed 780G system with the Guardian 4 Sensor. And outdoors the U.S., we proceed to obtain optimistic buyer suggestions on the efficiency of the 780G, which is now accessible in over 60 international locations. In Q2, 780G drove mid-teens development for our diabetes enterprise in worldwide markets.
And throughout diabetes, we’re investing closely within the growth of a number of next-generation insulin supply and sensor applied sciences. And we stay centered on restoring robust development to this necessary franchise over the approaching years. Turning to our Hugo surgical robotic, now I’m positive we’re going to get into this in Q&A, however we noticed quite a lot of optimistic momentum this quarter as we scale manufacturing manufacturing, develop regulatory approvals and ramp installations. In addition, we simply obtained FDA IDE approval final week on our product enhancements. Now, this enables us to begin our U.S. urology medical trial by the top of the calendar 12 months and is a catalyst for continued progress with our worldwide gross sales. Now, earlier than I discuss our capital allocation and portfolio administration, let me share my ideas on the Ardian alternative.
Despite the impression we imagine COVID and medicine adjustments had on the ambulatory endpoint in ON MED, the totality of the information is compelling. The massive drop in workplace blood stress within the Ardian arm was spectacular and it was in keeping with what we have now seen in our different trials. Importantly, the present commonplace of look after lowering blood stress, it simply is not working, which was evident within the long-term SPRINT trial outcomes printed simply final month in JAMA Cardiology. Patients do not appear to remain on multi-drug remedy for lengthy intervals of time and finally simply cease taking their medicines. And that is the benefit of Ardian, it is at all times on. We have demonstrated that our Ardian process, it is protected, it is efficient, and it is sturdy. Physicians are excited and Ardian is most popular by sufferers.
Now we have now submitted our PMA to the FDA and we’re wanting ahead to working with governments and payers within the U.S. and around the globe who’re looking for enhancements to regulate hypertension and keep away from the expensive and devastating penalties of this illness. In addition to advancing our pipeline, we’re centered on decisively allocating capital and streamlining the corporate to ship sturdy development. We are releasing up sources to take a position extra in R&D, feeding our quick rising companies in areas the place we will see the strongest returns. Cardiac ablation options and diabetes are two clear examples of this. We are additionally making strikes with our portfolio to focus our firm and our capital on alternatives which are higher aligned with our long-term development acceleration methods.
Over the previous two quarters, we have now introduced our intent to separate three companies that we imagine will thrive outdoors the corporate. With our Renal Care Solutions enterprise, we’re progressing on the separation, forming a brand new kidney well being know-how firm along with DaVita. We proceed to anticipate this transaction to shut in calendar 2023. And final month, we introduced our intention to separate our mixed affected person monitoring and respiratory interventions enterprise. We stay centered on lively portfolio administration, evaluating each potential additions and subtractions to additional speed up our development and create worth for our shareholders. Now with that, I’ll flip it over to Karen to debate our second quarter monetary efficiency and our steerage.
Karen Parkhill: Thank you, Geoff. Our second quarter natural income elevated 2.2%, up considerably from Q1, however beneath our steerage vary, given the challenges Geoff talked about. Yet with a concentrate on bills, our adjusted EPS of $1.30 landed on the higher finish of our steerage vary. Currency had a considerably unfavorable impression of 5.8% on our reported income development. Our FX hedges mitigated that impression on the underside line with EPS down solely $0.01 or 80 foundation factors from foreign money. Looking at our outcomes from a geographic perspective, our U.S. income grew 1%; our non-U.S. developed elevated 3%; and rising markets grew 4%. Our rising markets development continued to be affected by China, which declined 9%, given the impression of a nationwide tender in our backbone enterprise and several other provincial tenders in sure different companies.
However, we proceed to see robust double-digit development in our different markets, together with mid-20s development in Eastern Europe and mid-teens development in Latin America. In truth, excluding China, our rising markets grew 15%. Turning to our margins, our adjusted gross margin of 67.6% declined 120 foundation factors from inflationary pressures in supplies, direct labor, freight and utilities. We anticipate these inflationary pressures to proceed and to impression the again half of this fiscal 12 months, greater than what we skilled within the first half. Our adjusted working margin of 26.6% declined 40 foundation factors, together with a 120 foundation level profit from our foreign money hedging program. Compared to the primary quarter, our working margin improved 270 foundation factors, given accelerated income development.
We anticipate sequential enchancment all through the fiscal 12 months. We proceed to take care of a robust stability sheet. I’d be aware that the overwhelming majority of our debt is mounted at low charges as we transfer into a better charge atmosphere. Regarding our capital allocation, we proceed to stability investing for the long run with returning capital to shareholders and we stay dedicated to our dividend and to returning a minimal of fifty% of our free money move to our shareholders. Now, turning to our steerage, as we speak, we set our second half income steerage at 3.5% to 4% natural, which excludes foreign money motion and income from our Intersect ENT acquisition. If current change charges maintain, international foreign money would now have a detrimental impression on our again half income of $930 million to $1.03 billion.
Our again half steerage interprets into a discount of our annual steerage, pushed by a slower tempo of market and provide restoration. On market, we predict incremental provincial tenders in China, notably in stapling and cardiac ablation. And Geoff referenced earlier that some process volumes within the second quarter did not get well as rapidly as we had been anticipating. So at this level, we’re assuming no incremental enchancment within the again half. On provide, whereas we have now had a significant restoration, it got here later than anticipated, notably in SI and cardiac diagnostics and that merely delays our tempo of restoration forward. By phase within the again half, the vast majority of the discount is in our Medical Surgical portfolio, which we now anticipate to be flat to up 0.5%.
We anticipate cardiovascular to develop 5.25% to five.75%, neuroscience to develop 6% to six.5%, and diabetes to say no within the low single-digits, all on an natural foundation. Our whole firm income steerage does assume continued income development acceleration, which we noticed in every month of the second quarter. We anticipate the third quarter development charge to be higher than the second and the fourth quarter higher than the third. We could have easing comparisons in ventilators, enhancing provide in sure companies like cardiac diagnostics and SI and the profit from product launches like Evolut FX and EV-ICD. In the third quarter, we anticipate natural income development within the vary of two.5% to three%, an acceleration from the second quarter. And assuming current change charges maintain, the third quarter would have a foreign money headwind between $460 million and $510 million.
By phase and on an natural foundation, we anticipate Medical Surgical to be down 2% to 2.5%, an enchancment from the second quarter, given lesser occasion headwinds and the impression of the flu season. Cardiovascular to develop 4.75% to five.25% on the continued rollout of Evolut FX and Linq 2, neuroscience to develop 5.75% to six.25% enhancing from the prior quarter with much less VBP impression in backbone and diabetes to say no within the low single-digits. On the underside line, we’re driving vital expense discount all through the corporate to assist offset the decrease income and continued inflation impression and now anticipate fiscal 23 non-GAAP diluted EPS within the vary of $5.25 to $5.30. That vary consists of an unfavorable impression of foreign money of roughly $0.18 at current charges.
For the third quarter, we anticipate non-GAAP diluted EPS to be within the vary of $1.25 to $1.27, together with an FX headwind of about $0.05 at current charges. Amidst the macro environmental headwinds we face from inflation, China VBP, softer process volumes in sure markets and foreign money, we’re laser-focused on driving operational and expense efficiencies. We are additionally dedicated to take a position appropriately for the long-term, allocating capital to our most promising development drivers and executing tuck-in acquisitions designed to succeed in extra sufferers and create worth for our shareholders. As we strategy Thanksgiving, I wish to share my gratitude to our staff who’ve been dedicated, notably throughout these difficult instances to ship on our mission to alleviate ache, restore well being and prolong life for thousands and thousands of individuals around the globe.
Back to you, Geoff.
Geoff Martha: Thank you, Karen. Now earlier than we open the traces for questions, I need you to know that our development charge and our consistency usually are not the place we would like them to be. That’s why I shared with you our aggressive agenda to remodel this firm 2 years in the past after I grew to become CEO. We launched into a plan of implementing a brand new working mannequin, eliminating the paperwork of our teams and forming extra nimble working models, whereas on the identical time, studying to leverage our scale. We set in movement a brand new performance-driven tradition, and we modified our incentive plans to reward new behaviors and efficiency. We introduced in new leaders to inject new methods of considering within the group, and we applied new capital allocation and portfolio administration processes.
Now these adjustments take time, and we face setbacks alongside the best way which have slowed us down. Some are environmental like COVID restoration charges, uncooked materials shortfalls and Chinese procurement coverage, whereas different setbacks are of our personal doing, like our high quality and operational challenges and the tempo of enchancment we anticipated. Look, I do know we have now extra work to do right here, however we perceive the foundation causes that led to the years of underperformance from this firm. And our aggressive transformation agenda is designed to repair these points. I do know we are going to get this proper, choosing the proper markets, being extra environment friendly and productive with our sources, empowering companies and growing accountability, enhancing our high quality, our manufacturing and our provide chain and turning our measurement and scale into a bonus.
And I do know we’re on the fitting path. The progress we have made up to now provides me that confidence. We have skilled leaders, a compelling pipeline and positions of power in a number of the most engaging medtech markets, which deal with vital unmet wants for sufferers. We will execute on our plan to ship sturdy development that we started 2 years in the past. And as we do, we are going to create super worth for all of our stakeholders. So now let’s transfer to Q&A. We are going to attempt to get to as many analysts as potential, so we ask you to restrict your self to only one query and provided that wanted, a associated follow-up. If you have got further questions, you’ll be able to attain out to Ryan and the Investor Relations group after the decision. With that, Brad, are you able to please give the directions for asking a query?
Brad Welnick: For as we speak’s session, Geoff, Karen and Ryan are joined by Que Dallara, EVP & President Diabetes Operating Unit; Sean Salmon, EVP and President of the Cardiovascular portfolio; Brett Wall, EVP and President of the Neuroscience portfolio; and Bob White, EVP and President of the Medical Surgical portfolio.
To proceed studying the Q&A session, please click here.