Medtronic PLC (MDT) Presents at Jefferies Healthcare Broker Conference Call – (Transcript)

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Medtronic PLC (NYSE:MDT) Jefferies Healthcare Conference June 3, 2020 2:30 PM ET

Company Participants

Karen Parkhill – EVP & CFO

Conference Call Participants

Rajbir Denhoy – Jefferies

Rajbir Denhoy

Thanks, everyone, again for joining us at Jefferies 2020 Virtual Healthcare Conference. I’m Raj Denhoy with the medical Device research team. Up next, we have Medtronic, and we’re very pleased to have Karen Parkhill, the company’s CFO. So, Karen, thanks for joining us today.

Karen Parkhill

Thank you, Raj. Happy to be here.

Question-and-Answer Session

Q – Rajbir Denhoy

Great. Yes. I wanted to maybe start with just exploring several issues that came up on the last earnings call, which I think was just a week before last. Seems like a long time ago, but it’s just two weeks ago. Then we can transition to the pipeline and sort of other aspects of the story.

Maybe at a high level, you chose not to give guidance, which a lot of companies didn’t do, but you did give us some very substantial guidepost, I think, in the way to kind of model the company and think about the next 12 months. And so there was quite a few questions, though, that came out on the revenue outlook. And you gave some quantitative or qualitative guidance, I should say, around next quarter being potentially lower than the previous quarters, the first quarter being down on the fourth quarter. But also some of the commentary you gave around how different geographies were performing suggested that maybe that was a conservative outlook. And so is there anything maybe you want to add to that or kind of ground us in what you’re really seeing right now?

Karen Parkhill

Yes. No, thanks for the question, Raj. We are really encouraged by the things that we have seen in the month of May. Some recoveries, particularly across our cardio business and in the U.S. and a little bit earlier than we had initially anticipated. So we’re encouraged by that, and we talked about on our earnings call some of the early and gradual recovery that we’re seeing in China and in Western Europe. And that has remained. Even though 1.5 weeks has passed since our earnings call, those trends are still there.

It’s true that we did say that we expect our first quarter to be potentially modestly worse than our fourth quarter because of the full quarter impact. And we really didn’t want to get ahead of ourselves on some of the early trends we’re seeing because early trends don’t necessarily make a full quarter. And we knew that we had some patient backlog for some procedures that we were seeing come back relatively quickly. But we know in certain procedures, it takes time to build up the backlog once you’ve gotten through that backlog. And in certain cases, we could see some strong recovery, a little bit of a dip, followed by recovery again. And so it was too early to make any broader calls than that.

But clearly, we’re encouraged. And if the quarter continues to play out based on the early trends that we’ve seen in this quarter, we’ll do a little bit better than what we said. But at this stage, again, too early to call the quarter.

Rajbir Denhoy

No. Completely makes sense. And you gave us a little bit on this, but in terms of the pace of the recovery and what you’re seeing, other than, obviously, with daily sales volumes, which we don’t want to get into that pattern of updating on that frequency, but are there other things that you’re seeing, conversations with hospitals, surgery schedules building, any other anecdotes you can point to in terms of how the recovery is shaping up?

Karen Parkhill

Yes. And clearly, you talk about daily sales. We’re watching daily sales. We’re watching weekly sales. But clearly, you see ups and downs in those, and so they don’t necessarily make a trend. But we’re encouraged by the fact that hospitals, particularly in the U.S., do want to get back to having some of our more elective procedures more quickly. They need it from their financial stability perspective. And so they’re anxious to bring those back. We are prepared and anxious and ready to help them. Our sales teams are fully equipped with the right PP&E. We hope to be one of the first vendors that is back in the hospitals across the country and across the world actually because we are ready, we are prepared. We are helping our customers with protocols and standards and procedures in place. And so we’re building stronger customer relationships as we come out. And we’re ready to help make this recovery as fast as it can be.

Rajbir Denhoy

Great. Just two more questions on the revenue side, and we can talk a little bit about the margin picture. The other kind of guidepost you gave us was that you expected the fourth quarter of this year — of this fiscal year to be up on a 2-year stack basis, actually show positive growth, which would imply something around 25%, perhaps 30% sort of growth. So maybe just — is that the right way to think about that? Are we looking for that level of growth in the fourth quarter of this year?

Karen Parkhill

Our likely scenario does indicate that. And when you think about it, it’s going to be substantial growth if we’re back to more normal levels off of a very low base in the prior year fourth quarter. So just given that, it needs to be high growth. And so that’s why we’ve chosen to look at it on a stacked basis because neither year — neither fourth quarter is normal. And so on our stacked basis, we’re purely looking at it in terms of revenue growth in 1 year, revenue growth in another year, add them up and divide them by two and that’s how we’re thinking about it.

Rajbir Denhoy

So really that simple. Okay. That’s great. And also at a very high level, one of the changes at the company under Geoff Martha, which we’ll certainly get to some more detail on that, but this move away from bulk purchases that you’re trying to put in place here, at a very high level, how should we think about that? So does that move revenue sort of within the same quarter? Does it smooth it out more? Are you thinking more of revenue moving between quarters? And how should we think about as we try to model the company when you move away from bulk purchasing?

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Karen Parkhill

Yes. Our real focus on bulk purchasing is to smooth those purchases out throughout the quarter so that we have greater visibility into the performance in the quarter earlier on. We have less reliance on some bulks. We have greater flexibility with our customers, greater predictability. And so all of that will help us. And one of the silver linings around COVID is that we had anticipated moving away from those bulk purchases and starting to smooth that out starting this fiscal year in the first quarter and using that extra week, and COVID merely accelerated that.

And so we had customers purposely not need or want to purchase in bulk in the fourth quarter. And so we began that a little bit earlier than we had originally anticipated. And we’re going to continue it through this fiscal year until every quarter. We’ve done it, and then we’ll be focused next fiscal year on ensuring that we maintain it that way. In the fourth quarter, we said that bulks impacted us about 5%. So it just gives you a little bit of magnitude of year-end and fourth quarter what that does.

Rajbir Denhoy

Right. So would you expect that, that year-end book that now maybe you’re trying to smooth out, that should be spread amongst the various quarters? Is that fair?

Karen Parkhill

Yes. So when customers purchase in bulk, obviously, they have greater inventory on their shelves and need — and purchase less at the beginning of the following period because they’re working down that inventory that they purchased. And so by smoothing it out, you will see some quarter-to-quarter impacts, but I think we need to get through a full year to see the full year-over-year impact and the quarter-over-quarter impacts.

Rajbir Denhoy

Great. Great. Maybe we could segue a little bit to the margin side. So at a very high level on the gross margin side, you talked about how you’d see a little bit of a degradation in the first quarter. I think you said down a few points. You feel it’s a pretty wide range, but you said it’d be down a few points. And you talked a little bit about some of the reasons for that, extra safety protocols, manufacturing plants perhaps being at lower capacity, some of those issues. So how should we think about the progression of your gross margin? So it will dip here in the first quarter, and then you expect it will remain depressed for a period of time? Or will it start to recover back pretty quickly?

Karen Parkhill

Yes. So what we said in the first quarter was on gross margins that the gross margins could be sequentially worse. And the reason that we said that is because we could choose in certain areas where we’ve got enough inventory to have reduced work weeks, for example, in those plants. And as we do that, it means that we may need to currently expense some of the fixed overhead in those manufacturing plants as opposed to what we normally and typically do, which is put it in inventory on our balance sheet. And so if we currently expense enough, it could move our gross margins sequentially worse in the quarter.

But that’s a temporary thing. And so then we said that we expected our margins, gross margins and operating margins, but our focus is more on operating margins, that we expect sequential improvement in our operating margins in quarter two and then again in quarter three. And then by the time we reach Q4, we expect to be back to more normal operating margin levels.

Rajbir Denhoy

Understood. The other question around kind of operating margins is your decisions around expense reduction, right? So several of your large peers and competitors chose to reduce expenses in this period. You’ve chosen perhaps to do the opposite, right? You’ve actually even guided towards spending being up this quarter by a couple of hundred million dollars. So what — maybe you could maybe dive into that decision a little bit more. The deleveraging is pretty substantial. So what was the thinking behind it?

Karen Parkhill

Yes. So going into this pandemic, we had the benefit of great financial strength and liquidity. And we recognize that this pandemic is a short-term impact. And because of our strength financially, we’re able to focus on the long term through the short-term impact. And so we purposely maintain that focus on the long term. We don’t want to stop investing in our people, in our R&D, in our ability to distribute our new products. We don’t want to stop that investment because we’re focused on driving our long-term revenue growth up and keeping it there sustainably. And we have the financial wherewithal to do that.

So we purposely didn’t stop investing. And we believe it’s the right move. We believe it will help us over the long term. We’re already seeing extensive and really positive and strong comments back from our employees, from our sales force, who we chose to not take their variable compensation down to nothing in this environment. And we believe that we will have greater retention of our talent, greater engagement from our talent as we move out of this recovery. And as we focus on supporting our customers, too, we’ll have greater loyalty from our customers coming out of it. So we think it’s the right long-term move, and we have the ability to do so.

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Rajbir Denhoy

Great. Yes, I wanted to get into some of the post-COVID trends sort of after some of the strategy questions. But maybe just to wrap up kind of the modeling and the financial questions, the — and I’m not sure you’re going to answer these questions, but I’ll ask them anyway. If you look at where The Street settled out and the analyst community settled out in terms of estimates for you for the year, something in the 3.60 to 3.70 range, but the range is very wide. So maybe less than 3, some north of 4. Do you think that 3.60, 3.70 range is appropriate for this year?

Karen Parkhill

Yes. We purposely didn’t give guidance because the environment is too uncertain. So for me to comment on that, Raj, is difficult. What I would say is that we feel good about the trajectory that we outlined for you. And as soon as the picture becomes more clear around the stability of our end markets, we’ll be focused on trying to give you greater guidance that you’re seeking.

Rajbir Denhoy

Understood. Maybe another question as it relates even as you move into next year. And so, again, I’m not going to ask the earnings question on next year. But when you think about the higher level of expenses that you’re incurring right now, I know you plan to get your margins up as you move through the year, but is this level of higher spending something that you’re feeling more comfortable with? Do you think you’ll leave this on for a period of time as you try to take advantage of the opportunity? Or do you expect substantial leverage will start to come next year as the top line starts to improve?

Karen Parkhill

We’ve been focused on driving the appropriate leverage for a while at the company and ensuring that we’ve got greater bottom line growth than our top line growth, and that has not changed. This is a short-term impact. And as we get back to more normal, we’ll be focused on continuing to drive that leverage that we’ve driven in the past. So while we may have purposeful added expenses around investment, we’re going to have purposeful — driving purposeful efficiencies and expense takeout to offset that. And should we see a new normal out there from revenue levels that is a more permanent new normal, then we’ll take action on expenses. But we firmly believe right now that this is temporary.

Rajbir Denhoy

Right. Again, just to put maybe a finer point on it, and you look at the earnings that people are proposing for you guys into next year, it implies a very significant step-up, almost 50%, which, again, that’s what the number suggests, right, in terms of coming off the trough this year. And it doesn’t sound like that is out of the realm for you, just given, again, just the math, right?

Karen Parkhill

Yes. Again, we’re not giving guidance right now. But think of us as we recover from this pandemic about getting back to the normal longer-term guidance parameters that we’ve given in the past.

Rajbir Denhoy

Great. Maybe we could just spend a couple of minutes on the pipeline, kind of transition to that, which, I guess, innovation-driven growth has been sort of a facet to the company strategy now for some time. But when you think about the pipeline going forward, how would you outline it for us? I mean, what do you think the biggest opportunities for you are over the next 12 to 18 months?

Karen Parkhill

We have said many times that we have the broadest and most robust pipeline that we’ve had in the history of our company, and we firmly believe that. And despite the pandemic, we remain very excited about what we’ve launched more recently, what we’ve got in the pipeline to launch soon and even our longer-term pipeline. We’re really excited right now about things like our Micra AV product, which is just coming out. But we had the Micra AV, the world’s smallest pacemaker in the single-chamber market, which was a smaller segment of the market. And now we’re able to put it in the dual-chamber segment of the market, which is a broader market. And we’re seeing great reception. And we believe that, that breakthrough technology is going to drive greater growth in market share. And very excited about what that can bring.

If we look at things like our Cobalt and Crome devices, which are new CRT devices which enable remote monitoring and remote programming, those are Bluetooth-enabled and really strong devices, but even stronger right now because of the remote capabilities that they offer, particularly in an environment where we want to keep our health care providers and our employees and our patients more safe. Enabling that remote programming where our reps do not need to be in the operating room, and enabling the remote monitoring from there is a really terrific feature.

And then we look broader into our pipeline across RTG. We’ve got spine-enabling technologies. We’ve got Riptide Aspiration catheters, longer term in the pipeline. We’ve got the robotic surgery, soft tissue robot. We’ve got Ardian. Super excited about what renal denervation and Ardian can bring. It’s — that’s a $1 billion market opportunity where it’s a breakthrough market invention. And when you think about it, hypertension is one of the — is the largest contributor and leading causes of what can lead to horrible patient outcomes and death. And renal denervation with one procedure can really change that outcome. So we’re super excited about that.

Rajbir Denhoy

Yes. So while the pipeline is full, if one wants to be critical, right, and I hate to be, but on the most recent call, you pushed out a couple of these products by just a little bit, but they still were pushed. The robotic platform was maybe 6 months pushed. 780G, your new pump in the diabetes space, was pushed a little bit, and you’ve slotted in a new pump before the 770G. So maybe you could talk about both of those. And so what’s the update on the robotic platform? What’s behind the delay? And then we can talk about diabetes after that.

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Karen Parkhill

Yes. So thank you for the question. I do want to talk about them. So COVID did impact us a little bit on our pipeline. And particularly for things that were still in testing mode and preclinical and clinical mode, there were some impacts. And you’ve seen it on two of those products there.

For robotics, the key issue is that we’ve got a lot of employees in R&D testing, that very extensive and robust platform, and testing the software and the hardware integration of it. And with COVID, they’ve had to work remotely. So they’re not on site. They’re not near each other. They’re not with the robot, and it’s just more difficult to get their job done efficiently with remote — the remote work environment.

We also have had surgeons and OR professionals that were slated to come and help with the testing in our labs. And because of travel restrictions, they’re unable to do that. So there is a setback, but that doesn’t mean that we’re not as excited as we were before about our soft tissue launch. We’re continuing to do everything we can to speed the testing, to find creative ways to work better remotely on this, to get back in the office as soon as we can and to bring this to market as soon as we can. But at this stage, because of these delays, we haven’t given a new expected date, but we’re working as fast as we can.

In terms of diabetes, we’re excited to hopefully launch the 780G in Europe soon. And we’re expecting the 780G launch, hopefully, this fiscal year — later in this fiscal year in the U.S. In the meantime, we’re launching the 770G platform in the U.S., which is an enhanced hardware version of the 670G. It has Bluetooth capability. It has an indication down to 2 to 6 years for the patient. And with the Bluetooth capability, it enables caregivers and parents to be able to monitor remotely the patient’s glucose levels. And with the Bluetooth capability, as soon as we launch 780G, it will enable the remote download of the advanced hybrid closed-loop technology, which the 780G offers, onto the 770 hardware platform.

Rajbir Denhoy

So just two quick follow-ups here. So the first on robotics, I mean, we should assume that nothing is amiss in a sense that there isn’t any significant change being done. These are sort of planned last minute tweaks to the robot that are just taking longer given the current environment. There’s no substitute change to the system. And then similarly on 780G, given the pushout on timing on that, what should we conclude about the challenges in bringing that product to market?

Karen Parkhill

Yes. So on the robot, we had said even prior to COVID that in our final phases of testing, we were seeing some challenges because we’re testing every single little bit of this robot. And we were seeing some challenges and tweaks that we needed to make between the software with the hardware. And then we had to retest that. And so we were a couple of months behind because of that. That was pre-COVID we had said that.

But what COVID did on top of that was not enable us to catch up from that because of the remote work environment. Beyond that, no, there is nothing you should read into this. It’s a complicated system. We’re testing the heck out of it, and we’re excited to get it out there as quickly as we can.

In terms of diabetes, same thing. We’re continuing to invest heavily. We’re continuing to do our clinical work and work with the regulatory authorities for eventual approval. Nothing to read into it.

Rajbir Denhoy

Understood. We have about three minutes left here, but I wanted to — something you raised earlier, just about how Medtronic wants to emerge from this pandemic. And you talked about both the size of the company, the technology the company has that they can bring to bear, this idea of remote monitoring, the use of data perhaps more fully. What are some of the initiatives you think about that Medtronic can do to really perhaps move the ball forward as we think about how health care evolves coming out of this?

Karen Parkhill

Yes. So we are excited about emerging even stronger. And we’re confident in our ability to do that based in part on how we’ve handled the downturn, how we’ve handled the ventilators, how we’ve handled our employees during this time, how we’ve handled working with our customers and doing what we can to help them come back stronger. We’ve got an embedded services and solution team that was embedded under Omar, and we’re using that team to help drive our customers to have the right standard protocols and procedures in place now that we have to operate in this COVID world. And that’s helping us gain greater strength in the relationship with our customers and, hopefully, greater loyalty coming out.

So our hope in emerging and our expectation, honestly, in emerging is that we’ll see greater retention and ability to recruit top talent. We will see greater market share gains because of the strengthening with our customer relationships, and ultimately, we’ll see greater revenue growth as a result. You’re on mute, Raj.

Rajbir Denhoy

I was going to say I can’t think of a better way to end it, Karen. So thank you very much for the time today and for all the thoughts, and best of wishes.

Karen Parkhill

Thank you so much. Take care. Appreciate your time.