美敦力 (MDT) 2022 Q2 法說會逐字稿

Good morning, and welcome to Medtronic's Fiscal Year 2022 Second Quarter Earnings Video Webcast. I'm Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations. Before we start the prepared remarks, I'll share a few details about today's webcast. Joining me are Geoff Martha, Medtronic Chairman and Chief Executive Officer; and Karen Parkhill, Medtronic Chief Financial Officer. Geoff and Karen will provide comments on the results of our second quarter, which ended on October 29, 2021, and our outlook for the remainder of the fiscal year. After our prepared remarks, our portfolio executive VPs will join us and we'll take questions from the sell-side analysts that cover the company. Today's event should last about an hour.

Earlier this morning, we issued a press release containing our financial statements and divisional and geographic revenue summaries. We also posted an earnings presentation that provides additional details on our performance. The presentation can be accessed in our earnings press release or on our website at investorrelations.medtronic.com.

During today's webcast, 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 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.

Second quarter organic revenue comparisons adjust only for foreign currency as there were no acquisitions or divestitures made in the last 4 quarters that had a significant impact on total company or individual segment quarterly revenue growth. References to sequential revenue changes compared to the first quarter of fiscal '22 and are made on an as-reported basis and all references to share gains or losses refer to revenue share in the third calendar quarter of 2021 compared to the third calendar quarter of 2020, unless otherwise stated.

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.

With that, let's head into the studio and get started.

Hello, everyone, and thank you for joining us today. This morning, we reported Q2 results, which despite a challenging market backdrop, reflects solid execution around new product launches and strong underlying earnings growth. Obviously, our end markets were impacted by the COVID-19 resurgence and the health care system staffing shortages, particularly in the U.S., which affected our quarterly revenue growth.

Procedure volumes were lighter than expected in markets where our technology is used in more deferrable procedures like our Spine business or those that require ICU bed capacity like TAVR. Yet in markets where procedures are less deferrable, like pacing, we experienced stronger growth.

While the U.S. market was a headwind, many of our international markets were much stronger. We delivered 6% revenue growth outside the U.S., including mid-teens growth in emerging markets. And our emerging market growth is up 9% versus pre-pandemic levels in Q2 fiscal '20.

In the midst of these market headwinds, we focused on managing what was in our control and executed to advance our pipeline, launch new products and win share. And when you look at our sequential revenue performance, our 2% decline was slightly better than most of our large cap med tech competitors. While the pace of the recovery from pandemic headwinds is hard to predict, our markets will recover. And as that happens, Medtronic is one of the best positioned companies in health care.

The underlying health of our business is strong, and it's getting stronger. We have an expansive pipeline of leading technology, a robust balance sheet and an expanding roster of proven top talent. Coupled with our revitalized operating model and new competitive mindset, we remain poised to accelerate and sustain growth. As I've done in prior quarters, let's start with a look at our market share performance.

Year-over-year market share is an important metric that our teams are evaluated against in their annual incentive plans, along with revenue growth, profit and free cash flow. And right now, the majority of our businesses are winning share, driven by our innovation and increased competitiveness. And this is exactly the sort of market share performance that gives us confidence in the deep strength of our businesses.

And to avoid any confusion about how we're performing, when we talk about our share dynamics, we'll refer to revenue share in the third calendar quarter to keep it directly comparable to our competition. Share momentum in our 3 largest businesses continued.

In the Cardiac Rhythm Management business, we extended category leadership, adding over 1 point of share year-over-year, driven by our differentiated micro family of pacemakers, cobalt and chrome high-power devices and our TYRX antibacterial envelopes.

In Surgical Innovations, we outperformed competition with strong performances in endostapling and sutures. And our Signia-powered stapling system and Tri-Staple technology continues to see great market adoption. In Cranial & Spinal Technologies, we're winning share and launching new spine implants that enhance the overall value of our ecosystem of preoperative planning software, imaging, navigation and robotic systems and powered surgical instruments, which is transforming care in spine surgery.

Our new implants also go directly at the competition, starting this past quarter with our Catalyft expandable interbodies to specifically attract Globus users. In addition to our 3 largest, a broad array of our other businesses have increased their competitiveness, are launching new products and winning share in their end markets.

So for example, in Patient Monitoring, we're winning share with our Nellcor pulse oximetry sensors and our monitors. In Respiratory Interventions, we picked up 4 points of share in premium ventilation due to our ability to respond quickly to spikes in demand from COVID resurgence. And in Neuromodulation, we won share across our product lines, including Pain Stim and DBS, as we continue to launch new products. In Pain Stim, despite the sequential slowdown in the market, we're gaining share with our Intellis with DTM technology and our Vanta recharge-free system. In DBS, we had a very strong quarter, winning over 6 points of share. We're executing on the launch of our Percept neurostimulator with BrainSense technology paired with our SenSight directional lead, and we continue to be the only company with sensing capabilities.

Since launching SenSight in the U.S. earlier this fiscal year, we surged ahead of the competition in new implant share. Sensing has redefined what it takes to compete in DBS. Our competitors don't have it. And as a result, we're expecting a long runway of share gains as we build upon our category leadership.

Now while the majority of our businesses are winning share, we do have a few businesses that are flat or losing share, and we're focusing our efforts and our investments to grow above the market.

In cardiac diagnostics, we're focused on improving supply to reverse share declines, and we're investing in new indications and novel AI detection algorithms to expand the market and drive growth. In Cardiac Ablation Solutions, we expect to win share as we expand the rollout of our DiamondTempt RF ablation system and drive awareness and adoption of our Arctic Front Advance Pro cryoablation as a first-line treatment for paroxysmal AF.

In Diabetes, while we lost share again this quarter, we remain pleased with the momentum we're building outside the U.S., not only with the 780G insulin pumps, but also with the positive customer feedback we've heard on our extended infusion set and fingerstick-free Guardian Sensor 4. And we expect our U.S. results to turn around as we launch these new products.

Next, let's turn to our product pipeline. I've already talked about the impact our strong flow of new products is having in the market. We've launched over 180 products in the U.S. Western Europe, Japan and China in the last 12 months. At the same time, we continue to advance new technologies that are in development. We're heavily investing in this pipeline with a targeted R&D spend of over $2.7 billion this fiscal year, which is an increase of over 10%, the largest dollar increase in our history.

We're expecting these investments to create new markets, disrupt existing ones and accelerate the growth profile of Medtronic. Let's start with our Symplicity renal denervation procedure for hypertension.

While we weren't able to end our ON MED study early, we remain confident in our program and our ability to serve the millions of patients who make up this multibillion-dollar opportunity. As a reminder, our previous 3 sham-controlled Symplicity studies all reached statistical significance, including the pivotal OFF MED study. And the ON MED study remains powered to detect a statistically significant and clinically relevant benefit at the final analysis.

We expect that ON MED follow-up will complete in the second half of next calendar year, and then we'll submit the PMA to the U.S. FDA for approval. When we think about renal denervation, let's start with the patients who have indicated that they want options, like the Symplicity blood pressure lowering procedure to treat their hypertension as confirmed by our patient preference study presented earlier this month at TCT.

We believe demand will be high, and we continue to expect this to be a massive opportunity that we will lead. Another opportunity for Medtronic is surgical robotics, where we are entering the soft tissue robotics market as a second meaningful player. We achieved a major milestone when we received CE Mark for Hugo last month. And we also completed our first procedures with Hugo in our Asia Pacific region at Apollo Hospitals in India.

The first surgeons to use Hugo in the clinical setting have told us they believe Hugo addresses the cost and utilization barriers that have held back the growth of robotic surgery. Look, demand is high, and we're building a long list of hospitals that want to join our partners and possibility program and be among the first in the world to use Hugo and participate in our global registry, which will collect clinical data to support regulatory submissions around the world.

Our robotic program is making progress toward a broader launch, and we remain well positioned in this critical field relative to every other potential new entrant. As we prepare for this broader launch, we're working hard to ensure an outstanding customer experience. We're also focused on optimizing our supply chain, manufacturing and logistics to prepare for scaling this business.

We're making steady progress on these activities, but not at the pace that we'd originally planned. And as a result, sales this fiscal year are likely to come in below our $50 million to $100 million target. Now that said, we still expect double-digit millions in sales this fiscal year, and we continue to expect a strong ramp in FY '23. We're off schedule, but we're not off track. And while we're disappointed in the revenue push-out for this important program, we're confident that we have line of sight to the solutions we need to be successful and to optimize the customer experience.

Demand remains high. Surgeons continue to do cases. Our order pipeline continues to build, and we're looking forward to starting our U.S. IDE soon. We remain confident in the success of this program, and we believe that we're poised to meaningfully expand the soft tissue robotic market and drive growth for years to come.

In Cardiac Rhythm, we just launched our Micra AV leadless pacemaker in Japan earlier this month. We also completed the U.S. pivotal study enrollment for our EV ICD, which follows our CE Mark submission in Q1. Just as we disrupted the pacing market with Micra, we intend to do the same in the implantable defibrillator space with our EV ICD.

Our device can both pace and shock without any leads inside the heart and veins, and it does this in a single device that is the same size as a traditional ICD. In structural heart, we're starting the limited U.S. launch of our next-gen TAVR system, the Evolut FX, this month with a full market launch planned for fiscal Q4. Evolut FX enhances ease of use with improvements in deliverability, implant visibility and deployment stability. We're also making progress on our transcatheter mitral program.

At TCT earlier this month, we presented very encouraging early data of our transfemoral delivery system for our Intrepid mitral valve, and we will be rolling that system into our APOLLO pivotal trial. In Diabetes, our MiniMed 780G insulin pump, combined with our Guardian 4 sensor continue to be under active review with the FDA.

When approved and launched in the U.S., we expect the 780G system to drive growth as it will be highly differentiated and further address the burden of daily diabetes management, and for the first time ever is helping hard-to-manage pediatric and adolescent patients achieve outcomes mirroring well-controlled adults. The user experience has also improved markedly, and these outstanding results were achieved with our 780G paired with our Guardian 3 sensor, so we expect the experience will be even stronger with Guardian 4. And the value of our offering will be further enhanced when we bring our Synergy sensor, which is now called SIMPLERA to market.

SIMPLERA is disposable. It's easier to apply and half the size of Guardian 4, and we expect to submit it to FDA later this fiscal year. In Pelvic Health, we're awaiting FDA approval for our next-gen InterStim recharge-free device, which we expect in the first half of next calendar year. With its best-in-class battery, constant current and full-body MRI compatibility at both 1.5 and 3 Tesla, we expect this device will extend our category leadership in this space.

In Neuromodulation, we recently submitted our ECAPs closed-loop spinal cord stimulator to the FDA. We're calling this device inceptive SCS, and we expect it to revolutionize SCS with closed-loop therapy to optimize pain relief for patients. We also continue to make progress on expanding indications for SCS into nonsurgical refractory back pain, painful diabetic neuropathy and upper limb and neck chronic pain.

Finally, in DBS, we continue to enroll patients in our ADAPT-PD trial studying our closed-loop adaptive DBS therapy in patients with Parkinson's. We're expecting enrollment in the trial to complete later this fiscal year.

Now before I turn it over to Karen, the one thing I most want to emphasize is that despite the ups and downs of the pandemic and its collateral impacts on hospital procedures, nursing and staffing shortages and the supply chain, our underlying business remains strong.

Medtronic is advancing a pipeline of meaningful innovation that we believe will not only enhance our competitiveness, but will accelerate our total company growth going forward. And with that, I'll turn it over to Karen to discuss our financial performance and our guidance. Karen?

Thank you, Geoff. Our second quarter organic revenue increased 2%, reflecting the market impact of COVID and health system staffing shortages on procedure volumes, primarily in the United States. Despite the softer end markets, our team executed to deliver strong margin improvement and earnings growth. In fact, our adjusted EPS increased 29%, significant growth reflecting the pandemic impact last year. And our adjusted EPS was $0.03 better than consensus with $0.02 from stronger operating profit and $0.01 from a lower-than-expected tax rate.

Our second quarter revenue growth came in lower than we were expecting back in August. We did see improving trends in our average daily sales each month of the quarter as COVID hospitalizations declined. That said, the bounce back in the U.S. wasn't as fast as we had expected or had seen in prior waves. We recognize many of our customers are dealing with staffing shortages on top of increased COVID patients, and we believe that had an increasing effect on procedure volume.

Looking down our P&L, we had strong year-over-year improvement in our margins, 360 basis points on gross margin as we continue to recover from the significant impacts from COVID last year, and 470 basis points on operating margin, given savings from our simplification program tied to our operating model.

Converting our earnings into strong free cash flow continues to be a priority. Our year-to-date free cash flow was $2.4 billion, up 58% from last year, and we continue to target a full year conversion of 80% or greater.

Turning to capital allocation. We continue to allocate significant capital to organic R&D, and we continue to seek attractive tuck-in acquisitions to enhance our businesses. For example, Intersect ENT, we announced our intent to acquire back in August. Intersect's assets complement our own and are accretive to our WAMGR. Plus, we believe we can accelerate their growth around the globe.

We're also returning capital back to our shareholders with a commitment to return greater than 50% of our free cash flow primarily through our dividend. Year-to-date, we paid $1.7 billion in dividends. And as a dividend aristocrat, our attractive and growing dividend is an important component of our total shareholder return. Looking ahead, although the environment remains fluid, we are seeing some improvement in procedures and our average daily sales in the first few weeks of November. So we're encouraged that the negative impact of the pandemic and health care system staffing shortages on our markets could be moderating.

And while our operations team has done a terrific job managing our supply chain to date, like other companies, we are dealing with an elevated risk of raw material supply shortages. As a result of these potential headwinds and given we're only midway through our fiscal year, we believe it is prudent to update our fiscal '22 organic revenue growth guidance to 7% to 8% from the prior 9%.

If recent exchange rates hold, foreign currency would have a positive impact on full year revenue of $0 to $50 million, down from the prior $100 million to $200 million I gave last quarter. By segment, we expect Neurosciences to now grow 9% to 10%, Cardiovascular and Medical Surgical to grow 7.5% to 8.5%, and Diabetes to be down low single digits, all on an organic basis.

Despite the headwinds we face on revenue, we will manage well what we can control, which includes expenses not directly tied to our future growth. We will continue to invest heavily in R&D and market development. And on the bottom line, we reiterate our non-GAAP diluted EPS guidance range of $5.65 to $5.75. This continues to include a currency benefit of $0.05 to $0.10 at recent rates.

For the third quarter, we're expecting organic revenue growth of 3% to 4% year-over-year. This assumes no real pickup in organic comp adjusted growth versus pre-pandemic levels from what we saw in the second quarter despite the improving trends we saw in September and October. While we are encouraged by those trends and by what we're seeing in November, we wanted to err on the side of caution with near-term guidance given the dynamic macro environment.

At recent rates, we're expecting a currency headwind on third quarter revenue of $80 million to $120 million. By segment, we expect cardiovascular to grow 5% to 6%; Neuroscience, 4% to 5%; Medical Surgical, 2% to 3%; and Diabetes to be down mid-single digits, all on an organic basis. We expect EPS between $1.37 and $1.39 with a currency tailwind of $0.02 to $0.04 at recent rates.

While we expect our markets will continue to be affected by the pandemic in the back half of our fiscal year, we remain focused on delivering solid revenue growth, strong earnings growth and investing in our pipeline to fuel our future. We also remain confident about the underlying strength and competitiveness of our business and our ability to accelerate revenue growth ahead.

Finally, I'd like to take a moment to acknowledge our incredible employees around the world who have worked tirelessly to overcome the many challenges created by the pandemic, executing our operations and supply chain, helping our customers and through it all, continuing to invent, develop and deliver the health care technology of tomorrow.

I also want to recognize a new member of our team, who many of you know. We couldn't be more excited to have Bob Hopkins, the top-rated med tech analyst over the past 3 years, join our team as Head of Strategy. And we look forward to a strong contribution and influence in the years ahead. Back to you, Geoff.

Okay. Thank you, Karen. And yes, it is great to have Bob here at Medtronic. For the last few quarters, I've been closing by commenting on the progress the company is making in various areas of ESG, or environmental, social and governance impacts. Part of the S in ESG is our focus on inclusion, diversity and equity and high employee engagement, which I discussed last quarter, and this makes Medtronic an attractive destination for top talent.

In the release we issued last week, you read about how Bob Hopkins and other highly sought after world-class leaders chose to join Medtronic and drive our transformation to become the undisputed global leader in health care technology. It's very important for our culture that we're bringing in new ideas and diverse perspectives to add to those of our talented leadership and employees across the company.

On the E front of ESG, as you know, we set an aggressive goal last year to be carbon-neutral in our operations by the end of the decade. And 2 weeks ago, we upped our game, announcing our ambition to achieve net 0 carbon emissions by FY '45 across our value chain. This ambition outlined in our FY '45 decarbonization road map will focus on operational carbon neutrality, supply chain greenhouse gas emissions reductions and ongoing logistics improvements.

To support our progress, as well as progress across our entire industry, we joined the International Leadership Committee for a net 0 NHS in the U.K. And we're taking a leadership role with the U.S. National Academy of Medicine action collaborative to decarbonize the U.S. health care sector.

Our ESG efforts are gaining recognition as last week, Medtronic was elevated from being a constituent of the Dow Jones Sustainability North America Index to joining a select group of companies in the Dow Jones Sustainability World Index. Look, we are really proud of this achievement.

In addition, I hope many of you were able to watch our inaugural ESG investor briefing last month. And if you haven't, I encourage that you watch the replay on our Investor Relations website. Now let me close on this note.

The lingering effects of the pandemic, combined with health care system staffing shortages, impacted our Q2 revenue more than we originally anticipated. We have both puts and takes on the timing of our pipeline and the supply chain dynamics pose near-term challenges. But our challenges will be manageable. We've got this. Our pipeline is delivering, and we're poised to deliver more innovation over the coming quarters and the next several years.

We have to show you that we can deliver. But robotics is coming. R&D is coming. Closed-loop SCS is coming. And our diabetes turnaround is coming. And Evolut FX and MITRA on EV-ICD and the pending acquisition of Intersect ENT, these are all coming. We're ready to execute and capitalize on these opportunities. We're in good markets, and we're focused on innovating, winning share and maintaining and/or achieving true category leadership across our businesses.

I know we have more to prove, but I'm confident that our organization, our talented and dedicated 90,000-plus global employees are up for the challenge. We're focused, we're hungry, and ultimately, we're going to deliver on these opportunities to accelerate our growth. And as always, we remain deeply committed to creating value for you, our shareholders. And with that, let's now move to Q&A.

Now we're going to try to get as many analysts as possible, so we ask that you limit yourself to just one question. And if you have additional questions, you can reach out to Ryan and the Investor Relations team after the call.

With that, Win, can you please give the instructions for asking a question?

(Operator Instructions) Lastly, please be advised that this Q&A session is being recorded. For today's session, Jeff, Karen and Ryan are joined by Sean Salmon, EVP and President of the Cardiovascular portfolio and the Diabetes operating unit; Bob White, EVP and President of the Medical Surgical portfolio; and Brett Wall, EVP and President of the Neuroscience portfolio. We'll pause for a few seconds to assemble the queue.

The first question comes from the line of Robbie Marcus at JPMorgan.

Great. I think everyone is happy to see the EPS guide reiterated here, but I think the top line guide is a little bit surprising, particularly where you have third quarter organic sales guidance, given, I believe, you made the comment that November was trending better. So I was hoping you could talk through that and maybe just walk through the Hugo launch delay, what you're seeing there? Is it an adoption issue, a technology issue? Or is it purely difficulty getting into hospitals with COVID-19 going on?

Robbie, thanks for the questions. I'll let Karen answer the guide question and maybe I'll hit the robotics question.

Thanks, Robbie. And you know what, I'm going to -- for the guide, I'm going to walk you through the quarters a bit to help give you and set the context. And I'm going to start with Q2 because versus -- if you look at versus pre-pandemic levels or 2 years ago, our growth in Q2 was about 1% organically. It was a little below peers, but you got to keep in mind that our inventory levels were lower back then because that was before we made the change to bulk purchasing.

So if you adjust for that inventory issue and a little bit of a tougher comp, our Q2 growth was in the 2% to 3% range versus pre-pandemic levels. And if you look at it sequentially, our revenue from Q1 to Q2 declined less than 2%, and that was while most of our peers saw declines of 3% to 5%. So our performance in Q2, we believe, is in line, at least in line with what we're seeing from our peers.

And then if you look at Q3 in our guidance, we're expecting that same 2% to 3% growth as we saw in Q2 versus the pre-pandemic levels. And yes, that equates to a slight deceleration from what we saw in October. And we're encouraged by what we've seen in October and into November. But given the dynamic environment, we focus on wanting to err on the side of caution with our Q3 guide. And then for Q4, we're assuming normal sequential seasonality just because it's our fiscal year-end. So you'll see sequential improvement in Q4. So hopefully, that's helpful.

Okay. So then maybe on the robotics question. I mean, let me first by saying, no, it's definitely not a demand issue. The demand remains high, higher than we can fill at this point. And we're continuing with our regulatory filings around the world. We're going to begin the U.S. IDE here very soon, and surgeons are continuing to do cases.

We're doing so far, uro and GYN cases. And we're close to -- I think we're, any day now, like our first general surgery case. So -- and like I said, demand continues to build. So the issue that we're doing, this is more of a limited release phase. That's where we are right now. And we're focused on optimizing the user experience. And the issues that we're managing through are some supply chain issues and some initial manufacturing issues, and those are the issues that we're working through right now. And we're really focused on making sure that these initial experiences with surgeons are really good. And so that's the reason for the slower revenue this year. But then again, next year, we expect next fiscal year a really strong ramp.

Next question comes from Vijay Kumar at Evercore ISI.

Geoff, I had a 2-part product-related question. One on Micra, there was an FDA earlier this month on complications related to perforations. How should we think about Micra? Is that something The Street needs to worry about? And one on RDN, you expressed a lot of confidence in the outlook. I mean we've had a couple of trials where some of your peers have missed endpoints. Is your trial design different from your peer? Because when I look at your peer, they added a 4 drug, and that's when you saw the control arm improve. So if your trial design is similar to your peers, what is the confidence we have that your (inaudible) trial will have the primary endpoint a year from now?

All right. Thanks, Vijay. I'm going to turn this one over to Sean. But before I turn it over because both the Micra and the Ardian question fall in his world, I'll give you my short answer on Micra. Don't worry about Micra. Micra is doing really well. I'll let Sean provide a little more commentary on the FDA letter.

And then on Ardian, look, we're, and Sean will give you more details, but we're very confident about this. We've got a lot of data here. We've had a registry going for a long time. We're following a lot of patients, picking up a lot of data here. And I'll remind you that our trial wasn't designed to end early. I know some expectations got ramped up about it ending early. And we're confident on this one. And the patient preference, the FDA has seen the patient preference data, they work with us on this and patients really want this. FDA knows that.

And look, I've been out myself in the last couple of months talking with -- and in the last couple of weeks, especially talking to a number of our investigators and this -- look, this works. This works and patients like it. And the FDA knows that, and we're confident in our trial. But I'll let Sean give you some more commentary on that. Sean, do you want to chime in here? You got to unmute.

Sorry, Geoff. And Vijay, thanks for the question. I'd say, first on Micra, this FDA letter is more of just a reiteration about the importance of being mindful of implant safety. But the actual rate of perforation that we've seen in the continued access study, the continued (inaudible) study, which we just reported out to your results at the ESC is actually below what we showed in the preclinical work, in the pre-approval trial, and the overall complication rates for leadless pacemaking are about 30% lower at 2 years than what we see with transvenous. So there's certainly no concern here. And the customer reception has been really, really excellent and continues to be despite the letter of the FDA just emphasized.

And on the clinical trial front for Ardian, you are right. There are differences in the clinical trials. And we remain, as Geoff said, very confident that our ON MED trial is going to make a standpoint. I think what you're referring to is the RADIANCE study that was reported on the RADIANCE TRIO study, which at 6 months, they did a full titration of drugs to get patients to their goal. So that was part of their study design was after the primary endpoint of 2 months, they've added drugs on it until blood pressure went down. And that's kind of the point of renal denervation in general, is that you can get there without as many drugs.

And we saw something similar in the pilot study for ON MED, where we were able to forward titrate drugs after the primary endpoint and get people's blood pressure there without having to go to diuretics, which patients really hate taking. So yes, there's nothing to read through on that one. Their trial began in Japan and Korea was a little different. It was more like HTN-3, where they didn't control for medications. They had none of those types of controls. So that's more a legacy study design that didn't leverage the learnings that we got from HTN-3.

The next question comes from Larry Biegelsen at Wells Fargo.

So one on diabetes. The quarter was in line, but you took down the guidance. Why is that? What are your expectations for the timing of 780G and Guardian 4? And Geoff, we've seen a wave of spins recently. What's your view of spins in general? And do you see opportunities at Medtronic for spinning off noncore or underperforming segments?

Thanks for the questions, Larry. I'll take the spin one and then I'll let Sean take the diabetes one. Well, look, as we've talked about in the past, looking at our portfolio and capital allocation is a high priority. And this new operating model, the Executive Committee, so my leadership, the leadership team here, we spend a lot more time on looking at our portfolio and capital allocation than we have in the last 10 years since I've been here, that's for sure, orders of magnitude more time.

And look, there's -- we're always looking at our different businesses, including our high-performance businesses and high-growth businesses to make sure we're the right owner because I do think focus is important and making sure that you can provide the right amount of capital and are there synergies between businesses that matter. And we're always looking at this and debating this. And we've engaged our Board as well quite a chunk of our time and each Board meeting is spent on this as well.

So I do see opportunities. I'm not signaling anything. But I can tell you that this is something that we're constantly looking at. And I don't see ourselves as like a GE or a J&J that like dramatically different businesses. But it's -- I do think it's an opportunity for us over time. Sean, do you want to take the diabetes one?

Yes. Sorry, Geoff. My mute button was broken there. Yes, Larry, so nothing different than what we've been talking about all along. We've got really strong uptake of 780G and Guardians 4 Sensor outside the United States. In the U.S., we have just -- we're waiting for that approval to come through, and we've had very good interactive conversations with FDA.

I think we're making excellent progress there. But do remember that when we launch a new product in Diabetes, and there's a training element to that, that takes some time, so it pushes the revenue outward before it starts to gain traction. What we see in the U.S. as well, we're growing pump share right now globally. We do have a lot of patients that came out of the installed base. We have to kind of rebuild that installed base to get momentum going, and that's really going to be driven by the 780 with Guardian 4 Sensor launch.

The next question comes from Matt Taylor at UBS.

All right. I had kind of 2 small follow-ups. One on the overall environment. When you're talking about these COVID impacts and staffing shortages, it sounds like you've seen things get a little bit better in November. And I was just wondering if you had an hypothesis as to why that was. And could you give us more of a flavor for how much the improvement has been sequentially?

Sure. On the environmentals, yes, so like we said in the commentary, each month throughout our quarter, throughout our Q2, was better than the next. We didn't quantify that, and it got better into November. But the procedures have bounced back, but not as quickly as prior waves and not as fast as we hope. There's definitely -- it's definitely a fluid situation, and it's gotten a little bit harder, more difficult to predict, right?

Before, it was more of an epidemiology discussion around COVID cases and the severity of them and the impact to ICU beds. Now you've got this critical staffing shortage in our -- in hospitals around the world. I mean, really particularly more so in the U.S., though, particularly this nursing shortage you hear about. And that's a little -- that's been a little bit more difficult to predict. And I think that's the thing that I'd say surprised us a bit last quarter.

And then finally, you've got some supply chain issues, which for us have been manageable so far. But as time goes on, that gets more difficult. So we took, I think, Karen, walked you through the guidance, I think we took a conservative approach here, particularly for our Q3 guide on that. But it's difficult to quantify all these things working together here.

The COVID cases jumping back up like you've heard about in Europe, nursing shortages in the U.S. and then global supply chain issues. I think the hospitals are doing a good job managing the headwinds they have. And I think we've done a pretty good job. Our team has done a really good job on the supply chain issues. During COVID, we were able to build up inventory on some of these critical products. But as these issues drag on, it becomes more challenging, and that's why we've taken, I think, a bit of an appropriate position given the uncertainty for our Q2 guide -- or Q3 guide rather, sorry.

And maybe I could just ask a follow-up, supply chain. You talked about some of the issues with Hugo and the impact on the (inaudible) revenue. Do you have any thoughts on how quickly that can resolve and what kind of contributions you should expect in the subsequent years versus the prior guidance that you had given?

Right. Well, so look, first of all, I'd say -- I should have mentioned this when I was answering Robbie's question. We did underestimate the supply chain, some of the supply chain issues and early manufacturer issues and a complex program like that -- like this. This is a complex program. And that's on us.

We should have probably provided a little bit more cushion there because we really, like we've said all along, we want to make sure that we're optimizing the customer experience here. So in terms of how long this goes on, well, in terms of like, first of all, like we said, we're still having double-digit revenue this year, double-digit millions. And we didn't -- we're not quantifying the next year. But I'll tell you this, it will be a very healthy ramp-off this year.

So like I said before, because we are -- cases are continuing, demand is building, we're continuing to get new regulatory filings that we filed for and expect approvals and starting our U.S. IDE soon. So there's a lot of activity going on here, a lot of good things, a lot of good feedback. And we just appropriately are optimizing, in my opinion, the end user or the customer experience here. And FY '23 will be a strong year for the robot.

The next question comes from Cecilia Furlong at Morgan Stanley.

I wanted to ask just on Hugo as well. RDN, the expenses you talked about previously, the $400 million this year, just how we should think about realizing that this year versus what gets pushed into next year? And combined with that, just how we should think about expense ramp in '23 -- fiscal '23 associated with your other pipeline products.

Yes. Thanks, Cecilia. I'm happy to take that. So the $400 million operating profit drag that we talked about earlier this year was not just Hugo. It was both Hugo and Ardian, and the important investments we're making in those big product launches for us. And so we will continue to have more expense on those products in FY '23. It is too early to give you a signal because we still have 2 quarters to go this fiscal year, and we're just beginning our planning process for next fiscal year.

The next question comes from Matt Miksic at Crédit Suisse.

Great. So lots of things we could sort of ask after. But if I -- just to take one question. I'd maybe come back to the staffing question. And it sounds like, Geoff and Karen, you've taken a stab at the fiscal third quarter, which is obviously important calendar quarter for everyone in med devices given kind of the traditional Q4 push. And I just wanted to maybe ask you to talk a little bit about your confidence that we sort of see a turn after that? Or is this a Q3 impact, was an improvement into Q4? And then maybe what -- and I apologize because I know it's a terribly uncertain topic, but just what kinds of things would give you confidence that we do get past the staffing thing, say, as we get through the spring and into midyear next year.

Well, first on -- thanks for the question, Matt. I mean, obviously, the staffing issue is a hot topic. And I've been spending a lot of time with our team on this as well as our hospital customers. Look, these -- the hospitals are basically investing more in staffing. I mean that is, I think, one of the biggest issues here is them are the biggest opportunities. They're just -- they're paying more money for the staffing to get -- to incent people to come back.

And the other thing that I see the hospital is doing, where we're spending a lot of time with them is adoption on more remote capabilities and business models. I mean in our world, things like managing your cardiac rhythm patients using remote technologies, so you don't have to come back into the hospital and get their device checks. We're doing that remotely. And I can go down the list to other of our therapies, like another one would be, and it's not in the U.S. yet, but in the NHS and U.K., they're using our PillCam. They've accelerated the use of the rollout of PillCam to do colonoscopy, diagnostic colonoscopies for their patients because they've built up a long waiting list of people who are getting colonoscopy.

So I see hospitals, one, and it's not a sustainable situation, but short term, providing bonuses and incentives. And two, much more rapidly adopting some of, in our case, I mean, and they're working with other industry players as well to adopt things that are more remote, and they're prioritizing therapies that have less complications that result in less hospitalizations and return hospitalization. So I mean it's not an overnight solution, but they're aggressively working this.

I mean no one likes to cancel a TAVR case because there's nobody to monitor the ICU bed or cover the care. So nobody wants to do that. And so they're moving fast on this. And like I said, we're seeing progress here even in our results into November. But it is fluid, and that's why we've taken the approach we've taken on the guide. I don't know if you have anything to add, Karen, to that.

No? She's saying no. So I don't have more for you, Matt. This one is a tough one.

The next question comes from Joanne Wuensch at Citi.

A couple of things I'm curious about. Do you think that there's been a change in the way that consumers are looking at health care?

Well, I'm not sure if there's a question underneath the question. But yes, I think consumers have been much more engaged in health care. And this is something that's weighing into our strategy. You saw that we rebranded Medtronic here last quarter and gone to a different look in engineering in the extraordinary. That's part of a first step to us more aggressively directly reaching out to consumers and educating them about our therapies.

I mean things like Pillcam Genius, which I just talked about, things like cryoablation as a first-line indication for AFib. They don't want to be on these regimen of drugs. And so we historically have relied on our specialist physician partners like in the case of cryoablation on AFib, it's been electrophysiologists to kind of "build up our referral pathways in our markets."

Now I think given the changes in technology, the miniaturization, which leads to less invasiveness, the connectivity of our devices, the better efficacy, we're moving up in the line -- in the food chain here closer to first line, like I mentioned in AFib. And some of our businesses are already there, more of a consumer business like diabetes and pelvic health for overactive bladder. So you're going to see us more engaging consumers and directly.

And the reason we're bullish on this is, one, like I said, the therapies have changed, less invasive, more efficacious in some cases, just a better solution clinically proven than pharma, which is the typical first-line indication. The other thing that we're seeing getting to your question is, like I said, here's a proof point on consumers more engaging. Like on our Ardian trial, we -- this trial filled up really quickly, enrolled really quickly, all through consumers opting in through our digital marketing efforts in social media efforts in the Ardian trial, consumers self-enrolled. That's a first for us.

And so we are seeing much more engagement from consumers and their care. And through -- they're using the Internet and digital platforms to get that education, and that's changing our strategy.

The next question comes from Matt O'Brien at Piper Sandler.

As I look across the different segments on the surgical side, the one that's done the most from the first guidance that you provided last quarter is the cardiovascular business. And I get the whole staffing shortage issue. It's just a little surprising, TAVR, you can't delay those too long. So I'm just wondering how long that -- some of these pressures you think will last? I mean, is this something that's going to go deep into calendar '22 that you're going to continue to encounter in that segment? And then what can really kind of -- what can you do to help us sway some of these issues on the staffing side?

Well, look, it's -- like I said, it's hard to predict, Matt, the timing. But like I was just with one of our bigger customers in the South of the United States like 1.5 weeks ago, and they had a couple of -- and it was a cardiologist that had a couple of TAVR cases canceled that day. And there's a huge sense of urgency because of the nursing shortage. So they have a huge sense of urgency in correcting that issue.

And like I said, they are prioritizing moving nurses. First of all, they're getting more aggressive with their staffing strategies to attract and retain staff. They're reallocating resources around the hospital, the health system, if you will, to get more nurses into these critical care areas. They're pushing certain cases out to ASCs. We're seeing growth in surgical centers, where they need less staff to do these cases. So we're seeing them aggressively make these, I'll call it, reallocation of resources, and we're helping them as much as we can in these areas.

So I -- look, the -- like you said, you can't defer these cases. First of all, I don't know how -- I don't like -- I've never liked the term elective, I think it's more deferrable. And you can only defer some of these cases so long as you pointed out. And so people are innovating. Hospital systems are innovating here. And I just don't -- it's really hard to predict.

I mean like I said, last quarter, we underestimated the impact of the nursing shortage. Like I said, we're seeing improvement, but -- and we've taken a conservative guide in our fiscal Q3 in particular, but it's really difficult for us to provide much more specifics than that.

Matt, I might add. I know you're all trying to figure out how long this will last. And if you just look at -- if we just look at the recent trends in November, we saw some good upticks last month, particularly in cardio. And we don't know if that's because it's preholiday, pre-Thanksgiving, but we are seeing some good encouraging trends.

Next question comes from Chris Pasquale at Guggenheim.

Karen and Geoff, most of the focus in terms of macro headwinds has been on the U.S. so far, but some of the recent headlines that in Europe have been a bit concerning. Just curious what you're seeing in your European business over the past few weeks, whether guidance assumes any deceleration in OUS procedure trends during the third quarter?

Well, Chris, thanks for the question. And you're right, the Q2 was a U.S. story for us. I mean the other regions performed well, especially our emerging markets. We're seeing really strong growth in emerging markets.

But Europe performed well as well in other developed markets last quarter. Now in the last few days and weeks, you're hearing in Europe about certain countries pulling back on elective cases. I really don't see this to be long lived here, given the vaccination status in these countries, the high vaccination rates in most of these countries and other new therapies like the oral antiviral therapies coming online. So I don't see it taking too long there directly from COVID, and we've reflected that in our guidance.

The final question comes from Rick Wise at Stifel.

Maybe, Geoff,, just since I'm bringing up the rear here, one bigger picture question from you, and then I'll add a question for Karen. I mean you're obviously working hard to -- it's not exactly turn around Medtronic, but make Medtronic grow faster, be more profitable, be more innovative, execute better.

I'm sort of curious your reflections on sort of a big picture sense of do you feel that the challenges of COVID staffing and everything you're talking about today have slowed your personal mission to drive that forward. Obviously, you're highlighting innovation and all the new products, et cetera. But at a high level, I'm just wondering your evolving thoughts. And maybe shorter, Karen, if you could just talk us through a little more gross margin.

I mean, gross margins, despite the challenges in the quarter, better than expected. Maybe give us a little more color on do we expect that kind of trend in the second half? And do you feel more optimistic about the longer-term potential to expand gross margins as all these new innovations roll out?

Rick, well, thanks for the question. And maybe last but definitely not least here, and I appreciate the question. And look, I'm -- it's a great question. And I'm very bullish on where we stand, and I'll walk you through why.

I mean, yes, COVID in this nursing -- the critical staffing shortage like highlighted by this nursing shortage in the U.S. And just spending a lot of time talking about vaccines and vaccine mandates, yes, it is a bit of a distraction, but I am very happy about our bigger picture here.

We've -- one, what I really like is to structurally how we've made the company smaller on the front end, if you will, with these 20 operating units and the clarity that we have into the end markets and the dynamics, what the customers are really asking for, what the competitors are doing. And we've got a really good handle on our pipeline by each of these operating units. And we have gotten more aggressive in funding these businesses and holding them accountable to making the right choices and prioritizing innovation and innovating faster.

So I feel really good about that. And my team, we spend a lot of time looking at these operating units and making these judgment calls, what is the appropriate funding? What does a good pipeline look like how should we feel about the competition. And it's not just like me sitting around talking to an operating unit leader, it's my team, different portfolio leaders, even if it's -- the business is not in their portfolio, asking tough questions because every incremental dollar funding we put in one business is one less dollar we put in another business. So the rigor around this and the constructive debate and the diversity of thought coming from the different people, it's leading to better decisions and the energy route inside the company and around the company is palpable.

I mean we're getting -- our employee scores remain high despite all the burnout and everything and is affecting employees, but still we've got great scores and feedback. We're getting -- attracting talent like never before. We've had a 50% spike in our -- and people applying for jobs at Medtronic. The market share situation is going well.

And so look, we've got a lot to do here. We've got some big drivers that we've got to show. We've got to bring this robot program and ramp this. Already in -- we've got to get that data back and ramp that. We've got the diabetes turnaround. We're seeing -- we can see it. You can just see it off in the horizon. You can see the products doing so well in Europe and other parts of the world. We've got to get that in the United States.

But we're making this progress. And that's why I feel good. And culturally, you're seeing a level of competitiveness and accountability. So like this quarter, revenue didn't come in where we wanted, but we still had an operational beat on EPS and we're holding EPS guidance for the rest of the year. That's the kind of company that we want to be. Disappointed about the miss on revenue. There's some environmental factors. But quite honestly, I was hoping that we could overcome all of those. We weren't quite able to this quarter, but just so you get some color commentary on how we think about it, that's how we're thinking about it. And we're going to -- I know we're doing the right things.

We're going to stay the course. We're going to keep making these investments, keep holding ourselves accountable to being like the undisputed technology leader and growing above the market. That's where we want to go. And so optimistic about where we're going in that direction.

So with that...

Gross margin, I'm going to take.

Gross margin.

Yes. So -- and I just want to emphasize something that Geoff said before I go to gross margin, Rick. And that is despite the challenges that we've had from COVID, our R&D investment is not coming down. And we said at the beginning of the year, we were increasing that 10%, and we still fully intend to do that.

So we're offsetting our headwinds in a different way when it comes to delivering the bottom line. Also, on gross margin, yes, our gross margin was better than expected. We're really pleased with that. We're -- we've got a very concerted effort to improve our operations and to lead to better gross margin.

We're focused on getting our gross margin back to pre-COVID levels. And from there, at least sustaining it and hopefully improving it. And if you look at just the year-over-year, we're still focused on that 2.5 to 3 points of improvement in gross margin this fiscal year. And when I think about longer term, I would just say to you that nothing has changed from our focus on delivering that 5%-plus revenue growth and that 8%-plus bottom line growth. And I would say that includes next fiscal year in FY '23, even given some of these headwinds that we've talked about today.

Thank you, Rick. Geoff, please go ahead with your closing remarks.

Okay. Well, thanks, everybody, for the questions. We definitely appreciate your support and your ongoing interest in Medtronic. And we hope that you'll join us for our Q3 earnings webcast, which we anticipate will be on -- we'll be holding this on February 22, where we'll update you on our progress. And Ryan will kick off that call standing outside of our world headquarters here in Minneapolis, again, without a coat on. He's promised us that no matter what the weather.

So with that, thanks for watching today. Please stay healthy and safe over the holiday. And for those of you in the U.S., I'd like to wish you and your families a very happy Thanksgiving.