美敦力 (MDT) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Medtronic First Quarter Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Ryan Weispfenning, Vice President, Head of Investor Relations. Please go ahead, sir.

Thank you. Good morning, and welcome to Medtronic's Fiscal Year 2021 First Quarter Conference Call and Webcast, Geoff Martha's first quarter as Chief Executive Officer.

Another first today is that we're presenting our prepared remarks by video. We hope that you'll appreciate this new format, and please let me know if you have any feedback.

Today's earnings call should last about an hour. Geoff, along with Karen Parkhill, Medtronic Chief Financial Officer, will provide comments on the results of our first quarter which ended on July 31, 2020. After our prepared remarks, we'll take questions from the analysts.

Before I turn it over to Geoff, here's a few things to keep in mind. Earlier this morning, we issued a press release containing our financial statements and a revenue by division summary. We also issued an earnings presentation that provides additional details on our performance.

During today's prepared remarks and Q&A session, 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 given risks and uncertainties, including those related to the impact COVID-19 has had and is expected to continue to have on our business. 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 year-over-year revenue comparisons mentioned during this call are given on an organic basis, which adjusts for 3 things: First, the inorganic impact of our Titan Spine acquisition; second, foreign currency; and third, the extra week that we had in the first fiscal month this quarter compared to the first quarter of fiscal year 2020. The extra week is a result of our 52-, 53-week fiscal year calendar which results in an extra week every 5 or 6 years.

Finally, reconciliations of all non-GAAP financial measures can be found in the attachment to our earnings press release or on our website at investorrelations.medtronic.com.

With that, I'll turn it over to Medtronic Chief Executive Officer, Geoff Martha. Geoff?

Okay. Thanks, Ryan, and I appreciate everyone joining us today. But before we dive into our Q1 results, I want to once again thank the frontline health care workers who continue to fight COVID-19 every day. We are thankful beyond words for your sacrifice and tireless resolve.

I also want to acknowledge all of the Medtronic employees who have gone that extra mile to support our customers and patients during this difficult time. Thank you for showing that our mission, written 60 years ago, still inspires us and really defines who we are as a company.

I also want to acknowledge the wildfires burning in Northern California. Medtronic has been a long-time member of the Santa Rosa community. And while our operations aren't currently affected, our thoughts are with those heroes battling these terrible blazes and the people affected, including some of our employees. We hope for a quick containment, and we're standing by, ready to assist.

Okay. Now let's switch gears to Q1. Our results reflect a very strong recovery from the depth of the pandemic that we saw back in April. Procedure volumes began to recover this quarter in multiple markets around the world, and we drove market share gains in a number of our large businesses. Our revenue declined 17% on an organic year-over-year basis. And our adjusted EPS of $0.62, while down 51%, was well ahead of expectations.

We've seen a faster than expected recovery. Our pipeline is kicking in, and we're increasing our cadence of tuck-in M&A. But most importantly, we're finding a new gear at Medtronic, and we're becoming a more nimble and a more competitive organization. And in the coming weeks, you're going to hear more from me on this topic as we begin to outline the new Medtronic.

When the pandemic first hit, we had to postpone our biannual Investor Day originally scheduled for June. Well, today, we're announcing that we've rescheduled the meeting, and we're now going to host a virtual meeting with you on Wednesday, October 14. We're going to use that opportunity to lay out where we're headed, including a deeper dive on our pipeline now that it's coming to fruition as well as the actions we're taking to simplify the company. So we look forward to being with you, virtually at least, on October 14.

Now I'd like to do something a little different than our past earnings calls and lead with a discussion of market share. Collectively, our results in the month of June were stronger than many of our competitors, and that strength continued into July and now into the first few weeks of August. In some businesses, we're benefiting from the actions we took at the start of the pandemic to better partner with our customers. In other businesses, we're seeing the benefit of new product launches as our pipeline kicks in across the company. In fact, we've already had over 130 regulatory approvals this calendar year in the U.S., in Europe, Japan and China. We've included a key approvals slide in our earnings presentation that outlines all of this.

We're gaining share in our largest businesses, like Spine and CRHF pacing and High Power. For example, our U.S. Core Spine business declined in the high single digits, which was better than the market. We estimate that we gained over 0.5 points of share in the second calendar quarter. Our differentiated offerings of enabling technologies, which includes robotics, imaging and navigation, combined with our implants, is reshaping the spine industry.

In CRHF, we estimate that we gained significant implant share in both the high and low power markets in the second calendar quarter, with the greatest gains coming in the U.S. Micra, our leadless pacemaker, grew in the low 40s globally and approximately 60% in the U.S.

While many have been focused on how Micra is expanding the market and taking share, our new Cobalt and Crome ICD and CRT-D platforms are also beginning to drive meaningful implant share in high power. We launched these devices mid-quarter in the U.S., and we're now working with a growing number of providers across the country who have not implanted with Medtronic in years. Electrophysiologists are choosing Cobalt and Crome for their unique AF and heart failure therapeutic algorithms, the high 40 joule output, extended battery longevity, heart failure management capabilities as well as their BlueSync remote programming and remote device management. These features provide layers of competitive advantage for us. We saw a 35% sequential increase in SmartSync accounts globally. And our proprietary remote control programming technology, which was launched in the previous quarter, saw a sixfold increase in adoption sequentially.

In addition, utilization of our TYRX absorbable antibacterial envelopes increased by nearly 9 points sequentially to 50% of our U.S. transvenous pacing and ICD implants as hospitals are focusing on minimizing patient rehospitalization rates during COVID.

We've also begun to return to sequential implant share capture in TAVR, one of our largest growth drivers. In the second calendar quarter, we maintained our share and market leadership in Europe and gained approximately 1 point of implant share sequentially in the U.S. as we opened new NCD accounts and saw great response from interventional cardiologists and cardiac surgeons to the bicuspid, leaflet immobility and hemodynamic clinical data that was shared at ACC in the spring.

In fact, we've received approval from the FDA just last week to remove bicuspid labeling limitations for low-risk TAVR on the strength of these data. This labeling change complements the approval we received earlier this summer as the only CE Marked TAVR system with a bicuspid indication for intermediate-risk patients. These are important regulatory milestones given the large size of the bicuspid patient population, including 60% of the low-risk population.

I'll also point out the share gains that we're seeing in Pain Stim business within neuromodulation, where we've been rolling out our new DTM therapy. The superiority data that we have for DTM is resonating in the market. We're taking advantage of this by focusing on customers that either don't use Medtronic devices or split their business across multiple companies, and we're having great success with this strategy. In fact, almost half of our DTM implants in the quarter occurred with these type of customers. And equally important, our SCS trials, which are a predictor of our future implants, were ahead of our expectations and even caught up to prior year levels in June. This bodes really well for our Pain Stim business going forward.

So while we're driving share gains in many important businesses, there are also areas that we need to improve. In DBS and Pelvic Health, while we lost share in the quarter, we're very bullish on where we're headed. In DBS, we received FDA approval for our Percept PC deep brain stimulation system with BrainSense technology in late June. Percept is the first DBS to record brain signals while delivering therapy, and we expect this to drive share gains in this high-growth market going forward. In fact, we believe this is the beginning of a multiyear run in DBS with our directional lead launching next year followed by a closed-loop DBS system. We're redefining the standard of care and creating a significant technology gap between us and our competitors.

In Pelvic Health, we just received FDA approval for our InterStim Micro device which has important features over the competition. Our device is 50% smaller; it recharges far faster; and importantly, the recharger doesn't need to be perfectly aligned for a successful charge. Additionally, Medtronic is the only company to offer physician practices the choice of recharge and recharge-free, and this is very important in the neuromodulation space. The physicians' feedback on our InterStim Micro rechargeable product has been universally positive. And there are several early indications that our share in the U.S. is rebounding quickly, much like we saw in Europe following the Micro launch earlier this year. In just a few weeks, we're winning back accounts, and we're seeing cases our competitors' device is being explanted and replaced by Micro. We've been waiting for this. Patients now have the ability to choose a smaller, better rechargeable product. Physician practices prefer to deal with 1 company, and our team is enjoying taking back the share.

Finally, in Diabetes. Look, we're missing out on the better growth of this market and nobody at Medtronic is comfortable with this dynamic, and we're pushing on several fronts to advance our technology. We're actively increasing both our near- and our long-term growth opportunities through increased organic investment, innovative funding with our recently announced Blackstone partnership; and inorganic activity, highlighted by the announcement earlier this month of our pending acquisition of Companion Medical. Companion's smart pen technology expands our ecosystem to include the multi-daily injection portion of the diabetes market with a patient population that is nearly 12x larger than that, that use insulin pumps.

But make no mistake, we are still very focused on regaining technology leadership and the pump and the sensor market. However, we're also going to meet patients where they are and provide them with real-time, data-guided support. We expect to build a system that combines InPen with our smart CGM technology, including our Nutrino and Klue artificial intelligence algorithms, all of this designed to deliver better outcomes and reduce the burden of managing the disease for MDI patients.

See, Companion is just one more example of how we're going on the offensive as a company through an increased cadence of tuck-in acquisitions. In fact, in addition to Companion, we've done 2 other major tuck-in acquisitions this calendar year with Digital Surgery and Medicrea. Combined, these 3 deals total approximately $1 billion in total consideration.

Data and analytics are the next big frontier in surgery. That's why we acquired the pioneering technology company, Digital Surgery, the leader in surgical artificial intelligence. We're integrating their technology into our soft tissue robotic-assisted surgery system and also intending to use their surgical video management and clinician decision support solutions beyond robotics. In fact, we plan on a limited launch this fall for the Touch Surgery Enterprise, which is an extremely easy-to-use surgical video capture solution paired with a computer and connected to the cloud.

Medicrea, a pending acquisition we announced last month, has differentiated technology that incorporates artificial intelligence into surgical planning for spine cases and then uses the plan to create personalized spinal implants. With Medicrea, Medtronic will be the first company to offer an integrated spine surgery solution that includes AI-driven surgical planning, personalized implants and robotic-assisted surgical delivery. This further extends our competitive advantage in Spine.

We will continue to use the strength of our balance sheet to supplement our organic growth and help drive increased and sustained revenue growth into the future.

Next, let's turn to our pipeline, which is not just a share-taking pipeline, it expands the total addressable market for Medtronic as we intend to bring innovative technology to large health care opportunities such as hypertension and cancer screening.

So starting with our Cardiac and Vascular Group. I've already mentioned the impact that our recent launches of Micra AV and Cobalt and Crome are having in our CRHF division. But in addition to that, our next-generation cardiac diagnostic, LINQ II, received FDA approval in the quarter. And we began the limited U.S. release and expect the full market launch by calendar year-end.

In our Cardiac Ablation Solutions business, we started the European limited release of our DiamondTemp cardiac ablation system with its unique closed-loop, temperature-controlled RF system. And in June, our Arctic Front Advance cryo system became the first ablation system to receive FDA approval to treat patients with persistent AF. And this Saturday, results from our STOP AF First trial, which studied our cryoballoon as a first-line treatment for paroxysmal AF, will be presented virtually as a late-breaking trial at ESC.

And in our Coronary business, our Resolute Onyx drug-eluting stent became the first and only stent to receive CE Mark for 1-month DAPT treatment for high bleeding risk patients. And we expect FDA approval for this differentiated labeling later this calendar year.

In CVG, we also resumed a number of important clinical trials that were on hold due to the pandemic, including our pivotal trials for our extravascular ICD, our Intrepid transcatheter mitral valve, our PulseSelect pulse field ablation system and our Symplicity Spyral renal denervation system.

In our ON MED renal denervation trial, half of the sites have resumed enrollment, and we're aiming to complete the trial and present the data next calendar year. We're in the lead with Ardian, and this represents a multibillion-dollar opportunity to better treat the millions of patients around the world who suffer from hypertension.

As I've already mentioned, we're now launching a number of products across the Restorative Therapies Group, like the DTM spinal cord stimulator, our InterStim Micro sacral nerve stimulator and our Percept PC deep brain stimulator. Look, RTG is on a roll, and we expect these products to drive growth and take share going forward. And we intend to keep the RTG momentum going well into the future. We're making large investments in new products for neurovascular, for ENT and for enhancements to our Mazor X spinal robotics system.

In Diabetes, we continue to execute on our near-term pipeline. We're on track for the MiniMed 770G approval later this summer. We've received CE Mark approval for our MiniMed 780G advanced hybrid closed-loop system, and we'll launch this fall. We also continue to make meaningful progress on our sensor pipeline. Our U.S. pivotal trial for Synergy is now underway. Enrollment is going well, and we're getting great feedback on this disposable sensor that is 50% smaller than our current product.

In our Minimally Invasive Therapies Group, we continue to make progress on bringing our soft tissue robotics system to market. Our final validation and verification testing is going very well, and our surgeon feedback continues to be positive. On the last earning call, we told you that our time line had been disrupted by COVID-19, but we've been managing through this and mitigating the impact to our time lines. In fact, we expect to be in a position to file for CE Mark and U.S. IDE approval in the first calendar quarter of 2021. Now COVID could change that, but we thought it was important to update you as to where we are today and let you know that we have a high level of confidence as we move towards commercialization.

In MITG, we've also been rapidly developing new solutions to treat COVID-19, including adding remote management capability to our Puritan Bennett 980 ventilator, integrating Nellcor pulse oximetry sensors with Vapotherm's closed-loop high-flow ventilation system, and enhancing our Vital Sync remote monitoring solution to allow caregivers to remotely monitor our pulse oximetry and our capnography devices through a mobile application.

Many of these features, they were developed in days and weeks, which in the past might have taken us months and quarters. But because we found new ways, we're moving faster. We're partnering with others, whether that's on technology development or in supply chain relationships. We're working with our regulators to ensure they have everything they need to streamline their decision-makers. And our own people are stepping up across the company. As one example, we increased our internal ventilator production fivefold in a matter of just a few months, from 200 a week to over 1,000 a week.

This is what I mean when I say Medtronic is finding a new gear. We've been operating with a high sense of urgency, and we're going to carry this forward. I've discussed in the past how our organization needs to simplify and become less bureaucratic. In the coming weeks, you're going to hear more about the actions we're taking to become a more nimble and a more competitive organization, empowering our business units while also allowing them to take advantage of Medtronic's global scale. I'm really excited about this direction. And I'm convinced that by empowering our general managers, we can become more competitive, we can accelerate our innovation, we can serve our customers better and we're going to unlock a lot of value for our shareholders.

So with that, let me now ask Karen to take you through a discussion of our first quarter financials and our outlook. Karen, over to you.

Thank you. As Geoff mentioned, our first quarter organic revenue decline of approximately 17% was better than initially expected and an 8 point improvement over last quarter.

CVG and RTG, in particular, had double-digit improvements from their fourth quarter decline. Within CVG, Cardiac Rhythm & Heart Failure improved the most, declining in the mid-teens, thanks to both rebounding procedures and share capture from new products. And within RTG, Core Spine and Pain Stim had strong sequential improvements with the bounce back of these more deferrable procedures in the United States.

I would note that our organic revenue decline excludes the benefit we received from an extra week of sales in the first fiscal month of the quarter, which we estimate added approximately $360 million to $390 million in revenue, less than our extra week would have been without a pandemic. But it's important to note, this benefit was offset by our plan to reduce customer bulk purchases.

Hopefully, you'll recall from prior earnings calls that we intended to use a good portion of the benefit from this extra week to reduce the practice of customers placing large bulk orders as we're working to better balance these across the quarter. We began this process earlier than planned due to depressed demand with COVID in the fourth quarter, and we still had some residual reduction in customer inventory levels this quarter. As we look ahead, the vast majority of the bulk reduction is behind us. There are only a small number of areas, such as our TAVR business, where we've been transitioning to a consignment model in select U.S. accounts and where we should see another quarter or 2 of modest headwind.

On the bottom line, our adjusted EPS was $0.62, a decline of 51%, including an estimated benefit from the extra week of approximately $0.06 to $0.10. As our revenue improved throughout the quarter, we saw a strong flow through to our bottom line, resulting in EPS well ahead of expectations.

That said, with the decline in revenue, we continue to see deleveraging down our P&L. Several of our plants ran at less than full capacity, resulting in a larger period expense of our fixed overhead costs and a decline in our gross margin, as we expected. We also had increased SG&A and R&D spend, as I signaled last quarter, given both the extra week and the increased investment we are making in our pipeline and product launches. As a result, our operating margin was 16.5%, down 12 points year-over-year, but an improvement of 40 basis points from last quarter.

Turning to our balance sheet. Our financial position is strong with ample liquidity to act on opportunities. We remain focused on investing both organically and inorganically through tuck-in acquisitions and minority investments to drive our long-term growth strategies. We've increased our cadence of M&A and we're increasing our level of R&D investment with partners like Blackstone Life Sciences, who will invest more than $300 million over the next several years, to help us accelerate specific pump and CGM programs in diabetes. These creative strategies will enable us to accelerate our planned investment and our growth. I view this as a key win for our company; the patients we serve; and you, our shareholders.

Turning more to the macro level. We expect both organic and inorganic investments to fuel a longer-term revenue growth acceleration, creating strong returns for our shareholders, supplemented by our growing dividend. As an S&P Dividend Aristocrat, we've increased our dividend for 43 years, and our current yield of 2.3% is in the upper quartile of S&P 500 health care companies.

Looking ahead, the uncertainty of the COVID-19 pandemic continues to make it difficult to provide our traditional annual and quarterly guidance. However, as we shared last quarter, we intend to be as transparent as possible to help you understand how we're thinking about the trajectory of our business.

We've experienced a faster-than-expected recovery. On the top line, May was better than April and June was better than May, and that improvement has continued into July and August. While there's still uncertainty regarding the recovery, if these trends hold, we would expect our second quarter organic growth rate to improve at a rate similar to what we saw between the fourth and the first quarters, where the fourth was down 25% and the first declined 17%. From there, we expect sequential improvement in the third and fourth quarters, and we still expect to be back to normal growth in the fourth quarter on a 2-year stacked basis.

When we look at our second quarter expectations by group. MITG should be better than the company average, given continued increased demand in our Respiratory business and increased volumes in Surgical Innovations. CVG has the potential to be a little better than company average given its new product introductions. Diabetes is expected to perform roughly in line. And RTG could be a little below the total company given its higher mix of capital equipment sales, but we're still seeing some sequential improvement.

Looking at the P&L. We're investing to support numerous product launches, and we're investing in R&D programs to ensure our pipeline remains full. Despite the pandemic, we're not pulling back. Instead, we're focused on making the necessary investments to accelerate our revenue growth and ensure the long-term health of our company. Having said that, we could see a couple of points of sequential improvement in both our gross and operating margins in the second quarter compared to the first. And we expect continued margin improvement through the second half until we return to more normal margins some time toward the end of our fiscal year.

Regarding currency, the picture has improved with a weakening dollar. On revenue, assuming recent rates hold constant, our second quarter impact flips to a slight tailwind after 2 years of a headwind, and the full year benefit is now over $100 million. On the bottom line at recent rates, the second quarter headwind should be similar to the first, and the full year has improved by about $0.05 from the $0.20 impact I mentioned last quarter.

As I wrap up, I would want you to take away that whatever the recovery looks like, we intend to outpace our end markets. We're focused on competing and winning, and we have the industry's best and broadest pipeline, the resources and the people to do it. The future is bright, and I'm proud to be part of this team, driving our imperative to fuel our growth and also fulfill our mission, ensuring that millions of people around the world can benefit from our products and services.

Back to you, Geoff.

Okay. Thanks, Karen. I hope you got a sense today for our recovery trajectory as well as how we're changing at Medtronic, and we'll continue this conversation at our Investor Day on October 14.

During the pandemic, our entire leadership team came together to determine how we could better serve our customers and evolve our culture. We worked together to find this new gear, and we're on our way to becoming a more nimble and competitive organization. We're playing offense, and we're energized to use this moment when our pipeline is kicking in to expand our markets and take share. And importantly, we're driving towards faster and broader top line growth, not just as we emerge from the pandemic, but sustainable growth over the long term.

So with that, let's now move to Q&A. In addition to Karen and me, we also have our 4 group presidents: Mike Coyle, Bob White, Brett Wall and Sean Salmon, here to answer your questions. And as usual, we want to get to as many questions as possible, so please help us by limiting yourself to one question and, if necessary, a related follow-up. If you have additional questions, please contact Ryan and our Investor Relations team after the call.

Operator, first question, please?

Your first question comes from the line of Vijay Kumar with Evercore ISI.

Geoff, congrats on a solid [prints] here. I had one question and a follow-up. I'll ask them in the same question.

I guess it's interesting, you started your comments with a focus on market share, Geoff. One, is the implication here that Medtronic's focus on market share, the implication is that you guys need to be growing in line to above market -- end markets? Because I do feel like one of the better thesis is Medtronic is too big to grow. Is that about to change with this focus on market share? And what is driving this, right? Is this -- has something changed here internally to drive this focus on market share to see that being reflected in numbers?

And as a follow-up, I think a robotic time line, calendar first quarter '21. I think the ultimate time line was mid of this year, this 5, 6 months. I just want to make sure that was just purely a function of COVID and software issues, et cetera, that have been resolved. And what does it mean for robotic market share, right? If you're focused on market share across your segments, does it mean that Medtronic should gain its a fair share or perhaps more than fair share in that robotic surgery?

Okay. Thanks, Vijay. I appreciate the questions. On the first one regarding market share, you're asking why the focus, what's changed? We spent the last couple of years talking about our pipeline. And this has been a big focus on the company. And like we've talked about, our pipeline is the best it's been in a long time. And as we went through this CEO transition, I spent a lot of time with the team, on Zoom calls all the time. And we're determined to make this pipeline count, not just for patients and our customers, but for shareholders.

And so we feel that, sometimes, our market share is commensurate with our technology, meaning our technology should yield more market share. And this is an organizational focus that we want to take on in terms of just really focused on -- really a deeper focus on understanding the end markets and our competitors, what the competitors are doing. And making sure that we understand that and compete effectively.

And this isn't -- this is an organizational focus. This isn't just -- I'm not talking about our field. It's everybody. And understanding each one of these competitive battles that we face, first recognizing those, understanding what it's going to take to win and tracking them. And all these competitive battles add up, and there's no rounding error when it comes to one of these competitive battles.

So it is an enhanced focus on market share, and we felt like now is the time to do this given all the products that we have coming out. We want to make it -- like I said, we want to make the pipeline count, not just for our patients, which is first and foremost, and our customers, but for our shareholders as well. So I felt that was the moment to do this. And we're really excited about that.

And yes, the expectation is overall, in aggregate, to grow at the market or higher. And we haven't done that in the recent past. And so in some cases, we need to exceed the market growth and -- to make up for a couple of areas where we're behind. But the expectation for every single one of our segments is to grow at least at the market share. And we've made that really clear. And as you talk to people in Medtronic, I think that message is out there.

Your second question about the robot. Yes, I mean, the delays were driven by COVID. Yes, the software issues we've talked about in the past, we believe are resolved, and we're in the final validation and verification. And the testing has gone really well. We've got surgeons working on these robots. And like I said, the feedback is great, and we're excited. And we're going to hit our market release date here shortly. And what that means for us is that, that triggers the file -- or the ability for us to file, which we talked about in the commentary I mentioned, in calendar Q1 for both CE Mark and U.S. IDE.

So yes, we're -- we feel it has been de-risked. We've got a high level of confidence. And now the excitement is building inside the company and with our surgeons that are working on this. So we're excited.

And you asked about a market share forecast. Yes, I'm not prepared to give that right now. I mean, we're going up against a strong competitor. We're really excited about this. My time at Medtronic, I feel like we're in a position where you're defending high market shares from new competitors. It's going to be fun to be on the other end of that equation and coming at a well-established, 100% market share competitor, but coming at them with some great technology with the financial resources of Medtronic, a really energized field sales force. So we're looking forward to this.

And I'm not going to give out market share forecasts, but we're going to be a meaningful player in this market. Go big or go home, Vijay. We're going to be meaningful on this, and we're excited.

I love that, go big or go home. Congrats, guys.

Your next question comes from the line of Bob Hopkins at Bank of America.

Just one clarification and one question. On the clarification side, you mentioned talking about some disclosures you'll be making over the next couple of weeks about kind of changes at Medtronic. Is that all stuff that's going to come at the Analyst Day? Or are there disclosures coming before that? So that's just the clarification.

And then the question is, Geoff, I was really encouraged to hear your comments about improvements continuing into July and August. And obviously, Karen made those as well. It's a huge issue for Medtronic and for all of medtech because there is a lot of uncertainty out there. So Geoff, I was wondering if you could just make some comments on just what you're seeing out there in July and August in terms of kind of the rescheduled procedures versus new demand? And what you're hearing from hospitals and patients? Just any comments on the kind of the pace of the broader recovery would be much appreciated.

All right. Thanks, Bob. One, on the clarification, on the changes, these are changes we'll talk more about, like you mentioned, at our Investor Day. And I don't want to go too deep into them today. But the broad brush strokes are some structural changes that empower our businesses to make decisions and to be more -- and this is really getting at speed of decision-making, at being nimble and faster. And as you know, we're competing against a lot of focused -- smaller-focus companies, not just here, but in China and other places around the world. And then -- but at the same time, allowing these businesses to benefit from very specific and meaningful areas where our scale makes a difference, like technology platforms.

Any time our businesses are pooling from broader technology platforms in Medtronic, they're able to iterate on a much more consistent -- meaningful iteration on a much faster and consistent basis and also disrupt, like we did with -- what we're doing with Micro right now in the pacing space. Our manufacturing footprint to ensure a high-quality standard all the time at the right price, at the right cost levels. So things, technology, manufacturing, our regional scale as we move into some of these regions, these are all areas that we want to make sure our businesses can benefit from.

But in terms of disclosures, there's not going to be like disclosures before that. We'll be rolling this out to -- within the company over the next couple of weeks [and in] a month or 2. But I don't think there's going to be any formal disclosures on that until we get to our Investor Day when we talk about it.

And in terms of your question around the market improvements, it is encouraging. A couple of comments there. First, there's a big difference depending on the therapy or product area and the business that we're in. We do have a wide range here. Things that are more urgent like neurovascular, things that are more selective like some of the areas [in RTG] like Pelvic Health or something like that.

We're seeing, by country, it's different. But we're seeing a much -- we've seen much -- continue to see a much sharper recovery in the United States and Europe. China has been pretty steady. But the whole pile of geographies and all of the therapy areas, all of them are improving. And we're seeing sequential month-over-month improvement. I think the last time we had an earnings call, we were talking about how things ended in April and we had some momentum into May. Well, that every week, it's got -- every month, it's gotten better, into June, July and into the first couple of weeks of August. We continue to see improvements here.

And then in terms of the patient fear, look, the surveys that we've seen and conducted, that has been -- it's still out there. But it's been, in my opinion, mitigated quite a bit.

And the hospitals. I just talked to another hospital CEO on Friday, and this is in the U.S. context. They seem very committed to staying, keeping open for business and serving patients. And I think they also need it financially. And another shutdown, it's something they don't want to do.

And then, yes, the other thing that I think -- so these are all things that are going on out there. And we're participating in helping with patient fear, and where we've partnered with the American Heart Association, American Stroke Association. And we're working with physicians, we're working with -- but the other area I want to highlight is stuff that we're doing, right? Like I just mentioned, we're out there working with physicians and their offices and hospitals. We're out there, staying focused on our customers.

We're also helping them implement new technologies that really help in this COVID time frame, like our remote capabilities, especially in Cardiac Rhythm right now. That's making a big difference. We talked about the ventilator space. I mean, these were physician-specific requests that came from individual hospitals around product features. And our response to this and how fast we move, this makes a big difference. And these stories circulate within the hospital, and the C-suites have been more engaged with us.

And so between the market coming back, but from a geography perspective, from a therapy perspective, and the actions that we've taken over the last couple of months, we're in a way better position than we thought we would be just 3 months ago, and we see the continued momentum.

Now everybody is a little nervous about the fall with the back to school. I just dropped off 2 college students in the last week. And -- but like I said earlier, I do think hospitals are committed to staying open. And we're feeling better about what was maybe a potential disruption. We don't feel -- we're not as worried about it as we were a couple of months ago. Hope that helps.

Your next question comes from the line of David Lewis with Morgan Stanley.

Just 2 for me. I'll ask right up front for Geoff and Karen.

So Geoff, I just -- I know it's early, but what's the profile Medtronic should aspire to relative to the 4% and 8% top and bottom you gave back in 2018? And if we can't get specific numbers, I'm just sort of curious, should investors expect that both of those numbers should move higher? Or is the focus more on revenue for the intermediate term?

And then, Karen, just kind of related question. There's been a series of off- and on-balance sheet transactions, most notably the recent M&A and Blackstone. So that clearly suggests the company's desire to accelerate growth. What does it tell us, if anything, Karen, about sort of the flexibility of the P&L in terms of margin opportunities going forward?

Well, maybe I'll take a stab. David, first, thanks for the question. Let me take a stab at it, and then I'll hand it off to Karen.

But on the 8% EPS, now we're committed to that, right? So talk about market share, we talk about growth. Let me be clear, it's not at the expense of that 8% EPS growth, it's -- and our free cash flow conversion, which we've worked so hard to improve over the last couple of years. So we're not going to take a step back there. We're committed to that. And as we grow -- as we grow more, right? As we grow at the market more in aggregate, which would be a meaningful improvement over the last couple of years, and take share, the growth will get higher. We'll have some optionality of what to do with that incremental earnings, but we're committed to that 8%. And we'll decide, as that growth gets there, what we're going to do with the extra EPS. I'd like to invest some of it, and we'll see what we do with the rest here.

But with that, maybe I'll turn it over to Karen for comment.

Yes. Thanks, Geoff, and thanks, David, for the questions. Yes, we have a strong balance sheet, and we have been using that to help our growth. And we've supplemented that, as you mentioned, with partners like Blackstone to help us accelerate that growth.

In terms of the flexibility of the P&L for margin going forward, what I would say is that our bias is going to be on driving revenue acceleration higher and keeping it consistent. And so given that bias, we will be focused on continuing to invest to ensure that our pipeline remains as full as it has been in the recent past.

So could margins improve? Yes, a little bit, but we're more committed to driving that revenue growth acceleration and maintaining a bottom line EPS of 8%-plus than we are on dropping a significant amount to the bottom line. We'll be focused more on investing. Hope that helps.

Super helpful.

Your next question comes from the line of Robbie Marcus with JPMorgan.

And I'll be the first to tell you I did kind of like the video format. It was good to see you after being virtual for so long.

Maybe on the question, and I'll kind of loop 2 in here. The first is we're seeing you year-over-year increases in R&D while we're seeing most of your peers down year-over-year. You're clearly leaning in on R&D. I was wondering, where are these dollars going? What are the projects that you're seeing and you're investing in?

And then maybe along those lines, you're also clearly investing heavily in Diabetes. There was speculation a while ago, maybe you'd exit that business. It looks to me less likely given how much you're putting into resources here. What's the latest thoughts? You have new management. Lots of investment there. How should we be thinking about this business? And is this a 3- to 5-year turnaround story? Or is it something we could see in the shorter term?

Okay. Thanks, Robbie. A lot into those questions there. Well, first, thanks for the compliment on the video. I'm glad it went well. My wife was skeptical, but I thought it was okay. We'll see how we go going forward here.

In terms of the R&D increases, yes, we want to put more into R&D both -- and be creative. And when I look at R&D, we're looking at traditional R&D of our income statement. These creative third-party partnerships like Blackstone, which have a very good return on them, are also something we want to use. And are inorganic, I mean, because most of what we're buying is technology -- technology-oriented tuck-ins, which is -- which are all somewhere on their path to commercialization and/or just been commercialized.

So all of this gets back to investing in areas in our business. We just have a lot of great ideas. The old idea that our eyes are bigger than our stomach, and we want to get more R&D capability here. We've got -- just to list some of the products. We're talking about our pipeline today that's coming out, right? But the R&D -- and there's some R&D that needs to go into sustaining that and iterating that, things like spinal robotics and things like that. I mean, we're not done, we're just getting started. So there's a lot more to go into there.

But some of the things that are on the pipeline, like Ardian, that's a multibillion-dollar opportunity there. The EV ICD, I'll start with cardiac here. Pulse select -- the pulse field ablation. I mean, just those 3 are, I'd call, more medium term for us and are very exciting and I think could use more investment to speed up and drive bigger impact.

And in RTG, there's always more to invest in, in neurovascular. Brett Wall and Stacey Pugh make sure of that. There's lots of products there, and that's a high-growth area.

Like I mentioned, DBS, we have the directional lead system coming out. We want to invest in closed loop. I just think, look, neuromodulation is a big growth opportunity for this -- for the industry, for the company. And I think it's going to have a huge impact on patients.

And then MITG, obviously, the soft tissue robot, we talked about the time line there. But we still have to commercialize that. That's going to take some investment, may not show up in the R&D line, but we need to invest there. And we mentioned in the commentary, some of the products starting to come out from our Digital Surgery acquisition, this Touch Surgery Enterprise. We're very excited about that as we move -- we believe we're leading in robotics, soft tissue robotics, the AI side of it. And so there's a lot of opportunity there.

And then of course Diabetes. We've got to catch up on the sensor side. And we're -- I don't know if everybody picked up, but we're really excited about the sensor pipeline here. It's -- I wish it were happening even faster, but it is accelerated from what we -- we're well into the Synergy trial -- enrollment, rather, and getting great feedback on that.

So there's lots of opportunities for R&D investment. And that's probably, I don't know, 70%, 80% of what we're talking about internally is this pipeline and how do we feed it, how do we speed it up? So very excited about that.

And then speaking on Diabetes, you said 3 to 5 years. I'm not even going to ask Sean this question because I know the answer. It's not 3 to 5 years. It's going to be faster than that. And I think when we get 780 out there, it's going to be a big step forward. Like I mentioned, our sensor pipeline, which is the weak spot here, that is -- we feel good about that. And again, I wish it were faster, but it isn't 3 to 5 years.

So -- and the rumors about Diabetes, they didn't come from us. I mean, we're committed to this, and we've never blinked, and we're not going to.

Your next question comes from the line of Joanne Wuensch with Citibank.

As has been communicated with investors this morning, one of the themes that's coming across is a sense of being reinvigorated or "a different Medtronic." So what you see, Geoff, because you're relatively new in the CEO role and you get to do it in the midst of a pandemic. What do you see that is different that how you're going to make your mark on the company?

And on the other side of this pandemic, how do you think Medtronic is going to look different? Because it seems to me that the way Medtronic has approached managing its employees during the pandemic may be somewhat different than the way others have.

In terms of reinvigorated, I think we do feel reinvigorated, and it's in large part because of where we sit right now as a company. I mean, this pipeline is exciting, and it's something that we've been investing in for a long time.

And look, the COVID has been -- has extracted a huge human toll and an economic toll. But -- so I'm looking for bright spots coming out of COVID. And one of them has been the ability for, during this time, our leadership team to sit down together, like I said, a lot of Zoom calls and some face-to-face, but -- and really look at where we are as a company and take a step back.

And what we're seeing is way more opportunities than challenges. But top of -- I mean look, we've got our mission, especially during a pandemic like this, really shows how valuable that mission is, and it helps us clarify our decisions and really helps us, in our opinion, stand out relative to others in how we act and how we show up. And so we've always had that, and that has shown even just how -- we're reminded how powerful that is during a crisis like we face now.

We've got a very -- we've got great technology, great market positions. We've got a very experienced leadership team, and I come back to this pipeline. And so when we started to look at all this, we feel like there's just a huge opportunity. We want to make this pipeline count. And so that's why we're excited. And if it feels like we're reinvigorated, that's good. I don't know if I want to use that word, but I can tell you that we're excited because of all this and the opportunity.

And it's not just like, hey, here's the pipeline, and it's going to work its way through. And then there's like a -- then there's peaks and troughs. That's not it. We're refilling this pipeline. I just mentioned all these -- I just went through the last question, all of these things about the R&D, where we're putting it. There's so much to do, so much opportunity. So yes, we are excited. And that's why we also are focusing on this market share opportunity. We want to make this pipeline count.

And how we'll look different? One, we want to -- in the near term, we want to be growing at or above the market. So whatever the recovery is, it's hard to forecast. We're trying our best, as you guys are, to forecast recovery. But we want to be on the leading edge of that and doing better relative to our competitors. And our pipeline is going to lead the way, and we're going to have great commercial execution here. And so that should be a meaningful increase to our growth relative to our competition. So that looks different.

And look, our employees have always had a strong loyalty and allegiance to Medtronic. But I think that's increased over the last couple of months as people realized what -- how much the mission means. But we still have work to do and working on things like what is our role here in some of social justice issues that are out in the communities that spill into our offices. And so you're going to see us more aggressive on those, taking stronger stands on some of those issues.

But over time, longer term, we want to put the tech in medtech. And we want to shift -- we want to pool in some of these digital technologies to change our offerings. And over time, we're very device-centric, in addition to the devices, we want to pull in data and analytics. And you start to see that in pockets of Medtronic, like with the Nutrino acquisition in Diabetes, the Digital Surgery, acquisition in MITG for the soft tissue robot. We're working with, partnering with companies like Viz.ai for stroke detection.

And so having our offerings be smarter and self-learning, and our offerings providing a lot of data and insights in addition to therapy back to our customers, I think this is an area that, that -- this is going to take some time, but this is something we're committed to.

Next question comes from the line of Larry Biegelsen with Wells Fargo.

And mine -- or for Karen. Just Karen, one clarification. How much of the extra week was offset by reduced bulk purchases in the quarter? And for my question, last quarter, you gave some helpful commentary on the exit rates in the last month. What did you see in July relative to what looks like about a negative 9% organic year-over-year growth rate you're guiding to in fiscal Q2? And can you get to flat or growth in fiscal Q3?

Thank you. Thank you, Larry. So in terms of the extra week, basically, all of it was offset by the reduction in customer bulk purchases. So the net effect was essentially very minimal.

In terms of the monthly trends that we're seeing, we're not going to give year-over-year monthly comparisons, and that's really because the reduction in bulk sales and the different number of selling days in the quarter can make that confusing. But I would want you to take away that our -- and Geoff talked about this, our average daily sales rate saw a significant step up in May and then again in June, and that continued into July and August. And we believe this trend will continue.

We've signaled that we believe our second quarter should see improvement roughly equal to the improvement that we saw between the fourth quarter and the first quarter. And just to remind you, the fourth quarter declined 25%, the first quarter 17%. That's a differential of about 8%. That's the kind of improvement that we would expect to see in the second quarter. And then we would expect to continue that improvement into the back half. And by the time we reach our fourth quarter, we would expect to be back to more normal growth when you look at it on a 2-year stacked basis.

I think we have time for maybe 2 more questions.

Our next question comes from Danielle Antalffy with SVB Leerink.

I second Robbie's comments on the visual, too. So thanks for that.

If I could just ask a question, Geoff, on the commentary around market share gains. And I'm curious, just more specifically, tied to sort of what you're talking about with the new infrastructure investments and things like that, that we'll hear more about on the Analyst Day, how much of this sort of reinvigorated effort around really gaining market share and being more aggressive is tied to things like that versus potentially having to build out further from a product perspective and innovate even more on the pipeline? And that's my only question.

Well, on the innovation side, I mean, like I said, we feel like we've got a great pipeline, the best we've had, and it's coming to fruition now. And we've got more out there in the medium and long term. But we're not ever going to be satisfied on our pipeline. I mean, innovation is the lifeblood of the company. So we're always going to want to invest more. And really just not -- ultimately, the ultimate judge here would be the level of innovation and the outcomes we can produce with these technologies, both for patients and economic outcomes for the health system. So that's the ultimate.

But we don't want to be outspent either. So we are investing more, using these creative, like the Blackstone partnership, using our balance sheet more, trying to get more efficient. We're always going to try to get more efficient in R&D. So we're never going to be satisfied with innovation. Omar used to talk about -- he talks about health care as being like a, by definition, an unlimited demand. As soon as you solve one problem, people want another problem solved, and they want it solved faster. So we're going to keep going on the innovation.

And the market share, it's really -- it's 2 things that we're going to need to do -- well, 3 things really. You need to have the products, right? You have the pipeline, which we've talked about. The other 2 areas that we've talked about is structurally allowing to help increase that innovation, allowing our business units to have more levers to pull, to be more nimble and faster to compete with -- the marketplace in medtech is pretty competitive.

Like I said, we face a lot of smaller and maybe more focused competition. And I don't really like this idea, well, they're smaller, so they should grow faster. I don't -- I'm not a believer in that. And so neither is our leadership team for that matter, and we're not accepting that. So we want to treat our businesses and give them the ability to compete against anybody, whether it's a big, well-funded or competitor with lots of technology or more established competitor or a smaller, up and coming competitor. We want to be able to compete with all. So making some structural changes to better position them for that.

And then the third is just the cultural piece, is just setting that expectation that we're always going to be a mission-driven company. We're always going to be an innovation-driven company. We're always going to be that company that's pushing the envelope here and starting new therapy areas like an Ardian. We're going to be that company. But we also want to be the company that is able to kind of hold the share in these markets that we establish; and in some cases, like soft tissue robotics where we weren't the first, to come in as a meaningful second. And I think there's room for improvement in the mindset of the company on competing like that. So that's a cultural.

So pipeline, always first. Some structural changes that we think we can work through without too much disruption here. And then the cultural changes around expectations on competing.

Well take the last question, Regina.

Our final question comes from the line of Raj Denhoy with Jefferies.

Wonder if maybe I could ask about Companion Medical. You talked about the potential for that product in the diabetes market. But maybe you could share a little bit about your internal projections for revenue growth for that and when it can start to be a meaningful contributor to your growth.

Well first on Companion, we're -- we haven't finalized the acquisition, so we're limited in what we can say. But Sean is the real champion and architect behind on that deal. And so maybe, Sean Salmon is on the phone here. I'll turn it over to Sean for some comments.

Yes. Great. Yes. Thanks for the question, Raj. Yes. So as Geoff said, the deal is not yet finalized, but the opportunity is very attractive. You heard Geoff's commentary, so there's about 12x the number of patients. It's -- we think by our modeling, it's about 13.5 million patients worldwide who are using multiple daily injections to treat their diabetes. And it's a very, very underpenetrated opportunity. So for us to go into that market and add value to those who either choose to be there or have to be there because of other considerations is where we want to meet those patients.

And this really dovetails very nicely into our improving sensor pipeline and adding the capabilities that we've added in the company over time, those building blocks for the powerful AI and data science capabilities, which we think when deployed against, knowing how much insulin you're getting at what time, you can markedly improve the outcomes for patients who choose to use multiple daily injections.

So that does a few things, right? We can capture more of the patients who are upstream and maybe move patients who get comfortable with technology into some other solutions that we have in our automated insulin delivery systems.

Great. And maybe just, Geoff, one follow-up relative to acquisitions broadly, right? So Companion and other kind of tuck-in deals you've talked about. Should one assume that you have no appetite for larger deals, or you continue to focus really just on the tuck-in side of things? Really just any broader thoughts there would be helpful.

Focus is on the tuck-ins. And the tuck-ins can get up to $1 billion or low billions. But that's the focus, is we've got -- that's the focus. We like where we are right now and the tuck-ins will help us. But we're not focused beyond that.

Geoff, would you like to conclude?

Okay. Well, thanks for the questions. And look, I really appreciate -- we all really appreciate your support and interest in Medtronic. And we're looking forward to presenting more details of our longer-term strategy at our October 14 Investor Day, and then updating you on our quarterly progress on our Q2 Earnings Call, which we anticipate holding on November 24.

So thanks for joining us today, stay healthy and safe, and have a great day.

Ladies and gentlemen, that will conclude today's call. Thank you all for joining, and you may now disconnect.