美敦力 (MDT) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Medtronic fourth quarter earnings conference call. (Operator Instructions) Please be advised that today's conference call is being recorded.

I would now like to hand the conference over to Ryan Weispfenning, Vice President and Head of Investor Relations. Sir, the floor is yours.

Thank you. Good morning, and welcome to Medtronic's Fiscal Year 2020 Fourth Quarter Conference Call and Webcast. During the next hour, Geoff Martha, Medtronic Chief Executive Officer; Karen Parkhill, Medtronic Chief Financial Officer; and Omar Ishrak, Medtronic Executive Chairman, will provide comments on the results of our fourth through and fiscal year 2020, which ended on April 24, 2020. After our prepared remarks, we will be happy to take your question.

First, a few logistical comments. Earlier this morning, we issued a press release containing our financial statements and the revenue by division summary. We also issued an earnings presentation that provides additional details on our performance.

During today's earnings call, many of the statements made 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.

Finally, unless we say otherwise, revenue rates and ranges mentioned during this call are given on a constant currency basis which compares to the fourth quarter after adjusting for foreign currency. References to organic revenue growth exclude the impact of our Titan Spine acquisition and currency. 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'm now pleased to turn the call over to Medtronic Chief Executive Officer, Geoff Martha. Geoff?

Thanks, Ryan, and thanks to everyone for joining us today. I hope everyone is staying healthy and safe. And our thoughts are with the many people who have been affected by the COVID-19 pandemic.

I'd like to recognize the incredible heroism, resolve and sacrifice of the frontline health care workers fighting COVID-19 as well as our employees who are supporting them. Many of these frontline health care workers are our long-time customers and friends, and we are continually inspired by their selfless efforts to care for others.

As has been said, this pandemic presented the world with an unprecedented challenge, which required an unprecedented response, including by our team at Medtronic. And I'm extremely proud of the way our employees have risen to the occasion and jumped in to help health care workers, governments and NGOS, and for the way they've continued to support their communities and their families.

Our top priority during this pandemic has been to ensure the health and well-being of our 90,000 employees and their families around the globe. Our employees have been impacted by this virus like everyone else. But I'm grateful for the way our people have continued to do their jobs and persevere through these challenging circumstances. Whether that employee is an engineer working on the next innovation breakthrough in our factories making critical life-saving products, a field rep, assisting a physician on the front line with a medical procedure, or any of our employees working virtually, we are all fulfilling the Medtronic mission.

We've taken a number of measures in our facilities around the world to protect our employees. And importantly, we've continued to invest in our employees during this time, including implementing reward and recognition programs for business-critical, on-site workers. We're also protecting our sales reps from significant impacts to their incentive compensation during this period. And we've developed an extensive emergency leave policy to provide temporary pay for employees who can't work remotely and are facing certain situations, such as home schooling, childcare issues or a positive COVID-19 diagnosis.

During the pandemic, we've been at the service of medical professionals and health care systems around the world, stepping up for physicians, hospitals and health facilities that are on the front line. We've developed and rapidly deployed new remote procedure support and remote monitoring solutions to reduce patients' and clinicians' exposure to the virus causing COVID-19. We've hosted dozens of virtual forums and medical education programs to help physicians navigate the challenges of the pandemic. We've also worked tirelessly to make sure our products and therapies are readily available. The most visible example of these efforts is the work we've done to expand our ventilators' capabilities and dramatically increase the ventilator production.

Physicians asked us if we could engineer a way to adjust ventilator settings remotely, outside of the ICU and away from the patient. So we partnered with Intel to develop a solution that we brought to the market in a matter of weeks. Furthermore, we're on track to increase our production of ventilators fivefold from pre-pandemic levels by the end of next month. We've enlisted help from others to accomplish this, including SpaceX, who is working to supply a critical valve for our PB980. And we continue to closely partner with key government authorities to allocate our ventilators to the communities that need it the most, including a recent focus on emerging markets.

But we understood that simply increasing our own production volumes would not be enough, so we did what Medtronic does. Consistent with our mission, we put patients first. We decided to make our PB560 ventilator design specifications available at no cost so other manufacturers can use these specs in manufacturing ventilators during the pandemic. Through this initiative, we're creating partnerships with large-scale manufacturing companies, such as Foxconn in the U.S., Baylis Medical in Canada, Vingroup in Vietnam, Walton Group in Bangladesh and Tata Group in India.

During this time of need, we've been supporting our communities. Since the start of the fourth quarter, Medtronic, along with the Medtronic Foundation, has pledged more than $36 million in monetary and product donations to nearly 50 nonprofit organizations to support health systems, patients and vulnerable communities around the world. If you're interested in reading more on our response to our employees, our customers and our communities, I encourage you to visit our website, medtronic.com/covid19.

Now let me turn to our Q4 financial results, which have suffered due to COVID-19. Our revenues declined 25%, both constant currency and organic. This resulted in EPS of $0.58, which was down 62%. These results are in line with the press release we provided last month, where we discussed the expected negative impact on our fourth quarter revenue resulting from a slowdown in procedures and the associated significant deleveraging that was expected to affect our earnings. They're also consistent with the impact seen across the industry. It's important to note that our quarterly results include an additional month of impact in April when compared to the quarterly results of our competitors on a calendar year cycle.

When we look at our Q4 revenue, the difference in our individual business results can be explained by 4 factors: The first was the mix of urgent procedures versus those that are more deferrable. Almost all of our businesses were affected by the decline in procedure volumes this quarter. Health care systems diverted their attention and resources to fighting COVID-19. Governments implemented restrictions on elective procedures, and people avoided seeking treatment even for emergency conditions. Our businesses that had a larger mix of products used in urgent procedures felt an impact, but they were far less affected than those with therapies where the procedure could be deferred longer.

The second factor was the loss of large bulk purchases near the end of the quarter. As you can imagine, the normal flow of these orders, which tend to be larger in April given our fiscal year-end, did not materialize. As I noted on our last earnings call, prior to COVID-19, we were already planning to reduce large bulk orders and balance them across the quarter, starting with our next fiscal year. With the pandemic, our efforts were clearly accelerated.

The third factor was centered around capital equipment. While capital equipment represents a small amount of our overall revenue, there are certain businesses that have a higher mix and felt the impact of hospitals and surgery centers delaying their capital evaluation and purchases.

The last factor was the degree to which businesses and products and services that played a role in fighting COVID-19 or had specific products and customers that were stocking ahead of the pandemic. This led to greater-than-expected growth in a select few of our businesses. So with these 4 factors in mind, let's look at our results by business group.

Our Cardiac and Vascular Group declined 33%. CVG's therapies tend to overall be less deferrable, but we still saw substantial declines in procedure volumes. Moreover, CVG felt a greater impact than some of our groups from the reduction in bulk purchases, with particular impact on CRM implantables, diagnostics and transcatheter valves.

Our Minimally Invasive Therapies Group declined 12%. MITG's revenue mix is weighted more to the middle of the deferrability spectrum, so it did experience a significant impact from the decline in surgical volumes, particularly in the Surgical Innovations and GI, which both declined in the low 20s. This was offset by growth in respiratory and patient monitoring as well as in renal care solutions.

In respiratory and patient monitoring, which was up mid-teens, we saw significant growth in airways and ventilators as we sought to meet the COVID-19-related patient needs around the world. We significantly ramped production, which led to ventilator revenue nearly doubling. We also saw strong correlation in demand for pulse oximetry and capnography, but the increased demand was offset by overall reduced demand for patient monitoring products, given fewer non-COVID-19 hospitalizations and procedures. Renal care grew high single digits, driven by access catheters and acute and chronic dialysis products as dialysis treatment continued throughout the pandemic.

Our Restorative Therapies Group declined 32%. RTG's therapies tend to be used in procedures that are more deferrable, including those in Core Spine, Pain Stim, ENT and Pelvic Health. RTG also was impacted by the reduction in customer bulk purchases and capital equipment purchases. RTG's Neurosurgery business, in particular, has a high mix of capital sales.

Our Diabetes Group declined 7%. The decline was driven by a delay in new patient starts on insulin pumps and due to the closing of physician offices as a result of COVID-19 as well as continued competitive pressure. This was offset by an increase in demand for diabetes supplies, including continuous glucose sensors and infusion sets, particularly in international markets.

Next, let's review our fourth quarter performance by geography, which I think is a particularly helpful way to analyze our results given the progression of the pandemic to different regions throughout our quarter. First, China declined 38% and experienced the impact of COVID-19 for the entire quarter. Our revenue in China declined 46% in both February and March. We started to see gradual sequential revenue improvements midway through March, and our April revenue improved to a decline of 21%.

In Asia Pacific, our revenue declined 13% as we saw the impact of the virus in many markets through the quarter, with the number of COVID-19 related cases peaking in some countries within the quarter. Korea declined 2% as COVID cases peaked in mid-March, and Australia and New Zealand declined 11%, with cases peaking in early April. Japan declined 14% as cases continue to increase as we exited the quarter.

In EMEA, our revenue declined 10%. Western Europe revenue was tracking with expectations through mid-March, when we started to experience a significant decline. Revenue in Western Europe declined 32% in April, driven by procedure delays and, to a lesser extent, fewer customer bulk purchases.

In the Americas, our revenue declined 32%, with the U.S. declining 33%; Canada, down 24%; and Latin America declining 15%. Like Western Europe, our U.S. revenue was tracking with expectations through mid-March before experienced significant decline, driven by a combination of procedure delays and the reduction of bulk purchases.

Turning to our pipeline. We think about the impact of COVID-19 in 3 categories: products that just received regulatory approvals over the past few months, products under regulatory review, and products that are in clinical trials or preparing to enter clinical trials.

Starting with the products that recently received regulatory approvals. The pandemic has interrupted some of our recent launches given the delay in procedures. This includes the European launches of our Percept PC deep brain stimulator, Interstim Micro rechargeable sacral nerve stimulator, Cobalt and Crome high-power CRM devices and the DiamondTempt ablation catheter. It also slowed the U.S. launches of our AV fistula indication in our IN.PACT Admiral drug-coated balloon, our DTM therapy in Pain Stim and our Micra AV pacemaker. It's worth noting that prior to the pandemic, Micra grew over 60% in the U.S. in both February and March.

The good news is that as procedures come back, we expect these launches to pick up steam. Moreover, we just received approval for Micra AV and our Reveal LINQ 2 cardiac diagnostic monitor in Europe as well as U.S. approval for our Cobalt and Crome high-power CRM devices, which we announced earlier this month. Our Cobalt and Crome offerings should be particularly valuable in the current COVID-19 environment as they are the first and only Bluetooth-enabled high-power devices in the U.S. that allow for distance programming and better remote monitoring.

Regarding the second category of products, those in regulatory review, the pandemic doesn't currently appear to be affecting the approval process. As a result, we're expecting a number of approvals this quarter, including U.S. approvals for our Interstim Micro sacral nerve stimulator, our Percept PC deep brain stimulator and our Reveal LINQ 2. We're also expecting European approval this quarter of the MiniMed 780G. In the U.S., we anticipate approval this summer of a new product we're calling MiniMed 770G, which is Bluetooth-enabled and allows for wireless over-the-air software upgrade, before launching our 780G later in the fiscal year. In addition, 770G will be the first hybrid closed-loop system available to patients aged 2 through 6. Patients who purchased the 770G will get the free software upgrade to 780G with our advanced hybrid closed-loop algorithm upon approval. We expect to show the pivotal results of our advanced hybrid closed-loop algorithm in adults at the virtual ADA conference in June.

With the third category of our pipeline, those that are enrolling clinical trials or preparing to enter clinical trials, the pandemic has slowed things down as clinical trial start-ups and enrollments have been placed on temporary pause. This includes our soft tissue robot, products in our diabetes CGM sensor pipeline and our Ardian On Med trial. Regarding our soft tissue robot, our ability to finalize the system in preclinical testing has been delayed. And given the uncertainty of the pandemic, it's too early to update you on time lines. However, we're exploring ways to expedite this work with the intent of minimizing the delay.

In diabetes, we continue to be optimistic on our ability to close the competitive gap in continuous glucose monitoring sensors. We intend to submit data to regulatory agencies on our Zeus transmitter at the end of the summer, and we've completed verification of our Synergy sensor that will enable our IDE submission within the next few weeks. And in renal denervation, we will combine our Ardian On Med data with our recently presented OFF MED data to support U.S. approval.

Look, we are excited about creating the new renal denervation market with its potential to treat millions of patients with hypertension. With all these recently approved and near-term pipeline products, customer enthusiasm remains high. And collectively, these represent growth acceleration as we emerge from the pandemic.

With that, let me now ask Karen to take you through a discussion of our fourth quarter financials and outlook. Karen?

Thank you. As Geoff mentioned, our fourth quarter organic revenue declined 25% and adjusted EPS was $0.58, a decline of 62%. We did have significant deleveraging down the P&L in the quarter as we continued to invest for the future despite the lower revenue growth. Gross margin declined by approximately 700 basis points, driven in large part by increased expenses as a result of COVID-19, including manufacturing facility cleaning, increased protective equipment, bonuses for our factory employees, and higher freight and obsolescence charges. In addition, we experienced a negative impact from mix, as products in higher demand carried lower margins. And we continue to experience a year-over-year impact from increased China tariffs. In addition to a lower gross margin, our operating profit was affected by continued R&D investment in our pipeline and continued spending in SG&A as we purposely protected the variable compensation of our sales reps.

Below the operating profit line, our adjusted interest expense declined 30%, driven by our successful debt issuance and tender transactions that we completed last spring and summer. And our adjusted nominal tax rate was 12.6% for the quarter and 14.3% for the year. Both were favorably impacted by lower earnings and the jurisdictional mix of profits. Excluding any nonrecurring tax benefits we received in fiscal year '20, our adjusted nominal tax rate would have been approximately 15%.

Despite the decline in earnings, we did not lose our focus on driving free cash flow. In fact, we generated $6 billion for the fiscal year, converting 97% of non-GAAP earnings, well above our long-term target of 80%. And our financial position remains strong. Over the past several years, we have made important decisions to maintain a healthy and robust balance sheet, which enable us to not only withstand significant disruption, but more importantly, maintain our focus on the long term. We have ample liquidity, with $10.9 billion of cash and investments as of the end of the quarter and an undrawn $3.5 billion credit facility. In addition, we have no public debt maturing until March of 2021.

As we stay focused on the long term, we will continue to allocate our capital to drive our growth strategies, including investing in our pipeline to accelerate our long-term organic revenue growth. In addition, we have not slowed our business development activities, as we continued to look to supplement our organic growth drivers with inorganic opportunities, including minority investments and tuck-in acquisitions.

We also continued to focus on generating proper returns for you, our shareholders, through both our organic long-term growth and our strong dividend. As an S&P dividend aristocrat, Medtronic has increased our dividend over the past 42 years. And this morning, we will make it 43 by increasing our annual dividend, $0.16.

Looking ahead, the uncertainty of the COVID-19 pandemic makes it difficult to provide our traditional annual and quarterly guidance. Instead, we are happy to provide our thoughts on the recovery. As you know, there are many factors that will influence its speed and trajectory, and these will vary by geography and therapy. COVID case volumes and potential resurgence will certainly play a role, as will updates to recommendations from government agencies on the resumption of elective procedures and provision of non-COVID-related health care.

Hospital capacity will be another key factor. We recognize that new protocols designed to ensure patient and provider safety can slow the return to full capacity. And some health care systems are planning to increase capacity by extending workdays or doing procedures on weekends, though this isn't the case in all regions. Moreover, some hospitals are at this point maintaining surge capacity in case there is a second wave. We are assuming that any potential second wave will be adequately contained, but we are watching this closely and are prepared for a range of scenarios. While it is still early, we believe we have seen the worst of procedure decline and are seeing encouraging signs of earlier-than-anticipated recovery in several places around the world.

In fact, the recovery has begun in China, although it is gradual. While the ultimate pace there is still uncertain, we've seen a reduction in our weekly decline in revenue over the first few weeks of May, with high-teens decline from the prior year. In other parts of Asia, such as Japan and India, we are still experiencing severe year-over-year procedure declines, and we continue to expect lockdowns to impact our first quarter, while other markets like Australia, New Zealand and Korea should continue to see recovery. In the U.S. and Western Europe, we started to see sequential revenue improvement and hope to see that continue. In May, we've seen our weekly revenue across Western Europe declining around 20% from the prior year, and the U.S. has been declining around 30% over the same period.

With all of this in mind, we currently expect first quarter revenue growth to be modestly worse than the fourth quarter for both the total company and each of our groups. To be clear, we are seeing encouraging signs in many geographies, but our largest regions are likely to experience a full quarter of impact compared with just 5 or 6 weeks in the fourth quarter. And at this point, we expect second quarter to be better than the first as the recovery continues and sequential improvement through the remainder of the fiscal year. By the time we reach the fourth quarter, we would expect to be back to more normal revenue growth on a 2-year stacked basis.

Focusing on the first quarter, while there is still a lot of uncertainty regarding the recovery, we would expect RTG revenue to be the most challenged, followed by CVG, with both expected to decline more than the total company. MITG and diabetes are both expected to decline in the first quarter as well. However, they should be better than the company average. And remember, we have an additional selling week in the first quarter, something that happens every 5 or 6 years with our fiscal calendar. Because this extra week already occurred the last week of April, during the time the impact of the pandemic was at its highest, we picked up only a minimal amount of additional revenue.

On the bottom line, we continue to plan for significant deleveraging in the near term. We expect our gross margin to remain under pressure owing to product mix, lower volumes and the extra cost of safety protocols. Where we have more than enough inventory to meet current demand, manufacturing plants may operate at less than full capacity, which could lead to period expensing of some fixed overhead costs. With this in mind, our first quarter gross margin could be down a few points sequentially.

As stated, we are not taking a short-term view when it comes to investment. We believe in the strength of the company and are positioning ourselves to come out of this crisis even stronger as we continue to invest in our employees, our pipeline and our product launches. Given this, the first quarter SG&A and R&D spend should be a couple of hundred million dollars higher than the fourth. Though similar to revenue, we would expect operating profit to improve as we progress through the fiscal year.

Regarding currency, the U.S. dollar has strengthened substantially since the pandemic began, especially against emerging market currencies. As a result, our FX impact is looking to be about $0.10 more negative to fiscal '21 EPS than a few months back and just over $0.20 for the fiscal year.

Before I turn the call back over to Geoff, I would like to express my sincere gratitude to our employees around the world for their ongoing commitment to our mission. I couldn't be more proud of our teams and the way they have worked together to support our customers and ensure patients have access to our life-saving therapies.

Back to you, Geoff.

Thanks, Karen.

Now looking back at what we've accomplished since the start of the pandemic, we're in many ways already a stronger company as a result of our actions. We've reaffirmed our mission in a profound way. When patients and health care workers urgently needed solutions that we couldn't provide alone, we turned to tenet 2 of our mission for a path forward. Tenet 2 tells us to focus our efforts on biomedical engineering where we display maximum strength. But it also says to gather people and facilities that augment these areas. And we did just that, forming new partnerships that enhance our biomedical expertise with additional technology, supply chain reach and manufacturing capacity from other companies.

We've also gone back to our roots as a company by reinstilling the value of close partnerships with our customers. We're focused on our customers' needs during this pandemic, moving beyond just selling the best medical therapies to using our expertise to bring broader solutions to the table. Feedback from customers and governments on our support has been incredibly positive, and they are grateful for our efforts. And we're bringing these new solutions to market at record speed. Development time lines have been measured in hours and days, not weeks and months, and the output has been very impressive. This pace and impact has created a strong energy and spirit within Medtronic. Despite the day-to-day challenges of the pandemic, our people are really engaged and excited to assist customers in the recovery.

So now as the world begins to recover, we're focused on emerging from this pandemic even stronger. We're executing strategies and supporting investments that others in our industry, who are in a different financial position, have been unable to make. We're harnessing new partnerships, cutting through the bureaucracy and operating at a high sense of urgency and speed. We're also sharpening our competitive edge to drive an even higher level of performance. As we emerge, we expect these investments will even be more evident in our traction and retention of top talent, and in the new products and solutions that we're offering physicians, patients and health care systems.

Now for competitive reasons, I'm not going to get into the details of all the actions we're taking. However, when you combine these new possibilities with our pipeline, I couldn't be more excited about the future. We will come out of this even stronger, and in doing so, create sustainable value for our shareholders and for society.

Finally, as many of you know, it's my first earnings call as CEO, which also means that this is Omar's last earnings call. So I want him to say a few words. Omar?

Thank you, Geoff. And this is my 36th Medtronic earnings call, so it was definitely time to turn the job over to someone else. And you're just doing great.

Thanks, Omar.

The past 9 years has really gone by fast. And it's been a pleasure getting to know all of you in the investment community, whether that was visiting your offices around the world, hosting you in Minneapolis or meeting you at the conferences. I sincerely appreciate all the interest you had in this company and in this industry and the support that you've given me and the Medtronic management team over the years.

As I look ahead, I have full confidence in Geoff and this leadership team to take the company forward. The team has been incredibly focused on the recovery and has a number of plans in the works. We're operating from a position of strength, given the strong financial position of the company and the full and robust pipeline.

While I didn't expect to be turning over the CEO role during a pandemic, it's reassuring to know that the decisions that we made over the past several years have prepared us for this time. I'm confident that we have the right, engaged team in place to ensure that Medtronic emerges even stronger.

As you've heard me say many times before, health care is a perpetual growth opportunity as the 3 universal health care needs of improving clinical outcomes, expanding access, and optimizing cost and efficiency will not go away. The Medtronic mission and focus on these growth opportunities is enduring. I'm glad to have played a role in leading this storied company, and I'm sure its best days are ahead. I wish Geoff, the team and all our employees all the very best going forward.

Geoff, thank you.

Thank you, Omar. And you didn't just play a role. You played a major role. And as you step away as CEO, you're leaving us well positioned to thrive. The list of your accomplishments is long and meaningful. But to list a few that come to mind when I think of your legacy? Well, first, you doubled the size of this company, and you inspired our global employees to think differently, to think bigger. And you're the only CEO, other than our co-founder, Earl Bakken, to be inducted into the company's Bakken Society, which is the highest technical honor at Medtronic. You've created value for our shareholders; you got our whole industry to focus on value-based health care; and importantly, you operationalized the mission in everything we do, which led to improving the lives of millions of people over the past 9 years. It's been a pleasure and an honor working with you and learning from you.

Finally, I really appreciate all you've done to make this transition a smooth one, and I look forward to continuing to work with you in your Executive Chairman and Chairman of the Board roles.

Before we start Q&A, I'd like to briefly note that we currently anticipate holding our Q1 earnings call on Tuesday, August 25. We've also postponed our biannual Institutional Investor and Analyst Day as a result of the COVID-19 pandemic. This was originally scheduled for next month, and we'll let you know the date once it's scheduled.

Let's now move on to Q&A. In addition to Karen, Omar and me, we also have our 4 group presidents, Mike Coyle, Bob White, Brett Wall and Sean Salmon, here to answer your questions. (Operator Instructions) If you have additional questions, please contact Ryan and our Investor Relations team after the call. Operator, first questions, please?

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

Geoff, congratulations on your first call as CEO. And Omar, sorry to see you go. You'll be missed. Geoff, maybe we can start with what you were talking about at the end of the call, which is why you're so optimistic that Medtronic will emerge stronger. It's something we've heard a lot of CEOs mention over the past quarter earnings here. But Medtronic is actually doing stuff. You're paying employees, both your sales reps through this. You're paying bonuses. To me, it seems like you're actually building culture during a really difficult time here. But maybe just give me your thoughts on why that's not just lip service, but something that will actually materialize, Medtronic coming out of this pandemic.

Sure. Thanks for the question, Robbie, and thanks for noticing. Let me walk through. There's several components to the answer. First, I got to start off with our financial position going into the crisis. I mean having a strong balance sheet makes a huge difference and lets us lean into this whole crisis and play offense. And the actions that we took during the crisis, right, specifically, you mentioned some of them: to support our employees and -- through benefits programs; and protecting our reps' incentive compensation, especially the highly leveraged representative -- sales reps in the United States; and providing all the safety measures, et cetera, et cetera, so that they have both -- protecting their health, but also reducing anxiety during this time. That makes a big difference. And these employees' morale right now is really high. And we -- I'm sure we'll get questions on this later, but we do see this strong early signs of the recovery, and our employees are ready to go without distraction. And they've -- we've used this time wisely. So I think they're ready to go and it's going to make a huge difference for us, because after all, innovation and commercialization are still a people game.

And our customers, okay? So the same with our customers. And we spent a lot of time, partly because we were able to reduce employees' anxieties. They could stay focused on our mission, our patients and our customers. And we spent a lot of time, I mentioned it in the commentary, with our customers. And it was a different dialogue. It's what can -- it wasn't just selling our therapies and their features, which are great, but it was really, how can we help them through this pandemic? And how can we help them come out the other side? And the dialogue we're having with customers is one I've been wanting to have since I've been here. I hate it when they call us vendors, suppliers. I hate those words. But now we're sitting down with them, and they really are, they're using the word partner and then they're backing it up and then really engaging us in their recovery plans and relying on us in their recovery plans. And so we've put a lot -- we've been developing several programs that -- I really don't want to get into some of the details of those because I do think they're unique and I think they're a competitive advantage. But things around patient confidence, protecting health care workers, hospital productivity, these are things we're putting in place with our larger partners in particular. But we think we could scale these to even smaller hospitals, and it's really building momentum. So that's another component of it.

And then it's our pipeline. So our pipeline going into this was strong. We talked about it on the commentary. A lot of these products now as we emerge, a lot of these products are hitting. We've got a lot of approvals coming out. We mentioned the Micra in cardiac rhythm, the Cobalt and Crome approval. LINQ 2 just got approved in Europe. Percept PC in DBS, which coming from -- and the Interstim Micro in Pelvic Health. Coming from RTG myself, I mean, these have been a long time coming, and we sacrificed a lot to get these things out, and I'm really excited. We also have Stimgenics in pain, the recent acquisition; some ENT products; DiamondTemp in AFS in the EU. So this wave of products hitting the market at a great time.

And then specifically though, how these products are positioned during this pandemic. The whole remote programming, remote monitoring capabilities that before were important, but now are like critical, right? And we're seeing hospitals talk about making these standard of care. And if that -- if and I'd say, when that happens, we are well -- we are the best positioned in the marketplace for that. And then secondarily, a hyper focus on complications because they don't want patients coming back, and we're very well positioned there as well with things like Micra and TYRX, and I can go on.

So those are the big ones. And I started with the financial condition, and I'm going to end with that one again. I think it's worth mentioning twice the fact that we have a strong balance sheet. To add all that up, and we're feeling good about how we come out of this thing. And we can debate how big the pie is -- when the pie gets back to the normal size. But if we don't have a bigger slice of that pie, I'm going to be disappointed.

Great. Maybe as a quick follow-up. Medtronic right now probably has the best balance sheet that it's had in 5-plus years. You've been talking increasingly over the past 12 months or so about increased M&A. With asset prices down 20% across the board, is this the right time for Medtronic to be going out to do M&A? And what are you seeing in terms of opportunity set out there right now?

The answer is -- the short answer is yes. I think it is a good time to do M&A. Like as you mentioned, asset prices are down. It doesn't mean that we lower our standards. I just think, again, we can play offense. And I think our focus remains the same on tuck-ins that can -- tuck-in acquisitions that can -- but I'm a little more partial to the tuck-ins that are more meaningful and can actually affect our growth rate, our long-term growth rate. Like I said, we don't buy growth. We grow what we buy. And so that's what we're focused on. And like I said, there are some opportunities that, at least I felt personally, were out of our reach, too expensive before this, and now are kind of more in line with what we think are reasonable returns for those investments. So yes.

Great. Thank you.

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

Karen, just 2 for you real quickly here. The first, I wonder if you can just help us with recovery here into the first quarter. I know you said growth would be modestly worse than the first. Can you just maybe help us kind of how you're thinking about progression of recovery, maybe across the next couple of months? But more specifically, given the stocking dynamic in the fourth quarter and the extra selling week in the first quarter, is this could be kind of a material swing? I just wondered if you could help us with some of those dynamics here heading into the first. And then I had a quick follow-up on margins.

Sure, David. Thanks for the question. As Geoff said, we are seeing encouraging and positive signs of recovery right now, particularly in our largest regions of China, the U.S. and Western Europe. That said, as I mentioned, we do expect a full quarter impact in Q1 as opposed to the 5 to 6 quarters that we had in Q -- or 5 to 6 weeks that we had in Q4. So we are expecting, at this stage at least, Q1 to be modestly worse in terms of revenue growth than Q4. But we do expect improvement in Q2 and sequential improvement going forward into Q3 and Q4. And by the time we hit Q4, we do expect to be back to more normal revenue growth for us. And we'd measure that on a 2-year stacked basis given the tough year-over-year comparison.

In terms of stocking in the extra selling week, I did mention that the extra selling week happened for us the very first week of our quarter, which was the end of April. And obviously, because that was such a depressed time, we are seeing minimal revenue impact from that extra selling week. As we think about stocking, we have said starting last quarter that we intend to focus on driving revenue more evenly throughout our quarter and reducing the amount of bulk transactions that we have. We'll continue to do that every quarter this year, but we had a good head start, obviously, in the fourth quarter.

Okay. Very helpful, Karen. And then obviously, from a margin perspective, fourth quarter should maybe not be the trough margin period. So when did you see sort of the trough margin period in the business? And more specifically, that revenue recovery is super helpful. How should margins and earnings recover relative to that revenue? I mean if you get back to that normalcy quarter that you specified, is that the normal quarter for margins? Or should margins or earnings kind of lag that revenue recovery?

No. Thanks for that question, David. In terms of margins, I did mention that we could see sequentially worse gross margins in the first quarter. And that's really, as we think about the increased expenses due to COVID-19, along with the fact that should we choose to not run some of our manufacturing operations at full capacity, that we will have a potential move to period expensing some of the overhead in those manufacturing plants as opposed to rolling it on to inventory in our balance sheet. And so that may cause margins in the first quarter to be a little bit worse than the fourth quarter. But we would expect to see margin improvement as we move into Q2 and then continued sequential improvement as we move into Q3 and Q4. And by the time we get to Q4, we would expect to be back to more normal margins on a constant currency basis.

As I mentioned, FX has become more of a headwind for us this fiscal year and really due to the strengthening of the dollar, particularly against emerging market currencies. And at this stage, we're looking at an FX impact of about $0.20 to the bottom line, which can obviously impact margins, too. But we're really seeing good signs of recovery right now, and we're very excited about what the future can hold even beyond FY '21.

Yes. I mean I think this is obvious, but I can't help myself from stating this, that from a revenue perspective, in particular, Q1 is modestly worse than Q4 because of the extra 5 to 6 weeks of impact. But we are seeing early signs of the recovery. It's maybe too early to extrapolate that all throughout the year, but it's -- we're seeing -- it's faster than we anticipated, especially in Europe and the U.S. And for sure, Q1 is the trough.

Thanks, David.

Your next question is from the line of Bob Hopkins with BOA (sic) [BofA].

And good luck to Omar and Geoff. Just 2 things I would love a comment on, and I'll list them both upfront in the interest of time. One, I apologize, it's a little short term. I just want to dig a little deeper on your comments on the upcoming first fiscal quarter. And I'm sorry if I missed this, but did you give a sense for what you're seeing in the month of May? Just trying to get a sense for what kind of improvement you're assuming from May to get to that total Q1 comment that you made. And then I was also wondering if you could just maybe offer up a quick comment on the upcoming diabetes data that we're going to see at ADA, because I know in the past, you have commented that you do expect a time in range of around 80%. And I'm just wondering if that is still the case.

Yes. Thanks, Bob. I'll just talk about the month of May quickly. We are seeing encouraging signs and particularly, as we look at our largest regions, in China and the U.S. and Western Europe. In China, where we had stronger declines in February and March of around 46%, we said we saw April declines of around 21%. And now we're seeing declines in China in the high teens. So continued improvement there. And in Western Europe, where we saw declines in April of around 32%, in May, we're seeing declines of around 20%. So again, continued improvement in Western May -- in Western Europe. And in the U.S., the picture is a bit clouded when we look at April because of our bulk purchases, but we're clearly seeing procedural improvement across the U.S., and in May, declines of around 30% just in the first few weeks of May, which is better than what we had in April.

Yes. And just to build on that in the U.S., I mean Karen gave you the numbers. Anecdotally, we're getting texts, calls from hospital -- big health system CEOs, purchasing people basically indicating a faster-than-anticipated recovery in many parts of the United States, and basically saying, are you guys ready? Buckle up. So that's -- 2 things I like about that: one, the encouragement; but two, that they're talking to us about these things.

And so it's -- yes, the Northeast is going to be a little slower. I think the patient fear factor is a little higher there because the virus hit harder in New York and Massachusetts. But other parts of the U.S., very optimistic. So anyway, that's why we're thinking Q1 for us is the trial, and we're starting -- the trough rather, and we're seeing the -- we're starting to see encouraging signs here.

On the second question, Bob, I think I'm going to ask Sean Salmon to answer that one. Sean?

Yes. Thanks for the question, Bob. So we'll have 2 data sets coming up at the ADA, the virtual ADA, the first of which is going to be a randomized study out of New Zealand which serves as the CE Mark data. And the second one is the adult portion of the advanced hybrid closed-loop data, which will be featured there. And just one thing to set your expectations for that. We really evaluated a number of different things in that study. Most importantly, we looked at targeting the glucose settings for the patients at 2 different levels: One is the usual level that we have with 670 today; and the other one is a more aggressive, lower target, and we're evaluating the safety of that. So as you look at those results, you'll see that there's really a lot to unpack there. But we're very confident in the product and look forward to sharing the results next month.

Great. Thanks, Bob.

Your next question is from the line of Kristen Stewart with Barclays.

And Omar, it's been great having you as CEO. And Geoff, welcome to your first call. It's definitely an interesting time for you guys to have this changeover here. I guess my question is just, as you guys are thinking just kind of longer term and bigger picture, Geoff, just thinking about kind of your earlier comments, I guess, a couple of quarters ago just kind of on the M&A landscape. And you guys clearly have a very good balance sheet, and Karen has done a great job just improving the cash flows of the company. How are you just thinking about deployment of capital now? You guys have the opportunity, I guess, to be potentially a little bit more aggressive on the M&A front. Do you think this is the opportunity now to go out and do that? Or are you guys going to be a little bit more watchful and waiting to see how the landscape shakes out just given COVID and the backdrop?

Thanks, Kristen. Thanks for the comments. Thanks for the question. And yes, I am, coming into this new role, I definitely have a -- even more of appreciation for the cash flow, and I'm a little forgiving of all the grief that Karen gave you about the generating more cash flow in my prior role. I'm thanking her now for that.

But when it comes to M&A, we're not going to be watchful and waiting to see how COVID plays out or the economy. I mean that -- we believe that health care and med tech, the areas that we're in, like we said earlier, are going to come back. And Karen indicated earlier in the call that we believe by our Q4, that our revenue growth on a 2-year stack basis will be back to normal levels and profitability. So I mean we feel like this is a hit. Obviously, it's a very difficult financial impact for everybody, but we do feel bullish on the future here of the market and then us as well. So we won't hold back for those reasons.

And like I said earlier in the call, we are looking for -- mainly focused on tuck-in deals that are going to create long-term improvements to our weighted average market growth rate and allow us to better position us strategically. So tuck-in deals are what we're looking for. I tend to prefer -- we'll do various sizes. I like the medium billion dollar -- that range because it has a bigger impact on our growth rate. But -- so that's what we're looking for. And for sure, the virus' impact on the markets and prices, asset prices is going to help, is going to make certain assets more attractive. I hope that helps. Hope that answers your question.

Yes. And just in terms of thinking through, I would say, more from a opportunity in the different businesses that you have, has COVID -- or just kind of thinking through the landscape change, the different areas that you would look opportunistically, whether it would change your view on whether to tuck-in more on the cardio side or whether it would tuck-in more thinking about like telehealth or any of those areas. Does it change kind of where you would think you'd lay kind of your chips from more of a product or service oriented or anything like that?

I wouldn't say it changes by the business areas. I mean the -- you mentioned we're going to be making investments, more investments in remote capabilities of our product and of our business model, quite frankly. So whether it be remote programming of devices, remote monitoring of devices, remote case support, digital medical education and things like that. So investing -- and this is an area where I think Medtronic as a company, as an enterprise, this is an area we can add value to our different business units by making investments like these that can scale across a lot of them. Whether that's -- I don't know that, that needs to be M&A, and there could be -- there are some opportunities there that we're looking at that are more around that whole idea of remote, but also just organic investments and partnerships with large and small technology companies.

Like I mentioned in the commentary, I mean I was really blown away by how some of these other companies can augment our technologies, like whether it be Intel or some of the -- there's a lot of smaller companies as well augmenting our capabilities to be more virtual, to be more remote. And so I think the partners -- some partnership opportunities. So in the virtual areas, it's -- or the remote areas, it's organic investment, partnerships, including partnerships with other companies, and potentially some M&A as well. So that's one area that I would argue has definitely increased in terms of our focus. But nothing, I wouldn't -- I can't think of anything between the different businesses.

Thanks, Kristen.

Your next question is from the line of Pito Chickering with Deutsche Bank.

Like when you sit back and look at the impact on COVID, it looks like the health care systems globally were unprepared to deal with a large scale of respiratory pandemic. And now that it appears that the worse is behind us, you might be starting having discussions with countries about the infrastructure investment needed to deal with the next wave or next pandemic. So for example, widespread respiratory monitoring or ventilators.

Yes. Thanks for the question, Pito. The answer to that is yes. And right now -- and maybe I'll ask Bob to comment as well. But right now, we have a big focus on emerging markets, specifically, regarding COVID and other respiratory, other viruses. And we're pooling our portfolio together, between our ventilation portfolio, our capnography, SpO2 and our monitoring capabilities to provide, I'll call them, standing up a lot more hospital capacity for the patients in these areas with all those devices and how they work together and providing solutions to these countries and -- that they don't have today and the scale. And I really think it's not just a onetime event. I do think this will introduce these technologies to the emerging markets and help that become more of a standard of care, because they are under-penetrated today. So I do think it will have a long -- a lasting and longer-term impact as well.

And I'll let -- Bob, do you want to make any comments to that?

Yes. Geoff, just to build on what you said, and you said it really well. We think we're really uniquely positioned with our combination of technologies in capnography, pulse oximetry, ventilation. An example of this is we were a key player in standing up the Javits Center in New York City. And we think the opportunity as emerging markets stand up ICUs and care theaters, that Medtronic will be there with them to do that. And as Geoff mentioned, we're seeing tremendous interest from governments around the world as they look not only to stockpile and build their ventilation capability, but how they think about it. Because while we're seeing great recovery in the markets that Karen and Geoff mentioned, this pandemic is still going to hit emerging markets in a pretty big way unfortunately, and we want to be there to support it. So that's it, Geoff. I think we're really well positioned to capitalize on that.

Thanks, Bob. And the last thing I'd say to that, Pito, is we also have a business that does remote patient monitoring. We do a lot of remote patient monitoring for chronic comorbid patients in the VA in the United States. And that business has really gotten an uptick of interest, and we're positioning it more strategically to support patients in the pandemic so -- in a number of ways.

Thanks, Pito.

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

And Omar, you will be missed; and Geoff, congratulations. I just want to spend a few minutes on the TAVR franchise. That was a bit of a problem child on the fiscal year third quarter. How has that evolved? What did you see early in the cycle? And how did -- how do you see Dr. Popma's new role. Congrats on that hire, too.

Right. Joanne, thanks for the question. Obviously, the issues in Q3, we talked about extensively on the last call, where we were very disappointed with the U.S. performance of TAVR given that we had procedural growth rates in, call it, the 14%, 15% range when the market was growing double that, a little bit in the 30s. That was strictly a U.S. issue. As you recall, we were actually growing with the market, a little ahead of the market outside of the United States. We talked a lot about how we were refocusing sales forces and repositioning them back into large, high-volume accounts where they had been basically been deployed into the start-up of new accounts with the NCD and increasing the sharpness of the messaging around our benefits of the supra-annular design that we have relative to better gradients and better hemodynamics.

We were very encouraged, actually, with where things were headed during the course of Q4 and the first half in those first seven weeks that we actually grew in the high teens. And in fact, as we were exiting that 7-week period, so the last 3 to 4 weeks there, we were actually well north of 20% in terms of procedural growth rate. Now while that's still below the market, very good traction that we were seeing. And then obviously, in the last 5 weeks, 6 weeks of the quarter, obviously, we saw the impact of the pandemic hit that market pretty dramatically.

Of course, the other benefit that we had was the ACC data releases, where we saw very significant, positive data coming in the bicuspid area, our leaflet immobility and leaflet thrombosis data and some data that was a little more problematic for one of our competitors. So collectively, yes, we really like where we're positioned in terms of pushing our messaging for our product and design.

Obviously, the recovery is taking place currently now. And as Geoff mentioned and Karen mentioned, we are very encouraged by the trends that we are seeing in terms of now 5 weeks of continuous improvement in terms of overall procedural growth in that period. So we are encouraged with where things are headed.

And we're thrilled with the addition of Dr. Popma to our team. He is obviously one of the leading physicians in the area of structural heart and has just been instrumental in the support of our program over the years and guiding our program. And we think he will really help us with the messaging of our product for -- with low-risk patients for bicuspid patients and in our clinical design and development. So we are very, very excited about where our TAVR program is headed.

Thanks, Joanne.

Your next question is from the line of Larry Biegelsen with Wells Fargo.

Just I'll ask both of mine upfront here. You talked about some of the improvement you've seen in May across geographies, but I'd be curious to hear what segments are coming back faster. Any surprises? Is it more the emergent versus the elective procedures? Is it more inpatient versus outpatient? And are those the trends you expect to continue over the upcoming quarters here?

And just second, Bob, since it's such an important product, any more color on the delay to the surgical robot? Just curious why preclinical testing would be delayed by COVID. And is it -- are there some tweaks you're making? Is that also part of it? And should we just think about this, Bob, as maybe a couple-quarter delay? Is that the best way to think about it right now?

Well, Larry, maybe I'll start on the first question, and I might ask Mike Coyle to comment a little bit, too, and then we'll turn it over to Bob for the robot question. I'd say on the -- in terms of the recovery and the procedures, the recovery -- in summary, I'd say this kind of makes sense for us in terms of the rates of the recovery. The therapies and products that are more urgent, if you will, or less deferrable are definitely coming back faster, like Neurovascular in RTG; TAVR, Mike mentioned; stents, cardiac rhythm, they're coming back faster. And then the more deferrable procedures are taking longer, like our Pelvic Health franchise in RTG, for example. But we're seeing really strong data coming in on cardiac rhythm for a number of reasons.

And maybe, Mike, you can talk to that for a second.

Right, yes. Obviously, the ones that are -- we listed in our 8-K as being the least elective are the ones that are coming back the quickest. So in a cardiac surgery franchise, obviously, ECMO has seen a lot of significant growth. But pacemakers are coming back very quickly just given the symptomatic nature of the patients and their needing to be treated. And it is playing extremely well for things like Micra, where we showed data of a 60% reduction in implant complications associated with pacemaker implants using Micra, that -- and keeping patients out of the ICU right now is a big priority. And so that -- and TYRX, which is getting a significant increase in utilization in order to keep patients out of the hospital has been significant.

But as Geoff mentioned, I think the thing that probably has us the most encouraged is that moderately elective group of technologies, things like the ICDs, CRT, the TAVR and coronary stents, these are areas that we're seeing a very nice rebound, especially over -- a very consistent rebound over the last 5 to 6 weeks. And we're even beginning to see in some of the less elective procedures, like atrial fibrillation and our diagnostics business, a very similar trend, although, obviously, trailing behind the others in terms of the rate of recovery. So as we said, it's encouraging what we're just seeing over the last 5, 6 weeks.

Yes. Some of that is the market, and I think some of that, in the case of implantables, our CVG implantables, is how they're positioned with the remote capabilities, the distance programming, for example, and lower complications. I think that's helping as well, Larry.

So maybe I'll turn it over to Bob here for the robot question.

Yes. Thanks, Geoff. And Larry, thanks for the question. And certainly, as Geoff mentioned during his commentary, COVID has limited the pace at which we can really complete the required software system in preclinical testing. And Larry, this shows up in, I think, the impact in 3 ways: First, our engineers have been forced to work remotely and, thus, really limited access to the hardware and the robotic systems itself. Two, surgeons and OR staff have no ability yet to travel and participate in lab testing, and that's had an impact. And then three, the availability of our external partners and sites to conduct some of the testing. As you know, as I've talked to you about previously, we have software development and testing centers around the world, all of which have had impact on productivity. And then as I shared with you previously, we've certainly been working through the software development and integration challenges. That took us a bit longer and set us back as well.

But the thing I would leave you with: Our team is looking at every single, creative way to expedite our work related to the program, and we're seeing some amazing creativity. But true, as Geoff mentioned, given the uncertainty of the pandemic, it's too early to give you an update on time lines at this point. But thanks, Larry.

Your final question will come from the line of Vijay Kumar with Evercore ISI.

And Omar, congratulations on your tenure here at Medtronic. Maybe just one quick one for me. Karen, I think you mentioned that, Q4, back to normalized growth, and you guys look at growth from a double-stack perspective. I just want to clarify. Q4 of '20 was down 25%. Do you mean that Q4 of FY '21 will be up 25-plus percent? So on a double-stack basis, we're back to growth? Just one clarification on that.

And then, Geoff, on the pipeline here, I think you mentioned Interstim Micro, Percept DBS. Just maybe in a normalized environment, right, what kind of share gains or what kind of impact could we expect from these products?

Yes. So on your first question, Vijay, on what's normal in Q4. Obviously, things are uncertain, and so we're not giving specific guidance because of that uncertainty. But just as we look forward right now, when we talk about a return to normal growth on a 2-year stacked basis, we're talking about normal around the mid-single-digit levels. And so you can expect that on a 2-year stack basis. Hopefully, that helps.

Yes. And Vijay, it's Brett Wall with RTG. And related to these new neuromodulation products, particularly Interstim, pre-COVID in Europe where we had launched this technology, we took back 40% of the accounts that had been with the competitor, so we're -- that was pre-COVID. So we're really thrilled with this new technology. The technology itself is extraordinarily competitive. Every patient can get an MRI, whether it's 1.5 or 3 Tesla. The product itself has terrific battery recharging capabilities. The recharge experience is great for the patient. It has just significant ease of use for the patient. And the device itself has a programmer that has the ability to have 11 different programs on the patient, which allows that patient and physician to make multiple changes versus the competitors' kind of a plastic, single-program device that doesn't really allow any flexibility, particularly in a post-COVID world.

On the Percept device, this device, which we'll also launch -- both these devices, we'll launch this quarter in the United States. And that will put us back into a significant share-taking mode. Is the first device that's going to have the ability to move forward and close the loop with DBS procedures and sense what's happening in the brain. And we're going to be able to move forward and significantly alter the experience for the patient and also for DBS in general. So this is really a significant reboot across this entire franchise.

Thanks, Vijay. Geoff, do you have any final remarks for us?

Okay. Thanks, Ryan. So on behalf of our entire management team, I'd like to thank you for your continued support and interest in Medtronic. And hey, look, we look forward to updating you on our progress on our Q1's earning call in August. And so please stay healthy and safe.

Thank you. Thank you, everyone, for joining today's conference call. You may now disconnect.