Ladies and gentlemen, thank you for standing by. And welcome to the Medtronic First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [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 2021first 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 adjust for three 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 five or six 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 healthcare 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 depths 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…

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 improvement from their fourth quarter decline. Within CVG, cardiac rhythm and 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 improvement, 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 know this benefit was offset by our plan to reduce customer both 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 two of modest headwind. On the bottom line, our adjusted EPS was $0.62, a decline of 51% including an estimated benefit from the…

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 topline 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 four group presidents: Mike Coyle, Bob White, Brett Wall, and Sean Salmon, here to answer your questions. 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.

Hey guys, thanks for taking my question. And Geoff, congrats on a solid earning per share. I had one question and a follow-up, I'll ask them and then 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 -- Medtronic's focus on market share, the implication is that you guys need to be grown in line to above market in markets? Because I do feel like one of the better thesis is Medtronic is too big to grow. So, 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 of robotic timeline in a calendar first quarter '21. I think the original time line was mid of this year, this five to six months, I just want to make sure that there's just purely a function of COVID and software issues, et cetera, they've been resolved. And what does it mean for robotic market share, right? If you're focused on market share process segments, it doesn't mean that Medtronic should gain it's fair share, and perhaps more than fair share of robotic surgery? Thanks, and I'll stop there.

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, we 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, our customers but for shareholders. And so we feel that sometimes our market share isn't commensurate with our technology, meaning our technology should yield more market share. And, and this is an organizational focus that we want to take on, in terms of -- is really focused on -- really a deeper focus on understanding the end markets and their 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 is not 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, understand 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.…

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

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

Hi, good morning, and thanks for taking the questions. Just one clarification and one question. On the clarification side, you mentioned talking about some disclosure 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 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. That'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 that 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 and being nimble and faster. And as you know, we're competing against a lot of focused, smaller focused 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. Anytime 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 businesses can benefit from. But in terms of disclosures, I don't -- there's not going to be like disclosures before that. We'd be rolling this out to within the company over the next couple of weeks, a month of two. But I don't think there's going to be any more disclosures on that until we get to Investor Day to talk about it. And in terms of your question around the market improvement, it is encouraging. A couple comments there. First, there's a…

Thank you.

Next question please, Regina?

Next question comes from line of David Lewis with Morgan Stanley.

Good morning. Just two for me. I'll ask them right up front for Geoff and Karen. So Geoff, I know it's early, but what's the profile Medtronic should aspire to relative to 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 often 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? Thanks so much.

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, and we're committed to that, right? So, we talk about market share and we talk about growth. Let me be clear, it's not at the expense of that 8% EPS growth, and our free cash flow conversion, which we've worked so hard to improve over the last couple years. So, we're not going to take a step back there, we're committed to that. And as we grow more, right, as we grow at the market more as an aggregate which would be a meaningful improvement over the last couple 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 to also 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, then we are on dropping significant amount to the bottom line. We'll be focused more on investing. Hope that helps.

Super helpful. Thanks so much.

Thanks, David. Next question, please?

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

Thanks for taking the question. 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 two 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 in 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 three to five year turnaround story? Or is it something we could see in the shorter-term? Thanks.

Okay. Thanks, Robbie, lot into those questions there. 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 offer 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 are all somewhere on our path to commercialization 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. We want to get more R&D capability here. We've got just to list some of the products, we are 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 already in that's a multibillion dollar opportunity there. The EV ICD, I'll start with cardiac here, PulseSelect Pulsed Field Ablation, I mean, just those three 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 neurovascular. Brett Wall and Stacey…

Thanks a lot.

Thanks, Robbie. Next question, please, Regina?

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

Good morning, everybody. As has been communicated with investors this morning, one of the themes coming across is a sense of being reinvigorated or quote a different Medtronic. So what do you see just 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 approached managing its employees during the pandemic may be somewhat different than the way others have. Thank you.

In terms of a 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 extracted a huge human toll and an economic toll. 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 that, 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, and how we react and how we show up. And so we've always had that and that has shown even just -- 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,…

Thank you.

Thanks, Joanne. Next question, please, Regina?

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

Good morning. Thanks for taking the question. And mine are 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? Thanks for taking the questions.

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 Jeff 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 two year stack basis.

Thank you.

Thanks, Larry. I think we have time for maybe two more questions. We can take the next one, Regina.

Our next question comes from the line of Danielle Antalffy with SVB Leerink.

Hey, good morning, guys. Thanks so much for taking the question. And 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. Thank you so much.

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 it. 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 to solve faster. So we're going to keep going on the innovation. And the market share, it's really two things that we're going to need to do. Well, three things, really. You need to have the products right? You have the pipeline, which we've talked about. The other two areas that we've talked about is structurally, allowing to help increase that innovation, allowing our business units to have more leverage, the pool 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…

Thank you so much.

Thanks, Danielle. We'll take the last question, please, Regina.

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

Good morning. Wondering if maybe I could ask you 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 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, Sean Salmon's on the phone here. I'll turn it over to Sean for some comments.

Yes. Great, thanks. Thanks for the question Raj. Yes, as Geoff said, the deal is not yet finalized, but the opportunity is very attractive. You'd heard Geoff’s commentary, so there's about 12 times the number of patients. 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, it does a few things right? We can capture more of the patients who are upstream and maybe 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 for you 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 we continue to focus really just on the tuck-in side of things, really just any broader thoughts here would be helpful?

The focus is on the tuck-ins. And the tuck-ins can get up to billion dollars or low billions. But that's the focus. That's the focus. Like where we are right now, and the tuck-ins will help us. But we're not focused beyond that.

Great. Thank you.

Thanks, Raj. 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.