Medtronic PLC

NYSE:MDT

Earnings Call Analysis

Medtronic Reports Strong Q3, Raises Guidance

Medtronic's Q3 revenue grew 4.6%, slightly ahead of expectations, while adjusted EPS of $1.30 beat guidance by $0.04. The company saw strong international growth, with non-U.S. markets contributing significantly, and high-teens growth in Middle East and Africa, mid-teens in South Asia, low double-digits in China, and single digits in Eastern Europe due to sanctions. They expect full-year organic revenue growth of 4.75%-5%, raising the full-year EPS guidance to a range of $5.19-$5.21. Medtronic anticipates FY25 to continue showing durable growth but acknowledges headwinds from inflation, currency, and taxes, although they remain focused on improving the company's earnings power and making strategic investments in innovation. Recent product launches in various medical technology segments are expected to bolster future performance.

Medtronic's Consistent Mid-Single-Digit Organic Growth and Diversified Business Strength

Medtronic, led by CEO Geoff Martha, and CFO Karen Parkhill continued its journey in fiscal '24 third quarter with a consistent performance, delivering mid-single-digit organic revenue growth. The growth was propelled by various sectors across the company, including diabetes, spine, cardiac surgery, and structural heart, and saw strong international market expansion. This performance comes as part of Medtronic's transformation, focusing on innovative technologies like robotics and AI and fostering a performance-driven culture.

Strategic Update on Patient Monitoring and Ventilator Business

A critical move for the quarter was Medtronic's strategic decision to exit its ventilator product line, which had become unprofitable, and consolidate Patient Monitoring and Respiratory Interventions businesses into Acute Care and Monitoring. This decision allows for reallocation of investments into areas with higher growth potential and improved competitive positioning, likely due to a robust data-driven approach leveraging AI advancements within the company. All these changes are made without diluting the company's P&L, aiming to maintain strong profitability and category leadership.

Segment Performance Highlights in Q3

Medtronic's established market leaders like Cranial and Spinal Technologies showcased growth through novel ecosystems like AiBLE, and the company continued to expand its footprint in surgical technologies and Cardiac Rhythm & Heart Failure. The synergistic businesses, including cardiac surgery and coronary categories, posted impressive growth rates. Meanwhile, highest growth businesses propelled by Diabetes' double-digit advancement and the global adoption of the MiniMed 780 system contributed significantly to the company's top-line growth, signaling robust momentum in innovation.

Financial Performance and Margin Improvements

Q3 saw a revenue increase of 4.6%, exceeding expectations with a notable adjusted EPS of $1.30. Despite a flat adjusted EPS year-over-year, the company enjoyed an 8.5% growth on a constant currency basis. This achievement of leveraged growth can be attributed to an improving gross margin, which stood at 66.1% and productivity initiatives geared towards cost reductions. These measures are part of Medtronic's plan to strengthen financials by focusing on price optimization and disciplined cost control amidst broader economic factors such as inflation and currency fluctuations.

Forward Guidance and Commitment to Deliver Success

While specifics were not provided during this earnings call, Medtronic is set to finalize its guidance during the Q4 earnings call. The company expects to continue the trends discussed previously without major changes to the variables affecting its financial landscape. Medtronic's leadership is keen on balancing innovation and cost discipline to ensure they meet their commitments, with a high bar for strategic decisions that prioritize innovation-driven and profitable growth without causing earnings dilution.

Earnings Call Transcript 2024-Q3

[Ryan Weispfenning, executive]

Good morning, and welcome to Minnesota, where we finally have some snow. I'm Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations. And I appreciate that you're joining us this morning for our fiscal '24 third quarter video earnings webcast.

Before we go inside to hear our prepared remarks, I'll share a few details about today's webcast. Joining me are Geoff Martha, Medtronic Chairman and Chief Executive Officer; and Karen Parkhill, Medtronic Chief Financial Officer. Geoff and Karen will provide comments on the results of our third quarter, which ended on January 26, 2024, and our outlook for the remainder of the fiscal year. After our prepared remarks, the executive VPs covering our segments will join us, and we'll take questions from the sell-side analysts that cover the company. Today's program will last about an hour.

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

During today's program, 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 statements. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports and other filings that we make with the SEC and we do not undertake to update any forward-looking statement.

Unless we say otherwise, all comparisons are on a year-over-year basis and revenue comparisons are made on an organic basis, which excludes the impact of foreign currency and third quarter revenue in the current and prior year reported as other, which stems from prior business separations. There were no acquisitions made in the last 4 quarters that had a significant impact on total company or individual segment quarterly revenue growth.

References to sequential revenue changes compared to the second quarter of fiscal '24 and are made on an as-reported basis. And all references to share gains or losses, referred to revenue share in the fourth calendar quarter of 2023 compared to the fourth calendar quarter of 2022, unless otherwise stated.

Reconciliations of all non-GAAP financial measures can be found in our earnings press release or on our website at investorrelations.medtronic.com. And finally, our EPS guidance does not include any charges or gains that would be reported as non-GAAP adjustments to earnings during the fiscal year.

With that, let's head into the studio and hear about the quarter.

[Presentation]

[Geoffrey Martha, executive]

Hi, everyone, and thank you for joining us today. Our momentum and solid execution continued this quarter as we establish a track record of consistently delivering mid-single-digit organic revenue growth. Diabetes took another step forward with double-digit growth supported by a return to growth in the U.S. I'd also note the particular strength we saw in multiple businesses like Core Spine, Cardiac Surgery, Structural Heart and Cardiac Pacing. And we had strong growth across international markets as we expand access to our innovative health care technologies all around the globe.

At the same time, we've had a rapid cadence of new product approvals, and we're continuing to differentially invest in our pipeline of highest growth opportunities. We're advancing innovative core technologies like robotics, AI and closed-loop systems. And with five AI products already FDA approved, we're leading the way in bringing the tech into med tech.

We also continue to make progress on our comprehensive transformation of the company. We're incorporating a performance-driven culture that's based on execution, speed and playing to win. And we're leveraging our scale to drive efficiencies. So when you look at our financials this quarter, you're seeing the early results of our focus on restoring earnings power and converting our earnings into strong cash flow. And we're using that cash to both invest in high-return opportunities and return value to our shareholders.

So we're executing and we're delivering. And we expect to continue over the coming quarters and years, given our momentum, our ongoing transformation, our breakthrough innovation, our exposure to strong secular growth markets and our numerous catalysts across the business.

Now before I get into the details of our Q3 results, I do want to mention that we provided a portfolio management update this morning on our Patient Monitoring and Respiratory Interventions businesses. After a comprehensive review, we have decided to exit our unprofitable ventilator product line and retain and bring together our remaining PMRI businesses into one business, which we're calling Acute Care and Monitoring.

Now we've determined it is in the best interest of Medtronic, it's stakeholders, the ACM business, both near and long term to exit vents because of its increasing on profitability and market preference shift to lower acuity ventilators.

Now as we exit vents, I want to recognize the strong legacy of our business and the Puritan Bennett brand. And we're committed to serving the needs of our customers and honoring our ventilator service contracts.

And I also want to thank the employees in our ventilator business who played an incredible role during the pandemic to dramatically expand production to get ventilators to the communities around the world that needed them. And while we exit, we do believe that existing manufacturers can meet the customer demand for new ventilators going forward.

Now, at the same time, we decided to retain and refocus the remaining PMRI businesses. Three main factors have driven this decision. First, we have strong conviction in our lead and drive growth in Acute Care and Monitoring given our improved competitive position and our ability to properly fund this business with savings from exiting vents.

Second, the importance of data in this space is changing rapidly. It's becoming the basis of innovation. And this fact further improves our competitive differentiation.

And lastly, as a company more broadly, we continue to prioritize profitable innovation-driven growth and category leadership and ACM can deliver both. That does not mean we will shy away from additional portfolio moves going forward, but the bar is high for any strategic activity that dilutes our focus on our profit and growth.

So when you take these decisions together, we're able to provide increased investment for Acute Care and Monitoring using the savings from vents and bringing two businesses together, all without creating dilution to our P&L.

Now let's get into the details behind our Q3 results in three categories: Established market leaders, synergistic and highest growth businesses. In this quarter, all three grew in line growth algorithm. Our established market leader and synergistic businesses grew mid-single digits, while our highest growth businesses posted high single-digit growth, and we expect their contribution to our overall growth to further accelerate in the quarters ahead.

Now looking first at the established market leaders. Combined, they made up just under half of our revenue and grew 4%.

Starting with Cranial and Spinal Technologies. We're driving consistent above-market growth on the continued adoption of our AiBLE ecosystem. CST delivered high single-digit growth in Core Spine, mid-teens growth in biologics and high single-digit growth in enabling technology. We had strong double-digit unit growth in StealthStation navigation, O-arm imaging and Mazor robotic systems, a leading indicator for future growth in this business. We also continue to see strong adoption of unit adaptive spine intelligence, our integrated AI-based surgical planning solution.

Now with AiBLE, we're offering a complete robust ecosystem of enabling technologies and associated implants for spine surgeons. Our global footprint, which includes over 10,000 systems is [ over ] 4x greater than the nearest competitor. And with this scale and extensive and rapidly increasing installed base, we're transforming the spine industry. We are leading the way. As more surgeons adopt our integrated spine technologies and in an environment where there is disruption from consolidation, we're attracting the best sales teams to Medtronic to grow and expand our business.

Next, in surgical, we grew 3%. Our wound management business, 1 share, growing in the high teens on the strength of our VLOC barb sutures. We also had solid mid-single-digit growth in hernia products as we won share in synthetic permanent mesh with our ProGrip platform. And as expected, our surgical growth continue to have a modest impact from declines in bariatric surgery.

Now we still believe this impact will be temporary as more patients become eligible for surgery, and as patients seek a more permanent treatment to weight loss.

To wrap up our established market leaders, cardiac rhythm also grew 3%, driven by high single-digit growth in cardiac pacing. Our [ micro alleles ] pacemakers continued to post strong results, growing 15%, driven by the launch of our next-generation MicroAV2 and VR2 devices. We're also benefiting from the adoption of conduction system pacing, an alternative to traditional single or dual chamber pacing. Our 38-30 lead, the only one on the market approved for conduction system pacing, continue to grow -- from double digits.

In CRM, we also began training and limited launch of our Aurora EV ICD. Now we expect the EV ICD, to reaccelerate our defibrillation solutions growth in the coming quarters. As I've shared with you in the past, Aurora is a game changer in the ICD space. It delivers the benefits of a traditional ICD including similar size, longevity, and pacing features, but without the leads in the harder veins. And these benefits can be realized with one device and only one implant procedure.

We expect our advantages will not only displace the competitors device, we will expand the population far beyond the existing segment and be a strong growth driver for CRM.

Now turning to our synergistic businesses. Combined, they grew mid-single digits in Q3, and I'll highlight some of the drivers here. Let's start with aortic, which grew 13% on supply recovery and continued momentum of our Endurant AAA franchise. Cardiac Surgery grew 10%, driven by strength in perfusion and cannula and ECLS oxygenators given competitor quality issues and the strong sales in international markets of our Avalos surgical valve.

Coronary grew 7%, driven by double-digit growth in both guide fitters and balloons. And we increased our drug-eluting stent share in the U.S. and in Europe on the continued rollout of our Onex frontier drug alluding stent.

Now turning to businesses in our highest growth markets. As I mentioned earlier, together, these businesses grew in the high single digits this quarter, and we expect their contribution to our growth to accelerate going forward. Now Diabetes led the way, growing double digits on the global adoption of our game-changing MiniMed 780 system. We're seeing strong sequential momentum, growing 5% over the prior quarter. Our customer base is growing sequentially, and we're driving more revenue per customer.

In the U.S., we not only returned to growth, we grew mid-single digits, driven by nearly 50% revenue growth in insulin pumps. We doubled our new users year-over-year, attracting those on multiple daily injections as well as users of competitor systems. Users are choosing 780G for the outcomes it delivers. With intensive insulin users, these outcomes matter. And the 780G is highly differentiated. It's the only AID system to automatically adjust and correct sugars every 5 minutes. It offers flexible glucose targets as low as 100 and features our proprietary meal detection technology.

This leads to high time and range for users. And this type of glycemic control is coming with less effort and burden. As users realize the relief that comes from spending more time in automation with our SmartGuard technology. It's worth pointing out that in a recent third-party survey of nearly 2,000 U.S. diabetes pump users, the 780G scored #1 in overall pump satisfaction. And among Type 1 CGM users, our Guardian 4 sensor mirrored competitor sensors in overall satisfaction.

And during the quarter, we secured CE Mark for our Simplera Sync sensor for use with the 780G, and we look to begin the limited release this spring. And in the U.S., we're planning to submit the 780G with Simplera Sync to the FDA in the first half of this calendar year. Simplera Sync is half the size of our current sensor. It has a disposable design and is much easier to put on.

Now we've been driving the Diabetes turnaround for some time. And I got to tell you, it certainly feels really good to return to double-digit growth, but we're not finished here. There is definitely more work to be done as we work to bring to market an even more robust ecosystem of differentiated technology for people living with diabetes including next-generation durable pumps, smart pens, patch pumps, sensors and algorithms. And as the intensive insulin management space moves to using smart dosing through either AID or Smart MDI, we expect an acceleration in the growth contribution from our Diabetes business.

Now turning to cardiac ablation solutions. We delivered 11% growth in international markets, including 9% growth in Western Europe. Our strong international growth as well as our overall performance continues to be driven by our leading Arctic Front cryo solution as pulse ablation is still in the early stages. We're seeing, though, a lot of enthusiasm in the market for our PFA products.

In Europe, we're the only company with PFA offerings for both the single shot and the focal segments. And in single shot, we have now started the limited market release of our PulseSelect PFA system here in fiscal Q4. And we're seeing very efficient procedures and after just a couple of cases. And so the learning curve is really short. The catheter handling and maneuverability has been excellent due to its small shaft and our custom 10 French bidirectional sheath. Clinicians are also reporting no noticeable muscle contraction with our PFA product, which is beneficial for patient experience.

In focal, we continue to ramp manufacturing of the Affera mapping system and Sphere 9 catheter and remain in limited market release in Europe. Sphere 9 is the only catheter that can perform both pulse field ablation and radio frequency ablation and high-density mapping. It's really an all-in-one catheter.

In the U.S., our cast business declined in the quarter. We faced the first full quarter of competition in the cryoablation space, which is a space we created and had been the only player. In addition, many customers actually held back purchases as they awaited the launch of our PulseSelect PFA catheter, which is now commercially available.

We do expect to improve from here as we roll out the recently approved next-generation nitron cryo console and PulseSelect, the only PFA catheter FDA-approved for both paroxysmal and persistent AF. And in addition to the European feedback, clinicians have consistently commented on how well it's visualized and how easily it connects to their mapping system.

So we're also making progress in bringing our Affera mapping system and Sphere 9 catheter to the U.S. with the last patient follow-up in our Sphere per AF pivotal trial now completed. We expect to see the results at a medical meeting in the first half of the calendar year.

With an $8 billion market size, expanding our share in this under-penetrated cardiac ablation space is a big opportunity for us. We expect our growth profile to improve over time, first, moving towards market growth and then winning share as we bring our rich pipeline of innovation to patients who need this technology.

In Neurovascular this quarter, we grew high single digits when you exclude sales in China where the market is subject to volume-based procurement. We continue to have strong double-digit growth in flow diversion globally. This is being driven by our innovative Shield technology for treating brain aneurysms, which is available on both pipeline Flex and Vantage flow diverters.

In Robotic Surgical Technologies, we continued growing the installed base for our differentiated Hugo robotic system in international markets. In the U.S., our EXPAND Euro pivotal trial continues to enroll, and we expect to have first enrollment in our hernia trial very soon.

We expect Hugo, equipped with advanced digital capabilities, to be a meaningful growth driver for us in the years ahead. We believe surgeon preference for our open console and modular design, our leading position in minimally invasive surgery and instrumentation, our connected digital ecosystem and data-enabled insights, along with our world-class surgical training program and partnerships, will meaningfully advance the low penetration of robotic surgery around the world.

Now turning to Structural Heart. We grew high single digits in the quarter, including mid-single digits sequentially as we see ongoing adoption of Evolut FX, its improved design and market-leading valve performance.

In Europe, where FX was launched for the first full quarter, we grew double digits. And Japan grew in the low 20s on the continued adoption of FX. I'm pleased to share the news today that we have submitted Evolut FX plus to the FDA for approval. FX Plus has three windows in the frame to allow easy coronary access while providing the same dependable valve performance of our Evolut platform.

And we were also pleased to hear that 1-year trial results of our SMART trial will be presented as a late breaker at ACC on April 7. We're excited to see the results and are looking forward to having both FX plus and the SMART trial as well as the continued strength of our 4-year low-risk data as catalysts for our Structural Heart business.

Now with that, let's go to Karen for a deeper look at our Q3 financial performance and our fiscal '24 guidance raise. Karen?

[Karen Parkhill, executive]

So looking at our financials. Our third quarter was another quarter where we delivered on our commitments. Our revenue grew 4.6% ahead of expectations, and adjusted EPS was $1.30, $0.04 above the midpoint of our guidance range. We attribute the beat to stronger-than-expected revenue growth and gross margin, offset by $0.04 from greater-than-anticipated currency impact, primarily from the devaluation in the Argentine peso in December.

We're delivering durable mid-single-digit revenue growth and have now for several quarters. As Geoff mentioned, international markets were an important driver for us. Our non-U.S. developed markets grew 6%, including 8% growth in Western Europe and 7% growth in Japan. In fact, we had double-digit growth in several of our businesses across both of those regions.

Emerging markets grew 10%. We had high-teens growth in the Middle East and Africa and mid-teens growth in South Asia. China grew low double digits as some of the VBP we expected there continues to be delayed. And Eastern Europe grew in the low single digits, given Russian sanctions.

In the U.S., we grew 2%. We have several new product approvals that are at the earliest stages of their launches and expect those launches to positively impact our U.S. growth over the next couple of quarters and beyond.

Looking down the P&L, we delivered a strong quarter. Both our adjusted gross and operating margins were ahead of expectations. Our adjusted gross margin of 66.1% improved year-over-year, overcoming a 60 basis point headwind from foreign exchange and continued elevated inflation. We attribute the favorability primarily to the delayed China VBP and lower freight costs.

We also continue to see traction from our pricing efforts and an early benefit from our comprehensive COGS efficiency efforts. While our adjusted operating margin of 25.2% declined 70 basis points, it was entirely driven by currency. In fact, operating margin on a constant currency basis was up 160 basis points from improvement in gross margin and strong SG&A leverage as we continue to drive efficiencies across the enterprise.

Below the operating margin line, our adjusted tax rate was a little higher than anticipated, mainly due to the jurisdictional mix of profits. On the flip side, income on our investments was also a little better than expected with higher rates.

It's worth noting that while our adjusted EPS was flat year-over-year, it grew 8.5% on a constant currency basis from the leverage we drove down the P&L. We also significantly improved our free cash flow and conversion in the quarter.

Now turning to guidance. Given our top and bottom line beat and continued strength in our underlying fundamentals, we're raising our full year revenue and EPS guidance. We now expect full year organic revenue growth of 4.75% to 5%. For the fourth quarter, we're expecting organic revenue growth to be in the range of 4% to 4.5%. On a comp adjusted basis, this is an acceleration from the third quarter as we continue to ramp our recent product launches.

With the exit of ventilators that we announced today, we are moving the associated revenue to the other segment starting in the fourth quarter. As is the case with all revenue in other, we will exclude it from our [ unit ] revenue growth and additional details can be found in our third quarter earnings presentation.

Regarding currency, based on recent rates, we would see a full year revenue impact in the range of an unfavorable $15 million to a favorable $35 million, including an unfavorable impact of $70 million to $120 million in the fourth quarter.

On the bottom line, with the beat in the third quarter, we're raising our full year EPS guidance by $0.04 at the midpoint to a new range of $5.19 to $5.21. I'd point out that given our durable performance, we've been able to increase this guidance by $0.15 at the midpoint from where we initially started the year. For the fourth quarter, we expect adjusted EPS of $1.44 to $1.46. And regarding currency, based on recent rates, we're seeing an unfavorable impact of 7% on full year EPS, including an unfavorable 5% impact in the fourth quarter.

Lastly, while we'll give our fiscal year '25 guidance on our earnings call in May after we finish our planning, I want to share our early thoughts. You've seen us deliver durable revenue growth for several quarters, and we expect that to continue.

Down the P&L, inflation, currency and tax are currently headwinds to earnings growth. And we expect to continue to increase our investments in R&D. That said, we're very focused on driving offsets where we can and improving the earnings power of the company.

And regarding the portfolio management decisions we announced today, while the Street's FY '25 numbers didn't yet reflect the potential separation. With today's decision, we're able to increase investment in innovation-driven growth without near-term earnings dilution or an ongoing impact to cash flow, all with a focus on optimizing long-term shareholder value.

I want to close by expressing my sincere gratitude to all of our employees for your hard work and unwavering commitment to Medtronic mission. Your dedication was instrumental in achieving our results this quarter and making a difference for so many people around the world. Thank you.

Geoff, turning it back to you to take it home.

[Geoffrey Martha, executive]

Okay. Thank you. But before I wrap up, I want to note that Tom Holleran passed away last week at the age of 94. Tom provided decades of leadership to our company. First as General Counsel, next as President and as a Director on our Board for many, many years. In the early '60s, Tom was one of the instrumental people who created our Medtronic mission, together with our founder, [ Obaken ]. Tom was also a significant leader in the Twin Cities and beyond and served on several company Boards. Our thoughts are with Tom's family as they celebrate his life.

Now before we go to analyst questions, I'll close with a few brief concluding comments on our progress. You've seen now for several quarters in a row that we're delivering on our commitments with durable mid-single-digit revenue growth. And when you look over the last couple of quarters, we've had a rapid cadence of meaningful innovative product approvals, many of which are just getting started, including EV-ICD, both PulseSelect and Affera in PFA, inceptive for SCS, Percept RC for DBS and, of course, our new Simplera Sync sensor in Diabetes. And we can't forget Simplicity for hypertension.

When you combine these with our investments to enter surgical robotics, along with the strong execution we're having in businesses like spine and Diabetes, this is what gives us confidence in our ability to continue delivering durable growth.

At the same time, we've been sharing with you our efforts to restore the earnings power of the company. And we're seeing those efforts begin to show up in our financials. And the comprehensive transformation that we've been working on streamlining our operating model, aligning incentives, revamping our capital and portfolio management activities and instilling a performance-driven culture, well, this is also having an impact.

These changes take time, and we're certainly not done, but it's very encouraging to see our progress and where we stand today. And equal exciting are the catalysts that we see coming, which we believe will lead to significant advancements for patients and value creation for both health care systems around the world and our shareholders.

So with that, let's move to Q&A, where we're going to try to get to as many analysts as possible. [Operator Instructions] If you have additional questions, can reach out to Ryan and the Investor Relations team after the call.

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

[Brad Welnick, executive]

[Operator Instructions] Lastly, please be advised that this Q&A session is being recorded. For today's session, Geoff, Karen and Ryan joined by [ Kielar ], EVP and President of Diabetes; Mike Marinaro, EVP and President of the Medical Surgical portfolio; Sean Salmon, EVP and President of the Cardiovascular portfolio; and Brett Wall, EVP and President of the Neuroscience portfolio. [Operator Instructions]

[Unknown Attendee]

We'll take the first question from Larry Biegelsen at Wells Fargo.

[Larry Biegelsen, analyst]

Congratulations. I know they're a nice quarter here. I wanted to just focus my one question on the fiscal 2025 comments, Geoff and Karen. You talked about durable growth. Is that -- should we think about that as mid-single-digit organic growth? And just help us -- I think there'll be some concerns about what we're seeing in the afib business, given the low double-digit decline in the U.S. What are the puts and takes to consider there?

And on earnings, Karen, can you quantify those headwinds, inflation, tax and FX in fiscal '25? And consensus is at about 5%. Are you comfortable with consensus EPS growth?

[Geoffrey Martha, executive]

Well, first of all, thanks for the questions, Larry. Maybe I'll start with the CAS one. And then Karen, maybe Sean and I will take the afib one and then Karen can talk about the FY '25 questions.

So I'm going to phone a friend and have Sean here in a second here. But on our Afib business, look, we are confident in the investments that we made that are going to bear fruit here. We haven't seen it translate into financials yet, but there's lots of leading indicators here that we're seeing that give us confidence both one in continued, I think, stronger performance than people might think in cryo, but importantly, in PFA for both PulseSelect or organic program and then Affera. But Sean, do you want to comment on this a little more specifically for Larry?

[Sean Salmon, executive]

Yes, sure, Geoff. So Larry, in the U.S., what we had experienced was the first time ever a competitor in the cryo segment. So we had 100% market share, and we had a competitor ramp up their production. We felt that in the fourth quarter. I think there's also some interest patient for new products we're launching, including a nitron console, a refresh on our capital equipment for cryo and of course, the PulseSelect which just started its launch in the United States after the quarter closed. And that's doing very, very well. The feedback has been exceptional. Doing well in the United States, doing well outside the United States. And I think those catalysts to growth of pulse field for both the PulseSelect, that's the single-shot technology as well as our point-by-point ablation is driving a lot of enthusiasm.

So I think we're going to see a return to growth. And into next year, we'll really feel the full force of those launches. So it's a step back, certainly in the United States, with the 11% growth worldwide or outside the United States, I should say, is giving us a lot of confidence. This is a pipeline that's poised to return us to growth in that segment.

[Geoffrey Martha, executive]

Thanks, Sean.

[Karen Parkhill, executive]

And on FY '25, Larry, I would just start with the fact that we're really pleased with our performance through these last several quarters. Q3 was another solid quarter. Our fifth consecutive quarter of solid mid-single digits. And I would point out that we drove that mid-single-digit growth this quarter, off of mid-single-digit comps last year. And that's what we expect to continue into FY '25.

We've been working through our planning process, and we expect to wrap that up in advance of our Q4 earnings call. So we'll give our guidance in May. Not ready to give you real specifics but from a high level, we've had no major changes to the puts and takes for next year that we discussed on our earnings call in Q2. And we're focused on obviously setting up guidance that sets us up for success, prioritizes innovation and allows us to deliver on our commitments.

But just on margins and down the P&L. There are puts and takes. We've got inflation that's stabilizing a bit, but it's still higher than historical. Currency is always dynamic. But at recent rates, we are facing a decent headwind from FX, and we'll just have to see how that shakes out.

Global tax reform is likely to be a headwind but as always, we're focused on driving offsets where we can. And as you know, we've made good and real progress on our COGS cost out work and that started with centralizing our global ops and supply chain and focusing those teams on putting in place tangible programs that we now have in place to drive that cost at work.

And always, we're continuing to focus on driving pricing as an important lever. We've built a new muscle around pricing, and we're just making it stronger and stronger.

And then we're always focused on controlling expenses. We've got discipline on our largest driver of our expense is our headcount, and we expect that to continue. So really, no major changes from what we laid out last quarter.

[Ryan Weispfenning, executive]

Okay. Thanks, Larry. [Operator Instructions]. Brad, can we take the next question, please.

[Brad Welnick, executive]

The next question comes from Robbie Marcus at JPMorgan.

[Robert Marcus, analyst]

I wanted to ask on the Patient Monitoring business. The original intent was to try and sell it or spin it. You're now keeping it and exiting the ventilator business. Just maybe walk us through the thought process what happened in the market and why this is the best outcome for Medtronic?

[Geoffrey Martha, executive]

Sure. I'll take that one, Robbie. So a couple of things. I'll start with -- a couple of things have changed. And I'll start with what we do have strong conviction in driving profitable category leadership in this, what we're calling Acute Care and Monitoring business. And a couple of dynamics have changed. And just as a reminder, the monitoring component -- the Patient Monitoring component is the biggest part of that -- of those businesses that we intended to spin. .

I think the biggest thing that change is our improved competitive positioning is in our monitoring business, in particular, changed over the last year. As we are working on the process, we continue to run the business, and it performed well. And the competitive dynamics versus our main competitor, Masimo, changed significantly for the positive for us. And we believe that we can ensure that, that change is durable with the increased investment. And we found a way to make that increased investment, which leads to a decision to wind down the vents business.

It's a very difficult decision, but the business became increasingly unprofitable throughout the last year. The growth slowed even more. And the dynamics within the vent segment are changing, moving to lower acuity ventilators. And our kind of, I'd say, unique and worthy contributions are more in the higher acuity hospital based.

And so with that market changing and becoming increasingly unprofitable, our decision to wind that down creates the oxygen, the investment, if you will, that we can fund the monitoring side of the equation here and ensure that this -- our competitive positioning versus Masimo, we feel like we can extend it.

And another dynamic that has emerged is the use of data and the importance of data in the space, and that's been changing and becoming increasing and actually, I'd say it's the basis for innovation. And our confidence in taking that data and translating that into meaningful iteration, rapid iterations as well as disruption over time is pretty high given what we've been able to do with AI and other parts of the company.

And so you add all this together, and I try the last thing I'll make a comment on is, as a company more broadly, we continue to prioritize profitable growth and category leadership. And when you take all these factors together, we believe we're able to provide increased investment for this Acute Care and Monitoring business, or what we call ACM now, using the savings from vents and also bringing the two -- these were two separate businesses, Respiratory Interventions business with ventilators in it and our monitoring business, bringing them together at the leadership level also creates some savings. And then we can fund the incremental investment needed for the monitoring business, all without dilution to our P&L.

So the last thing I want to say is this is a difficult decision. And it doesn't take anything away from our employees who play such a pivotal role during COVID in driving ventilator innovation and responding to the global needs during the COVID pandemic. And I also want to give a nod to the -- just the legacy of the -- brand, which has been so strong. And we're proud of the rich legacy of this business and -- ventilators and this decision has not been easy.

And the last thing I'll say is, this does not mean that we're going to shy away from additional portfolio moves. So don't read anything into that. But the bar is high for any strategic activity that's going to dilute our focus or our earnings.

[Ryan Weispfenning, executive]

We'll take the next question. Please, Brad.

[Brad Welnick, executive]

The next question comes from Joanne Wuensch at Citi.

[Joanne Wuensch, analyst]

There are a lot of products that I could ask about. So I'm just going to throw a couple of headline ones out there. Diabetes, congratulations on a return to U.S. growth. Is there a way to peel that apart a little bit on the new accounts or new patients versus renewals?

And I guess my second question has to do with Hugo and if you can give us a little bit of a state of an update on how those launches are going outside the United States?

[Geoffrey Martha, executive]

Thanks, Joanne, for the questions. Obviously, we're -- we've been working on this Diabetes turnaround for some time, and it hasn't been a straight line. But we definitely have some momentum here on 780G, that platform, and just our capabilities here to use, like I was talking about in the Patient Monitoring business here as well, to create algorithms that really are differentiated and drive differentiated outcomes for patients. And that's playing out globally and now in the United States. So I'll have Que -- maybe Que, if you could come in and answer Joanne's, if you could "peel" a little part a little bit more for Joanne. I'd appreciate it.

[Que Dallara, executive]

Yes. Look, we're very pleased with the progress that we've made every quarter since we had launched. And we are seeing new patients grow significantly as well as renewals. So both are progressing very well.

Look, it will take time to rebuild our installed base, but you can see with the pump growth that we saw in the U.S., high 40s year-over-year. That's going to be followed by consumables and CGM growth as well. So we expect to continue to make progress every quarter, but pretty pleased with how the markets reacted to the product introduction.

[Geoffrey Martha, executive]

Okay. Thanks, Que. Mike Marinaro, can you jump on Hugo here?

[Unknown Executive]

Yes. And thanks, Joanne, for the question. We continue to see very good progress with Hugo outside the United States with an expansion of installations in countries around the globe. In fact, we entered into two new subregions in Central and Eastern Europe and are continuing to see very good response to the things we've talked about previously.

So the open console, the very crisp visualization and increasingly very good feedback around our Touch Surgery Enterprise platform, which on its own continues to expand and had a very good quarter with installations, both with Hugo and in our broader surgical business.

Also, as Geoff noted during the commentary, we continued very good progress with our expand Euro IDE here in the U.S. and are preparing for our first patient enrollment hernia IDE. So in total, good reception, a sharpening sort of appreciation for the features of Hugo, I think an emergence of the digital ecosystem and an appreciation for that as well.

[Geoffrey Martha, executive]

Yes, Joanne, on this one -- thanks, Mike, first of all. And I'd say on this one, the robotic system has been and the features are -- and had been well received, but it's broader than that, as Mike pointed out. I mean, it's about the digital platform that comes with it and -- as well as the instrumentation as we transition instrumentation in our laparoscopic business onto the robot, particularly stapling and energy. All these moves build momentum -- build capabilities and momentum over time. .

And we're seeing -- we saw that play out in the spine business. We bought Mazor, it wasn't an overnight change. You saw our last couple of quarters have been, but it took the integration of these things. Mazor with our navigation and then imaging and then getting these AI guided surgical planning systems, all these things coming together, every quarter, more progress have built the ecosystem we have today that's really driving, not just the growth for Medtronic, but the growth for the spine industry right now. And we expect to do the same thing in soft tissue surgery.

[Ryan Weispfenning, executive]

We'll take the next question, please, Brad.

[Brad Welnick, executive]

The next question comes from Travis Steed at Bank of America.

[Travis Steed, analyst]

Can you hear me okay?

[Geoffrey Martha, executive]

Yes.

[Travis Steed, analyst]

Geoff, just curious if you could talk a little bit more on the gross margin productivity. Some of the things you're driving there. And can you still get the kind of 2 to 3x annual cost savings on the gross margin line?

And last month, the investor comments, you talked a lot about leverage -- growth. I'm just curious if that's a comment that applies to FY '25 or if that was more of a longer-term comment?

[Geoffrey Martha, executive]

Sure. Let me tell you, I'll start off and transition to Karen. On the gross margin, a couple of things that I'd point out. One is pricing. Karen talked about that. I do think -- what we're seeing here is a lot of innovation in the industry and a lot at Medtronic. And this innovation we're finding is valued. It drives value in the health system. And I think we've gotten better at showing the health economics of the innovation that applies from the innovation in addition to the clinical value. I think in the past, we were pretty indexed on clinical value. And more recently, we keep that focus and then add the health economics, and it's getting paid for. And we're -- I think doing a better job of making those points and getting that pricing. And I do think it's durable. So the pricing has increased, I'd say, for the company overall 200 basis points or so relative to the past. And I think we're going to keep pushing for even more. On.

The converse, if you don't have the innovation, be prepared for that as well because I think hospitals have gotten more sophisticated in the purchasing and your price is going to pay for that if you're not keeping up with the innovation. But we -- given where we are on the product like goals and given this pricing loss, so we feel good about that being especially to the historical baseline.

The other you asked about is cost of goods sold productivity. And the answer -- the short answer to your question is yes, we do think it's sustainable. We've got lots of opportunity here. Can you think about it, we have this pretty big footprint of factories and distribution centers and too many suppliers, I said in the past.

Now with Greg Smith coming in a couple of years ago and we've centralized that, we can take a strategic look across that portfolio and we have a long list of cost down programs. And then we've ensured that we've effectively contracted those between our global operations and supply chain team and our operating units. Because it takes release product engineering to make sure that these cost programs can happen that are in our operating units. So we feel good about that, and we feel that that's sustainable.

So those are two big changes that impact positively gross margins now and into the future. And speaking of the future, I'll turn it over to Karen to talk about your FY '25 leverage question.

[Karen Parkhill, executive]

Yes. So just on -- I'll just add on gross margins, too. We're pleased with our performance that we had this quarter. We overcame a 60 basis point headwind from FX and continued inflationary pressures. And a lot of that was driven by strong pricing, which Geoff talked about. We did have some continued delays in China VBPs, in aortic in peripheral vascular, in stapling. And those VBPs could be coming through this coming fourth quarter, this current fourth quarter and potentially into next year. So that's just something going on in gross margins.

As we talk -- as we think about leverage down the P&L, clearly, we're focused on driving leverage. And I think we talked about it last quarter, Travis, clear leverage is where your bottom line grows faster than your top line. We're focused on getting there eventually. We're not ready to talk about that for FY '25. It's still too early for our planning guidance. And I've already pointed out lots of different puts and takes for next year.

[Geoffrey Martha, executive]

Yes. Karen said pricing on the gross margin side, pricing. Cost of goods productivity, a lot of focus there. Karen mentioned earlier on the call about discipline around our G&A. Our people are the #1 driver of our cost there. And so we've put a discipline in there that we're holding to. And then finally, just setting up the portfolio for profitable growth.

And the decision on -- with the changing dynamics, the decision to hold our monitoring business because of the confidence in the profitable growth is evidence of that is setting up the portfolio the right way. So I'll leave it there on the focus of -- on recovering the earnings power of the company and we'll provide more details on that FY '25 look next quarter.

[Ryan Weispfenning, executive]

Next question, Brad?

[Brad Welnick, executive]

The next question comes from Vijay Kumar at Evercore ISI.

[Vijay Kumar, analyst]

I guess one on earnings questions here. I look at your peers, their earnings have grown versus fiscal '19 -- 2019 prepandemic levels. Medtronic earnings have essentially been flattish. Can Medtronic commit to perhaps about trend earnings growth over the medium term as you play catch up similar to what your peers have done?

And I think related to that, Geoff, in the past, you mentioned about a $400 million drag from investments in Ardian, Hugo. Where are we on those investments? Are they still a drag? When can those be profitable to the business?

[Geoffrey Martha, executive]

Thanks, Vijay, for the questions. I'll start with the latter question on Ardian and Hugo and let Karen handle the earnings growth ones and further comment on the Ardian and Hugo. I'd say on -- look, Hugo -- the way we're looking at Hugo is a part of our broader surgical franchise, an important part of that and it needs investment. And it is -- if you look at Hugo specifically, it is taking a meaningful amount of investment to keep it going here. We've reached -- I love the milestone that we're at now in terms of a robot that's out there that's performing well and has got great features that are valued by physicians globally. The feedback has been strong, but we still got more work to do. .

We've got to get our instruments on there. We've got to complete the U.S. trial. We've got to continue to build out a U.S. -- a capital equipment U.S. sales force. So this is a tall order. But our confidence in executing there is high, and it's important to this huge business, our surgical business, which is our biggest business and drives a lot of profit and cash flow.

And I say our confidence is high. I know we're up against a strong competitor in Intuitive. But we like our competitive positioning overall and especially against the other potential robotic companies there and dynamics of this market, we think, play in our favor. So there's investment there.

On Ardian, and by the way, we're really trying to call it Simplicity now. We've got to get -- we'll get ready for some consumer education on this hypertension therapy. So we're trying to get rid of the Ardian term as much as possible. So we've got a square jargon going on around here on that one. But on hypertension, this one, we believe, will start to show some profits here. So it's much less of a drag, and we hope to, in the next couple of quarters and in the medium term, this to generate not just revenue but income. It's a highly profitable product line for us with high gross margins, and it will be a positive to our overall mix.

And like I said, Hugo is going to take investment, but this one, I think, will provide oxygen, not in the next quarter or 2, but over the medium term here. So I'll leave it there, but it's -- and turn it over to Karen.

[Karen Parkhill, executive]

Yes. And I would just say on earnings, we've made good progress on driving the earnings power of the company just in this year. I noted that we've been able to increase our guidance on the bottom line by $0.15 at the midpoint from where we initially started the year, and that's driven by the strong track record that we've drove -- that we've driven in the last -- the first 3 quarters of this year. And we do expect that to continue.

Over the medium and long term, we are committed to the right earnings growth. There's no debate about that. And we're focused on overcoming the headwinds that we've got over that time frame and delivering on that growth.

[Ryan Weispfenning, executive]

We probably have time for two more questions, Brad, take two more.

[Brad Welnick, executive]

The next question goes to Matt Miksic at Barclays.

[Matthew Miksic, analyst]

Matt at Barclays. Can you hear me okay?

[Geoffrey Martha, executive]

Yes, we can now.

[Matthew Miksic, analyst]

Great. So maybe just a follow-up here on some of the products that you've mentioned recently approved and I think some of the products that you hope to see approved in the coming quarters, and I'm thinking of like Aurora and PulseSelect and in additions to the U.S. approved products in Diabetes. And I know Sean mentioned sort of the rough trajectory for AF ablation. But maybe on that business, for example, any additional color around cadence? Is this something that we start to see improve in the fourth quarter? Or is this sort of like a early to mid-'25 kind of process on some of the same commentary for sort of cadence and trajectory in Aurora and for example, maybe the Diabetes business would be super helpful.

[Geoffrey Martha, executive]

Sure. So maybe I'll start with Sean. Before I turn it over to Sean, as I pointed out in the commentary, all the puts and takes in the -- our ablation business, what we call Cardiac Ablation Solutions, our Afib business. We do see an acceleration in this business even in the fourth quarter here. So -- but I'll turn it over to Sean to talk about Afib and then Aurora.

[Sean Salmon, executive]

Yes. Thanks, Geoff. And Matt, the trajectory is obviously going to be upward for both the EV ICD as well as the CAS business in total. As you launch these new technologies, there's some training that you have to do to make sure that the physicians are comfortable with how to use the products. And that's, of course, something we're very deliberate about to make sure that there's a good patient outcome and good acceptance of the technology. And that's something we do pretty frequently in our business. So we're really, really good at it. And the feedback has been excellent.

The procedure efficiency on PulseSelect has been looking these cases done in like half an hour. And the acceptance on Aurora has been exceptional, too. So as I said, I think it's the same story for both those technologies where you push growth now, but into next year, we'll see the full impact of these innovations.

[Geoffrey Martha, executive]

Que, you want to comment on Diabetes?

[Que Dallara, executive]

Yes. Look, we continue to push the pipeline in diabetes, starting with Simpler approved with CE Mark last September, followed by Simplera Sync recently approved that we announced at JPMorgan and we completed our clinical trials for -- with Simplera Sync in the U.S., which we expect us to in this first half of the calendar year. So that's the cadence that you should expect.

And as Geoff mentioned in his opening comments, we have next-generation products that we discussed at ADA last year that we continue to make progress on and aggressively moving to get next-generation TID pumps in patch comes out to the market.

[Ryan Weispfenning, executive]

I apologize to the analysts that we weren't able to get to. We have time though for one more, Brad.

[Brad Welnick, executive]

The final question comes from Anthony Petrone at Mizuho Securities. .

[Anthony Petrone, analyst]

Can you hear me okay?

[Geoffrey Martha, executive]

Yes, we can. Yes, we can...

[Anthony Petrone, analyst]

Okay. Great. One, condolences on passing of Tom to the team and his family. And maybe one just going to Structural Heart. Maybe just to set up on the SMART study, quick two-part question. One, was that ahead of schedule? Was it expected to be at TCT instead of ACC? So as the late breaker getting approved a surprise? And then maybe just high level, how do you think that study will play out once we have the results? It is head-to-head in TAVR in high-risk symptomatic severe. So just thoughts on how you think that data received once it's out there post ACC at that session in the coming weeks?

[Geoffrey Martha, executive]

Well, thanks -- first of all, Anthony, thanks for the comment Tom Holloran. He's a real legend around here and just a great guy. So we're going to miss him.

On Structural Heart, two comments before I turn it over to Sean. First, I really applaud the business for their evidence generation in total. On -- we just did our low-risk data and we publish it every year, not just when it's convenient. And then they had the courage to do a head to head, which is not something that's often done in our space.

And so I can tell you that I, for one, love that, just the commitment to data and the competitiveness to go head-to-head. And I'm very much looking forward to the results that are going to come out in early April at ACC. But in terms of the specifics of what you're asking on how it might play out, I'll turn that over to Sean.

[Sean Salmon, executive]

Yes. Thanks, Anthony. The completement of enrollment happened in October of '22. So that's a 12-month endpoint for the study, and that pushes you really out of the window for TCT. So I think we're on schedule, I'd say. Pleased to have been accepted as a late breaker at ACC. But that's really, as expected, I'd say.

In terms of the trial itself and how it'll be received, I think the momentum that we have on data from the notion 10-year data that's low-risk patients out 10 years showing superior durability of our valve compared to surgical implants and then our 4-year low-risk study with hard endpoint benefits and a widening benefit on serious outcomes like mortality and disabling stroke then, of course, going head-to-head in a really important patient population, those with a small -- we said that's about 40% of the global market, really prevalent among women and within smaller patient populations like in Japan, for example.

So that's -- I think it's really important and compelling data. It's a 1-year outcome, which portends long-term outcomes. And I think that we're excited for the reception of these results. And we do think that, that's a catalyst for growth for us with our really unique position in that particular subset of patients, which is a big chunk of the market at 40%.

[Geoffrey Martha, executive]

Okay. Thanks, Sean. And so just to wrap it up here. One final comment on the ventilation -- the monitoring and ventilation decisions. As a result of these portfolio decisions, Bob White will be leaving Medtronic, and he's been just such an impactful and important leader for the company for a long time. And although the friendship will remain strong, we're definitely going to miss working with him day to day, and I want to wish him well. And I know that comes from the Board of Directors and the executive committee and everybody at Medtronic who's interacted with Bob. Just a high ethical leader and just a good guy and we wish him well.

And in terms of -- and so for [ tuning in ] today, I just want to thank everybody for the questions. Definitely appreciate your support and continued interest in Medtronic, and we hope you'll join us again for our Q4 earnings broadcast, which we anticipate holding on Thursday, May 23. And again, we'll update you on our progress and how we finish the fiscal year, but also look ahead to fiscal '25. So with that, thanks for spending time with us today, and have a great rest of your day.