Welcome to the Boston Scientific Q2 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, this event is being recorded.

I'd now like to turn the conference over to Lauren Tengler, Vice President, Investor Relations. Please go ahead..

Thank you, Kyle. Welcome everyone, and thanks for joining us today. With me on today's call are Mike Mahoney, Chairman and Chief Executive Officer; and Dan Brennan, Executive Vice President and Chief Financial Officer.

We issued a press release earlier this morning announcing our Q2 2023 results, which included reconciliations of the non-GAAP measures used in the release.

We have posted a copy of that release, as well as reconciliations on the non-GAAP measures used in today's call to the Investor Relations section of our website under the heading Financials & Filings. The duration of this morning's call will be approximately 1 hour.

Mike and Dan will provide comments on Q1 performance as well as the outlook for our business including Q2 and full year 2023 guidance. And then, we'll take your questions. During today's Q&A session Mike and Dan will be joined by our Chief Medical Officer, Dr. Ken Stein.

Before we begin, I'd like to remind everyone that on the call, operational revenue growth excludes the impact of foreign currency fluctuations and organic revenue growth further excludes acquisitions and divestitures for which there are less than a full period of comparable net sales.

Relevant acquisitions and divestitures excluded for organic growth or Baylis Medical, which closed on February 14, 2022. The majority stake investment in Acotec Scientific Holdings Limited and Apollo Endosurgery, which closed in February and April of this year, respectively.

Divestitures include the endoscopy pathology business, which closed April of this year. Please note that, we have elected to consolidate Acotec results on a one quarter lag, which had an immaterial impact on our Q2 reported and adjusted results. On June 15, 2022, we announced our entry into a definitive agreement to purchase a majority stake in M.I.

Tech, the agreement required global regulatory approvals that we were unable to obtain in some countries. As a result, the original agreement was terminated and in June of this year, we purchased a minority stake in M.I. Tech.

For more information, please refer to our financial and operating highlights deck, which may be found on our Investor Relations website. On this call, all references to sales and revenue, unless otherwise specified are organic.

This call contains forward-looking statements within the meaning of the federal securities laws, which may be identified by words like anticipate expect, may, believe, estimate and other similar words.

They include, among other things, statements about our growth in market share, new and anticipated product approvals and launches, acquisitions, clinical trials, cost savings and growth opportunities, our cash flow and expected use, our financial performance, including sales, margins and earnings, as well as our tax rates, R&D spend and other expenses.

If our underlying assumptions turn out to be incorrect or if certain risks or uncertainties materialize, actual results could vary materially from the expectations and projections used on – or expressed or implied by our forward-looking statements.

Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs filed with the SEC. These statements speak only as of today's date and we disclaim any intention or obligation to update them. At this point, I'll turn it over to Mike.

Mike?.

Thanks, Lauren, and thank you to everyone for joining us today. We're very proud of our second quarter results, which exceeded our expectations and demonstrated the strength of our category leadership strategy, commitment to clinical evidence, and the winning spirit of our global team.

In second quarter '23, total company sales grew 12%, both operationally and organically versus second quarter '22, exceeding the high end of our organic guidance range of 7% to 9%.

We anticipate that most of our business units grew in line or faster than the respective markets, fueled by our innovative portfolio and commercial execution, also supported by healthy procedure demand. Second quarter adjusted EPS of $0.53 grew 21% versus second quarter '22, exceeding the high end of the guidance range of $0.48 to $0.50.

And second quarter adjusted operating margin was 26.8%, also slightly higher than anticipated. Through the first half of the year, we have grown their business organic sales rate at 13%, with broad-based durable growth across all of our business units and regions.

Importantly, we have also grown our adjusted EPS growth 20% during the first half, while balancing our investments to ensure we achieve our short-term and long-term goals.

Now for our 2023 guidance, we're guiding the third quarter '23 organic revenue growth of 7% to 9% and we expect momentum to continue and are raising our full year organic guidance to 10% to 11%. Our third quarter adjusted EPS estimate is $0.46 to $0.48 and we're increasing our full year adjusted EPS range to $1.96 to $2.

I'll now provide some additional highlights in the second quarter, along with comments on our '23 outlook, and Dan will provide more details on the financials. Regionally, and on an operational basis, the U.S. grew 9% in second quarter, with notable strength in our WATCHMAN, PI and Endoscopy businesses.

Europe, Middle East Africa also grew 9% on an operational basis versus second quarter, with strong performance in the region was broad-based, with double-digit growth in four out of our five major markets in Europe. Across the portfolio, we saw strength in new and ongoing product launches, including FARAPULSE, POLARx, ACURATE neo2 and LUX-DX.

Asia Pacific grew 24% operationally versus second quarter, led by strength in China and Japan. Japan growth is fueled by new products, including agent, our drug-coated balloon for the coronary arteries, and resume our minimally invasive BPH technology with device performance and procedures that leave nothing behind is resonating in the market.

China delivered excellent growth in the second quarter, led by our innovative portfolio and commercial execution against the COVID impact second quarter '22. We also saw particular strength in our interventional cardiology therapies, WATCHMAN, CRM and PI business units and we continue to expect double-digit growth in China for the full year.

I'll now provide some additional commentary on our businesses. Starting with urology. Urology sales grew 8% organically in the second quarter. The stone management franchise grew double-digits, driven by LithoVue and ongoing globalization efforts.

Rezum continues to do well globally, growing strong double-digits in the quarter and most recently launching in Brazil. We continue to see ongoing momentum within our prosthetic urology franchise, fueled by patient activation efforts. designed to bring awareness to our erectile restoration and male incontinence interventions.

Endoscopy sales were excellent, growing 12% organically and 14% operationally in the second quarter, with notable strength in the U.S., Latin America and Asia-Pac, with new product momentum and healthy procedure demand.

Our Apollo integration is progressing well and earlier this month that we received FDA clearance for OverStitch NXT, a suturing system that enables suture placement during advanced endoscopic procedures. This next-generation device brings ease-of-use benefits and improved accessibility when using a single-channel endoscope.

Neuromodulation sales grew 3% organically in the second quarter. Spinal cord stimulation sales were flat versus prior year and we expect SCS sales growth to improve in the second half of the year, with strong trialing in the second quarter in support of clinical evidence, which was presented this month at Aspen.

Notably, six-month outcome data were reported from the SOLIS trial, which is a randomized controlled trial for non-surgical back pain, which demonstrated superior outcomes for SCS against conventional medical management, also consistent with primary endpoint results.

Our brain franchise grew double-digits in the quarter, with continued momentum from new product launches in the U.S. and procedure recovery in Europe.

Earlier this month, we received FDA approval for the Vercise Neural Navigator 5 software, which when used with our deep brain stimulation system can help provide clinicians with data for efficient programming in the treatment of Parkinson's disease. Peripheral Interventions sales were very strong growing 13% organically versus second quarter '22.

Our arterial franchise grew double-digits, led by our drug eluting portfolio.

And earlier this month, after reviewing all available data and analysis, the FDA provided updated information associated with paclitaxel-coated devices used to treat PAD, recognizing the safety of these devices and eliminating the requirement for specific warning language within device-related labeling.

We're pleased that the FDA determined that the available data do not support an excess mortality risk and we remain dedicated to helping physicians provide the best care possible for their patients. In Venous, U.S.

growth was led by ongoing strength in Varithena, a non-thermal treatment for varicose veins, with international growth driven by our clot management technologies. Our Interventional Oncology franchise grew double-digits with strength across the entire portfolio.

And last month, we received clearance for the EMBOLD, Soft and Packing Coils, which along with the EMBOLD fibroid coil, complete our detachable coil system.

We also began our limited market release for Obsidio, which is the only conformable gel embolic material that's indicated for the peripheral vasculature, adding to our robust embolization portfolio. Cardiology delivered another excellent quarter with organic sales growth of 13% versus second quarter.

Within cardiology, the Interventional Cardiology Therapies business, sales grew 12% organically versus second quarter. Our coronary therapies franchise growth was driven by our innovative imaging technologies as well as the recent launch of our agent drug-coated balloon in Japan, offsetting ongoing price pressure in drug eluting stents.

Our structural heart valves franchise grew strong double-digits with another quarter of performance from our ACURATE neo2 in Europe. Market reception remains very high, backed by clinical evidence, ease-of-use benefits and a focus on lifetime patient management. We continue to expect to bring ACURATE neo2 to the U.S. in the second half of 2024.

WATCHMAN sales grew 27% organically versus second quarter, also outpacing the market. U.S. demand remains strong and international growth was led by China and Japan.

We were pleased to have completed enrollment in the WATCHMAN FLX Pro CT pilot study, which is a single study design using multiple imaging modalities to assess post-procedural healing in the next generation of WATCHMAN FLX Pro.

We expect continued momentum within the WATCHMAN franchise further supported by the anticipated approval of our both WATCHMAN FLX Pro and our steerable sheath called Trusteer (ph) by the end of 2023. Cardiac Rhythm Management sales grew 5% organically in the quarter.

In core CRM, our high-voltage business grew low-single digits and our low-voltage business grew mid-single digits, and we believe that performance was in line or slightly below market growth as the replacement tailwinds neutralize.

Our diagnostic franchise grew double-digits in the quarter on the strength of our broad cardiac diagnostic portfolio and we anticipate momentum will continue, supported by the approval of our next-generation ICM called LUX 2 expected later this year. Electrophysiology sales grew 28% organically in the second quarter.

International growth continues to be fueled by strong performance in both FARAPULSE and POLARx across Europe and Asia-Pac. We continue to make progress towards bringing these innovative technologies to the U.S., and we expect POLARx approval in the third quarter.

In addition, we are looking forward to the data presentation of the ADVENT trial, our U.S. IDE, at the ESC Conference on August 27. Recall the ADVENT trial is a first of its kind, randomized clinical trial, designed for a non-inferior 12-month primary safety and efficacy endpoints compared to a commercially available RF and cryoablation systems.

It is notable for its design and rigor as it seeks to demonstrate the single procedure effectiveness of an intervention without the use of antiarrhythmic drugs and reablations. We continue to anticipate the approval of FARAPULSE in the U.S. in 2024.

The Access Solutions franchise grew strong double-digits in the second quarter with continued momentum in the U.S. and Japan with a differentiated VersaCross Transseptal platform. We're also proud of the performance of our global teams and are confident in our future.

We remain committed to sustainable innovation and our financial goals, consistently growing sales faster than our underlying markets, expanding operating margins and delivered strong double-digit adjusted EPS growth with a strong adjusted free cash flow generation.

We're looking forward to our September 20 Investor Day, where our leadership team will provide more insight into our innovative pipeline today, the opportunities ahead and our long-term financial goals. So before I pass it along to Dan, I want to announce that we also have some movement within our business unit leadership team.

And after nearly 20 years at Boston Scientific, Maulik Nanavaty has announced his plan to retire in August. Jim Cassidy will now lead the neuromodulation business, where he previously spent eight years prior before moving over to lead the WATCHMAN franchise five years ago. Lastly, Angelo DeRosa will now lead our WATCHMAN business.

Angelo has spent the last 10 years of Boston Scientific in Europe, most recently leading the European CRM and EP business. Congratulations to Jim and Angelo and we appreciate Maulik for his many contributions to Neuromodulation in Boston Scientific throughout his career. With that, I'll pass it over to Dan to provide more details on the financials..

Thanks, Mike. Second quarter 2023 consolidated revenue of $3.599 billion represents 11% reported revenue growth versus the second quarter of 2022 and reflects a 100 basis point headwind from foreign exchange, in line with expectations. Excluding this $33 million headwind from foreign exchange, operational revenue growth was 12% in the quarter.

Sales from acquisitions and divestitures contributed 30 basis points, resulting in 11.6% organic revenue growth, exceeding our guidance range of 7% to 9%.

Q2 2023 adjusted earnings per share of $0.53 grew 20.7% versus 2022, exceeding the high end of our guidance range of $0.48 to $0.50, driven by strong sales performance and a favorable effective tax rate in the quarter.

Adjusted gross margin for the second quarter was 72%, slightly ahead of our expectations, resulting in an adjusted gross margin of 71.2% for the first half of 2023.

We continue to expect second half gross margin to be lower than the first half of 2023 and in line with the second half of 2022, largely due to timing of foreign exchange movements in 2022.

Second quarter adjusted operating margin was 26.8%, slightly ahead of expectations, predominantly driven by strong top line performance and partially offset by slightly higher SG&A spend.

We continue to focus on adjusted operating margin expansion and are maintaining our full year 2023 goal of approximately 26.4% adjusted operating margin, which would represent 80 basis points of improvement versus the full year 2022. On a GAAP basis, the second quarter operating margin was 14.3%.

Moving to below the line, second quarter adjusted interest and other expenses totaled $93 million, slightly higher than expectations, driven by FX volatility in certain unhedged currencies.

On an adjusted basis, our tax rate for the second quarter was 9.8%, slightly below expectations due to certain discrete tax items and a lower than anticipated operational tax rate of 13.2%, driven by our geographic mix of earnings in the quarter.

Fully diluted weighted average shares outstanding ended at 1,456 million shares in Q2, which includes the issuance of 23.98 million common shares upon the conversion of our mandatory convertible preferred stock on June 1 of this year.

Free cash flow for the quarter was $514 million, with $658 million from operating activities, less $143 million net capital expenditures. Excluding special items, adjusted free cash flow was $730 million. We continue to target full year 2023 adjusted free cash flow in excess of $2.3 billion.

As of June 30, 2023, we had cash on hand of $426 million and our leverage was 2.4 times, in line with our expectations. I'll now walk through guidance for Q3 and the full year. We expect full year 2023 operational revenue growth to be in a range of 11% to 12%, which excludes an approximate 50 basis point headwind from foreign exchange.

Excluding the impact of closed acquisitions and divestitures, we expect full year 2023 organic revenue growth to be in a range of 10% to 11% versus 2022. We expect third quarter 2023 operational revenue growth to be in a range of 8% to 10% versus Q3 2022, excluding an approximate 50 basis point tailwind from foreign exchange based on current rates.

Excluding the contribution from closed acquisitions and divestitures, we expect third quarter 2023 organic revenue growth to be in a range of 7% to 9%. We continue to expect our full year 2023 adjusted below the line expenses to be approximately $340 million. We continue to expect our full year 2023 operational tax rate to be approximately 14%.

Under current legislation and forecasted geographic mix of sales, we now expect an adjusted tax rate of approximately 12.5%, reflecting favorable tax discretes recognized in the second quarter. We expect a fully diluted weighted average share count of approximately 1.475 billion shares for Q3 2023 and 1.464 billion shares for full year 2023.

We expect full year adjusted earnings per share to be in a range of $1.96 to $2, representing 15% to 17% growth versus 2022, which we believe delivers top tier financial performance.

We continue to anticipate a neutral impact from FX on our full year 2023 adjusted earnings per share and we expect third quarter adjusted earnings per share to be in a range of $0.46 to $0.48.

For more information, please check our Investor Relations website for Q2 2023 financial and operational highlights, which outlines more details on Q2 results and 2023 guidance.

In closing, I'm very proud of our first half financial performance with top tier organic revenue growth of 13%, adjusted operating margin of 26.2% and adjusted earnings per share growth of 20%, all contributing towards our top-tier financial goals. I look forward to continued momentum in the second half of 2023.

And with that, I'll turn it back to Lauren, who will moderate the Q&A..

Thanks, Dan. Kyle, let's open it up for questions for the next 35 minutes or so. In order for us to take as many questions as possible, please limit their self to one question. Kyle, please go ahead..

Thank you, Lauren. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Robbie Marcus with JPMorgan. Please go ahead..

Good morning and congrats on a really nice quarter..

Thanks, Robbie..

Maybe with my one question. It looks like you guys beat pretty much across the board with the exception of neuromodulation. It looks like it was a really strong geographically as well, split across the regions.

We've heard from some public statements from managed care companies that outpatients saw kind of a bolus in utilization, but it looks like it was global as well.

So I'd love to get the read from you on what you're seeing, what's underlying demand, what is maybe onetime upside, and what you're seeing in the different regions around the world? And if there's any difference inpatient, outpatient, cardio versus non-cardio? Thanks a lot..

Sure. Good morning, Robbie. Yeah. So as you know, our portfolio is with the interventional procedures that we offer are very geared to an outpatient setting, in which we think is very positive trend and strategy for the long-term outlook for Boston Scientific, that's where the market is moving towards. So just a quick snapshot around the world.

Japan had a very strong quarter just -- really that's primarily portfolio related. China had an excellent quarter. There was an easier comp in second quarter last year due to COVID impact. But I think that whole outpatient dynamic doesn't really play as significantly as much in Asia-Pac there.

But really, it's more portfolio related for Japan, some COVID benefit, but great performance in China. And I think what's impressive about Europe, it's really across the board, across all the regions and the emerging markets. Some slowness in Russia, but we're lightly exposed in Russia, less than 1% and U.S. grew 9% as well.

You've seen a bit higher proportion of outpatient procedures in the U.S than some of the other regions. But we continue to see just very strong patient demand. There's still a typically a very common wait list for most of our procedures for physicians. So it's a very steady supply and we have a terrific portfolio to meet the market..

Thanks a lot..

Thank you..

Our next question comes from Joanne Wuensch with Citi. Please go ahead..

Good morning and thank you for asking – for taking the question, let me ask. As soon as you print this very good quarter, I'm going to get 15 questions about or more about what to expect for ESC and for the analyst meeting.

So maybe you can sort of set or level set what you expect or how we should think about putting those two events within the right framework?.

Sure. I'll -- maybe Dr. Stein comment and I'll see if I need to comment further afterwards..

Yeah. Thanks, Mike. Thanks, Joanne. Obviously, our big highlight at ESC is going to be the release of the data from Advent, which is, I think as everyone is aware at this point, our IDE trial to seek approval of FARAPULSE in the United States. We're really proud of the rigor of that trial.

It is the first randomized trial in this space, comparing Pulsed Field Ablation with FARAPULSE system against thermal ablation with RS and Cryo. It's an incredibly rigorous design in terms of the endpoints and the monitoring, and we look forward to sharing those results in public..

Yeah. To make additional comment on FARAPULSE in the quarter, really pleased to see the increased utilization in Europe. We still have been supply chain constrained with our councils in Europe. So the demand for the platform far exceeds our ability to supply thus far, which we've reported out for a number of quarters in a row.

But what's exciting, we just recently received GMED approval for a manufacturing approval to actually manufacture this in Minnesota, where we are here.

And so we do anticipate, with the capabilities of the European team and the materials work by the supply chain, that we expect a significant increase in availability of new accounts in the fourth quarter of 2023 and that continuing on in 2024 well in advance of the launch in the U.S.

So really proud of the supply chain team in this environment to build this capability internally to meet the demand. And you should expect a number of new centers opening in the fourth quarter, but the utilization is what surprised me.

The utilization growth within the served centers in Europe continues to be impressive, which speaks to the performance of the platform..

And then specific to Investor Day, Joanne, which is coming up here on September 20 for us, I would expect to see what you've seen in past investor days. You'll see the team give us a sense of what we think we can do with our financial goals over the next three years.

So a formula, it's worked pretty well for us in our past Investor Days and I would look for us to do the same here in September..

Thank you very much..

Our next question comes from Rick Wise with Stifel. Please go ahead..

Good morning, Mike. Hi, Dan. Maybe focusing on the excellent margin performance. Operating margins were particularly stand out and the divisional performance, I mean, MedSurg up 410 basis points, cardiovascular up 240 basis points. Help us understand maybe a little more detail the drivers.

Is it volume, is it mix? And to what extent did price play a role? And I'm not quite sure I'm understanding your commentary, Dan, about second half margins as well? Thanks so much..

Sure. Let me try and put a finer point on that, Rick. So for the first half, we ended at 26.2% operating margin with a real strong 26.8% in the second quarter, which puts us in a good spot for our full year target, which is the 26.4%. Specific to Q2 and the 26.8%, for us, it's always about achieving the overall operating margin goals.

And I think history would show that we manage all lines of the P&L pretty well to accomplish that objective. So in any given period, you may see one area of the P&L might contribute more or less. But the ultimate goal is, obviously, to get to that bottom line.

And then really specific to Q2, I'm really happy that we got to that 26.8% adjusted operating margin. It's 160 basis points better than last year. And we were also able to accelerate some key SG&A investments to ensure the success of some of those upcoming transformational launches that we have starting here, hopefully, this year with our Cryo launch.

So for us, it's always about all areas of the P&L can contribute to the overall operating margin story.

Relative to first half, second half, the gross margin, which was a little north of 71% for the first half should be lower in the second half, should be more in line with where we were in the second half of last year, kind of in that 70.5% range for the second half.

But the operating margin for the second half will get us -- will be higher than it was in the first half and obviously get us to that 26% goal for the year. The reason for the gross margin being lower in the second half, as we've said, is the FX movements in 2022.

So as you go forward, I think lower gross margin in the second half, but higher operating margin in the second half to get to that 26.4%. And one little slight quarterly nuance is, I would expect to see a step down in Q3 relative to that 26.8% that we posted in Q2 and then a step up in Q4 to get to the overall number to get to 26.4% for the year.

So hopefully, that gives you a little bit of flavor of how we were thinking about it in Q2 and what the second half would bring to get us to that 26.4% for the year..

Appreciate that Dan. Thanks..

Sure..

Next question comes from Larry Bison with Wells Fargo. Please go ahead..

Good morning. Thanks for taking the question. I'll reiterate my congratulations at another strong quarter here. Dr. Stein, on Advent, just using the same definition of success in Advent as manifest, I think the success rate was 74%.

So what differences do we need to consider between the two studies and how much do you think those differences could impact the results for FARAPULSE? And separately, what have the success rates been with RF and Cryo in previous studies when using the same criteria as Advent? Sorry for the long question.

Just lastly, if FARAPULSE is numerically lower on success or efficacy versus RF and Cryo, how do you think it will impact adoption? Thanks for taking the question..

Yeah. Sure, Larry. There's a lot there. Let me start right, again, reinforce to everyone. The definition of "success" is very different across a lot of the trials.

And Advent, I think, has the most rigorous definition of what constitutes success, frankly, compared to any trial that's ever been done in this space, whether it's PFA or whether it's thermal ablation.

And so specifically, right, ADVENT is a randomized trial and that requires patients to have success to have no arrhythmia recurrence, cannot continue taking antiarrhythmic drugs even at doses that had previously failed and cannot be reablated during the so-called three month blanking period after the index ablation.

It also includes a very rigorous screening for asymptomatic arrhythmias, including three days of periodic Holter monitoring throughout the of course of the one-year follow-up in the study. I think because of that, there's really no way to make apples-to-apples comparisons across the trials.

And the other thing, I'd do in terms of expectation, we'd refer everyone back to the design manuscript for the ADVENT study, which is now published online in Heart Rhythm. And this study was designed around to achieve optimal power around an assumed success rate using this definition of 65% in both the thermal and the FARAPULSE arms.

And again, to remind everyone, the studies were powered for non-inferiority. And from our standpoint, then success would constitute a demonstration of non-inferiority both for safety and for efficacy..

Got it. Thank you so much..

Our next question comes from Travis Steed with Bank of America. Please go ahead..

Hi. Congrats on a good quarter.

Just maybe following up to Larry's question, how would you frame up the commercial opportunity for FARAPULSE for the market growth and share kind of based on the various potential outcomes for ADVENT? And I think you said it the most exciting product launch in your career, but just curious how you think the commercial opportunity frames out based on how ADVENT comes out? And then curious if you've seen the data yet or are you still blinded to the data? Thanks..

Yeah. We're obviously very bullish. WATCHMAN has been a pretty amazing product launch as well. Sometimes it gets drowned out in some of these would be continued momentum in that category and the growth of that market. But FARAPULSE is very exciting for us.

We've been investing for quite a while post-acquisition to build up manufacturing capabilities, which is the most important thing we could do to meet the demand that we're seeing in Europe and in certain countries in Asia-Pac. So we're very pleased with that milestone.

And as I commented earlier, expect to drive a number of new installs in the fourth quarter. I also mentioned just the ongoing increase in utilization.

So the physicians who are using that in Europe and selected markets in Asia continue to drive more usage of it, which really is a terrific sign, very similar to what we saw with WATCHMAN throughout that progress.

We also have a very strong clinical trial cadence with our persistent trial advantage, which is enrolling very quickly in other trials that we've announced as well as ongoing enhancements of the portfolio.

So we have the R&D to continue to strengthen the portfolio, the clinical science studies to continue to advance it, and it's the fastest growing -- one of the fastest-growing fields along with WATCHMAN in MedTech, where we have a very low share.

We know it's a very competitive market, but we feel we have many advantages with FARAPULSE and really driving the clinical data in this field and we also have the commercial infrastructure to exploit the opportunity. So we're very bullish on it, and we're looking forward to the ADVENT release..

Our next question comes from Danielle Antalffy with UBS. Please go ahead..

Good morning, everyone. Thanks so much for taking the question and congrats to Maulik. He was always a pleasure to work with, if you could pass along my best to him. I'd appreciate it. Thank you so much. And my question is really around just thinking about the back half of the year top line growth guidance. It does organically move higher.

And I just want to make sure I understand all the puts and takes there. Obviously, back half of the year does get a little bit tougher from a comp perspective on an organic basis, but does reflect some deceleration.

I want to basically understand how much of this is just prudent conservatism on your part, which you guys tend to do versus some real product driven or business driven things we need to consider when looking at the back half? Thanks so much..

Sure, Danielle. I think I can take that one. If you look at the second half, take the full year of 10% to 11%, which I'm super excited about. I mean they have a fully double-digit range for the full year for organic revenue growth is exciting and I'm proud of that.

And when you look at the second half, the guidance we've given for the third quarter is 7% to 9%, so 8% at the midpoint. And then the implied is 7% to 9% for the fourth quarter to get to that, coupled with the first half performance that's what gets you to that 10% to 11% full year result.

And I think that's appropriate and prudent guidance with where we are the comps, they're a little harder in the second half. I think it's like 100 basis points harder in the second half than they are in the first half. But overall, I think that 7% to 9% is appropriate, prudent for the second half.

And if it gets us to that 10% to 11% for the full year, I think that will be a really successful year, coupled with 80 basis points of margin expansion and EPS growth of 15% to 17%, adjusted EPS for the year, I'd call that a pretty good year for the company..

Great. Thanks so much, Dan..

Sure..

Our next question comes from Matt Taylor with Jefferies. Please go ahead..

Hi. Good morning, and thanks for taking the question. Dan, I had one more conceptually on margins, I guess. I wanted to understand some of the key puts and takes for margin expansion going forward.

And specifically, I think a lot of investors are focused on inflation kind of abating and the potential for you to get savings on things like freight and lower component costs.

Do you think that we could see any of that be good guide (ph) for margins in '24 and beyond, and maybe just speak to the high-level factors there, if you could?.

Sure. I'll start at the kind of the overall operating margin level. So if you say that we achieved the 26.4% adjusted operating margin goal for this year, the good news is there's still a long runway of margin expansion journey for us, well beyond that 26.4%.

We've said publicly many times that we believe that 30% plus is a very reasonable target for the company. There's nothing structurally that prevents us from getting there. And to the extent that you have a durably, consistently growing top line, it just gives you a number of leverage opportunities to continue to grow that.

So you have that kind of as a backdrop. Specific to areas of the P&L, I think the inflation piece is largely hitting gross margin. And we said that we had the $375 million of impact in '22 versus 2019 in gross margin and, in this year, it's basically stayed relatively consistent.

So it's not a headwind or a tailwind versus last year, but obviously, a headwind versus that 72.4% margin that we were in 2019. So specific to your question around what happens going forward, I don't think we'll see a lot of inflationary abatement in '23.

I think the guidance that we've given assumes we're kind of in -- we are where we are for the year. But as we look forward to '24 and beyond, yes, I mean, this year, the full year gross margin is -- will be kind of approaching 71% for the year. So that's a gap to where we used to be. And our goal, we're maniacally focused on getting back to that level.

We do need some macro help in that, as you mentioned. So some of the elements of it, freight, we do see that getting a little better, the inflationary impact of the cost of the inputs into our manufacturing process, we see that abating over time. And then the consistency of the supply of the materials into our manufacturing process has improved.

I mean, frankly, that’s improved, but it’s not back to where it used to be. So we still – it is choppier than we’d like to see it. And that does impact your ability to really run a really efficient manufacturing process. So I think ‘23 kind of, as I said, we are where we are.

When you get to ‘24 and beyond, I think there is an opportunity for gross margin to continue to contribute. Frankly, I think all areas of the P&L can contribute, both areas in OpEx, SG&A and R&D, we can be more efficient. In R&D, we certainly can be more efficient overall in SG&A.

And if gross margin can move north of that, approaching 71% that we have for this year, I’m excited about the opportunity for margin expansion going forward..

Great. Thanks. I’ll leave it there. Thank you..

Thanks, Matt..

Our next question comes from Matt O'Brien with Piper Sandler. Please go ahead..

Hi. This is Sam Kurtz on for Matt. Congrats on a great quarter and for taking our question. I guess we would like to touch on the guidance again.

And maybe could you tell us a little bit about where you're most excited heading into the second half of the year and where we could potentially see that upside?.

Yeah. Thank you. I'm trying to be vague. It's as you saw in the first half results, the results are really broad-based across the company and across each region. Excellent growth in Asia Pac and Japan and China, continued share taking in Europe and excellent performance in the U.S.

So it's really not one region driving it, which should give investors a lot of confidence in just the momentum and durable growth of the company. The standouts, there are a number of them. You continue to see WATCHMAN performance very strong. That market continues to grow well in excess of 20%. We continue to take a little bit of share in that category.

And we're very excited in the future about the launches of the distributable sheets and the next-gen WATCHMAN FLX Pro and the potential of these market-expanding trials, which will read out in a couple of years here. So that platform continues to do very well. Our coronary business did excellent. We're seeing nice results of agents in the U.S.

We'll be launching that in 2024, which really reverses any declining trend in drug-eluting stents, and that complex coronary business continues to do well. We saw a great strong growth in PI and endo, euro. We had some softness in our Neuromod business. We anticipate that to get better in the second half. So really, it's a continued momentum.

And what we'll highlight at Investor Day is some of the questions we received today. We have some potential very big growth drivers with ongoing WATCHMAN momentum in our entire EP business with the launch of Cryo, which we anticipate in the third quarter this year, and FARAPULSE, which has been discussed at great length.

So just good momentum and extremely exciting launches coming that we’ll detail out at Investor Day..

Thanks so much..

Our next question comes from Matt Miksic with Barclays. Please go ahead..

Hey. Thanks so much for taking the question and congrats on a super strong quarter. So really impressive breaking into double-digits. You are welcome.

So Dan, I want to just follow up on cash flows and cash flow conversion and sort of what the puts and takes there have been in the first half? What your expectations are in the back half, and your intermediate long-term goals there? I'm sure you more about at the Analyst Meeting, but anything you can share now? And then also just on cash, if I could.

You have so many things going on in that portfolio and in your our clinical programs, but I'd love to get your sort of posture on the business development front and your efforts to find and invest in additional technology and assets? Thanks..

Sure. So on free cash flow, I'm really happy with Q2. Strong free cash flow quarter, both sequentially and year-over-year. To your point, conversion, it's an area of focus for us, an area of opportunity that has our attention, and one we're looking to improve on as we go forward here.

As I've said in the past, there's a couple of kind of key reasons, one of which is our GAAP operating income is lower than some of our peers. We're doing a pretty good job of closing that gap over time, and that will be a key contributor.

And then the acquisitive nature of what we do is -- can be a bit of a hamstring there, but I would look for -- as you said, at Investor Day, I'd look for us to give some pretty concrete goals relative to what we think we can do over that LRP period in the next three years to improve the conversion ratio that we have.

And again, it’s a focus area for us and something that we will look to improve on going forward.

And I think your second question was on cash and M&A, is that fair?.

Yeah, exactly. Yeah..

Yes. So I mean our capital allocation strategy has been remarkably consistent, right? It’s all about the number one priority being high-quality tuck-in M&A. It’s still our number one priority. We continue to look at opportunities in conjunction with our financial goals. We have closed two deals this year.

The acquisition of Apollo closed in April, and then our acquisition of a stake in Acotec, the Chinese company, closed in February. So we’ve closed a couple this year. We continue to look to be active in the M&A space, and that remains our number one capital allocation priority..

Thanks and congrats..

Thanks, Matt..

Our next question comes from Marie Thibault with BTIG. Please go ahead..

Hi. Good morning. Nice quarter and thanks for taking the question. I wanted to ask here on POLARx, the Cryo catheter. You have that coming to the U.S. in the second half of this year. I know it's had pretty great success in Europe, but given some of the supply dynamics happening with FARAPULSE, it sounds like manufacturing will ease there for 47:16.

And the timing of the FARAPULSE launch here in the U.S.

How are you thinking about that POLARx launch here in the U.S.? Can that same success be replicated here, do you think?.

Yes. Thank you. POLARx is doing extremely well in Japan, doing quite well in Europe as well, where we also are selling FARAPULSE, as you indicated. We do not have the constraints on POLARx from a supply standpoint. So the team has been well ahead of that. So there's no limitations there.

We do anticipate approval at some point, likely in the third quarter. So we'll have the supply to meet the demand. We have the commercial team in place. And the Cryo market is quite substantial in the U.S. And certainly, doctors are very interested in FARAPULSE, but there's a number of Cryo users there.

Some physicians may be looking for even longer-term data on FARAPULSE. So we do see a nice market for Cryo in the coming years. And that's an area that really hasn't seen any innovation in nearly a decade. And so we're excited about what POLARx delivers in terms of differentiating features.

Physicians are anxious to try a new platform, and we had the demand to support it. So it's -- we're blessed to have both FARAPULSE coming in the U.S. and Cryo as well as our mapping system to really meet the demands of the electrophysiologists. So we're excited about launching Cryo..

Okay. Very good. Thanks so much..

Yeah. Thanks, Marie..

Our next question comes from Patrick Wood with Morgan Stanley. Please go ahead..

Amazing. Thank you very much for taking the question. I'd love a little bit more detail if you could on the Endo business. Obviously, you did very well in the quarter. There's obviously a lot happening in that business overall.

But maybe just giving us a sense of patient volumes relative to share pricing, like any details you can give around their single-use endoscopy, that kind of thing. I'd love any more details, if you could? Thanks..

Thanks for the endo question. Just one of our very best businesses in the company, a very global business, a strong contributor to accretive OI margin and grew 12% in the quarter. And consistent with other quarters, on the portfolio, it's quite broad-based. We did see strong procedure volume in the quarter, which is positive.

And so I would say the procedure volume overall is quite high in that arena. But still, as mentioned earlier, oftentimes waitlist certainly in the U.S. and in Europe for that business. So we expect ongoing strong demand there. The Apollo acquisition, we're very excited about.

The strategy for within endo is we have such a broad-based portfolio with so many SKUs that we are the clear category leader in that area. And we also, as you know, offer very differentiated technologies within that portfolio like SpyGlass, Axios (ph) and now Apollo and also the GESTALT-D (ph) platform.

So Apollo also adds this endoluminal suturing capability. The opportunity to expand into the endobariatric market, which we believe will be a high growth area. Certainly, it is in Asia today, in Japan and in the U.S. patients seek a less invasive form to have that bariatric procedure. And it couples nicely with the entire portfolio.

So our customers enjoy doing broad-based contracts with our Endo business and the portfolio that we offer, supported by strong procedure volumes. So we'll continue to innovate in that business. And the scopes continue to contribute growth as well. So it's really broad-based across that portfolio..

Really appreciate it. Thanks for the details..

Our next question comes from Vijay Kumar with Evercore. Please go ahead..

Hey, guys. Thanks for taking my question. Maybe my first one here, you look at 2023 double-digit organic, that's a pretty big number.

Should we worry about comps? When you look at the outlook here, can you just remind us, the plus and minuses from a product perspective, what could be tailwinds, headwinds in fiscal '24?.

Yeah. So we -- it's good for us to create tough comps. We didn't have an easy comp going into this year. It was about a 9% comp going into '23. So that's a pretty healthy comp. And you indicated what the guidance is. I won't repeat up too many of the other comments. It's broad-based momentum.

So growing in that guidance range versus 9% comp is a strong year. And we'll give guidance obviously in January for 2024, and Dan will give some insights to our three-year LRP at Investor Day.

And we're really bullish about this next three-year period based on these differentiated launches that based on the current momentum that we have in the business, the product cycle that we have and the opportunity to potentially take it up to another level over a three-year period with these launches, many of which we've been discussed on the call today, many of them coming out of the cardio business.

And also the benefit of the margin improvement opportunity that Dan outlined, which we think is a multiyear margin improvement opportunity for us and the increasing strength of the balance sheet.

So I think all those areas point to the momentum of the company, but we're excited about really the next chapter of the company, given the cadence of launches that really have been a bit more derisked, I would say, versus a year ago..

Understood. That's helpful commentary.

Dan, on the margin question, any one-offs that we should be aware of when we think of fiscal '24? Anything on FX, kind of VVP (ph), anything that's outside the normal operating leverage at Boston and Delaware that we should be thinking about?.

Yeah. Obviously, with FX, we'll see where that is when we snap the line when we give guidance. So hard to comment on that now. And then there's always things that happen – VPP (ph) and other things that happen in every year. So our goal will be to -- we'll hit that 26.4% for this year continue to move that north over the LRP period.

And again, as Mike said, look for us to be pretty prescriptive as what we think we can do at our Investor Day upcoming in September..

Understood. Thanks, guys. Congrats on the [indiscernible]..

Thanks..

Our last question comes from Jayson Bedford with Raymond James. Please go ahead..

Good morning and thanks for fitting me in. Just touching on an earlier question and trying to break out what's normalized market growth versus, say, a temporary catch-up here. You've grown revenue in the double digits in three of the last four quarters here.

So I guess my question is, what do you think end market growth is right now in the markets in which you compete?.

You've seen others report. So the markets are healthy. There's -- we had a bit tougher comps than some of the others in the second quarter. So we're proud of the growth we had in the second quarter. And we had maybe a bit less easier comp. So the -- we'll further redefine what we think the markets are growing in the future.

We call it maybe the -- we would have said 6% to 7%-ish range for our served market growth and maybe that's a bit higher this year. But we still believe that in most of our business units, we're growing faster than our peer group, which is what we're paid to do. So it's a healthy market.

And whenever we have a very close pulse with our customers and the hospitals that have -- the big hospital systems who have already announced earnings, they have very healthy demand, but we see an ongoing patient backlog for lack of a -- patient wait time. So we don't see the current demand abating.

Oftentimes, you'll see a bit of a slowdown in some of the vacation months in August and so forth, which is very routine. But we do anticipate continued support from strong procedure volume in the coming years. We don't see that really abating..

Helpful. Thank you..

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