Good morning, and welcome to Medtronic's Fiscal Year 2021 Second Quarter Earnings Video Webcast. I am Ryan Weispfenning, Vice President and Head of Medtronic Investor Relations. Before we start the prepared remarks, I am going to share with you a few details to keep in mind about today's webcast.

Joining me are Geoff Martha, Medtronic Chief Executive Officer and Karen Parkhill, Medtronic Chief Financial Officer. Geoff and Karen will provide comments on the results of our second quarter, which ended on October 30, 2020. After our prepared remarks, we'll take questions from the sell side analysts that cover the company.

Today's events should last about an hour. Earlier this morning, we issued a press release containing our financial statements and a divisional and geographic revenue summary.

We also posted an earnings presentation that provides additional details on our performance which can be accessed from our earnings press release or on our website at investorrelations.medtronic.com.

During today's webcast, many of the statements we make may be considered forward-looking statements and actual results may differ materially from those projected in any forward-looking statement.

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 are given on an organic basis which adjust for foreign currency. There were no acquisitions made in the last year that had a significant impact on our quarterly revenue growth. All references to share gains or losses are on a calendar quarter basis unless otherwise stated.

Finally, reconciliations of all non-GAAP financial measures can be found on the attachment to our earnings press release or on our website at investorrelations.medtronic.com. And with that, let's get started..

Hello, everyone, and thank you for joining us today. Our Q2 results were significantly stronger than Q1 and came in well ahead of our expectations. Our recovery from the depths of the pandemic has been faster than expected and we are now approaching year-over-year growth.

Now while we continue to monitor COVID resurgence around the globe, healthcare systems are by and large better prepared and patients are more willing to seek the care they need.

Obviously, there's some near-term uncertainty, but I am encouraged by the steps we have taken over the past year to position Medtronic, not only for continued recovery, but to maximize our performance over the medium and long-term.

Now building on the strength of our pipeline, we're going on the offensive and winning share in several of our businesses. We're investing in opportunities to create and disrupt big markets and we're seeing the results.

We're supplementing our pipeline with an increasing cadence of tuck-in M&A and we're in the process of implementing our new operating model and reenergizing our businesses with a competitive focus on market share and being bold. All of this is aimed at accelerating our growth and creating value for society and for our shareholders.

Now like quarter, I'm going to lead off with a discussion on market share, and I'm pleased to note that we're winning share in an increasing number of our businesses. Our pipeline is coming to fruition and we're benefiting from recent product approvals across the company.

Since last quarter, we received 50 product approvals, bringing our total to over 180 regulatory approvals in the U.S., Europe, Japan and China, since the start of the calendar year. We're also benefiting from the actions we took earlier this year to partner with our customers through the pandemic.

We've helped our customers in areas such as environmental safety, hospital productivity, patient engagement, and remote monitoring and support and these partnerships are leading to increased market share in a number of accounts. In Cardiac Rhythm, we're notably outperforming competition.

We estimate we've gained nearly 2 points of share year-over-year. Our pacemaker product line grew 6% globally, as our Micra leadless pacemaker family continued to perform extremely well, growing 75% globally and 84% in the U.S. Micra is now annualizing at approximately $350 million.

We also continue to see the benefit of our recently launched Cobalt and Chrome high-power devices, with BlueSync distance programming and a patient app for remote monitoring. These are both important features in the current environment.

Our CareLink remote monitoring adoption is up 10% globally and transmissions on our unique CareLink Express System, which enables unattended in-clinic follow-ups, increased 40% quarter-over-quarter. Our CRT-D product line grew 4%, driven by the Cobalt and Chrome launch and our improving replacement cycle.

In addition, we're continuing to see strong adoption of our TYRX antibacterial envelopes, especially important during a pandemic where there's a renewed emphasis on avoiding infections of any kind. TYRX revenue more than doubled and it is utilized in over half of our U.S. CRM implants.

In Cardiac Diagnostics, we estimate we gained modest share year-over-year as the launch of our LINQ II is offsetting Boston Scientific's entry into the market. In drug-coated balloons, we grew in the high-single digits and gained share both year-over-year and sequentially.

We're seeing strong adoption of our IN.PACT AV DCB, driven in part by its pivotal data that was published earlier this fall in the New England Journal of Medicine. In Surgical Innovations, we held share year-over-year and our share is up nearly a point versus the prior quarter, driven by strong gains in Advanced Energy.

We're earning share with superior products like our LigaSure Exact Dissector and our Sonicision Curved Jaw Ultrasonic Dissector. We're also wining back share from reprocessors. In Advanced Stapling, our share was down year-over-year with difficulty comps given J&J's recall in the prior year.

However, we did gain share sequentially on the strength of our Tri-Staple technology. In our Restorative Therapies Group, we're beginning to see important share gain from recent product launches. Starting with Pelvic Health, we estimate we regained 8 points of share in the U.S. and 2 points in Europe sequentially from Axonics.

This is the result of our very successful launches of our InterStim Micro rechargeable device and our SureScan MRI leads. We're quickly recapturing share in the rechargeable space with Micro as we get on contract in more and more accounts. From our FDA approval in August to the end of October, we believe our share of the U.S.

rechargeable market has gone from 0% to over 50% in just three months, and we continue to see high trialing rates at 125% of pre-COVID levels, driven in part by our basic evaluation lead, which is a strong leading indicator of future growth.

In Pain Stim, we continue to see strong momentum as the markets adopt our DTM therapy on our Intellis platform. While we're facing headwinds in replacements, given where we are in our cycle, we estimate that we gain new implant share in the U.S. Also our new SCS implants in the U.S.

grew in the high single digits in the quarter and we saw strong trialing increases year-over-year, a leading indicator of future growth in this business. Importantly, we're seeing the majority of our new implant and trialing growth coming from competitive accounts, as we win share from competitors.

This is all being driven by the strength of our DTM data, which showed superiority over conventional stim at three months, but we strengthened this evidence last month when we showed DTM superiority that is sustained at 12 months.

In Brain Modulation, we're building momentum with our Percept PC device, the first and only DBS system that can sense brain signals. Now we launched Percept in the U.S. this past quarter. While our U.S.

share was down year-over-year, Percept drove increasing new implant share gains each month as we went through the quarter, returning Brain Modulation to growth. In ENT, we gained share both sequentially and year-over-year.

We launched several new products in the quarter, including our NextGen nerve monitoring program, NIM Vital; our PTI system for parathyroid detection; and Stealth Station Flex ENT, our new nav system to support outpatient ENT procedures. And going forward, we expect these launches to continue to drive share gains and market growth.

In Neurovascular, we had a good quarter in aspiration, coils and access, resulting in overall growth for our neurovascular business. While we had share loss and flow diversion due to our new entrants in the U.S. market, we estimate that our share of neurovascular increased overall, as we won share from both Penumbra and Terumo.

Now turning to the businesses where we are holding share, we estimate that our procedure share was steady in both drug-eluting stents and TAVR on a sequential basis.

In DES we were one of the winners in the Chinese National Tender and will receive volume that is being reallocated from our multinational and local competitors, whose tender bids were not accepted. While our volume will increase significantly, this will be more than offset by significant price declines as dictated by the tender.

This will impact our business over the coming quarters. That said, we believe participating in the Chinese that market is a long-term strategic opportunity. As our increased access to more Chinese hospitals will provide opportunities to pull through our full product line today, as well as in the future with products like TAVR and renal denervation.

Speaking of TAVR we held procedure share in the U.S., Europe and Japan sequentially. We expect to be back to gaining share year-over-year in the U.S. next quarter as we anniversary our share loss from our fiscal third quarter last year.

The market is responding to our competitor messaging on our valve hemodynamics which is a key determinant of valve selection in low risk patients.

We're also getting favorable customer response to our data in bicuspid patients, which make up a large portion of the low risk population and we're continuing to increase our field personnel and open new accounts in the U.S.

which we expect to lead to share gains going forward, both from Edwards as well as winning share in Boston Scientific accounts given their recent decision to remove their Lotus valve from the market. In MITG we estimate we held share in both GI and respiratory.

In respiratory we saw strong acceleration in ventilator sales with our revenue increasing nearly fourfold year-over-year and growing nearly 50% over Q1. This is driven by our ability to increase production and shift our mix to our high acuity PB 980 ventilator to fulfill backorders and meet customer demand particularly in the U.S. and Europe.

We do expect ventilator revenue to decline sequentially in the back half of our fiscal year, returning to more normal levels in FY '22. In Spine, we estimate that we held share year-over-year with a slight gain in the U.S.

We’re seeing strong double-digit growth in our surface enhanced titanium interbodies that came from our acquisition of Titan Spine last year which is now in our organic results.

In Spinal Robotics, while large capital equipment purchases continue to be pressured as a result of COVID, we estimate that we sold over one and a half times that number of robots than Globus did. We continue to grow our share in the spine robot market which is a good leading indicator of our future spine implant sales.

In addition, we’re expanding the capabilities of our Mazor X robot. We received approval earlier this month for navigated interbodies, as well as our Midas Rex high-speed power drills. While we’re growing and holding share in many important businesses, there are also areas in which we are losing share and we’re working to improve.

In diabetes, we discussed with you our plans to return this business to market growth and we’re seeing positive early signs as we lay the groundwork to create a business that can compete and win. We performed better than expected in Q2, but there is much more to do and we're laser focused on doing what it takes to return to market growth.

The MiniMed 780G launch is off to a great start in Europe and we just started the limited release of the 770G in the U.S. last week. As a reminder, we plan to enable 770G users to upgrade their pump to a 780G through a software download once we get 780G approval. We’re also pleased by the recent CMS proposal to cover all CGM devices.

If finalized, it would ensure patients transitioning into Medicare have continued coverage for their integrated CGM and will open up the U.S. Medicare market to our closed-loop insulin pump systems as early as April. Regarding Companion Medical, the acquisition closed in September and we’re excited to have the team on board.

Companion revenue was minimal in Q2, but we expected to become more meaningful going forward. We announced the integration of our CGM data into the companion InPen app two weeks ago. This will allow InPen users to have their Medtronic CGM readings in real-time alongside insulin dose information, all in one view.

We were able to deliver this solution ahead of schedule in just two months instead of two quarters, and this speaks to the strong integration work that is happening between our diabetes team and Companion Medical. It's also a great example of how Medtronic is operating with speed and a sense of urgency across the company.

Now let's turn to our pipeline which has a number of future opportunities for us to win share as well as create in disrupted markets. We covered this in detail with you last month at our Investor Day, so I’m going to give the abridged version today.

Starting with CVG we continue to make good progress on several opportunities highlighted at Investor Day. It appears to have been missed by the Street last week, but last Monday was a huge day for the treatment of AF.

Our Arctic Front Cryo balloon was the subject of a simultaneous AHA data presentation and New England Journal of Medicine publication, that promises to redefine the role of our cryoablation technology, making it first-line therapy in the treatment of paroxysmal AF.

We currently have CE Mark for this indication and anticipate FDA approval in the first half of next calendar year. Regarding our DiamondTemp cardiac ablation system, it continues to rollout in Europe and we’re targeting a U.S. launch in the first half of the next calendar year.

Also, in CVG we’re enrolling pivotal trials for Extra Vascular ICD, our Intrepid Transcatheter Mitral Valve, our PulseSelect Pulsed Field Ablation System and our Symplicity Spyral Renal Denervation system.

Now, RDN represents one of our biggest opportunities to become an important therapy to treat the millions of patients around the world who struggle with hypertension. We’re aiming to complete the ON MED trial and present the data next calendar year. In MITG we’re excited about bringing our soft-tissue robotic system to the market.

We continue to expect to file for CE Mark and U.S. IDE approval in the first calendar quarter of 2021. Although these filings are likely to occur later in the calendar quarter as COVID is slowing some of our on-site activities.

In RTG, we’re making large investments in new products for neurovascular and ENT and in enhancements to our Mazor X spinal robotic system. We’re also focused on expanding indications in spinal cord stimulation and bringing to market our steerable lead and closed-loop system in DBS.

In diabetes, we continue to work with the FDA on the most efficient filing strategy for the 780G, while on the sensor front we submitted our Zeus sensor to the FDA in October, and we have completed our SYNERGY pivotal trial and will file it when we complete the manufacturing module.

We continue to get great feedback on SYNERGY, which is disposable, it's much easier to use and half the size of our current sensor. These are just a few of the many innovative products in our pipeline. We expect them to be the foundation for material future revenue growth and we’re excited to keep you updated on our progress.

I will now have Karen take you through a discussion of our second quarter financials and our outlook and then I’m going to come back with some concluding remarks before we go to Q&A. Karen, over to you..

Thank you, Geoff. Our second quarter organic revenue of $7.6 billion declined 1.5% and adjusted EPS of $1.02 declined 22% from last year. However, compared to the prior quarter, our revenue increased 18% and adjusted EPS grew by 65% as our end markets continued to recover.

In fact, we continue to see sequential revenue improvement each month and despite the number of COVID cases rising in many of our markets, October was better than September in all of our groups and regions with the exception of China, given the impact of the national tender in drug-eluting stents.

MITG led the way with its growth rate increasing by over 20 points in both Surgical Innovations and Respiratory GI and Renal. SI benefitted from increased elective procedure volumes in Europe and the United States driven in part by elective procedures that were delayed from the spring and early summer.

Our RGR's improvement came from strong ventilator sales as well as from GI patient monitoring and renal care products. Across MITG we had growth in a number of our businesses in the second quarter including advanced energy, lung health, airways, ventilators and patient monitoring.

CVG and RTG also delivered double-digit improvements from the first quarter with increased procedure volumes and share capture and several businesses returned to growth from the prior year. In CVG, we grew in pacing, CRT-Ds, TYRX, aortic and drug-coated balloons. And in RTG, we grew and DBS, neurovascular, pelvic health and China Orthopedics.

On the P&L, while we continue to see the expected deleveraging year-over-year, the recovery in our business is evident in the sequential improvement in our adjusted margins, over 300 basis points in our gross margin and nearly 600 basis points in our operating margin.

Our better than expected revenue flowed through to the bottom line resulting in EPS well ahead of expectations. Turning to our balance sheet. Our financial position remained strong. In the quarter, we completed another euro debt offering €6.25 billion and used the proceeds to reduce our U.S.

dollar debt and prefund our March euro debt maturities, driving roughly $80 million of additional annualized savings. This was our third euro transaction in the past year and a half.

Combined, we have issued over $18 billion and our portfolio now sits with a weighted average maturity of over 12 years and a weighted average coupon of less than 2%, among the lowest of the large cap issuers and the lowest among our competitors in medtech.

As I shared with you at our Investor Day last month, we remain focused on investing, both organically and inorganically through tuck-in acquisitions and minority investments to drive our long-term growth strategies. Last month, we announced the acquisition of Ai Biomed to expand our ENT portfolio.

In addition, we closed our acquisition of Avenu Medical and Peripheral Vascular earlier this month and we announced the completion of our Medicrea acquisition in spine last week.

We expect both our organic and inorganic investments to fuel a longer term revenue growth acceleration, ultimately creating strong returns for our shareholders, supplemented by our strong and growing dividend.

We are an S&P Dividend Aristocrat having increased our dividend for 43 years, and our current yield of 2.1% places as in the upper quintile of S&P 500 Healthcare Companies. Now turning to our outlook, particularly with the rising cases of COVID around the world, the impact to our business remains difficult to predict.

So we will continue to not provide our typical guidance. That said, I do want to give you a sense of the recovery ahead. While it is still early in our third quarter, we've seen our average weekly sales track ahead of the same weeks in the second quarter.

So while there are pockets of more restrictions and delayed procedures around the globe, the impact to us has thus far been limited. As we've said before, hospitals are better equipped now to handle COVID patients and remain open to serve non-COVID patients.

And over time and with education, patient fear is not as heightened as it was last spring and early summer. While there is still uncertainty ahead, if the recovery trend continues as it has to-date, our third quarter revenue could be flat to slightly up year-over-year on an organic basis.

And we would continue to expect to return to normal organic revenue growth on a two-year stacked basis by our fiscal fourth quarter. By group next quarter, MITG growth could be in the low single digits, a little lower than the second quarter, given the benefit we had from strong ventilator sales.

RTG and Diabetes should deliver improvements from the second quarter with a decline in the low single digits and CVG should be roughly flat as we continue to recover and take share. On the P&L, while we are continuing to invest in our product pipeline and launches during the pandemic, we still expect sequential operating leverage as we recover.

For both our gross and operating margins, we would expect a couple points of improvement in the third quarter versus the second and we continue to expect to return to more normal operating margins in the fourth quarter.

Regarding currency, assuming rates hold constant, the tailwind on revenue in the third quarter should be similar to the second and the full year benefit could be roughly a $150 million. On the bottom-line, we'd expect a $0.04 headwind per quarter for the remainder of the year.

As I wrap up, while the pandemic could impact our outlook, our ability to continue to invest in our pipeline, develop our markets and execute on product launches will allow us to outpace our markets. I'm proud of the hard work from our employees this year and I'm excited about the impact we are having on millions of patient’s lives around the world.

With our competitive spirit, and focus on being bold, we will be at the forefront of the recovery. Back to you, Geoff..

Okay, thank you, Karen. Now to wrap up, I hope you're seeing the strong execution that our organization is delivering. I want to take a moment to thank our employees across the globe for the great performance they have collectively produced this quarter.

To sum up the second quarter, we're improving our growth, advancing our pipeline and winning share and we're doing all of this while operating in the midst of a global pandemic, and while we make bold and comprehensive changes to our operating model.

And one last note regarding our operating model, we're making solid progress on decentralizing and de-layering our businesses. We're empowering our 20 operating units, gaining greater visibility into our end markets, upping our competitive game and holding our business leaders more accountable.

We're leveraging the strengths of our enterprise by centralizing manufacturing and certain core technology development. We've increased our focus on allocating capital to our best opportunities and we're supplementing this with an increased cadence of tuck-in acquisitions.

And we're enhancing the culture of this company by increasing our competitiveness and being bold, adding these on top of all the great attributes of our mission driven culture. We expect this to lead to more innovation, accelerate our growth, and unlock a lot of value for our shareholders. So with that, let's now move to Q&A..

It’s now time for the Medtronic earnings call Q&A session, where Medtronic executives will answer live questions from the sell-side analysts covering the company. [Operator Instructions] Please also be advised that this Q&A session is being recorded.

For today's session, Geoff Martha and Karen Parkhill are joined by Mike Coyle, EVP and President of the Cardiovascular Portfolio; Bob White, EVP and President of the Medical Surgical Portfolio; Brett Wall, EVP and President of the Neuroscience Portfolio; and Sean Salmon, EVP and President of the Diabetes Operating Unit.

I'll now turn it over to the moderator, Ryan Weispfenning. Please go ahead..

Great, thank you. Let's first go to the line of Bob Hopkins from BoA Securities.

Bob?.

Great, thank you very much and good morning, everybody. So the first question I'd love you guys to comment on is some of the geographic results you showed in the quarter, because I found the breakdown really interesting.

Specifically, I'd love to hear your thoughts on, it looks like Europe was up in the quarter, China was down in the quarter, maybe comment on some of the trends that are driving those results in Europe and China? And specifically on the China tender, was that worse than you thought in terms of the final outcome there? And was that tender contemplated when you gave the long-term guidance that you provided at the Analyst Day? Thank you..

Yes, thank you, Bob, for that question. We were pleased with the geographic results that we saw. You are right, Europe was up and certain parts of Asia were up. China was down, but that was really due to the national tender. Absent the impact of the national tender, China would have been in strong growth territory.

And on the tender, it was really close to what we expected. We – it was hard to predict, but we were pleased to be one of the five finalists in the tender. So we expect to be gaining share or gaining share and volume as a result of that..

Yes, just Bob on the tender, I say, I think it is in the -- over the next couple of quarters, it's going to be a headwind, because we're going to have a lot of volume increase here matter of fact that, but it's going to be offset by the price decrease.

And so, but we view it as strategic over time, because this is going to be one of the tip of the spear, if you will, for more aggressively taking our commercial organization into the lower tier cities, the rural cities in China, tier two, tier three and it will also help us pull through other products around coronary today plus in the future with TAVR and renal denervation.

So, not happy about the short-term impact. I think long-term, this is, like I said, a strategic and we'll see the volume, the Chinese Government has been reaching out to us and working with us to make sure we're prepared, because they're expecting us to have a pretty dramatic increase in volume here.

So we'll see how this plays out, but we do think that over the next couple of quarters it's more of a headwind than a tailwind..

Okay. And then just really quickly for Karen, your comments on current trends, I appreciated those. I just wanted to be clear.

So are you saying that what you're seeing so far this quarter is not worse than what you saw in October in terms of year-over-year growth?.

That's correct, Bob. What we've seen in the first couple of weeks in November is higher than what we saw in the similar weeks in the second quarter. That said, the first few weeks of a quarter don't necessarily make a trend. So we'll be closely watching any impact from the COVID surge.

I would say that if these trends continue, and there's only a limited impact from the COVID surge, we do expect or our revenue could be flat to slightly up in the third quarter..

Thank you very much..

Great. Thank you, Bob. Let's next go to the line of David Lewis from Morgan Stanley. David, please go ahead..

Good morning. Thanks for taking the question. Just two quick ones from me. I'll start with Karen. So Karen, the revenue numbers in the quarter and the forward momentum is very impressive.

Did the drop through on margins, Karen, in the second quarter was actually weaker than the first quarter? So let me just talk about where are those investments going? How should we think about drop-through into the back half of the year? And where are we on the cost plan? And then I have a quick follow-up..

Yes, thanks for that question, David. Clearly, we have been focused on investing for the long-term through this pandemic. And as a result, our margins are a little bit more depressed than normal. We have said that we expect to be back to more normal margins in the fourth quarter all along and we continue to expect that.

In terms of the drop-through of the additional revenue, we did have some period expensing on the manufacturing front as well, similar to last quarter. We expect that to not be a headwind next quarter.

And we continue to invest below the gross margin line and particularly as we're focused on, driving the right commercial launches of some of our new products. And so, we're focused on investing appropriately, and ultimately getting our margins back to normal by the fiscal fourth quarter..

Okay, very helpful. And then, Geoff, maybe for you.

I mean, there's been $1.6 billion of balance sheet deployment over the relatively near-term, over the next six to 12 months, should we expect a similar cadence of deals? Should we expect sort of higher or lower? And then if Karen, if there's any sort of quantification across that $1.6 billion in terms of what the revenue impact could be here over the next six months or so that'd be super helpful? Thanks so much..

Yes, David, on the M&A, it's obviously it's hard to predict, right? I mean, but, I would suspect a similar cadence of these tuck-in types of deals. Again, it is hard to predict, but it is, like I said, part of our strategy, it's something that we're looking to do to augment our R&D..

Yes. And David, in terms of the revenue contribution, much of what we bought this year are really early stage tuck-ins and it goes along the lines of grow, what we buy don't buy growth. So these acquisitions are really expected to be larger contributors to revenue in the years ahead.

The combined expected revenue contribution for the rest of this fiscal year is small. And we'll obviously evaluate whenever revenue from an acquisition becomes meaningful to a business, we will certainly adjust it from our organic results until we anniversary that.

So, the one that we may end up adjusting for starting in next quarter is Companion Medical, because it could be impactful to the diabetes business alone, but certainly not to the total company..

Thanks..

Thank you, David. Let's next go to the line of Robbie Marcus at JPMorgan. Please go ahead, Robbie..

Great. Thanks for taking the question and congrats on a nice quarter. I was looking at diabetes, which to me is one of the businesses that could have the most upside potential if your turnaround plan works out.

I was hoping you could walk us through maybe the next six to 12 months in terms of new product cadence, how that should impact numbers? And also, I know you've been deferring pump sales for a long time waiting for 780G and the upgrade program.

How do we expect that to play out into numbers over the next 12 to 18 months when 780G hits the U.S.?.

Sure, Robbie, I will turn that one over to Sean with one edit, not if it happens, but when the turnaround happens, so Sean will talk to that..

Okay, great. Thanks for the question, Robbie. So over the next six to 12 months, really the focus is going to be on rolling out the new pump platforms. We're off to a really, really good start for the European launch of the 780G. So we're in, I think, now 12 countries. We will continue to roll those out.

As time goes on here, the 770G as just said just started its initial launch in the U.S. and we've had really strong demand for that, as we've got a number of these upgrade pathways in place. So the pathway upgrade from existing 670G as well as the next tech pathway to get people to come into the new pumps.

We've seen an increase in the proportion of patients as new starts in the U.S. as compared to just replacements of in-warranty patients coming out of the warranty and, of course, Companion Medical is going to be a big focus. We've got now the integration with our CGM in real-time, which is a big deal.

As we improve the sensor experience, that's going to get to be even more of a big deal. But more importantly, we've now trained up and have the entire sales force with this in their bag now in the U.S., as opposed to just the small sales force that came with Companion acquisition.

So I think the near term, those are the priorities, but we will look forward into what's next, obviously, the 780G launch for the U.S. is a big deal. The Zeus sensor globally would be a really important driver for us, and then a smaller product, but an important one.

We just started a limited launch in Finland, it's for a seven-day infusion sets, this allows you to wear this infusion set for almost twice as long as what is normally required. And that product we raised in the U.S. we just locked the database on that. So we should expect that to be a part of the mix going forward. Of course, all of this flows.

So you have hardware out there, it's upgradable by software to 780 and beyond. You've got the compatibility designed in for the sensor pipeline as well as extended wear infusion sets. So I think we're setting up for a really nice cadence of products that will traverse into growth..

And maybe just a quick follow-up Karen, there's a lot of nuance as we look at fiscal '22, which is where I think a lot of the Street is focused in terms of valuation.

So anything you could sit here today, I know it's impossible to call the recovery trends, one vaccine set, but anything that you see in models that stand out that you want to point people to as they think about modeling into fiscal '22, whether it's on the top line or whether the expense cadence? Thanks..

Yes, thanks for that question, Robbie. It's early. Obviously, we're still five months away from starting our fiscal '22 and we're really working on our plans right now. Plus, the pandemic makes it a little more difficult to forecast.

So I would say, we'll wait to give more color or guidance on FY '22, likely as we normally do on our fourth quarter earnings call, but clearly, you can expect that our growth should be higher than normal next fiscal year off of the depressed space and because we continue to launch our pipeline of products..

Thanks..

Thank you, Robbie. Let's next go to the line of Vijay Kumar from Evercore ISI. Vijay, please go ahead..

Hi, guys, can you hear me?.

We can..

Okay, excellent. So I guess, I had two quick questions, one financial and one on I guess on diabetes.

On I guess the financial part, when we're looking at this year-on-year organic growth, could you perhaps quantify what the impact from the move to consignment sales, the move, the shift away from bulk order was in the quarter because it looks like ex-dose impacts, perhaps organic year-on-year was in the low singles territory, positive territory.

I just want to make sure my math is correct. And I think I heard you say Karen, Q-on-Q you expect margins to be up a couple of hundred basis points.

I mean, if revenues are almost flat to up in 3Q, perhaps talk about any margin headwinds for 3Q?.

Sure Vijay. Let me start with the conversation on bulks. We mentioned last quarter that the vast majority of the booking impact was behind us, but there are still pockets in certain businesses where we continue to look at odd year-over-year comparisons because of bulks.

I would say biologics and spine is one of those areas, TAVR is another, but if you look at the total company, the impact from bulks is largely behind us.

In terms of the quarter-over-quarter margins, we said that we expect both gross and operating margins to be up a couple of points sequentially from the second quarter, and so if you look at the Street models particularly on gross margin, it could be a little higher than what than what the Street currently has.

Is that answering your question?.

Yes, it did.

I guess, on -- because I guess I was confused on the TAVR commentary on share, kind of market share being stable sequentially and if I look at your closest peer they were up mid singles new guys from minus air charges, I just want to make sure how you get to the sequential stable share on that?.

Yes, I know Vijay, I know and I understand it's a little difficult to track.

Well, why don't we have Mike Coyle, walk us through that math there?.

Thanks for the question, Vijay. So we would estimate that the overall TAVR market for the quarter was on a constant currency basis up around 2% and as you just noted, our reported numbers on a revenue basis, year-over-year are down about six. But when you basically consider the U.S.

market dynamic of the de-loading activity that we, that's been taking place where essentially we have shifted away from doing bulk purchasing and have actually moved customers on to consignment who essentially want to hold inventories. If you look year-over-year, our hospital held inventories of TAVR product are probably down around $25 million.

So that basically, when you correct for that, in terms of just the year-over-year comparisons were essentially flat in terms of our global, sort of TAVR market. So that's the difference between sort of the year-over-year versus the quarterly comparisons.

As we look in the quarter, sequentially from last quarter, we essentially held market share in the United States, on a year-over-year basis our case volumes were essentially flat with the prior year, which was a marked improvement over what we saw during Q1.

And so, as we look forward, we're very confident about our ability to take share for a number of reasons. Obviously, the most important of those being the recent announcements from Boston Scientific here late in the quarter, their decision to essentially remove Lotus from the marketplace.

And in addition from the TCT meeting the Scope2 data that basically had the accurate Neo [ph] product failing its non-inferiority endpoint going to head-to-head trial versus [indiscernible]. So that gives us really, I think, an opportunity to take share that they have had where we have been disproportionately hit year over, over prior quarters.

And of course, just going forward, the hemodynamic benefits of the product really are encouraging in terms of how the customers are receiving that.

We had another great TCT meeting here in terms of new data flow supporting the benefits of hemodynamics from lower pacemaker rates, the TAVI data was very encouraging in terms of direct comparisons of balloon, expandable self expanding valves. And, we continue to roll out our custom overlap technique for lower pacemaker rates.

So all of that we think is going to be very helpful for us to continue to take sequential share.

Now, the third quarter a year ago, we saw a pretty big dip in share that we've been sort of clawing back and so you're going to see it in the overall year-over-year numbers once we have anniversary that Q3 event and of course, as we get into Q4 we have normalized prior year comparisons for the hospital inventory adjustments that I just talked about.

So by the time we get to Q4, we think it will look very similar whether looking quarter-over-quarter or year-over-year in terms of share dynamics..

That's helpful. Mike and Geoff, one quick one for you on diabetes.

I think, you spoke about share gains, are you seeing anything on one, you look at the 3Q guidance, download signals and implies some improvement or 2Q what's driving that? And are you seeing anything on the pump market side? We're hearing some chatter about, customers delaying pump upgrades, waiting for the tide pool algorithm to come -- waiting for the tide pool algorithm, so perhaps talk about the diabetes pump market? Thank you..

Sure Vijay, I’ll have Sean, why don’t you jump in on that one?.

Yes, so Vijay, I think that there's a point of smaller proportion of the market that is waiting for the tide pool to become available. So I think the capabilities of that algorithm are really not anything advantaged over what that we have in the pipeline is certainly what's available currently in the market.

So I think the idea that this rather is pump, and you can kind of pick your components is appealing to some and to others, quite frankly, having to chase two or three companies around in order to kind of get your questions answered, track down what your challenges may be, is just not the kind of experience a lot of people are looking for.

They kind of want a one stop shop where they can get everything they need and all their questions answered in a single place and that's, of course, the advantage that will accrue to us as we get our pipeline of products out there. So I'd say it's really much, it is more of a niche opportunity and really not a big focus.

I don't see a lot of people waiting for it..

That's helpful. Thanks, guys..

Thanks, Vijay. Let’s next go to the line of Larry Biegelsen from Wells Fargo. Please go ahead, Larry..

Good morning, guys. Thanks for taking the question.

Can you hear me, Ryan?.

We can. Yes, thanks..

Great. All right, great. One for Karen and one for Geoff. So Karen, you talked about operating margins returning to normalized levels in Q4.

How do you define that? Is that the 30% we saw in fiscal Q3, 2019 or should we be thinking about 29% for fiscal the full year fiscal 2019 and any comments on consensus EPS for Q3 and Q4 based on the commentary you've given on this call? And I have one follow-up for Geoff..

Great, thanks, Larry, for the questions. In terms of normal operating margins in Q4, we're thinking about that pre-COVID for the full year, so roughly around the 29% level.

And then in terms of consensus, we clearly talked about revenue in the third quarter if trends continue and there's limited impact to COVID being around the flat to slightly up, which is higher than where consensus currently is and that would flow through down to margins as we've discussed approximately 200 bps sequentially higher from the second quarter and so flow through to the bottom-line.

So that's what I would say on the Q3 consensus and Q4 because we've said all along that we expect to be back to more normal growth on a two-year stack basis and more normal margins consensus is roughly right there already..

Perfect, thanks, Karen. And Geoff, on China, I heard your comments on the drug-eluting stent tender and the pricing there. China is an important market for you roughly 5% of revenues I believe.

How concerned are you that, what happened with drug-eluting stents could spill over to other areas of your business? How contained do you feel that is? Thanks for taking the questions..

Thanks, Larry, for that one. Yes, China is a strategic market for us and we are watching this tender process closely. Anyway, sorry, here there is a beep on the line here and hopefully that will stop here, hopefully. Anyway, in terms of China, we do think it's more contained for us at least for a couple of reasons.

One, the coronary stent business is one of the few businesses at Medtronic that does have less differentiation, I would say in the industry. The industry itself, the products aren't as differentiated as we see in some of our other segments.

And the other dynamic that there was unique here is that 80% of the drug-eluting stent market in China was already local, so they had alternatives there. And those two dynamics, the differentiation, the lower differentiation, and a robust local market, that doesn't exist in most of the segments that we compete in, in China.

So we do think it is we don't have a lot of exposure to that type of impact from a tender going forward. And matter of fact, this is where our diversification helps us. We've got a lot of growth levers in China and I do believe it is, still remains a bigger, a big growth opportunity despite some of these tender headwinds..

Thanks, Geoff..

Thank you, Larry..

Let's next go to the line of Matt Taylor at UBS. Matt, please go ahead..

Thanks, Ryan, can you hear me okay?.

We can..

Perfect. Okay, so I just wanted to ask a question about progression of utilization. We've seen some stronger recovery here than a lot of us might have expected with the current conditions. We've had a lot of good news around vaccines lately.

And I'm just wondering conceptually, as we go through next year, can you talk about how you expect that to impact recovery and could we see a bolus or elevated demand after the vaccines take hold or do you think that we've kind of lost some of these patients in the shuffle and that you won't see that kind of a resurgence?.

Thanks for the question, Matt. On that one, right now, like we do believe to the extent that there is pressure from the second wave or this spike, if you will, it is limited, as Karen said, both in depth and time.

Like I mentioned, pre-vaccine hospital CEOs, we talk to them all the time, dozens a week and their narrative has remained the same in that they've learned a lot of lessons and how to safely continuous elective cases despite COVID-19 and they have been able to treat COVID patients more efficiently and they believe that even in this spike, that they'll be able to continue elective cases.

We are seeing some pressure in some areas, but like I said before and then Karen mentioned earlier, we do believe that's limited.

Now, in terms of your question, once we get through once the vaccine is out there, and it's like pretty much an all clear signal for patients that are considered that may have been holding back, I haven't heard anybody talking about like a bolus of patients.

I think we have worked through by and large, there is a little bit of a backlog out there still, but we have worked through a lot and in our more elective areas, if you will, but by and large we've worked through a lot of that, and that backlog is relatively small. And we're starting to get back to more of a kind of steady-state run rate here.

And so, given all that, I wouldn't expect a big bolus. But, we could be surprised that this is, I wish there were a little more science around some of the numbers there, but we are trying to quantify as much as the feedback we're getting, but I haven't heard anything about a bolus of patients waiting out there for the next year..

Okay, thanks for the thoughts Geoff..

Thank you, Matt. Let's next go to the line of Rick Wise of Stifel Nicolaus. Rick, please go ahead..

Good morning, Ryan. Good morning, everybody. I'll just ask one question, Geoff, you were very clear at the Analyst Day about your focus on accountability, execution, innovation, the potential for improved growth and margins, et cetera, et cetera, et cetera.

It is, I guess, just two aspects of that as my question is, should we attribute, how much the excellent quarterly performance we're just looking is tied to your initiatives, your energy that you're bringing, your new vision you're bringing to Medtronic? And second, maybe just at a high level, just talk to us about the progress you've made, where you feel like you are and how we should think about the master plan going forward? Thanks so much..

Thanks for the question, Rick. And it would be nice to say that the master plan had that big of an impact so quickly, but I think in reality, it is the product launches, that's what's really driving the near term results, like I said, the product portfolio, and the pipeline rather, is the best we've ever had.

And we've got products launching now, which we listed a lot of those and then we've got products, over the next 18 to 24 months.

And the disruptive nature of those products in the next 18 to 24 months, in and of itself has created a lot of energy across the company as people can feel the near term impact of these products and things like, we mentioned in the commentary here our ablation business or cryoablation business being with this new England Journal of Medicine data being now a frontline therapy for AFib and taking that information and that opportunity and making the most of it.

That type of approach is getting people excited. So I think right now, it's really about the product launches.

Over time, though, I think the changes that we made, the decentralization, the unnesting of these operating units, these 20 operating units, and pushing them to be bold, to think big, be bold, and maximize their opportunity and you know what, don't be afraid to fail or I mean, we don't want to fail, but if we're too conservative, we're not going to take advantage of these massive opportunities in front of us like RD and like renal denervation, like soft tissue robot, like the example I just gave for our ablation business.

AFib is a massive under diagnosed problem here and we've got all kinds of therapies for this. So that is creating an energy across the company that I anticipate over time will translate into, I'd say above market growth and really expand the number of patients that we're serving.

And I'll end on this, we talk about, we touch or impact the lives of two patients every second and that's a pretty amazing statistic. But when you do the math, it's like 80 million people a year.

Well, there's over 7.5 billion people in the world and so I'd like to kind of reframe that question is like, why are we doing so few, given the technology that we have, and really expand that patient base? And that kind of approach is creating a lot of new thinking and energy that I think over time will take hold here, because we've got big plans here.

And but what you're seeing now is good, but I think we can do better over time..

Thank you, Geoff..

Thanks, Rick. Let's next go to the line of Matt Miksic of Credit Suisse. Matt, please go ahead. .

Hi, thanks.

Can you hear me all right?.

Yes..

Terrific. So, it's just a follow up on some of the current trends commentary that you've given, we're all watching hospitalizations, and they have increased and I'd say it sounds like your commentary was perhaps a little bit more optimistic and constructive, despite the surge than some folks were expecting, which is great.

And then the numbers were terrific here in the second quarter, but maybe if you could talk a little bit about how you're thinking about hospitalization trends in these conversations you're having and maybe when, and if, at what level they do become a little bit of a concern? And then I have one follow-up..

I think basically, Matt, what we're hearing is that, two things and it's and most of our feedback, I'd say 75% of it is coming from the U.S. hospitals, and then the rest from Europe, I'd say.

But in the United States, in particular, the two things that would have to happen, again given everything we said about the lessons learned and the commitment to hospitals, the commitment to keep elective cases going.

The two things that could derail them is literally they run out of space, from so many COVID patients, and it becomes like a real estate issue within the hospital, that would impact obviously elective cases. They would be deprioritized there. And in some cases, we're seeing that we're getting closer to that level of capacity.

So that's what we're watching. And the second would be some sort of statewide mandate that could happen, it's in today's political climate, I think it'd be foolish to try to predict anything. But, some sort of statewide mandate could happen as well.

So those are the two things and I think the hospital CEOs and executives are more worried about the first thing. And some of the larger systems have the luxury that are more regional of moving patients around, both COVID patients and elective patients, you can move elective procedures from one hospital to the next in some of these larger systems.

So that's -- they're really doing their best to manage those two things. But that's why we're, I guess, cautiously optimistic that the impact of this second wave will be limited, that and with the optimism of the vaccine news is another driver here..

That's helpful. Thanks for that.

And then, just to follow up on your comment on the New England Journal, article and presentation at AHA, the first line therapy for paroxysmal, can you talk about maybe how you expect that how investors should expect that to sort of show up in the numbers, is there penetration pathway here that we can expect to hear more about over the next year or so?.

I'll maybe have Mike provide a little more details on that data?.

Sure, Matt, currently, because no ablation therapy is approved for first line therapy, a patient has to fail a series of anti-arrhythmic drugs before they become eligible, and we'd estimate that's about a two-year, period of time that physicians will essentially titrate any rhythmic medications and basically, the data that was shown in the New England Journal said less than half the patients who actually go down that path will wind up being symptom free.

So essentially, you're taking a large portion of the entire diagnosed portions of the patients with symptomatic atrial tibrillation, and you're delaying them two years from coming in, and losing a lot of them to follow up there. And, of course, 45% of them will just stay on the medications.

By basically showing that cryoablation will have 75% of those patients symptom free in a year if we can push that into first line, we not only accelerate the curve, but obviously a lot of patients who wound up on anti-arrhythmic will then essentially not require them because they become symptom free with ablation.

So, there's obviously a lot of education that has to take place at the referral channel level. We think these data will be very compelling to be able to have that take place.

Obviously, we need FDA approval of the labeling indication which, as Geoff mentioned, we would expect to be in our next fiscal year, but we're very excited about being able to outreach to that referral community with a much better solution for the patients..

Thanks so much Michael..

Yes, this is like a trend that we're starting to see where our kind of definition of market development is expanding to not just to the specialist physicians around the world that we're used to dealing with, but to more the general practitioners and in this case, even and just general cardiologists, and to the patients themselves.

And so this is a muscle that this kind of hybrid b2c b2b, b2c, this kind of go-to-market, this muscle of market development we need to develop, because there's other areas across the company that we're seeing this. Obviously, diabetes is more in this camp.

And this is something that Medtronic, even a lot of Medtech historically haven't done, but I do think it's a muscle we need to develop here..

That’s great, thanks..

Thanks, Matt..

Let's next go to the line of Chris Pasquale at Guggenheim. Chris, please go ahead..

Thanks. One quick one on diabetes and then one on CVG for diabetes, Sean could just clarify the expected timing of the 780G U.S.

launch is there may still be some uncertainty about how you go about the filing strategy there?.

Yes, sure. So the situation we have, I think, as you probably already know is that the FDA's division that regulates the diabetes sector is also involved in a lot of the COVID diagnostics work. So it's really been a resource drain on their part for medical reviewers in particular.

So at their request, we're pulling together a lot of parts to that submission, including the pediatric data and not separating that out from just the adult data, so one submission for all patients, as well as the integration of the Zeus sensor into that package.

So that's the summary of the package, how we can consolidate down to fewer component parts that need to be reviewed, which will add efficiency for them and the time to market for us for the entire package..

Okay, but in terms of when we should expect to have 780G available for U.S.

patients, any sense for when that will be?.

That's hard to predict the review cycle time that we're intending to submit that in this quarter..

Okay, that's helpful, thank you. And then just quickly on the Chinese tender, the impact there in the back half of the year, you characterized the $26 million this quarter as reserve, which to me implies a pulling forward of the headwind, but then you also talked about it continuing to be an issue on a go forward basis.

So how much of the sort of annual impact of that was recognized this quarter versus still to come? Thanks..

Yes, thanks for that question, Chris. The reserve impact from the China tender is really because we've got product in the dealer channel, and we needed to compensate for the price that will be impacted in the dealer channel as soon as the tender is effective, so that's what's going on there.

In terms of go forward, obviously, the price go forward is 95% lower and so that will continue to impact us, but it was a bit of a larger impact now, since we had to do the reserve as well as the shorter impact for the quarter..

Thanks..

Thanks, Chris. Let's take one more question and go to the line of Kaila Krum at Truist. Kaila, please go ahead.

Kaila?.

Can you guys hear me okay?.

I can, yes. Please go ahead..

Yes, perfect. Thanks, Ryan and thanks guys for taking our questions. So you guys had mentioned that you're talking to dozens of hospital CEOs every week.

So I'm just curious what you're hearing in terms of their appetite for capital spending, and particularly as they are budgeting for calendar 2021? So any additional color there you can add would be helpful, thank you..

Yes, so capital, it is obviously the capital budgets in hospitals are pressured, but we're finding two things that are helping us out. One is that our capital tends to be, is tied to, for them profitable elective procedures like in spine and so that helps a lot. And the other thing is providing flexible financing options is the second one.

So although there is some pressure on just general capital, when that capital is supporting an elective procedure that is profitable and critical to the hospital's financial recovery, that's really helping and so they're continuing to have these conversations with us, and they're continuing to buy capital and I think, talking to our spine division the other day, they anticipate, the Mazor sales to get back to normal levels here, so which is evidence of what I just said.

And the second thing that's helping is, we're worked with a number of financing companies to provide various different financial or flexible financial solutions for the hospitals. So those two things have really helped us. And although that it's, there is some pressure, it's not like maybe you might see with general imaging or something like that..

Great, thanks so much for taking the questions..

Thanks, Kaila.

I'll ask Geoff to conclude with his remarks, Geoff?.

Okay, and thanks everybody for the questions and the great engagement and we really appreciate your support and the continued interest in our company. We will, we hope that you'll join us for our Q3 earnings broadcast, which we anticipate holding on February 23, where we'll update you on our continued quarterly progress.

So thanks for tuning in today stay healthy and safe. And for those in the U.S., I'd like to wish you and your families a very Happy Thanksgiving and have a great day, everybody..