For joining us. I'm very pleased to have with us this year Medtronic and in particular Thierry Piéton, who's CFO and EVP. My name is Matt Miksic. I cover U.S. medical d evices. Thanks, T hierry.
Thanks for having me.
Yeah, of course.
Appreciate it.
Our pleasure. You know, I wanted to start with the question that we're starting a lot of the sessions, not every session with, is just the events of the last week.
Yeah.
The two key questions are exposure to Middle East.
Yeah.
If you know, to the extent you can put some shape or size around that, and then you know, potential implications, not so much of what we've seen in the last week.
Yeah.
If price of oil were to remain higher for longer.
Mm-hmm.
Maybe drawing on the experience that you had in 2022 and how this might be similar or different.
The Middle East region for us is kinda 2%-3% of our overall revenue for the year, so it's a relatively minor portion. I would say within that 2%-3%, there's a large portion that's kind of healthcare necessary products. We don't anticipate, you know, a large impact. What could have caused an impact would be logistics issues, so if you're unable to ship, but it feels like today we've got a good grip on how to fix those. I would say, you know, short term, we don't see a very large impact coming from the conflict from that perspective.
On the price of oil, you know, it's the sort of petroleum derivative content in terms of raw materials in our products is less than 1% of our cost base. We've got, you know, sort of contracts that are in place for the year to come, generally speaking, with productivity commitments, et cetera. Again, we don't foresee that as a strong negative. We did launch the IPO of the MiniMed business just before the conflict erupted, I wanna say. The result is that there was some pressure on the pricing of the IPO.
That being said, you know, we made a commitment from a strategic perspective to separate that business, because we think strategically, both MiniMed and Medtronic are better off living their life separately and having their own investor base and having their own capital allocation, et cetera. We had committed to getting the overall separation done by the end of calendar year 2026. We decided to move forward with the IPO within that context. We're happy we did it. At the end, we got a good valuation for that business, and we're very confident in the way forward. We've set the first step to a path to completing that separation, and I think it's a very positive one.
Okay. That's helpful. In fact, just to clarify on the percent of your cost base, you're talking about the percent of your P&L or your percent of your COGS?
Percent of the cost.
Of COGS.
Yeah.
Of costs.
Percent of the COGS.
Manufacturing.
So.
Got it.
Real small portion.
Sure. No, that's helpful. Shipping and logistics, you know, there were some rising shipping costs, much different situation in 2022 because then there was also componentry shortages and all kinds of other things.
Yeah.
That were making it more difficult to get parts globally to where they needed to be.
Yeah.
You know, any sense that, you know, extended period of time where shipping costs are more expensive?
No. Look, again, shipping would be, again, a relatively minor portion of our cost base. I think back in 2022, the issue was accessing certain raw materials, and there's not really that problem in this case other than, again, petroleum-derived products, which is small for us. No, we don't anticipate a major impact from that. In the regions, there are several countries where we work for distributors, so we're able to make sure that they have the right level of inventory to be able to cope with some fluctuation in access from a logistics perspective. At this stage, we're able to ship in the region.
Okay. Finally, the timing, like things have to work their way through work in process and cost of goods.
Yeah.
Inventory, you know, is that if there were an effect now, would this be a, you know, 27 event?
It would be. I mean, typically our inventory cycle is about 35 weeks, right? It would take, you know, six or seven or eight months before we would see the impact in the income statement.
Got it. Okay. Well, you know, there's a limit to how much I can dig into the MiniMed.
Yeah.
Transaction, you know, given our involvement in that.
Yeah.
...transaction. I would ask from a Medtronic perspective.
Yeah.
This wasn't sort of just to put that, you know, underscore the fact this wasn't a one and done event, right? It priced at lower than was expected, but the timeframe for your divestiture, if you could talk about the second stage?
Yeah.
The benefits that you expect to.
Yeah. First, you know, again, the main rationale behind the deal is first and foremost a strategic one, right? It's about focused capital allocation, and it's about making sure that those two, these two businesses are gonna be as successful as possible on their own. I think clearly, you know, MiniMed is B2C. Most of the rest of Medtronic is B2B. The margin levels are pretty significant, you know, significantly different. You know, MiniMed represented or represents about 7% of our revenue, but kind of 3% of our EBIT. It's, you know, less profitable than the rest of the business. The R&D intensity in MiniMed is a lot higher than in the rest of Medtronic.
As a percentage of revenue, it's about twice the spend of the rest of the portfolio. So it's a relatively you know minor part of our business that took you know a significant portion of our capital and of management attention. The decision was made to separate, and all those criteria remain you know obviously completely the same. The path going forward is so we just did an IPO on 10% of the capital. If we were to exercise or if the underwriters were to exercise the greenshoe, that would go up to something north of 11%. The big part of the deal is the second part, which is the split of about 90%.
What's gonna happen there is, we will offer the option for Medtronic shareholders to either keep their Medtronic shares or opt for a conversion into MiniMed shares with a discount to incentivize them. The intent is to do this, I would say, you know, I would target roughly six months from the IPO from an ideal timing perspective. The result of that will be that we'll have a share count reduction as people convert from Medtronic stock to MiniMed stock. It will mechanically reduce the number of shares that Medtronic has which will mechanically increase the EPS. Net-net, we view this as an accretive deal for Medtronic shareholders.
Again, it gives access to MiniMed to its own capital, to its own shareholder base and investors, et cetera, and enables us to redeploy a portion of the investment and a portion of the capital towards elements of the portfolio where we have an even stronger right to win and better economics, candidly.
Obviously, it's growing a little faster than corporate average at the moment. Maybe
Yeah.
Maybe talk about some of the commitments that you've made, preliminary commitments for 2027.
Yeah.
In terms of, you know, driving leverage to the o perating line, leverage to the bottom line.
Yeah.
How, you know, the. Let's say the first part of the question 'cause there's a lot.
Yeah.
We'll get into, you know, how the composition of your other growth programs.
Yeah.
Can kind of get you to where you want to be, on the top line.
Yeah.
First in the, you know, leverage part.
Look, first, you know, the impact of the deconsolidation of MiniMed. MiniMed will be deconsolidated once we complete the second stage, right? The split. When we made the announcement of the deal, the calculation that we had made was that MiniMed was contributing about 40 basis points of growth for Medtronic, which is less than CAS and less than what we expect from, you know, a number of the other growth drivers which we'll talk about later. Since then, the growth has accelerated for Medtronic. You've seen the growth profile get better and better. You know, we were at about 5.5% in the second quarter. We did 6% growth in the fourth quarter. In the third quarter, fourth quarter seemed similar.
We're on an acceleration path. If you look at the algorithm going into 2027, you know, growth is going to continue to accelerate. I made this comment in the 3Q earnings call. We expect the organic growth in fiscal year 2027 to be higher than the organic growth in fiscal year 2026, and that's even excluding the effect of the 53rd week, because I know I've had a lot of questions. On an apples-to-apples business basis, you will see an acceleration of growth. We expect the gross margin profile to improve. The things that are hiding the operational improvements that we're making in gross margin today are basically the negative mix coming from MiniMed, and that will solve itself with the split.
We're seeing mixed pressure coming from the growth in the cardiac ablation systems part of the business, which will get better towards the second half of fiscal year 2027 with the mix between capital equipment and the catheters starting to go more towards the catheters. A lot of the improvements that we've made in net cost out, in pricing, et cetera, will start showing up in the gross margin. If you keep going down the P&L, we've said that we will continue to increase R&D as a percentage of sales. We'll keep doing that in 2027, but we will reinvest only a portion of the leverage that we're getting from the volume growth into the R&D spend, right? On the SG&A line, we'll continue to fund the growth areas.
We'll fund CAS, and we'll fund Ardian, and we'll fund Altaviva and Hugo, et cetera, to capitalize on these big opportunities. Net-net, the leverage that we can get on the G&A line, which is really the functional cost, will more than offset the resources that we're putting on the sales and marketing side. Net-net, we expect SG&A to provide some leverage going into fiscal year 2027. Op profit should look better. Below the line, tax will be more or less the same, slightly worse, but we're kind of stabilizing the tax line. On the interest side, we've got a bit of pressure, like a lot of the peers, coming from the fact that we're refinancing debt that was almost at 0% with debt that's at, you know, three to four percent.
All things being equal, that puts us in a position to have some EPS leverage going into 2027. Then we've got a number of moving parts, right? Which I alluded to in the 3Q call. We will have carryover from tariffs. This year tariffs were about $185 million. We forecast about $300 million going into fiscal year 2027, so $100 million-$120 million of carryover. We will have some dilution coming from the M&A activity that we're doing. You probably saw this morning the announcement on Scientia Vascular.
Yeah.
We've embedded some pressure coming from the period between the IPO and the split on the diabetes deal because a lot of the benefit from the split of diabetes comes from the share count reduction, and that's calculated on a 13-week rolling average. We will see that benefit and the deal will be accretive, but it will come gradually after the split. On the flip side, we'll have a benefit from the 53rd week that we have, which is something that happens every seven years for Medtronic. Net-net, including all of this, we're committed to high single-digit EPS growth. That's kind of the algorithm for us.
Okay. Well, there's a lot in there, and one of the things I think that surprised folks was given the strength in CAS.
Yeah.
Of course, you have Altaviva, you've got, you know, Ardian, which continues to ramp, you've got other growth programs. Just given the strength in CAS and the, you know, comps that folks are anticipating for next year, you know, the concern was, well, how can you grow faster? Maybe, you know, there's a few things that are different about the way CAS is growing for Medtronic than, for example, the way CAS grew Boston.
Yeah.
I think it has to do with, you know, the sort of account wins on the mapping side as well.
Yeah.
...as on the catheter side. Maybe talk about, like, you know, how has that been, how has that maybe tempered your growth, as strong as it's been, and how does that sort of help you drive more sustainable high growth over the next-
Yeah.
12, 18 months?
First of all, we're the fastest-growing franchise in this incredibly attractive market, and we're thrilled with that. It's a fantastic franchise. It's dilutive at gross margin, but it's super accretive at the operating margin level, so we're happy with it. I think what puts us in a different spot is kind of the product portfolio that we've got. We've got PulseSelect, single-shot, very competitive product. Then we've got Sphere-9. The big advantage of Sphere-9 is that it's dual energy, so it's RF and PFA, and it includes the mapping. For a physician, you know, you don't know how all of the procedure is gonna go when you started.
Having a catheter that enables you to do the mapping, to do the PFA, but also to do some RF if you need to in the procedure is a big differentiator. The alternative is to do the mapping with one catheter, pull it out, do a PFA ablation, and then if that's not sufficient, put it out again and put a third catheter. It's not great. It's not as good for the patient. It's not as good for the hospital economics 'cause it's more expensive. It's not as good from a procedure time perspective. Our data says that in the case of Sphere 9, 50%-60% of the cases that are being done are dual energy. The physician is having to use both PFA and RF. It's just a massive differentiator.
Originally, you know, we got some comments on, is this a niche product for high-end procedures? Clearly, the experience of the physicians is that it's not. It's a workhorse that you use when you don't know what the outcome of the procedure is gonna be. Then, you know, on top of that, we've just received CE mark for Sphere-360, which is the next generation single-shot. It reduces significantly the procedure time, even versus Sphere-9. We started the clinical trials in the U.S., so we should be able to commercialize that product in about 18 months from now. We're continuing to expand the usage of Sphere-9. We're launching it in Japan. We're looking at expanding indications to VT.
We're in absolute sort of growth mode for this business, and we really feel like we're at the beginning of the growth for this franchise. We're super excited about the prospects and clearly, you know, our ambition is to take the lead in this market. In the third quarter alone, we took 4 points of market share. We're super excited about the franchise.
Okay. No, it's been a huge win. And consequently, but still constrained. Maybe talk a little bit about. What are the. Not to make a, you know, big sort of negative point about it, but the reality is, you know, there are some hoops and hurdles that you need to go through to get a new center up and running, let's say, just using another catheter on an EnSite, an Abbott system, you know, don't face. Maybe talk a little bit about that.
Yeah. You know, first, at the beginning, the bottleneck was supply chain, and was the production of the catheters. It's 100% fixed. We have, you know, ample capacity to respond to the demand. The second, I would say topic that you need to address is the mappers 'cause you have a mapper that's physically present during the procedures. Since we're growing very, very fast, we're having to hire a lot of mappers. A large number of those mappers require training. Typically, it takes a few months before they're fully operational on our products. But again, there we're on track. We've hired hundreds of mappers since over the last couple of years, I would say, but most importantly in fiscal year 2026, and we'll continue to do that.
We're in a position to continue to grow the franchise. Now, if you look at the market, today, you know, about 70% of our revenue is coming from 30% of the centers, which are the big established centers. We feel like we still have a large opportunity to grow in these large centers because typically they have one piece of equipment today, and they're looking to add the second one and the third one. There's still significant opportunity to grow with the large centers. Now we're starting to look at smaller accounts as well. You know, again, a large opportunity to continue to grow from a commercial perspective. Even in the ASCs, which it will take time, but it will, I think, become a larger portion of the market over time.
We've got a perfect catheter for them, which is PulseSelect, you know, with great economics. I think the product range that we've got with Sphere-9 and PulseSelect today and shortly with Sphere-360 really puts us in a position where we can address the different parts of the market efficiently.
Okay. We could spend another hour talking about CAS, but we don't have another hour.
We could.
Just lastly on mappers. I think investors and we sometimes think about this as, okay, so it's hard to hire experienced mappers. You know, some of your competitors are doing their best to lock down those resources, and retain them, you know. I would imagine and what we've gathered is like the ability to hire isn't a constant. It's changed, right, over time.
Yeah.
Just as Medtronic has gotten recognition for, you know, the success and the adoption and the growth in Affera as recognized in the community talk a little bit about this, is the ability to, for people looking to join this team i mproving?
Yeah. Hey, look, you know if you're a mapper, you wanna go where there's business. You know, your salary is gonna depend on the number of procedures that you're able to carry out, you know, on a weekly basis, et cetera. Right now, you know, the mappers wanna come to Medtronic, and we know the competition is trying to do retention, et cetera, but look, we're on track. For sure, the mix between experienced mappers and less experienced mappers is gradually gonna shift, and we've incorporated that in the way we do the training and the way we do the onboarding. We pair the less experienced mappers with the more experienced ones, et cetera. You know, whereas it's an important topic and the team is very focused on it, we don't see this as a roadblock going forward.
Okay. Just a quick one on, you know, really important programs, Hugo and Ardian in a couple minutes we have left.
Yeah.
You know, there's different opinions on both.
Yeah.
... talk about maybe most importantly, you know, when and how will investors begin to see the sort of positive benefits either to growth however you're gonna be able to communicate about those businesses. Is that in calendar 2027, we'll be talking about those.
Yeah.
Maybe, you know, color on when we start to see them move the needle?
Yeah. So Ardian, short answer is yes, there will be impact on 2027. I think it's relatively limited still for Q4, so we're not reliant on a large pickup for Ardian in the fourth quarter of this year, but it will start having an impact in fiscal year 2027. Look, it's a huge opportunity. Even yesterday at CRT, I think a lot of you might have seen the comments from the physicians. Everyone is super optimistic about the number of cases building, but it's a new franchise, so you need to set up the hypertension centers. You need to, you know, sort of build the referral pathways between the consumers that want to undergo the procedures and where the physicians actually are. One of the hurdles is getting through the first reimbursement.
What we're seeing is, when a physician has done successfully a case and gotten the reimbursement, then the second one and the third one tend to come quicker. We're going through that buildup and look, again, it's an 18 million patient pool. 1% of that multiplied by the price of a catheter, you know, which is around $15,000-$16,000, is a very significant opportunity for us. It's a good margin business, so it's a great franchise.
Again, you'll start seeing the impact going into fiscal year 2027. Hugo, look, you know, we just got the FDA approval in the U.S. at the end of last quarter. The U.S. is 90% of the global market, so it's a massive open door for us now. We did the first procedures at Cleveland just before the earnings, and the way the product is received is very positive. You know, there's someone else in that market now.
Yes, we've noticed.
Someone has approval and can start selling an alternative, so we're looking forward to it. I will say, though, that it's a huge opportunity for us, so we wanna get it right. The approach is really to select the right customers, do the installation and the setup of the system in an optimal fashion, so that's, there's perfect sort of customer satisfaction. Our goal is to be the only OEM that can do open surgery, laparoscopic and robotic surgery. It's super important for our customers because they wanna have that full solution, and now we're able to do it, and so we're in setup mode and starting to do the first installations. We'll take our time, but it's a big opportunity.
Okay. The compulsion is, of course, to count boxes and talk about systems and things like that, but is the right way to think about this as, you know, entering a segment, entering an indication, if you will, within surgery that's gonna show up as improvements in the overall advanced surgery business? Is that the right way to measure?
It'll help for sure, especially as we expand the indications, you know. Today it's mostly urology. We'll go to GYN, and then we'll go to hernia and then general surgery. Our goal is to improve the coverage with these key accounts, and as this happens, you'll start seeing the effect in the financials.
Well e xciting times.
It is, yeah.
Well, thanks so much for taking some time.
Thank you. Appreciate it.
We'll leave it there.
Thanks very much.
Thank you.