Medtronic plc (MDT) J.P. Morgan 41st Annual Healthcare Conference

Medtronic plc (NYSE:MDT) J.P. Morgan 41st Annual Healthcare Conference January 9, 2023 11:15 AM ET

Company Participants

Geoff Martha – Chairman and Chief Executive Officer

Karen Parkhill – Chief Financial Officer

Que Dallara – Executive Vice President and President, Diabetes Operating Unit

Sean Salmon – Executive Vice President and President, Cardiovascular Portfolio

Conference Call Participants

Robbie Marcus – J.P. Morgan

Operator

Thanks, everyone. We’ll get started here. I’m Robbie Marcus, the medtech analyst at J.P. Morgan. I’m very happy to have Medtronic as our next company here. I’m going to call up Geoff Martha, Chairman and CEO, and then we’ll do a little Q&A after. Geoff?

Geoff Martha

All right. Thanks, Robbie. Okay. Thanks for the introduction, Robbie. And thanks to all of you for joining the Medtronic presentation this morning and what looks like to be a packed house. And despite the rain or at least the threat of rain, it wasn’t nearly as bad as we were told. It’s great to be back in-person here in San Francisco.

And before I get started, I do want to remind you of some disclosures, including that I’ll be making some forward-looking statements today that may — and may reference some non-GAAP financial measures. And I encourage you to read these disclosures, which are also available on our Investor Relations website as part of this presentation.

Okay. So let’s get going here. So today I want to update you on the steps that we’re taking to set up Medtronic for adorable growth. While it hasn’t yet translated into our financial results, we have an aggressive transformation underway in the company and I’ll share with you today how the actions that we’re taking get at the root causes of what’s held Medtronic back. And cover some of the proof points that these changes are working. I’ll talk about how we’re improving our operations, supply chain and quality and working to make our scale and synergies across the company actually count.

We’re also implementing changes to how we allocate capital and how we think about the portfolio, including divesting non-core assets and all of this is geared toward getting to faster and more durable growth. And as we look at the portfolio, I’ll share with you how we’re thinking about our mix of businesses, how this leads to a mid-single digit organic revenue growth company and how we expect growth acceleration starting now in the back half of our fiscal year.

And when I think about what has held Medtronic back over the years, I could sum it up in these areas. One, structuring and culture; two, market selection; and three, quality and operations. So starting with structure, we’ve taken decisive action as I’ve talked about to reduce the organizational complexity through our new operating model. We’ve eliminated group and region structures. We’ve empowered our businesses and more recently centralized our global operations.

Regarding culture, we’ve brought in several new external leaders who bring much needed capabilities in certain areas, but also just as if not more importantly a fresh perspective. And we’ve put in place a much stronger performance based incentive program. When it comes to market selection, we’ve implemented changes to how we allocate capital to ensure we’re prioritizing investments in high growth and high return areas. And we’ve also sharpened our focus on portfolio management, implementing rigorous processes that look at both additions and subtractions.

And finally, with quality and operations, we’ve been urgently enhancing our capabilities, including bringing in new leadership and implementing new systems. And as these actions continue to take hold, I fully expect to see improved financial performance and improved shareholder value creation over time.

Now in order to change the culture of a company, it has been very important to bring in fresh thinking. Fresh thinking from the outside, often from outside our industry. In operations and quality, I talked about how we hired Greg Smith over a year and a half ago to lead our global operations and supply chain. And Greg has brought in underneath him new leaders as we embark on centralizing this function to drive efficiencies, while at the same time improving our resiliency and our quality. And in certain of our businesses, we need better operators. And to do this, we did elevate some leaders within the company, but also brought in other leaders from outside the company.

Finally, we’re strengthening our functions, including strategy, digital innovation, IT and FP&A and by hiring strong external talent. These new leaders combined with our existing leadership team are driving the changes across the company. Another part of our transformation is turning our scale into an advantage. And we’re focused on three specific areas: global ops and supply chain, leveraging technology, like batteries, robotics and catheter delivery systems across multiple of our businesses and sales, sales to larger healthcare systems which keep getting bigger where we are becoming a partner of choice through our contract and supply chain management as well as our data exchanges.

Looking specifically at the progress we’re making on global ops and supply chain, we centralized these functions to create efficiency and leverage our scale, moving from 13 supply chain and manufacturing organizations down to just two. We’re modernizing our operations planning systems, including our [SIOP] (ph) capabilities to get ahead of supply chain risk. And we’re focused on consolidating our vendors to drive efficiencies, while at the same time ensuring redundancy. And we believe that all of this will lead to a competitive advantage for Medtronic, one where our scale is leveraged and from which all of our businesses will benefit.

Now another part of our transformation agenda is improving our capital allocation across the company. To disproportionately allocate capital, to high growth and high return opportunities, while ensuring that all of our businesses get the appropriate level of investment that they need to compete in their respective markets. We’re doing this through increasing our level of R&D and we target R&D growth at or above revenue growth. And as you can see in this chart, we’ve grown R&D at 5% over the past five years, 5% a year, including a 10% step up in FY ’22. And then we supplement our organic R&D with smart tuck-in acquisitions, as well as utilizing minority investments, strategic partnerships and even incubators.

And when it comes to capital allocation, we’re prioritizing returning capital to our shareholders. We target a minimum return of 50% of our free cash flow primarily through our dividend, which we’ve increased every year for 45 years. And we won’t hoard cash on our balance sheet. So to the extent we can’t find attractive tuck in M&A, we will look to return capital to our shareholders by repurchasing our shares.

Now portfolio management is an important part of our transformation agenda and critical to achieving the durable growth I’m talking about. We’ve put in place a regular cadence of evaluating our portfolio and you’ve seen the results as we’ve announced both additions and subtractions. On the divestiture side, we’ve announced three businesses over the past eight months that we intend to divest that together account for 8% of our revenue. And on the tuck in acquisition side, we most recently closed the acquisitions of Intersect ENT, as well as Affera. Excited about both of these.

And you can see how we are taking a very targeted approach on our tuck-ins. So one example is in our cardiac ablation solutions business, where we’re using these acquisitions to create scale in this high growth market. And most recently, with the addition of Affera’s — with Affera and their mapping and navigation technology, and also Acutus’s left heart access portfolio. So as we go forward, you can expect us to continue to make disciplined tuck-in acquisitions when it makes sense and also divest non-strategic assets.

So we have an aggressive transformation agenda like I’ve spoken about from our work in reducing organizational complexity, to improving capital allocation and enhancing our capabilities. We’re working to leverage our scale and implement new focused capital allocation and portfolio management processes. Now I realize that you’re not seeing this come through in our overall financials yet. I get that. But we’re seeing signs of progress in certain businesses. And let me talk you through a few proof points.

You’re seeing these green shoots in certain businesses, in particular, those that are in our neuroscience portfolio, because in these businesses we implemented changes earlier, prior to taking them to the entire company when I first became CEO. So let’s talk about neurovascular. This business was really a beta for the operating model that we now have in place across the company. When neurovascular came in from Covidien, it was standalone. And we kept it that way. Allowing them to have the focus that they needed to compete and win in the marketplace.

We also disproportionately funded their innovation due to the market opportunity, which is proven to be a wise decision as they’ve really pioneered the ischemic stroke market and remained a leader here. And this experience of a focused operating unit within Medtronic led us to what we did with our Cranial and Spinal technologies business. Here we combined our spine and neurosurgery businesses to make one entity, given that close linkages between these businesses and the new business model where we’re using the enabling technology to pull through implants, we put these two businesses together and we brought in a new leader to run the business.

We also added to the CST portfolio with strategic tuck-in acquisition, including Mazor Robotics, Titan Spine and most recently, Medicrea, which brought in an AI guided preoperative planning software as well as customized hardware. And it’s this ecosystem of spine hardware and enabling technology, which we now call [ABLE] (ph) has allowed us to extend our lead in the spine marketplace. And it’s a — this is an example of how we intend this model to work.

And as you can see in both of these examples, we’re realizing the benefits of the changes that we have made and they’re paying off in both — in terms of revenue growth, as well as market share wins. Now I can tell you similar stories about several other businesses like ENT and others, but the important point to take away is that, over time we expect even more of our businesses to demonstrate the benefits of the transformation agenda, whether that’s ensuring their current strong performance is durable, like our cardiac rhythm business or when we’re talking about a turnaround like with diabetes. And you’ll be able to track these very clearly as they accelerate our growth over time.

These proof points are real and they’re exciting, but we recognize as a whole we haven’t been delivering the growth we should over the past few quarters as we’ve had a few headwinds that have held us back. The good news is that, we have line of sight to these headwinds resolving and some sooner than others, but we haven’t line for all of them resolving. For example, ventilator sales, we’ve had a recent headwind impacting our first half growth by roughly 60 basis points given strong COVID related sales in the prior year. However, these difficult comparisons, they abate as we go through the back half of our fiscal year.

Another that I’ll call out is China VBP. We get a lot of questions on that. We’ve gone through VBP now in coronary stents and in our spine business and have a few other businesses that are now going through provincial tenders. However, we expect that as we exit this fiscal year, over half of our China revenue will have been through VBP and we expect to reach approximately 80% by the end of our FY ‘24, giving us a new albeit lower revenue base to grow from going forward. Overall, our guidance assumes our headwinds become less in the second half of our fiscal year, leading to accelerated revenue growth. And aiding this accelerated revenue profile are several key drivers that are expected to accelerate our growth over the next six quarters. This page with one exception are all drivers that are either here today or will have a meaningful impact on the second half of FY ‘23 and into our FY ‘24.

The one thing that is a little further out is Ardian, but we are expecting regulatory and reimbursement catalyst over this time frame. And I’ll point out the recent news that our pivotal data from the Pulsed AF trial studying our Pulse Select PFA catheter has been accepted as a late breaking clinical trial at ACC in March and we expect to be one of the first, if not the first PFA catheter in the U.S. market. You should take away that we have many drivers, as you can see on this page across all four segments and several of these pipeline catalysts, like I said earlier, are here now, right, already on the market.

These growth drivers are real and exciting for our top line growth even into next fiscal year. And we — but as we move down the P&L for FY ‘24, we do want to remind you and our investors of some of the things we talked about on our last earnings call. Macro factors combined with the imperative to ensure we invest for the long term will create significant EPS headwinds for our next year. Now we’re working to partially mitigate these headwinds through significant expense reductions, but inflation, interest, FX, and the increased R&D investments that we want to make are reducing our earnings power in the near term.

Now over the long term, our transformation agenda is setting us up for durable growth. So let me walk through how we think about our businesses and our overall growth formula going forward. On the bottom of the page, you have our durable growth businesses, which are established leaders in their markets and make up 50% of our revenue. These are big businesses with nice synergies that drive disproportionate amount of our profits and our cash flow. And we need to ensure that we continue to invest appropriately in each of these.

And to get the company to the overall growth profile that we want, on top of this, we need to invest in our highest and largest growth opportunities and these are in secular growth markets. To do this, we use cash flow from the four businesses highlighted below to help fund these high growth opportunities because they require disproportionate amount of investment.

And I’m going to talk through in more detail about both of these groups of businesses over the next couple of slides. So let’s start with our highest growth areas. I’ll start with Structural Heart. Here we have a strong position in the TAVR market where we just launched our latest generation TAVR valve, Evolut FX in the U. S. and we’re investing in future growth drivers in the Mitral and Tricuspid spaces. We also have leadership position in neurovascular market that I talked about earlier where we continue to gain share in a double digit growth market.

In diabetes, while we remain under a warning letter in the United States, we are driving consistent mid-teens growth in international markets and we recently completed 100% of our warning letter commitments and are prepared for FDA reinspection. And cardiac ablation solutions, I mentioned earlier this one as well, how we’re assembling a full suite of products for this space, including bringing multiple pulsed field ablation catheter to the market. And in surgical robotics, we’ve made very meaningful progress over the past few quarters as we expand to new geographies and specialty indications. And just last month, we announced our first enrollment in our U.S. IDE trial and expect to be a strong player in this multibillion dollar market.

At the same time, we have established leadership positions in our largest businesses that make up about half the company, as I said. So in Cardiac Rhythm Management, we continue to win share with our micro family of leadless pacemakers and we’re gearing up for the CE Mark approval of our Aurora EV-ICD here in the second half of our fiscal year. In CST and our ENT business, I mentioned earlier the impact of our ABLE technology ecosystem is having in the spine market, but the ENT business also drafts off this enabling tech technology in areas like navigation and powered instruments to drive its market leadership. And in surgical innovations, we have resolved the acute supply chain challenges that have held this business back over the past three quarters and we expect to recapture share going forward.

Now pulling this altogether, this slide shows you how we’re thinking about the portfolio and how we can deliver mid-single digit revenue growth over the long term. Starting with our established market leading businesses, this makes up about half the company and we’ve been consistently growing 3% to 4% percent prior to the pandemic. And we expect them to grow at this rate going forward, given the durability of these businesses. And as I mentioned, these are big businesses and they drive a lot of the economics in both in terms of profits and cash flow to feed other investments.

On the other hand, you have our highest growth businesses. Which are also our largest growth opportunities. These are growing collectively 10% plus pre COVID. And we expect them to grow in the high single digits, if not, higher going forward as we capitalize on each of these growth opportunities. We’re well positioned in these markets, but they do require a lot of investment. And in the middle, you have what we’re calling our synergistic businesses. They don’t fit any one growth profile, nor do any one of these have the economic impact of our established market leading businesses. But collectively, they deliver mid-single digit growth and have strong ties to other businesses in the company.

So for example, our Neuromodulation businesses. Here we leverage the strengths of our broad implantables franchise and we’re building on our implantables base and investing to drive innovation in areas like closed-loop spinal cord stimulation and closed-loop DBS. Another example in cardiac diagnostics where we’re evaluating opportunities to potentially expand this business, which leverages technologies from our CRM business and we’re looking to expand it into new diagnostic areas. And you’ll also notice the businesses that we’ve announced for divestiture, which make up 8% of the revenue and that rounds us out. So this is our portfolio today. We continue to evaluate it, but we like how this portfolio is shaping up. And this is what gives us the confidence in our ability to deliver durable growth over the long term.

So to conclude, we are urgently forging a path towards durable growth. Our aggressive transformation agenda is getting at what has held us back at the heart of what’s held us back. And we expect that this to result in the creation of a durable growth company. We expect our revenue growth to accelerate in the near term as we overcome headwinds and realize the impact of our growth drivers that are here today, on that page I showed you across all four segments. And we’re also working to turn our scale into an advantage. And we expect all of this to drive improved execution, financial results and shareholder value over the long term as we deliver on our operating initiatives and our growth drivers.

So with that, I’ll have the several others on my management team join me on stage and Karen, Sean, Bob, Brett, Que, and I are happy to take your questions that I think will be moderated by Robbie.

Question-and-Answer Session

Q – Robbie Marcus

Great. So thanks everyone. Maybe we could start it off. I was thinking Medtronic is probably the largest medtech company around the world with the touches more on market. So I thought it’d be good and I realize you’re intra quarter and you’re clearly not preannouncing fiscal third quarter. But what’s your latest sense of what trends are looking like around the world? China is a big one where there is a lot going on and just have you seen a return to normalization in most markets in medtech?

Geoff Martha

Well, like we said in our last earnings call, most of the markets have returned. We called out a couple that hadn’t. And we don’t — and since our earnings call today, we haven’t seen a lot of change. So like with the ones that we called out that hadn’t fully returned are TAVR, coronary PCI, SCS or SI, some certain procedures within our surgery business that are more elective and GI. And most of those are unchanged so far, except coronary has gotten slightly better in the last couple of weeks. Really, this is one that we’re kind of scratching our head as to what happened, why it’s slower, but it is coming back.

And as you mentioned, the China dynamic with the COVID there is new since our call. I can tell you this, it’s — a couple of things. One, it’s moving as you guys read the headlines like I do and it’s moving fast. And I can tell you, talking to our leadership there, we have like 4,500 employees. I mean, it’s ripped through our company quickly, like unbelievably quickly. But from a supplier side, they have a different approach. Our supply chain hasn’t — we haven’t seen issues yet there. People are going to work with symptoms. So it’s a whole different world. But it will impact cases, so — on the end markets side and we’re watching this closely as it evolves. But our hope is that, it’s going to be short lived, but it’s something that’s evolving and we’re kind of watching closely.

But the others haven’t changed too much. I don’t know, Karen, if I missed anything, you want to add in.

Karen Parkhill

No. You said well. I would — the only thing that I would add is just on China, even though we’re watching it closely, we’re continuing to track within our expectations for the quarter.

Robbie Marcus

Great. Good add. As we look back over the past year, I think there were a couple product issues that we’re all well versed in. As we look over the next 12 months, you had a slide up there with a lot. What’s the new product launches that you’re the most excited for? And I think what we all care about most is, what could be the most impactful for Medtronic?

Geoff Martha

Well, I think in terms of impact, it’s the totality of them. I mean, if you look across, there’s a lot. And since I became CEO, these things were further out, and now with the exception of Ardian, we’re not really counting on much in our FY ‘24 from Ardian. The others were all — they’re either on the market or close. And from a long term perspective, I’m excited about our diabetes products in the U.S. I’m seeing what we see in Europe and around the world, the patient clinical results as well as the patient experience. And we just see the market turning back to this AI automated and some delivery, whether it’s a pump, a patch or a pen. And we have a very strong position there. So getting those products back in the market, obviously, you have to get through this FDA inspection. That’s very exciting.

Hugo is exciting too. I know there’s a lot of skepticism out there, because it took us so long to get this product out there and other competitors have struggled to get competitive system out there against the — against da Vinci, but we’re getting really good feedback. And I think we have something to build from here. I’m to see that ramp. But the impact is going to come from the totality of everything, including some of the — just the — it’s not one product like in our CST business or ENT business where they’ve got this ecosystem of technology that creates a moat around them, just seeing those business models really extend their lead versus their competition is something I’m excited about.

Robbie Marcus

Getting the diabetes warning letter lifted is absolutely very important factor for helping Medtronic growth going forward. You said in the slides that you’ve completed everything and you’ve invited the FDA to come inspect. Is there any way to think about how long it may take or from now to approval? What’s a good benchmark maybe for the industry? I realize it’s impossible for you to say exactly.

Geoff Martha

Maybe I’ll introduce Que. This is her first JP Morgan. She’s really excited to meet you in person, Rob. So I’ll introduce Que and maybe have here answer that one?

Que Dallara

Robbie, thanks for the question. I mean, look, we don’t have a crystal ball. I think we feel very confident about being ready for the FDA. And it’s really in the hands of the agency on their resource levels. COVID is also an impact in the wintertime. And so it’s really a resourcing. They’ve indicated to us that this is a priority for them. And so, our anticipation is that, it will be I think what Geoff has said previously is, it’s months, not quarters. So we’re waiting when they can come back in.

Robbie Marcus

Okay. Maybe I’ll touch on fiscal ‘24. You had a slide up there and whether Geoff or Karen. First question is, do you think Medtronic can return to 5% plus organic sales growth next year? You had a long list of headwinds to consider down the P&L. Do you think Medtronic can grow on the bottom line next year?

Geoff Martha

Let me take the beginning, I’ll let Karen answer. I mean, look, I think what I’m excited about right now as we sit here today is, the improvements that we’ve made in our supply chain issues and quality issues, the product launches and the revenue acceleration that we’re seeing. I wish it were faster, but each quarter it’s getting higher and we’re excited about the back half of the year and exiting the year in that mid-single digit range. So we’re not — it’s too early to provide guidance for next year, I don’t want to get into that right now. But on the top line, just excited about removing some of the headwinds, fixing some of our kind of execution issues on the operations side, at the same time these products are hitting exiting the year mid-single digit and we will not hit the guidance for next year. But it will be a tougher year from an EPS perspective and I’ll let Karen maybe tackle that one.

Karen Parkhill

Yes, absolutely. And again, I’ll reiterate, it’s too early to give guidance for next fiscal year. We’re still in our planning cycle. We still have two quarters to go this fiscal year. But as we look ahead, it does start with the top line as Geoff mentioned and we should exit the year as we expected, in mid-single digit territory, which helps, because the earnings power starts with the top line and helps with the top line.

That said, we are facing continuing headwinds into next year, including inflation, currency, interest, taxes, and all of those headwinds will play a role. We are focused on driving significant expense reduction next year and we’re working on those plans right now to take both fixed cost and variable cost out of our base. Our new operating structure, I think helps us get at those costs a little bit better. Where it shakes out, too early to give you specifics at this stage, but we’ll keep you posted as we move through the rest of this fiscal year. And as Geoff said, next year will be a tougher earnings year, just given all of those headwinds.

Robbie Marcus

Geoff, you guys have been fairly active in smaller sized M&A and you recently announced a divestiture — spin of the patient monitoring business. How far along are you in your portfolio review? Should we expect potentially more actions from Medtronic, both — either additions or subtractions in calendar 2023?

Geoff Martha

Well, I think in the near term, I mean, look, first of all, divestitures take a lot of — a lot more work to execute not the analysis, but the execution. And so, I think given we’ve got three, our dialysis business, our patient monitoring business and our respiratory interventions business, which has our ventilators among other products, that’s a lot. That totals 8% of our revenue and there’s some operational entanglements we’ve got to undo. So I think over the near term from a divestiture standpoint, I wouldn’t count on others. However, that being said, the portfolio review, as I mentioned in my commentary, it’s ongoing. It’s not like a date that says, okay, as of the state we’re done. It’s part of our ongoing process here.

On the tuck-in acquisition side, those are a little bit less in our control. And if there’s certain things we’ve been tracking, we try to get ahead of processes and things like that. So you could see more on the tuck in M&A side. But on the divestiture side, I’m not saying no. But I think it’s unlikely in that time frame.

Robbie Marcus

Okay. You do have a fairly robust balance sheet right now. So where does M&A relative to share repurchase investment or dividend fall?

Karen Parkhill

Yes, we are pleased with our strong balance sheet and financial strength. And our capital allocation priorities haven’t changed for a very long time. We’re going to focus on continuing to drive tuck-in acquisitions to help us grow our top line, make it more durable. We’re also going to continue to balance returns to our shareholders. And you’ve seen us do that over the recent history. This past — since FY ’21, there was a slide that Geoff showed that show that we’ve spent $3.3 billion on tuck-in M&A and we’ve spent $3.7 billion on share repurchase all since FY ’21. So it is very balanced and you can expect that to continue going forward.

Robbie Marcus

Great. Maybe I’ll open it up if the audience has questions. Shy crowd today. Good. I’ll keep going here. Renal denervation was a product you announced data for later last year. You know, this had been a product that went through several development cycles. It’s filed, I believe, with the FDA or soon to be filed with the FDA. This is one where the trial results probably didn’t end up as everyone expected, given you had lots of positive, positive, positive data and then maybe some conflicting evidence. Do you feel like this can still be a multi-billion dollar type of product and over what timeframe?

Geoff Martha

Yes. I’m going to let Sean just give you the details here. I’d just say that we are bullish on this, and I’ll let Sean explain why. We’re — I know there’s skepticism out there, whether it be on FDA approval or less so on that, but more so on reimbursement. And I just don’t think at this point we have so much to talk about in terms of the product approvals. I think we’ve chosen leadership team just to not engage on the debate and just prove — and just make it happen. But I’ll let Sean explain why we’re bullish on this and why our customers are bullish on it?

Sean Salmon

Yes, Robbie, I think that’s the most encouraging thing what Geoff just said there. We still hear from customers, patients, especially that there’s still an intact, very strong value proposition here. And I think what — we ran into a pandemic. We had the ability to know that patients took more medications in the treatment on them, they weren’t supposed to, but they did. And we have proof of that urine and blood samples that said that worked. And that’s really the crux of the whole problem. You can get your blood pressure down if you take your medicines. All these medicines have been approved for years and years, they exist, yet patients aren’t getting their blood pressure goal. And when you take your medicines, it’s very hard to stay on them. I think of Ardian like, implanting a pill forever that you never have to remember to take that has zero side effects and as far as we know doesn’t wear off. So we got six years of data showing that it’s safe longitudinally, which is what payers care a lot about and that it remains efficacious longitudinally.

So I think really the value proposition didn’t change, the timing did. So will it take us longer to garner the kind of reimbursement or regulatory approvals that we’re anticipating? It may. But I think with a billion plus people having hypertension, the opportunity is still very compelling.

Robbie Marcus

Yes. Do me a favor. We have a microphone.

Unidentified Participant

[indiscernible]

Karen Parkhill

We can repeat it.

Unidentified Participant

Can you hear me? I was thinking in terms of the actual growth, is it coming mainly from just the issues that you laid out in terms of your headwinds? Or are you assuming any changes in the underlying markets, maybe a stronger U.S. or China back stronger? Or is it purely an internal dynamic in terms of accelerating the growth? And then I’ll ask my second question. In terms of margins, which you implied would be a tough year next year. Obviously, a lot of medical device companies have seen a hit to gross margins over the last couple of years. Do you expect to get back to the higher margin — gross margin level over the next couple of years as some of these headwinds abate and perhaps are you getting better pricing because of some of the actions you’ve taken with the hospitals and so on? Thank you.

Geoff Martha

I’ll start on the top line one and hand it off to Karen. I mean, we’re not assuming any like big acceleration in markets, right, in the end markets. As a matter of fact, our last quarter guidance, we called out a few of the segments that we’re in that hadn’t come back all the way. We just said for the back half of our year, we’re just assuming they stay where they are at 95% or whatever it is. So we’re not assuming that any acceleration of markets, it’s mainly just our two things. It’s the combination because we have a ways to go that the gap is on our top line growth from where it should be is significant. And so part of it is these issues that we’ve had. Some more market like the supply chain issues, some of our own supply chain issues are quality issues, those going away. Products coming back on market that we’re on hold for quality reasons or on our SI, our Surgical Innovations business coming back from very acute supply chain. So you have that headwind abating, which is meaningful. I mean, very meaningful.

And on top of that, you have that one page that showed all those products approvals that have we been talking about for several quarters that are now here, with the exception of Ardian, everything on that page is either on the market or very close. So that’s what’s really driving the top line improvement. Headwind is going away and some of these tailwinds. None of them are — we’re not counting on one home run. This isn’t a [indiscernible] moment for those baseball fans. There’s a lot of singles — at the Medtronic base of revenue those things are singles, doubles and there’s quite a few of them. We don’t need any one of them to hit. So that’s really the top line. Again to you point — guide other than through the back half of the year and we’ll exit at mid-single digits. But on the bottom line, I don’t know if you want to add on the top line too –

Karen Parkhill

I’ll just talk about the margins because you answered the top line well, Geoff. On gross margin, yes, we have seen a decline in gross margin over the last few years like many companies. And it’s driven in large part by the significant inflationary challenges and supply chain challenges that we have had. On top of that, we’ve had currency challenges too. When we look at gross margins going forward, we’re not necessarily expecting to get all the way back to pre COVID levels anytime soon. We’ve got continued inflationary pressures next fiscal year, which will impact our gross margin. And yes, we have been focused on pricing offsets and we’ve been doing actually a very good job offsetting the typical pricing impact and challenges that we faced every year of our history. We’ve talked in history about pricing impacting us between 100 basis points and 200 basis points a year. And with the very significant and concerted pricing focus that we have this year, we’re taking that to neutral, which is a pretty big change.

That said, we continue to have the FX inflationary pressure that will hurt our gross margin. But as we think about top and bottom line growth going forward, driving the margin stability is the first support. And then slowly increasing it over time on the gross margin level is what we’re going to be focused on.

Unidentified Participant

[indiscernible]

Karen Parkhill

Yes. The question was, do we see us getting back to the higher margin levels in the next three to four years?

Our margin pre all this happening was around 70% our gross margins. We’re pretty far off that at this stage. And so do we see getting back there over the next three to four year? Not necessarily is what I’m saying. But stability first and then slight improvement every year from there.

Geoff Martha

And there’s four things, because the formula that got us to the 70%, I think that formula there’s a number of market based issues and things that put pressure on it. So what we’re doing, four things. One, Karen mentioned is price. So this is something we’ve made meaningful improvements on over the last couple of quarters. The second is our cost of goods sold. We brought — we changed our operating structure like when we centralized our operations we brought Greg Smith in 18 months ago. This is before the market external forces on supply chain turned upside down. We made that move primarily initially for cost of goods sold reduction every year that’s meaningfully better than we’ve done over the past 20 years. Like every year cost of goods sold as we centralize and employee technology to lower cost of goods sold. Some of the progress has been distracted on because now we’re focused on resiliency more than anything right now. But that will come back to fold.

The others that we mentioned in my commentary, more expense reductions, G&A across the company, the new operating model kind of makes that a little bit — opens up opportunities for us to do that. And then the fourth is, it gets back to this market choice issue as we and our capital allocation, we are allocating capital not just to the highest growth, but the higher margin businesses. So things like our TAVR business, which the bigger it gets, the better our profitability mix gets. So those four things, price, cost reductions, G&A reductions and mix through decisive capital allocation are like more of something that we’re really focused on versus pre COVID, it wasn’t as big a focus.

Robbie Marcus

Unfortunately, we’re out of time. So let’s wrap it up there. Thank so much and thanks everyone.

Geoff Martha

Thank you.