Medtronic CEO Geoff Martha today said a “catastrophic explosion” in Medtronic’s supply chain for packaging and a shortage of resins were the biggest issues hurting the company’s fourth-quarter performance.
Fridley, Minnesota-based Medtronic (NYSE:MDT) reported about $350 million less in sales than analysts were expecting for the quarter, which ended April 29.
Martha said about 75% of the miss was caused by supply chain issues, 15% by the COVID-19 lockdown in China and the last 10% due to foreign exchange rates getting worse.
Supply chain struggles “came out fast and hard” in the fourth quarter across the company’s businesses, but were most pronounced in Surgical Innovations (SI), Martha said.
“It was three things,” Martha said. “It was semiconductors, which is affecting everybody. That affected a number of businesses, but particularly in our SI business. It also was resins. A particular resin that we use in our energy business and SI has been a major source of problems for us. And then packaging, our trade packaging, there was a catastrophic explosion in our supply chain. And so those last two ones — the packaging and the resins — were the biggest issues, the biggest supplier de-commits, and I’d say the biggest surprise. And most of that was in SI.”
Martha did not elaborate on the explosion, so it’s not clear whether he was speaking metaphorically or literally. More information was not immediately available from Medtronic.
Martha said suppliers missed more deadlines “than we’ve ever seen” in the latter half of the quarter. He expects the supply chain situation to improve in the next quarter or two, with the SI issues likely taking the first half of Medtronic’s fiscal year to resolve.
Analysts pressed Martha on supply chain improvements for more consistent performance, with Travis Steed at Bank of America noting that Medtronic’s supply chain issues were worse than its peers.
“We’re well down the path of remaking our global ops and supply chain to provide that resiliency that we just haven’t had,” Martha said. “And we started that over a year ago, centralizing the function and building a very strong leadership team under [former Walmart executive] Greg [Smith], bringing in new people from different industries, investing in all kinds of tools and technology and operating mechanisms for this. I’m confident we’re going down the right path there. I’m glad that we started when we did. I wish we would have started even earlier.”
Starting earlier would have helped with the fourth quarter surprises, Martha said.
“Our global ops and supply chain was really set up for a different era, a past era. And we had to make those changes. Unfortunately, they haven’t fully taken hold yet. They need more time to mature. I would have liked to have those moves done earlier. … But the good news is that we’re not just getting started on this transformation of supply chain. I’d hate to be starting it now in the middle of this environment.”
EVP and Medical Surgical Portfolio President Bob White reported ‘good progress on the supply chain issues” that slowed Medtronic’s launch of its Hugo surgical robot platform.
“We’re still in limited market release. … We’re currently in eight countries,” White said. “We’ve had a number of installs this past quarter in France and Italy and Denmark. We did receive regulatory approval in Brazil and Saudi Arabia [following] Canada and Australia. We’ve begun general surgery cases in Panama, in Chile and India. And now we’ve done procedures across urology, gynecology and general surgery, including our first bariatric case, which was a nice milestone.”
Medical device manufacturers are getting louder about material and component shortages, particularly semiconductors. Industry association AdvaMed continues to push the Biden administration to prioritize medical devices when supplies are short.
Medtronic CFO Karen Parkhill discussed that possibility in an interview with Medical Design & Outsourcing last year, before Medtronic’s supply chain issues became significant headwinds.
On today’s earnings call with analysts, Parkhill said Medtronic is taking a conservative approach with its guidance for the first quarter “given our recent challenges.”
“We’re assuming underlying fundamentals are pretty similar to last quarter — to Q4 — and we’ve built in some conservatism in the supply chain,” she said.
Shares of Medtronic were trading down about 5% at $99.90 in afternoon trading. MassDevice‘s MedTech 100 Index, which includes stocks of the world’s largest medical device companies, was up about 1%.