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Good afternoon and good morning to folks on the West Coast. I'm Larry Biegelsen, the medical device analyst at Wells Fargo, and it's my pleasure to host this session with the management team from Intuitive Surgical. With us, we have Marshall Mohr, Executive Vice President and CFO; and Philip Kim, Head of Investor Relations. In terms of format, it's going to be a fireside chat. If anyone has a question they want me to ask on their behalf, please email it to me. I think we're going to try to get in one or two polling questions. And I think before we jump in, Phil, you wanted to make some opening remarks.

Sure. Before we get started, I'd like to mention that comments made this morning maybe deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, which are described in detail in our SEC filings. Investors are cautioned not to place undue reliance on such forward-looking statements.

All right. So, gentlemen, thanks so much for being here. Really appreciate you guys participating in our conference again this year.

Thanks for having us, Larry. We're happy to be here. Q - Larry Biegelsen: Marshall, I hope next year, we don't have to ask you about COVID. But we feel like we're starting almost all of these conversations with just kind of, any qualitative color you can provide on the Delta variant and what was embedded in your guidance? I went back and looked at kind of your transcript, the low end assumes some impact of resurgence in the U.S. but I'm just curious if you can qualitatively talk about any trends you're seeing.

Yes. Thanks Larry. Let me say good afternoon to everybody, and thanks for having us at the conference. Yes, we saw in Q2, it was actually a rebound that was quicker than we had expected. And if you look at the compound annual growth rate relative to 2019, so pre-COVID, it was 16.5%. Growth rates back in 2018 and 2019 were in the 18% to 19% range. And so, a little lower then. But if you were to have drawn a line looking at adoption curves and so forth, 16.5% was nearly a recovery. So it was quite nice. Having said that, going into this quarter, obviously we've seen a resurgence of the Delta variant that has had a significant impact on household resources over the past month or so, regionally. You see most severe in places like Texas and Florida and some of the South where vaccination rates are lower. And in those areas, you're actually seeing some level that hospital resources are strained and you're seeing some level of deferral of procedures again. And there is a direct correlation between hospital resource availability and how strained it is and deferrable procedures and da Vinci procedures for that matter, and there are a number of da Vinci procedures that are deferrable in the short-term. Now they’re chronic conditions, so, they -- eventually the patients have to be treated, but they can be things like hernias and cholecystectomies and bariatric procedures can be deferred in the short-term. So, given the resurgence, you should expect that it is having some impact on our procedures. How deep, how much of an impact is really difficult to predict. You have access to the various models out there that the various professionals put out there about what will happen with resurgence. So, you have access to that data, and we're not going to try to predict what the extent or the length of this is going to be. But -- and I would also comment that it varies by region within the U.S. You see more severe conditions in the South, and in geographies I mentioned, and much less severe in some of the other geographies like the Northeast and then it varies around the world as well. You see less of an impact in China right now. Little bit of impact in Japan, although the hospitals seem be getting through things pretty well. You see some impacts in places like the UK and India. So anyway, I don't have something specific to give you. But I can just tell you, just in general what we're saying.

And just a couple follow-ups. One is, maybe, if you can't disclose this, I understand. But is it worse than you kind of expected when you gave your guidance? I mean, it seems like most people didn't expect it to be this bad. Is that a fair conclusion?

Yes, it is. Yes. Going back to our guidance, you said it, so I didn't repeat it, but I'll repeat it now. And that is, our guidance didn't assume any significant disruption or additional costs associated with supply constraints, which, frankly, supply constraints has dealt with potential problems. And then the second one is, I didn't assume any significant or widespread impact of COVID in the United States. And I think we are indeed seeing that.

And it's interesting, because you talked about the 16.5% CAGR in the first half, to your CAGR I think. So big picture, we know whole COVID’s transient, you see these procedures whenever COVID does wane, these procedures coming back? And you can get back to kind of the underlying trajectory, Marshall, just to kind of bring home the point that this is transient, and the underlying trends for your business are still strong.

I think that's right. I think we still believe that the opportunity for computer aided interventions is significant that robotics that you'll see -- long-term, we've talked about a line of sight market of 6 million procedures, there's many more procedures than that, that could be done robotically. And we believe that opportunity has not changed. All COVID has done is disrupt sort of the pace at which you get there.

And you've talked about on the call -- you just mentioned it a minute ago, and you talked about the call, inflation and potential supply constraints. And you've called that out as a risk before. But I believe until through the second quarter call that it was more of a risk as opposed to something that was materializing. Can you talk about kind of what you're seeing, I guess, on both fronts, one is inflation, one is supply constraints, and how those might be impacting you?

Yes. Frankly, it's hand to hand combat on when it comes to supply and I don't think we're unusual. I think you’re reading it in the papers, the car industry, the computer industry and if any of you are trying to order products that contain semiconductors, you see that the lead times have been extended significantly for all products. So when I say hand to hand combat, our teams are working hard with our suppliers to make sure that we have the supplies necessary to be able to supply our customers' needs. And so far they were successful, certainly through Q2 and if I had something significant to say today, I would. But having said that, the risk is still there and the risk is so significant that at some point in time there is the potential that a supplier is unable to supply what we need. We also through Q2 had not seen, you call out, inflation. Either inflation caused by demand supply, normal pressures or inflation in terms of suppliers just trying to charge us more because the opportunity is there. So, it hasn't had much of an impact at all. I would say that, as we go forward, though, one area that will likely see increased costs is freight. And the reason is that you're having to expedite parts either into the factory or from the factory out to customer. And so we'll see some of that, price is not a huge part of our costs but nonetheless we'll see increased freight.

When we think about kind of next year Marshall, what are some of the puts and takes to think about on the top line and bottom line?

Yes, I think at a top line level, again, it's hard to predict at this point in time what COVID will do to procedures. We'll give our views on procedures at the end of January for 2022. As far as system placements, we've actually -- through Q2 we saw a nice pickup in systems, on that surprised us actually, because we had expected the hospital finances and resources would be constrained. And yet they came out of the COVID at least to that point in better shape. We could see going forward the COVID has an impact on that going forward. The gives and takes on the top line also will have to do with the replacement cycle. We've had a tailwind for systems in terms of replacements. You've seen nice trade-outs of third generation product to fourth generation and but over time that third generation population out in the field, the installed base actually declines and therefore you'll see less trade-ins take place. Top line, also leasing impacts the top line in the short-term. In the long-term, it's actually very beneficial. We would expect leasing to fluctuate quarter to quarter but to increase as a percentage of total sales over time. So that'll have a negative impact. On the bottom line, know that we think that the opportunity in front of us like we said earlier is the same and therefore we're going to continue to invest in both innovation, digital innovation, expanded instrumentation and accessory capabilities. And so you'll see us invest in Ion and SP. And so from a cost perspective, we will continue to spend. So all I would say is that those of you that are thinking that the profitability you saw last quarter will either sustain itself or will increase, I wouldn't think that. Last quarter, what you did see was that the recovery of revenue took place faster than the recovery of costs. And what I mean by that is, costs that were eliminated or minimized by virtue of COVID, travel, marketing events and so forth were still being constrained in Q2, but we saw a rebound in the overall business. And so, that profitability in Q2 was I think a bit of an anomaly. And you'll see again us continue to spend in this environment.

Marshall, a lot to unpack there.

Yes. Sorry. Didn't mean to go on…

So, on procedures we've talked about earlier. I think we covered that pretty well. On placements and COVID, actually a lot of companies have talked about the capital environment remaining healthy, even recently. I've heard companies talk about a favorable capital environment. Can we -- is that -- I mean can you give us any color on whether you've seen changes in the capital environment or not?

Yes. We won't talk about the inter-quarter play here. We can say that at the end of Q2, things had gone, like I said, better than our expectations. And it was reflective of, frankly, I think that a lot of what happened in Q2 was expansion of existing programs at large IDNs, and that's an endorsement of robotics being beneficial in both in terms of treatment of patients meeting their quadruple aim, reducing their overall cost of care. And so -- and then they were preparing, I think, for -- at that point, everybody thought we had COVID licked in and things were going to continue to improve. And so I think they were also preparing for a post-COVID environment. They're going forward. Capital is driven by -- so I won't comment on expectations. We don't provide guidance on capital because of short-term swings that can occur. But the -- I would just tell you the factors that could impact it. Number one is, know that procedures drive capital in our mature markets. And so we talk about utilization statistic. That is an indication of whether capital is getting ahead or behind procedures. And I think that it was in tune. They were in tune with each other through Q2. But if procedures are significantly curtailed as a result of COVID, then it could have an impact on capital. I mentioned the trade-in cycle. The trade-in cycle will decline as the population of third-generation product out in the field declines. I mentioned leasing. And I think we don't know what will happen from a COVID perspective to hospital financing going forward. And then finally, I think as competition comes out, we do expect to see longer sales cycles and potential price degradation.

Marshall, when does the trade-in -- or when does that become a headwind for you guys? Is there a way to be more precise? And how many are still in the field? And when does that become -- go from a tailwind to a headwind?

I'll let Philip provide you the statistics.

Yes, Larry, over time, you should expect the percentage of trade-ins to come down as the installed base of Gen 3 declines and upgrades. Roughly 20% of the worldwide installed base is Gen 3 or older. And so has a lot of large numbers. As we work through that, that should be less of a tailwind. More broadly, with leasing, we've always said in the past that we expect that to continue to be a larger percentage of our placements as time increases and we're just trying to provide our customers as much flexibility as possible.

And there's about 600 systems in the U.S. that are third generation or older, unlike a number outside the U.S. Outside the U.S., there are places like China where those systems haven't been installed for very long. Xi was not approved, regulatory was until about 1.5 years, 2 years ago in China. So we expect that element, that set of systems to return more slowly over a longer period of time. In the U.S., what we saw last quarter was that, that decreased the trade-in cycle. It was roughly 20% of the systems outstanding have been traded-in in that quarter. So if that pace were to continue, then you'll see a substantial decline certainly through the end of next year.

Got it. Marshall, you talked about leverage in the P&L a minute ago. Historically, you guys have delivered 1x to 1.5x leverage. Is that ratio come to the lower end next year, should we be thinking based on your commentary? Or I don't know if you can comment on that at all. But the Street right now is kind of has kind of the low end of that for 2022.

Yes. We'll give you a specific guidance for '22 when we get to the end of January. I think what we're foreshadowing is that this is a period of investment for us. We think we still have to invest in both Ion and SP, which are in their earlier stages. In the case of Ion, we have regulatory approvals. We'll seek in outside the United States, we have also -- it's in other potential indications and uses for it. In the case of SP, we'll be investing heavily in clinical trials to be able to obtain additional indications and to attain clearances in other markets outside of the U.S. So I think those are 2 big investment areas. Again, data is probably the greatest area of increased investment and will continue to be. And then you'll see a return in certain expenses that just as COVID wanes, you'll see increased travel, marketing events and other activities that have before now been caused by COVID. So as far as leverage goes, like I said earlier, you should not expect profitability at the level that you saw in Q2 going forward, Q2 was an anomaly, and we will continue to invest.

Got it. You touched upon competition, Marshall, a couple of times. Obviously, we -- Medtronic potentially coming to the market in Europe in the second half of this calendar year. When -- if the selling cycle is elongated, what would you expect -- when would you expect that to happen, if it were to occur?

It's happened to a certain extent. As you see some of the smaller competitors out there, the hospitals and in parts of where you have government systems like NHS in UK or some of the public hospitals in France and Germany, you -- they're bound to go through tender activities. When it was just us, they actually could -- they had to issue a tender, but they could circumvent the time frame and get it done more quickly. Now they have to go through the full length of time if one of those competitors jumps in the game. Going forward, we expect that more and more of those tenders will see multiple competitors, including companies like Medtronic. And so as that happens, then timelines elongate. What do they elongate to? Think of more like 6-month timeframes OUS versus 3-month timeframes. And in the U.S., you'll probably get some level of contemplation about whether competitive products versus ours make sense. And even though they don't have to go through these formal tender approaches, it could still elongate cycles here, too.

And do you think this starts once they get CE Mark? Or people will -- might start hesitating or waiting before it’s done?

That's a great question. I think you're already seeing competition trying to get customers to slow down their purchases or wait until their product is ready. That's happened for the last 4 years, frankly, when companies thought they might be coming to market more quickly than they actually have been able to. So I don't know. My expectation is they'll continue to try to get customers to slow down and install, but it hasn't had a significant impact to date.

That's helpful. You’ve talked about kind of the ecosystem really being the key basis for competition. What -- can you elaborate on how you think about the ecosystem you've built relative to the competition?

Sure. I'll let Philip take the first step at it, and then I'll jump in.

Sure, Larry. So you've heard us frame the ecosystem in the past as really driving outcomes, and we are focused on clinical -- driving clinical outcome. So firstly, we make sure that we understand the customer base deeply. We make sure that we have the right technologies that help them. We have the right instruments and accessories, systems and imaging systems and so on. And we make sure that the operating processes work well, that we have training optimization, service and support, marketing, sales coordination. We make all these investments, they take time. You've seen us put up the slide before at various conferences. It's an entire ecosystem, and it takes time to build these ecosystems. It's not just a robot, it's not just having systems and the instruments, you need to also engage with regulatory agencies to get clearances, decision by indication, get the sanction, you need to know how to train and build the training pathways and you need to build clinical evidence. You need to go country by country. The build has to be engaged with surgical societies, get economic validation. It's all hard work country-by-country, procedure-by-procedure, as you know, Larry. And so we're continuing to invest in that ecosystem, and we're a mission-driven company. We're focused on the better patient outcomes, better surgeon experience, better treatment experience and lowering cost fee. So at the end of the day, we're trying to add value to the ecosystem.

All right. That's helpful. Let's try 1 polling question, but go to the second one, if you can. And if you can't, just we'll move on. The second one. Okay. Good. All right. So the second question is basically, Medtronic plans to launch its Hugo surgical robot in Europe in the second half of calendar 2021. What impact do you expect you guys to have on Intuitive Surgical? A, expect Hugo to reduce Intuitive placements at least in the near term? B, I expect Hugo to be a catalyst for robotic surgery and ISRG, a so-called rising tide? And C, not sure? There's a bit of a lag. It takes time for them to fill it out. So Marshall, I might ask you another question before we get those results. And I wanted to shift the conversation more to kind of the opportunities you guys have, new procedures, new platforms. And maybe just starting with procedures, Marshall. So when we look at the next years, which procedures do you expect to drive the most growth for Intuitive?

Yes. I think there are procedures that are already in flight, we're really talking about growth over the next couple of years will be driven by general surgery in the U.S. And in that category, you're really talking about continuation of adoption for bariatrics, cholecystectomy and hernia has been probably the big 3. But there are other areas of general surgeries that also are adopting for that, procedures that are smaller categories, but those will be the primary drivers. And then outside the United States, we're at the top of the urology curve in a number of countries, particularly in Europe. And so what we're seeing as drivers going forward will be thoracic procedures. And by the way, thoracic procedures growing quite nicely in places like China, and then -- and also the general surgery procedures. And in those cases, it probably starts with cancer procedures. And over time then into benign procedures. Reimbursements for benign procedures outside the U.S. are strained, are low. And so that's why we think cancer procedures adapt before the benign.

Are there new procedures that we should be following?

Well, I think we have 3 platforms now, right? And so if we're talking about multiport procedures, I think that there's lots of room in what we have, and I don't know that other than thoracic procedures that I would throw in anything else, look to Philip to tell me if I'm right or wrong. And -- but when it comes to the other 2 platforms, meaning Ion, yes, we expect to see nice growth in interventions to do lung biopsies, and we're seeing nice growth there. And in the case of SP where you got to have clinical data to be able to get clearances in the United States as well as outside the United States, that will take time. And we're focused on procedures where we think we can contribute the most value, which in a lot of cases, are procedures that are in part done by multiport systems. Longer term, we've talked about the potential of maybe some breast procedures or other things that we'll chase. But right now it's all about colorectal -- getting a colorectal indication as well as expanding in urology and thoracic.

That's helpful. Did you want to add something, Phil? Or do you want to go to the poll results?

Let's go to the poll results. I think Marshall covered it perfect.

Okay. What do we have? Marshall, catalysts for robotics surgery, 42%, 33% near-term headwind. And not sure -- sorry, 25%. Any reaction, Marshall?

I think the first 2 are probably -- I wouldn't disagree with either of them. In other words, I do think that the more you see entrants of competitors and competitors talking about robotics and the benefits of robotics that, that really does expand the market or at least make the parts of the market more accessible. And so I think it does. It is a rising tide with everybody jumping in. We've seen it already. When back in 2000 -- it's probably, what, 2018, '19 when these companies started talking about robotics as something that should be used for surgeries that you saw attitude start to change. And then as far as Hugo reducing ISRG placements, there is no question that there will be surgeons that want to try Hugo. There will be institutions that want to try Hugo. And we'll see how that trialing goes. But initially, they'll do their trial. And does that mean that they delay a placement of ISRG? It's possible. Longer term, we'll see how it turns out and what they choose. I’d find it hard to believe that they would -- that you have hospitals where you have both products and expect surgeons to jump from 1 to the other. So it's probably either or -- but we're not sure. And so that last category is right, too. We're not sure. We have to see what exactly it is they deliver, to Philip's point earlier, how broadly they address the ecosystem of things necessary to be successful and we'll see.

Okay. Marshall, a couple of minutes left here, but those are very helpful comments. I wanted to sneak a few more in. So Ion, you touched upon it. You're having a lot of success from the placements we've seen early on. How should we think about the pace of adoption of Ion?

Yes. You'll still see us in a measured sort of rollout right now. We're -- the clinical data from the PRECISE trial will be made available at the end of next year. I think what that does is that really opens up the next level of -- in the adoption curve. So you see early adopters doing it now. And then you'll see once that data is out and assuming it's as positive as we believe it will be, then maybe you see a little opening of the majority and then you'll see a broader pace of adoption. But for now, it will be a gradual increase over time. We’re really pleased with how things went last quarter, particularly, almost 1,500 procedures and 20 systems, that was quite a nice performance in our view. So anyway, that's how I kind of think of it. And we are going to start looking at how to obtain clearances outside the U.S. And we'll tell you as we go through time, whether we're filing or where our expectations are for growth.

In China, it probably is a big opportunity for Ion.

It is. Philip?

Yes. So with respect to China, we have that partnership with Fosun. But right now, the pathway for China is quite long and complex. And so we'll end up sharing timelines, when we have something that's worth sharing.

Okay. And Marshall, when do you think we'll know the impact of the Extended Use Instrument Program? I mean, obviously, it's hard -- probably a little bit difficult because of COVID. But when do you think you'll be able to kind of tell us about that -- the impact?

Yes. Thank you. You're right. It is complicated by COVID, and the ability to measure what is COVID versus what is extended use instruments and so forth is really difficult to parse apart right now. What we're hearing from our customers, though, is really positive feedback on the fact that they can do some of these procedures at a lower cost and competitively with other minimally invasive approaches. So we do believe that there will be some elasticity. It's hard for me to answer your question because I really don't know how long COVID is going to have an impact on us. But I think it's probably not for another year that we aren't able to measure it.

Okay. We're out of time. Marshall, I'm going to give you the last word. Anything -- we covered a lot of ground. But we can a minute or so here if you had any closing remarks or anything, you really wanted to cover that we didn't get to.

No. I think we covered the things -- the key things that I think are important for investors to understand. One is that this is a -- the opportunity is the same. COVID disrupts the pace at which you get there but the opportunity is the same. And as a result, that we will continue to invest in the infrastructure and in the innovation in order to capture as much of that opportunity as possible. And in the meantime, we'll see at the revenue level, what happens.

Okay. Perfect. Really appreciate you guys being here. I hope the rest of the day goes well for you, and we'll be in touch. Thanks, again.

Thank you, Larry.

Thanks, Larry.

Bye, everybody.