Medtronic Plc (MDT) — Q1 2017 Earnings Call Transcript

Great. Thank you, Jackie. Good morning and welcome to Medtronic's first quarter conference call and webcast. During the next hour, Omar Ishrak, Medtronic Chairman and Chief Executive Officer, and Karen Parkhill, Medtronic Chief Financial Officer, will provide comments on the results of our FY '17 first quarter which ended on July 29, 2016. After our prepared remarks, we will be happy to take your questions. First, a few logistical comments. Earlier this morning we issued a press release containing our financial statements and a revenue by division summary. We also issued an earnings presentation that provides additional details on our performance and outlook. You should note that many of the statements made during this call may be considered forward-looking statements and that actual results might differ materially from those projected in any forward-looking statements. 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. In addition, the reconciliations of any non-GAAP financial measures are available on our website investorrelations.Medtronics.com. Unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the first quarter of FY '16 and all year-over-year growth ranges are given on a constant currency and constant weeks basis which adjust for the negative effect of foreign currency translation and the extra week that was in our prior-year first quarter. As previously disclosed, we estimate the extra week had an approximate $450 million impact on revenue and $0.08 to $0.10 impact on earnings per share. The extra week impact for each business or region was estimated by adjusting Q1 FY '16 revenue by the prorated total company impact. The constant currency adjustment details can be found in the reconciliation tables included with our earnings press release. With that, I am now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Omar Ishrak.

Good morning and thank you, Ryan, and thank you to everyone for joining us. This morning we reported first quarter revenue of $7.2 billion and non-GAAP diluted earnings per share of $1.03, representing another quarter of strong top and bottom line growth. All our business groups and regions delivered strong growth, resulting in company-wide revenue growth of over 5%. In addition, our continued focus on both operating and financial leverage drove solid double-digit EPS growth and strong cash flow generation as we continue to strategically deploy our capital against our priorities of reinvesting with discipline in M&A and R&D, returning substantial cash to our shareholders and deleveraging our balance sheet. We feel very good about our momentum to start our fiscal year and are confident in our ability to sustain this performance over the coming quarters. Now let's turn to the drivers of our revenue growth. We have three specific growth priorities stemming from our overall strategies: New Therapies, Emerging Markets, and Services and Solutions with quantified growth expectations for each. In New Therapies, we delivered results at the upper end of our goal in Q1, contributing over 300 basis points to our total company growth. In our Cardiac and Vascular Group, which grew in the mid single-digits, we continue to complement our steady cadence of differentiated products with market-leading breadth, scale, and technology innovation. In CRHF, our AF Solutions and Diagnostic Businesses again delivered impressive growth. AF Solutions grew in the mid-30s, well above market growth on the strength of Arctic Front Advance cryoballoon and our recent FIRE AND ICE clinical data. In Diagnostics, which grew in the low double-digits, market acceptance of our Reveal LINQ insertable loop recorder had strong momentum resulting in increased pacemaker pull-through. In our core CRHF and peripherals business, revenues were flat in the global market, which, in our estimation, was down in the low single-digits. In the U.S., low single-digit growth in initial implants as well as our shared gains in high-power implants offset mid-single-digit declines in device replacements. We continue to take share in the U.S. with MRI safe systems and our recently launched Visia AF ICD. In Q1, we started shipments for MICRA Transcatheter Pacing System, the world's smallest pacemaker at 1/10 the size of the traditional device. Concurrently, we initiated physician training in the U.S. and we look forward to obtaining a national coverage decision from CMS for this transformative therapy by the end of the fiscal year. We also look forward to a number of new product launch catalysts over the balance of the fiscal year, including Claria MRI CRT-D system with effective CRT pacing in the U.S. and Japan, Visia AF in Japan, Reveal LINQ in Japan, and our CRT-P quadripolar pacing system in Europe. We closed our acquisition of HeartWare earlier this week, a leading innovator of miniaturized circulatory support technologies for the treatment of advanced heart failure. We're pleased to broaden our range of therapeutic options for heart failure patients with the addition of HeartWare and we expect it to add meaningful revenue growth to CVG throughout the balance of the fiscal year and beyond. Not only do we have complementary technologies and service capabilities, including infection control, physiological sensors, algorithms, remote patient monitoring, and patient management, and integrated diagnostics, but we also have experience with rechargeable battery technology and implantable controllers that can accelerate the development of reliable, fully implantable LVAD systems. In CSH, our Resolute Onyx XDES and Euphoria balloons are driving solid mid single-digits international growth in our coronary business but we experienced declines in the U.S. from competitive product launches. We anticipate FDA approval and market release of Resolute Onyx in the U.S. around the end of FY '17. In structural heart, the global TAVR market is robust, growing 40%. We continued to gain share in international markets with our CoreValve and CoreValve Evolut R valves. However, the lack of a large-size Evolut R is limiting our share in the U.S. market. We expect approval of our Evolut R XL valve early in the calendar year 2017. Earlier this month, Evolut R was the first system to be granted CE Mark for intermediate risk patients, and we're on track to submit our SURTAVI data for U.S. intermediate risk indication expansion approval in Q4 this fiscal year. In APV, we had strong high single-digit growth in our aortic business with Endurant II's aortic stent graft, Heli-FX EndoAnchor system and Valiant Captivia thoracic stent graft technologies all fueling growth. In our peripheral business, growth was driven by our IN.PACT Admiral DCB which continues to outpace and lead the fast-growing drug-coated balloon market on the strength of its handling characteristics and differentiated clinical data. Our Minimally Invasive Therapies Group grew in the mid single-digits with consistent quarterly performance stemming from five key growth drivers: open to minimally invasive surgery or MIS, gastrointestinal diseases, lung cancer, end stage renal disease, and respiratory compromise. Open to MIS grew in the high single-digits in Q1 driven by the recent product introductions in our advanced energy portfolio like the Valleylab FT10 energy platform as well as the continued adoption of Endo GIA Reloads with Tri-Staple Technology portfolio, specifically the Endo GIA reinforced reloads. G.I. diseases and lung cancer also grew in the high single-digits with solid growth in our G.I. Solutions business resulting from the continued launch of the Barrx 360 Express RF Ablation balloon catheter. Our focus on end-stage renal disease is benefiting from the fiscal Q4 acquisition of Bellco, a pioneer in hemodialysis treatment solutions. Respiratory compromise grew in the low double-digits. We were pleased to return both the Puritan Bennett 980 ventilator and the Capnostream 20 patient monitor to customers and patients following ship holds that were put in place last fiscal year. We continue to supplement MITG with tuck-in acquisitions. Earlier this month, we closed on the acquisition of Smith & Nephew's fast-growing gynecology business that will complement our existing global GYN product line. We also closed on our agreement to acquire majority ownership position in the Netherlands Obesity Clinic or NOK, which I will cover in more detail later. Across MITG, we're developing solutions that span the entire care continuum, aspiring to enable earlier diagnosis, better treatment, faster, complication-free recovery, and enhanced patient outcomes through less invasive solutions. In our Restorative Therapies Group, we're reinvigorating therapy innovation across all of our disease-focused businesses, delivering a consistent cadence of solutions across the patient care continuum resulting in mid single-digit growth this quarter. In Spine, we grew in line with the market with mid single-digit growth in the U.S. offsetting an international decline. Outside the U.S., we were mainly affected by the macroeconomic challenges in the Middle East, where we have strong market share and where the continued BMP in Europe, which we believe should be resolved by the end of the fiscal year. In the U.S., we continue on an upward trajectory, delivering another quarter of sequential improvement in our growth rate. Our speed to scale strategy is producing tangible results as we launch a steady cadence of procedural innovation like our OLIF procedure and new products including the SOLERA VOYAGER, ELEVATE and PTC interbodies for key lift and mid-lift procedures. Last month we obtained two-level FDA approval for our Prestige LP which we expect will help drive adoption of cervical disk arthroplasty procedures in the U.S. In addition, to speak to scale, our focus on surgical synergy which combines enabling technology with our spine implants to deliver integrated procedural solutions is starting to show results. In fact, the combined growth of our spine business and our spine imaging and navigation capital equipment in our Neurosurgery Business was in the high single-digits in the U.S. in Q1. We believe this is an indication of our overall growth in spine procedures and a more relevant comparison of our spine results against several of our competitors. We're also excited about our partnership with Mazor Robotics which is generating significant surge in interest and together we're set to introduce the Mazor X at NASS later this year. All our businesses in our Brain Therapies division delivered a strong quarter. In Neurovascular, our Solitaire FR mechanical connectivity device is delivering strong results even after the anniversary of the New England Journal of Medicine articles last year, solidifying our leadership position in the rapidly expanding ischemic stroke market. In Brain Modulation, our DBS products had a solid quarter and we just received CE Mark for SureTune2 which provides patient-specific visualization to aid in DBS programming. In Neurosurgery we saw robust sales of the recently launched O-arm 02 surgical imaging system as well as the StealthStation S7 surgical navigation system. While our Pain Therapies division declined in the low single-digits due to continued competitive pressure in our spinal cord stimulation products, our drug pumps grew in the mid single-digits. Our Interventional business showed continued strength, growing in the low single-digits with our OsteoCool RF spinal tumor ablation system driving solid growth and generating pull-through of our balloon catheter plasty products. And all of our business in our Specialty Therapies division, ENT, Pelvic Health, and Advanced Energy, collectively grew in the low double-digits. Turning now to our Diabetes group. We delivered high single-digit growth in the quarter with solid growth in our Intensive Insulin Management division driven by strong adoption of our MiniMed 640G system outside the U.S. While the U.S. market remains competitive, we were pleased to receive FDA approval for our MiniMed 630G earlier this month and we expect to see strong U.S. growth of this platform just like we have seen with the 640G outside the U.S. The 630G features a new, contemporary pump hardware platform including a waterproof case, HD full-color screen and remote bolus capability directly from the meter, along with several enhancements to our Enlite Sensor. The new platform also integrates continuous glucose monitoring with SmartGuard technology which is the only technology available in the U.S. that not only takes specific action against lows but also reduces the frequency of nighttime low episodes by a third. In addition to our current offerings, we submitted the PMA for our hybrid closed-loop system with the Enlite 3 CGM sensor to the FDA in June of this year. In our non-intensive diabetes therapy division, we saw another quarter of very strong growth as we continue to promote our iPro2 professional CGM system to type II patients being cared for by primary care physicians through our partnership with Henry Schein. Our NDT pipeline is centered on a steady cadence of product applications and informatics innovation to enable primary care physicians and patients to make better, more informed choices in the management of type II diabetes. In our Diabetes Services and Solutions division, we saw solid growth from both our consumables business and from Diabeter which I will cover in a moment. We're excited about the recent CE Mark approval for our Guardian Connect standalone CGM system with our current enhanced Enlite sensor and expect initial product availability in fiscal Q3. In the U.S., we have submitted our PMA application to the FDA earlier this year and expect to launch Guardian Connect together with the next-generation sensor in the second half of this fiscal year. Guardian Connect allows us to provide both type I and type II patients in multiple daily injections with a standalone real-time glucose monitoring solution. We also continue to make strong progress with our partnership with IBM and remain on track to launch our Sugar.IQ personal diabetes assistant powered by Watson in the next few months. When you combine our diabetes devices with our applications in cognitive computing capabilities that we will bring to our partnership with IBM, we expect to provide both type I and type II patients with not just a sensor but a comprehensive diabetes management solution. Across all four of our groups, CVG, MITG, RTG, and Diabetes, our new product pipeline is robust and we're confident we can drive sustainable growth of our new therapies growth vector within our 200 to 350 basis point goal. Next, let's turn to emerging markets which delivered double-digit growth contributing over 150 basis points to our total company growth in line with our expectations. We continue to execute against our strategies of channel optimization, government agreements, and private partnerships. We feel that these initiatives have the ability to accelerate growth and lead to sustained market outperformance. In Q1, our businesses in South Asia, Latin America, Eastern Europe, and China all grew in the mid-teens or higher. In China, our largest emerging market, we continued to outperform the overall market with our unit growth rates from all four of our business groups growing in the mid-teens. Latin America also had strong broad-based growth across our major markets, Brazil, Colombia, Mexico, Chile, and Argentina. Brazil was particularly strong from both recent distributor conversions and solid product growth in MITG. In South Asia, of which India is the largest market, we achieved low 20s growth with all of our groups delivering double-digit growth. We won important tenders in several product categories and are engaged in multiple private-public partnership opportunities across India. The only region with pressure in emerging markets in Q1 was the Middle East and Africa where we had declines in Saudi Arabia as a result of the macroeconomic environment in that country that is causing government budget controls, product license delays, and tender delays. Overall, however, the consistency of our emerging market performance benefits strongly from increased geographic diversification reducing dependence on any single market. We continue to believe strongly that the penetration of existing therapies into emerging markets represents the single largest opportunity in med tech over the long term. Turning now to our services and solutions growth vector which contributed approximately 30 basis points to Medtronic growth. While this overall result was below our goal of 40 to 60 basis points, services and solutions continues to achieve strong revenue growth mostly from CVG related offerings. We expect to further improve our growth contribution as this model expands across all our business groups. We continue to see success in our hospital solutions business through which we provide expertise and operational efficiency as well as daily administrative management of hospital cath labs and operating rooms. In Q1, our service revenue growth from hospital solutions was in the mid-40s. We have now completed a total of 97 long-term managed service agreements with hospital systems representing more than $2.1 billion in contracted service and product revenue over an average span of six years. While the majority of our activity is in Europe, we continue to expand into other regions including Latin America and the Middle East and Africa. Our Care Management Services business, which is primarily focused on remote monitoring of high-cost and chronic disease patients with comorbidities, grew in the high single-digits in Q1. Driven by strong interest and growth from payers as well as providers moving towards value-based care models. Care Management Services represents an important platform for us especially as post-acute care services become even more critical in bundle payment models for different interventions. We're now also managing chronic conditions in diabetes and obesity through our acquisition of Diabeter and majority stake in NOK. Diabeter, our holistic diabetes care management organization that is currently operating four centers in the Netherlands, delivered revenue growth of over 50% in Q1 and we're now treating over 1,700 patients. We're currently developing plans to expand the Diabeter model into other countries. NOK is a chain of clinics in the Netherlands for morbidly obese patients undergoing bariatric surgery offering an integrated comprehensive care model including extensive screening, pre-care program, bariatric surgery, post-surgery program, and long-term follow-up. We plan to gain critical insights from NOK's methodology and expand into more countries providing broader patient access to their multidisciplinary teams of specialists thereby improving patient outcomes. We expect all of these new businesses will start to contribute significantly to the services and solutions growth vector moving it to our expected range over the next few quarters. Turning now to our Q1 P&L, we grew revenue more than 5% in non-GAAP diluted EPS approximately 14% to 16% which resulted in EPS leverage of approximately 1,000 basis points. Our strong revenue growth and high profitability is generating significant accessible free cash flow and we remain committed to returning a minimum of 50% of our adjusted free cash flow through dividends and share repurchases. Before turning the call over to Karen, I'd like to note that we continue to refine our thinking on value-based healthcare solutions. As you know, CMS in the U.S. is shifting payments for certain episodes of care for fee-for-service to bundle payments over a longer time horizon. Our recently formed orthopedic solutions business continues to refine together with our surgeon partners our compelling comprehensive solution for CMS's first episodic bundle in joint replacement. Last month, CMS announced their plans to expand bundle payments beyond hips and knees to AMI and CABG procedures where we have significant market presence and clinical expertise. We're analyzing the details of these proposed bundles and intend to submit our comments to CMS as we move toward expected finalization of these payment models. While we're still early in the journey to value-based healthcare, we remain focused and fully understand and lead the shift to healthcare systems that reward value and patient outcomes over volume. And we continue to develop partnerships and insights into how we can utilize our expertise to play a role in this evolution. We feel appropriate application of medical technology can help address inefficiencies and improve outcomes in healthcare delivery driving new forms of value creation for both our customers and our shareholders. With that, I will now turn the call over to our new CFO, Karen Parkhill, who I am pleased to welcome to Medtronic and she will take a more detailed look at our first quarter financial results. Karen?

Thank you, Omar. Our first quarter revenue was $7.166 billion, which represents a decrease of 1% as reported, but an increase of over 5% on a constant currency and constant week basis. Foreign currency effects negatively impacted our first quarter revenue by $7 million, while acquisitions and divestitures added about 70 basis points to revenue growth. GAAP diluted earnings per share were $0.66, and non-GAAP was $1.03. After adjusting for a $0.04 impact from foreign currency translation and an estimated $0.08 to $0.10 impact from the extra week last fiscal year, non-GAAP diluted EPS increased by approximately 14% to 16%. EPS exceeded our expectations slightly due to a $0.01 to $0.02 tax benefit. In addition to a $376 million after-tax adjustment for amortization expense, non-GAAP adjustments after-tax included a $79 million net restructuring charge and a $39 million charge for acquisition-related items, primarily related to our ongoing integration of Covidien. There was also a $52 million litigation charge and a $31 million net benefit from resolving several tax matters with the IRS, including advantages from our Tyco tax issue and charges related to a proposed agreement for resolving issues from several acquisitions. The net tax benefit does not account for any effects from our unresolved Puerto Rico royalty rate dispute with the IRS. The operating margin for the quarter was 27.4% on a constant currency basis. When adjusting for the extra week, the operating margin improved by roughly 100 basis points compared to the prior year. Our operating margin consisted of a gross margin of 68.9%, SG&A of 34%, and R&D of 7.8%, all on a constant currency basis. Although our gross margin slightly declined, primarily due to revenue mix, we managed to improve SG&A largely through effective execution on our Covidien synergies. We are pleased with the successful completion of our SAP implementation in Europe during the first quarter and will continue to implement across other regions in the upcoming quarters. These conversions are expected to contribute to future synergies. We are on track to achieve $225 million to $250 million in synergy savings this fiscal year and remain committed to delivering $850 million in savings by the end of fiscal year '18. Our efforts to realize the Covidien synergies are also serving as enablers to catalyze other leverage programs designed to deliver additional long term margin expansion. Looking ahead at our operating margin keep in mind that recent acquisitions, including hardware, while not expected to be dilutive to EPS on a net basis could impact the operating margin percentage by an estimated 25 basis points in the second quarter and 35 basis points for the full year. However, we remain committed to our plans to generate 130 to 210 basis points of improvement in our operating margin this fiscal year as outlined at our investor day. When we take into account currency, it is also worth noting that net other expense of $39 million which is included in the operating margin, reflects about $55 million in reduced foreign-exchange gains versus the prior year. However, the elimination of the U.S. medical device tax offset that by an almost equal amount within net other expense. While we hedge into the majority of our operating results in developed market currencies to reduce earnings volatility from foreign-exchange, a growing portion of our profits are unhedged, especially in emerging-market currencies. As we have said before, that can create modest volatility in our margins. Below the operating profit line, net interest expense was $179 million. At the end of the first quarter, we had $32.1 billion in debt and $12.8 billion in cash and investments, of which approximately $5 billion was trapped. Our debt did increase by just under $1 billion as we issued short-term debt to manage minor timing differences between sources and uses of cash. Our non-GAAP nominal tax rate on a cash basis was 15.7%. This was an improvement to our forecast as it included the benefit from several operational tax adjustments for the quarter. Free cash flow was $1.2 billion. We're deploying our capital strategically, consistently and with discipline with a balanced focus on reinvestment, debt reduction and return to our shareholders. We paid $599 million in dividends and repurchased in net $1.5 billion worth of ordinary shares in the first quarter. At quarter end we had remaining authorization to repurchase approximately 51 million shares. First quarter average daily shares outstanding on a diluted basis were 1.407 billion shares. We remain committed to returning a minimum of 50% of our adjusted free cash flow to shareholders and deleveraging our balance sheet. As an S&P dividend aristocrat, we expect to deliver dependable long term dividend growth. In June, our board approved another double-digit increase to our dividend which brings our payout ratio to 40%. With regard to reinvestment, our investments, particularly M&A, must not only meet high financial return hurdles with minimal shareholder dilution but also provide a line of sight to improving outcomes and allow for Medtronic to add value. Before turning the call back to Omar, let me conclude by reiterating our outlook. Our revenue outlook and EPS guidance for FY '17 has not changed. We continue to expect revenue growth to be in the upper half of the mid single-digit range at 5% to 6% on a constant currency, constant weeks basis which excludes the estimated negative $450 million impact from the extra selling week we had in the first quarter of last fiscal year. While the impact from currency is fluid and therefore not something we predict, if current exchange rates, which include EUR1.13 and JPY100 remain stable for the remainder of the fiscal year, our full-year revenue would be positively affected by approximately $275 million to $325 million. With respect to earnings, we expect FY '17 non-GAAP diluted earnings per share to grow 12% to 16% after adjusting for the estimated $0.08 to $0.10 impact from the extra week last fiscal year as well as a negative foreign currency impact of $0.20 to $0.25. This EPS growth implies non-GAAP diluted EPS of $4.60 to $4.70. All of this is in line with prior guidance. Looking at the second quarter only, we expect our revenue growth to be within our full-year growth range of 5% to 6% and our EPS growth to be in the lower half of our full-year growth range of 12% to 16%, both on a constant currency basis. Again, while currency impact is not something we predict, if exchange rates remain stable, we estimate our second quarter revenue would be positively affected by $25 million to $75 million. Other than as noted, our EPS guidance does not include any charges or gains that would be recorded as non-GAAP adjustments to earnings doing the fiscal year. We feel good about the performance of our operations, the overall state of our markets, the diversification of our portfolio and geographies and our ability to execute, all of which gives us confidence in our ability to deliver on our annual and long-term commitment. As you know, our focus is to consistently deliver revenue growth in the mid single-digits and EPS growth in the double-digits on a constant currency basis. Our guidance for this fiscal year remains consistent with that long-term focus.

Thanks, Karen. We will now open the phone lines for questions. Along with Karen, I've invited Mike Coyle, President of our Cardiac and Vascular Group; Bryan Hanson, President of our Minimally Invasive Therapies Group; Geoff Martha, President of our Restorative Therapies Group; and Hooman Hakami, President of our Diabetes Group, to join us. If you have additional questions, please reach out to Ryan in our investor relations team after the call. Operator, please take the first question.

Just maybe Omar, I want to do start with HeartWare could you just spend a minute on why now on HeartWare that was the biggest question people had is people understand the franchise but why did you do the transaction today and then second there was obviously some dilution that comes with buying HeartWare given the burn in the company how did you offset that?

Okay, why now? Well, you know when you deal with opportunistic elements which can come through, so that was clearly one. The other is we really felt that we were in a position where we were getting critical mass around our expertise in heart failure and where HeartWare was positioned as a company we felt that we could add immediate value and through that combination drive up significant revenue not only in the first year but in the next couple of years through real milestones that the company can meet such as reaching approval for destination therapy and then other new products. So we felt this was the right timing for us. And besides, you can't plan acquisitions to the month period, it depends on a variety of circumstances and things just fell into place. We felt we had the management bandwidth to do this, the team was well-prepared, we had the right capabilities and we had additional synergies that we could add in many different ways. So we felt this was absolutely the right time. And in terms of the dilution, that obviously comes along with an acquisition this size, there are offsets to the cardiac and vascular group made that unless Mike is going to comment on the overall thing on that.

Sure, Mike, obviously we had a number of investments internally going on in R&D programs directed specifically at heart failure including diagnostic programs and services as well as enhancements to our CRT product lines and we basically are reallocating resources and people to support the activities within HeartWare and backing off on some of those because we actually think HeartWare's return on investment will be even better.

If I could just ask two quick follow-ups. Mike, this was a tougher quarter for the traditional ICD business, for the high power business, could you just comment on that and I was wondering if Hooman could comment on 670G timing in light of the 630 approval. Thanks.

As it relates to ICD, I think probably the thing that is impacting the overall market is U.S. replacements and that we saw pretty stable low single-digit growth in initial implants for ICDs but we’re now getting to a point where year-over-year comparisons on frankly replacements are down in sort of the low double-digit kind of range which is obviously a function of what's happening to initial implants 5 to 8 years ago depending on what you're talking about CRT to standard ICDs. So that's obviously putting some strain on the overall market growth. We actually took share in the ICD market as we continue to get the benefit of the MRI safe technologies rolling into not just the standard ICD's but also into CRT-D. And that's something that we think we can continue, we think we are very much in the front end of basically the mix shift toward use of MRI in standard high-powered and into CRT-D and we also obviously have a very robust set of new products that are just hitting the market and will be added to over the course of the next several quarters including the Visia AF and a single chamber segment as well as the Claria CRT-D device which adds the effective CRT algorithm to our overall set of offerings. So we think the market is going to provide a bit of a headwind because of the replacements but we think we’re in a good position to continue to take share and mitigate some of that. I was particularly encouraged to me that we could get to that mid single-digit growth when we’re seeing that kind of stress metrics in the ICD market but obviously we’re in a little bit of an off segment on our DES market as well and yet are able to still get into mid-single-digit growth so we think it speaks to the importance and value of the breadth of the portfolio.

Yes, with respect to 670, Mike, the PMA is with the FDA, it's really hard to predict when they're going to improve it, obviously it's in their hands now. We are working actively with them to answer the questions that they have regarding our submission but as you know, and as Omar talked about in the commentary, in the meantime we launched the 630G. We received approval and have launched the 630G and we're excited about this. This is going to address some of the biggest requests we've seen from patients, color screen, waterproof remote capability and so it's a chance for us to really bring additional enhancements to our patients while the 670 process goes on. So we’re excited about the new product that we have and in the meantime we’re working actively with the FDA on the 670.

Just a couple of questions here. Omar, the last four quarters, as you know, organic growth has been extremely stable within Medtronic. In this quarter, there were a couple of areas Mike mentioned one of them, but the stem franchise, U.S. geography broadly at a little bit the emerging market geography. What if you could sort of address those few areas and maybe a couple different people but just more specifically after that four quarters of significant stability of organic growth can that organic growth number get better here over the next several quarters and I have a quick follow-up after that.

We've always highlighted that one of our key strengths is the diversity of our portfolio, our geographic presence, and the various sources of revenue, including emerging markets, service solutions, and new therapies. This inherently leads to fluctuations where certain areas perform well in one quarter and less so in another. However, we are quite confident that we can sustain organic growth in the mid-single digits. We anticipate that acquisitions will help bolster this growth and provide us with additional confidence in maintaining this range. Our new product introductions and geographic expansion should also aid in achieving this. Specifically regarding your question, we are currently experiencing a down cycle for products in the U.S., where our new products typically have the most impact. We expect a resurgence of new products in the next few quarters, which should help us recover from the slight decline in U.S. revenue; we’ve traditionally seen growth around 4 to 3, which has dropped slightly this quarter. Nonetheless, we are seeing continued strength in various areas, particularly in surgical procedures and within the MITG portfolio, which remains stable. As Mike mentioned earlier, we are also in a down cycle for both cardiac and diabetes products, but we believe these markets will rebound in the coming quarters. This describes the current dynamics in the U.S. market and for new therapies. I’d also like to emphasize the growth in our restorative therapies, particularly in the Spine segment, which we are monitoring closely. We're encouraged by the early strength we see there, and while we need to show sustained mid-single-digit growth, we are pleased with RTG's progress, which is helping to counteract pressures in that portfolio. In emerging markets, we are satisfied with our performance despite the ups and downs of the past two years. We've consistently maintained double-digit growth, albeit with some fluctuations. The Middle East and Africa have been strong contributors to our emerging market growth recently, and while this quarter presented some challenges, other regions like Latin America and China have shown considerable strength to balance that out. We are confident that our projection of low to mid-teens double-digit growth in emerging markets is sustainable, despite any macroeconomic challenges. I believe I have addressed your points.

You did Omar, thank you. And just a quick follow-up on earnings and margins broadly for Karen and the broader team. So just to avoid any confusion we've had a last couple of quarters, your commentary Karen thinking about consensus in the second quarter earnings number we kind of come around kind of a $150 number plus or minus a penny. I wonder if you could just comment about your comfortability with the consensus or that number and then just broadly if you take a step back from the analyst day, margins were the real focus and I wonder you're giving us 12% to 16% for this year but your confidence that we continue to see the durability of that 12% to 16% or sort of mid-teens earnings growth and of all those plans and restructuring plans you referred to when does the investor really start to see the inflection in this plan where they could really get this sense of the sustainability of this long-term double-digit teens profile. Thank you.

Thanks, David. I don't comment specifically on consensus numbers but happy for any of you to follow up with Ryan to go through your models at any point in time. In terms of our confidence in delivering our long-term bottom line EPS growth, I think this company has a very strong ability and we're very confident in our ability to deliver our commitment. Not only do we have significant growth on the top line particularly from emerging markets as Omar noted, but we have been driving strong synergies from the Covidien acquisition and we're focused on delivering additional leverage beyond the Covidien acquisition through significant focus on managing our cost efficiently and I feel we’re very confident in our ability to do just that.

I think maybe if I could just add to that your question about when to watch for inflection points, well listen like we've said before the Covidien synergies, if we hit our $850 million projection, that alone takes us through the double-digit EPS sort of projection. I mean by definition in FY '17 and mostly in FY '18. Now as we transition beyond that, we're like I mentioned in the Investor Day working on other efficiency programs in operations and in functions and many other areas which will then sustain that level. So those programs that we worked on right now but clearly the real results will prove themselves beyond FY '17.

So just two quick questions, one is just to clarify question on the revenue growth guidance for 2017 you know given that now you've closed HeartWare. I hear you specifically on the upper end of the mid-single-digit range but I'm just curious does M&A add about a point to growth for 2017 given all the deals that have happened?

Well, yes, I mean if you have the deals up, it's something like that probably a little less than that but you know the main point though here is that the range that we projected really balances out issues that may arise, market issues and other issues that arise in our business. We feel confident that even organically that we will be in the mid-single-digit range and the whole range. And we feel that acquisitions give us increased confidence that we will hit that and probably in the higher end of that range. I mean certainly this year with HeartWare we've got increased confidence for that. But that's the way in which we're looking at this. You know, it's probably if you want to direct answer to your question, it's probably slightly under a point that the acquisitions are adding but things roll off other things come in, it's a pretty dynamic picture and believe it or not there are some divestitures as well like the drug business and other things that grow out of our portfolio. So net-net it's probably a little less than a full point.

And Bob, we did say that this quarter net M&A added about 70 basis points this quarter.

Great. Thank you. No, I understand the philosophy around the guidance I just wanted to make sure I had a good understanding of all the moving parts. And then for second question just on the product side I was wondering if Mike could talk a little bit about the upcoming MRI safe competition, we’ve started to see a little bit of that roll-in just Mike your confidence in mid-single-digit growth now that we're about to see a steady cadence of MRI safe competition and then quickly on the diabetes side I heard the timelines for 670G but I just want to make sure there's no change in timelines on 670G from your perspective?

We believe MRI compatibility should become standard practice. Currently, in the dual chamber pacing segment, around 70% of our devices in the U.S., the most mature market, are MRI safe. This means that less than half of the patients receiving pacemakers in the U.S. are getting MRI safe devices. In other product lines, like ICDs, our penetration rate is about 50%, and for CRT-D devices, it drops to approximately 30%. These rates are still relatively low, indicating significant potential for growth in these areas. However, competitors are starting to catch up, especially in the MRI space, though we expect it to take several quarters into next year before we see competition in ICDs and CRT-D devices. We're advancing our product offerings, such as the Micra pacing device, which will offer enhanced value in the single chamber segment as reimbursement is expected to be finalized by the end of the fiscal year. In the standard ICD segment, our Visia AF device is gaining positive reception as it uniquely monitors atrial fibrillation without a lead, adding value beyond its MRI safety. On the CRT-D side, we're enhancing therapeutic benefits with features like adaptive CRT and effective CRT to improve response rates. Our Amplia hardware platform is also being upgraded to support multi-point pacing through software updates set to roll out before the end of the fiscal year.

And in terms of diabetes, the 670G is on track but Hooman do you want to say a couple of words on that?

There is no change or indication that the timeline for the 670G will be delayed. We didn't launch the 630 because we were concerned about the 670 timeline. Our collaboration with the FDA is strong, and we are actively engaged. The decision to launch the 630 was not related to the 670 but rather to meet patient requests for features like waterproofing and a color screen. Additionally, this launch helps refresh our product line in the U.S., as the 530G was introduced in September 2013, which is three years ago. Despite its longevity, we maintained performance with this product, but seeing the success of the 640 outside the U.S. prompted us to introduce these patient-centric features and a new hardware platform in the U.S. now to drive growth while we await the 670.

I was wondering if you could just I guess take a step back and I guess since this is your first call just refresh us on I guess your thoughts on joining Medtronic and I know as mentioned before on the call, the operating margins has been a real big goal for Medtronic. I was wondering if you could just refresh us on the overall thoughts there and just again Medtronic from a broader sense on your enthusiasm on joining the team.

I'm thrilled to be a part of this great team. Medtronic is an amazing company with a very strong mission that clearly spoke to me personally. I think we're a leader in the industry from a vision perspective and I'm excited to be at a company that is leading not just, not just the medical device industry but the healthcare industry in general and I'm thrilled to be at a team where we're focused on growth and efficiency. In terms specifically of the operating margin, as you know, our focus is to drive a stronger growth in our bottom line and we have in our top line and the only way you do that is through efficiency in our margins. We're very focused on that we talked about driving the Covidien synergies through to completion and ultimately achieving the $850 million commitment that we have put out there. And then on top of that, as we said, we're focused on driving efficiencies throughout the company looking at all of our processing, bringing in lean Six Sigma to make us better and more efficient, centralizing resources where we can, and ultimately driving double-digit bottom-line growth which is much stronger than a very impressive mid-single-digit top line growth.

Okay. And then just I guess from your perspective where do you think that you're going to add the most value from Medtronic and can you just give us your thoughts on capital deployment and how you look at the lens of M&A.

Sure. I'm excited to step into the very big shoes of Gary and I intend to steer the ship very much in the same direction that he has. I do come from a financial industry background, most recently though I've had experience in many industries within financial services, obviously one of the key things that we had been doing in an ultra-low rate environment was focused on efficiency and driving strong bottom-line. And so that's exactly what we'll be doing here. In terms of capital deployment, I think the highest and best use of our capital is to grow the intrinsic value of the company through reinvestment first and foremost. But beyond that, I think it's very important to have a dividend that is strong and that does steadily grow with earnings and then on top of that, where we can have meaningful pay back to our shareholders through share repurchase, and that's exactly what we're doing with our commitment to deliver a minimum of 50% of our free cash flow to our shareholders in the form of share repurchase. In addition to the ability of us on trapping more cash, we have an additional $5 billion commitment over a three-year period from FY '16 to FY '18. So obviously I firmly believe in all that we're doing with the company and hope that helps.

Let me also add that it's a pleasure to welcome Karen onto the team. She's made a great start and we really value the fresh thinking and perspective that will be very useful for us as we move forward.

Omar, I wanted to start with a broad question for you. In the first quarter of 2016, it was generally a strong period for the largest med-tech companies. We actually observed an acceleration in the average organic growth for these major med-tech players to between 5% and 6%, depending on whether Edwards and Intuitive were included. My question for you is what you believe is driving the improvement in industry growth. How sustainable do you think this is? Could we actually see growth improve for the industry from this point, or do you believe 5% to 6% is the new standard? I also have a follow-up.

The healthcare industry is very broad, and there are limitless opportunities for growth. From a medical innovation standpoint, there are numerous problems that need to be addressed, which can make a significant difference in patients' lives and promote equity in healthcare globally. We're only beginning to tap into these opportunities. Additionally, there's a major challenge with inefficiency and wastage in healthcare, leading to the loss of hundreds of billions of dollars worldwide due to inadequate payment models and delivery systems. Given this context, the growth of the healthcare industry is not surprising; it is something that should be expected. Although it's challenging to predict short-term trends, I anticipate that if all stakeholders in healthcare recognize these opportunities, we will see a steady increase in growth. I believe this is our rightful expectation. The companies mentioned are indeed strong players in innovation, contributing to new markets, and we aim to be a strong participant in these areas as well. Many individuals are driven by a sense of purpose and creativity in finding solutions. Overall, I see the healthcare market as one that should never decline if we can collectively understand and seize these opportunities.

And Mike, the intermediate risk indication for CoreValve in the CE Mark approval came earlier than people expected, what do you think the implications are for the market and for CoreValve for that intermediate risk indication? And just Karen, the net other expense or income for the remainder of the year it was a little bit lower this quarter than we expected and the catch rate as well, could you comment on that please? Thanks.

In terms of intermediate risk, we anticipated these developments regarding Edwards approval in the United States. We included this in our market estimates shared at the analyst meeting, so I wouldn't want to revise what we indicated at that time. It's encouraging to see these advancements happening sooner, as regulatory bodies are evaluating the compelling data to ensure these technologies are accessible to patients in the intermediate risk category. We are eager to complete the study and collaborate with the FDA to obtain label indications in the United States. We believe that the strong growth profile of the market, which was quite robust in Q1, will continue to serve as a significant growth driver for us and Medtronic overall.

Yes, on net other expense, we did mention the fact that our medical device tax does flow through that line item and obviously that was down year-over-year about $55 million. We did have currency gains that run through that line item as well. Those were down year-over-year too. In terms of our tax rate we did have several discrete tax benefits in the quarter that did push our overall tax rate down to 15.7% for the year. We do still expect our tax rate to be within the range that we talked about before of 16.5% to 17.5%.

Omar, we recently looked into the surgical practice patterns in orthopedics, and it appears that some aspects remain unchanged. There seems to be some resistance to change in the status quo, and the complexities of capturing internal savings present another challenge. Should we focus on Medtronic's orthopedic initiative primarily as a comprehensive solution that includes patient management and post-acute care, or is the implant aspect of the business central to your perspective?

No, I think it's the former; it is a broad solution that is necessary and we feel that there is a lot of cost. I mean the majority of cost in that overall episode is actually in the post-acute space and so we think we can make a considerable difference but let's not just put that in a single bucket because in overall process includes proper risk stratification of the patients and that risk stratification drives a very specific care pathway to which adherence must be made and then following that, a clear handoff to post-acute care in the most efficient manner possible and finally a clear measurement and accountability for the outcome of the patient. Those four things that I've just outlined are not things that today are looked at holistically. And I think in each one of those areas there's considerable inefficiency and we believe that putting technology and using technology will not only create an inflection point in the short term, but will actually create long term sustainability of savings in that process because as you improve outcomes, you improve your cohort selection and risk stratification. Your care pathways improve and then through all of that, implants will play a role in terms of providing the most effective implant at the appropriate cost and when there is innovation in those areas we use them to drive up outcomes. So that’s the way we look at it but you have to start with the holistic view and implant is only a portion of that and that’s our view.

No, I think you're right. When we take a comprehensive view, we examine various factors such as the patient segmentation, risk analytics, pre-procedure patient engagement, and education. We also consider inter-operative technologies, not just the implants, but various surgical tools that can reduce procedure costs during hospitalization or later on. Moreover, we look at post-acute remote patient monitoring and patient-reported outcomes, as well as the data collection and reporting on those aspects. For instance, I was recently with our Advanced Energy business in Portsmouth, New Hampshire, and they have technology that adds nearly $500 to the procedure cost. Over the past year, knowing that CGR was on the horizon, they had to revamp their go-to-market strategy. They conducted patient segmentation, which Omar mentioned, making it clear to their surgeon partners and the health systems what patient groups benefit from the hemostasis technology and which do not. They published papers showing the technology's clinical and economic value for those specific patient cohorts and have seen significant business growth as a result. Thus, the impact is noticeable. When viewed holistically, it's possible to document these outcomes. I believe it’s just a matter of time before certain technologies distinguish themselves, both positively and negatively. I acknowledge the stabilizing forces in place, but as hospitals, health systems, and payers become more adept at this comprehensive approach, assessing clinical and economic impacts over a 90-day period, I think we will see further differentiation. I just don’t think that understanding has fully penetrated yet.

And just a follow-up for Mike. Mike, you know there were reports of vascular injuries with CoreValve, I'm presuming that was mainly it's a training issue not a class effect related to the longer size of the self-expanding kind of devices. And a second follow-up on I'm presuming you pull the trigger on HeartWare being pretty comfortable with HVAC, it's going to be competitive until the pipeline evolves and just any thoughts you might have on the pipeline.

Sure. So on the field action we took, obviously we monitor all the patients that are being treated with our products and in that particular case we saw some overlap between specific anatomic issues and an increase in vascular trauma. So it was in fact only about training that this field action was done, it was to improve sensitivity to those particular aspects when screening patients and making sure that care is taken in terms of the delivery of the device. I would point out that our instance of vascular injuries is actually below what is in the TBT registry. So we have a low threshold for identifying these issues and what we think we can help improve outcomes we obviously take action to do it. So there was no change to the product, there were no issues with manufacturing, it basically was a training issue. On HeartWare, obviously we're very bullish on the HVAC system as it is we think that device performed very well, we were obviously able to see details of the clinical evidence that they generated in support of their U.S. approval in advance of making the decision to acquire the company and I think you’ve seen especially in their most recent quarterly earnings results that in Europe there is beginning to see after the initial trial a nice bounce back in terms of overall share which obviously is consistent with our view that this product with its smaller size and its performance characteristics should be able to compete very effectively in that space. We continue to look at the MVAD device and decide how aggressively we want to pursue that and we're working closely with the leadership team there very impressed with the people who are doing that work and we look forward to being a leader in this space for decades to come.

So maybe one I had a guidance clarification question and one follow-up. I guess when you look at sequentially 1Q versus 2Q, 1Q we came at the high end on a constant currency constant week EPS growth. 2Q was sort of looking at the bottom end of the 12% to 14% range, so can you just talk to sort of what changed in 1Q and 2Q and when I look at the annual guidance rate 1Q revenues came in 200 basis points above internal plans, So if we’re looking at low half of the annual sort of 5% to 6% but we came in north of 5% and so revenues came in better in 1Q but I'm just curious why how EPS sort of re-created on the EPS guidance.

In terms of first quarter versus second quarter, yes, our first quarter we did come in at the high end of that 12% to 16% growth range and we did give guidance that we expect second quarter to be at the low end of that 12% to 16% range. The key reason is the tax rate. We expect our tax rate from the second quarter last year to second quarter this year to be about 50 basis points higher. In terms of revenue growth rate, obviously we do expect our second quarter to be in the same line as our overall annual growth rate of 5% to 6%. Clearly we've got the HeartWare acquisition closing that gives us confidence around that range.

And then maybe one follow-up, I guess a lot of questions have been asked but I'm just curious maybe if Mike can answer this have you had conversations with the FDA on whether they would accept a one-year data for CoreValve given we have notion, we have subgroup analysis of high risk and your peer just got approval based on one year data and if you had those conversations what's been the response? Thank you.

Obviously, it's always a very fluid discussion with the FDA and I have been very impressed with the way they have adapted their views in the TAVR space to the quality of the clinical evidence and have been flexible in terms of timing on approvals in the space. Generally, I think we saw that again with Edwards and we had approval and so this group I think is extremely effective at balancing the therapeutic benefit of products with their risk and trying to get good new therapies to the market as quickly as they can. So we will, as you point out, continue to basically look at one-year and two-year cuts on the data. There was a large number of patients that we have, we've obviously completed enrollment. As we have said we expect around ACC to be reviewing those data publicly and obviously we'll continue to work with the FDA, and they will ultimately be the one to decide when the product is approved. Okay. Thanks to all of you for your questions. In conclusion, let me just reiterate that we're focused on consistently delivering on our three commitments: mid-single-digit constant currency revenue growth, double-digit constant currency EPS growth, and returning a minimum of 50% of our adjusted free cash flow to our shareholders. And as I noted earlier, we feel that the appropriate application of medical technology that can help address inefficiencies and improve outcomes in healthcare delivery driving new forms of value creation. With our differentiated growth platforms and leadership in the strong end markets, we believe that we're well-positioned to capture this to ultimately create a long-term dependable value for our shareholders. With that, and on behalf of our entire management team, I would like to thank you again for your continued support and interest in Medtronic. We look forward to updating you on our progress on our Q2 call which we currently anticipate holding on Tuesday, November 22nd. Thank you all and have a great day.