Medtronic Plc (MDT) — Q4 2017 Earnings Call Transcript

Great. Thank you, Crystal. Good morning and welcome to Medtronic’s fourth 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 fourth quarter and fiscal year 2017, which ended on April 28, 2017. 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 statement. 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. Unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the fourth quarter of fiscal year 2016, and rates and ranges are given on a constant currency basis. References to annual results increasing or decreasing are in comparison to fiscal year 2016, and rates and ranges are given on a constant currency and constant week basis, which adjusts for the negative effect of foreign currency translation and the extra week that was in the first quarter of fiscal year 2016. Finally, other than as noted, our EPS growth and guidance does not include any charges or gains that would be recorded as non-GAAP adjustments to earnings during the fiscal year. These 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. Thank you, Ryan. Thank you to everyone for joining us. This morning, we reported fourth quarter revenue of $7.9 billion, representing growth of 5%. Non-GAAP diluted earnings per share were $1.33, growing at 6%. Before providing more detail on our quarterly performance, I would like to recap fiscal 2017, a solid year for Medtronic. We delivered record revenue of $29.7 billion, growing approximately 5%, in the mid-single digits for the fifth consecutive year. We made progress in each of our growth strategies. In Therapy Innovation, we executed a steady cadence of meaningful product launches, as well as introducing some groundbreaking new technologies. In Globalization, we expanded access to our therapies in emerging markets resulting in double-digit growth. And in Economic Value, we continued to extend our industry leadership in developing value-based healthcare solutions. The integration of Covidien progressed as planned. We have now realized over $600 million in synergy savings and remain on track to deliver our goal of $850 million of total cost savings by the end of the next fiscal year. This operational productivity, coupled with our revenue growth, were key contributors to delivering double digit EPS growth and generating over $5.5 billion of free cash flow. We strategically deployed our capital in line with our stated priorities, balancing return of cash to our shareholders together with disciplined reinvestment in our businesses. We met our commitment of returning greater than 50% of our free cash flow to shareholders in the form of dividends and net share repurchases. In addition, we invested approximately $1.5 billion in several strategic investments and five tuck-in acquisitions, and we expect these acquisitions to further enhance our revenue growth and improve returns over time. Finally, late in the fiscal year, we announced the sale of a portion of our PMR division to Cardinal Health for $6.1 billion as part of our disciplined portfolio management strategy. But most importantly, in fiscal year 2017, together with our physician partners, we served 70 million patients, more patients in more places around the world than any year in our history. It is incredible that two patients around the world are benefitting from Medtronic therapies and services every second. I am very proud of our more than 88,000 dedicated employees, for all that they accomplished in fiscal year 2017, and all that we can accomplish going forward, as we continue to fulfill the Medtronic Mission. Moving now to fourth quarter performance. We had a strong finish to our fiscal year 2017, delivering over 5% revenue growth. CVG, MITG, RTG, and Diabetes all grew in the mid-single digits. Geographically, we also demonstrated solid, balanced performance, with mid-single digit growth in the U.S. and non-U.S. developed markets, and double-digit growth in emerging markets. Complementing our solid revenue growth, our operating margin and cash flow continued to improve as expected. Our performance continues to be fueled by our three growth strategies: Therapy innovation; globalization; and economic value. We are creating distinct competitive advantages and capitalizing on the long-term trends in healthcare, namely, the desire to improve clinical outcomes; the growing demand for expanded access to care; and the optimization of cost and efficiency within healthcare systems. These trends, along with an aging population in most countries, produce secular growth tailwinds that we believe represent sustainable, long-term opportunities for Medtronic. Now, let’s discuss our fourth quarter performance against each of our growth strategies. In Therapy Innovation, we continued to see strong adoption of our innovative products across all our groups. In our Cardiac & Vascular Group, which grew 5%, we are leveraging the breadth of our products and services, as well as our strong positions in important, rapidly expanding markets to drive sustainable growth. Combined, our TAVR, insertable diagnostics, AF ablation, LVADs, and drug-coated balloons are now annualizing at nearly $3 billion and growing at over 20%. In our cardiac rhythm implantables businesses, we recently received CMS approval for reimbursement coverage in the U.S. for Micra, the world’s smallest pacemaker. Also, as announced last week, we now have U.S. approval for the first MRI safe quadripolar CRT pacing system. In TAVR, we delivered mid-30s growth and increased our market share sequentially in both the U.S. and Europe on the continued launch of our Evolut R 34 mm valve. In Coronary, we just received FDA approval of the Resolute Onyx drug-eluting stent at the start of this fiscal year. Looking ahead, we expect continued strong growth in TAVR, driven by the Evolut PRO valve and intermediate risk indication expansion, and in Coronary, we expect the recent approval of the Resolute Onyx will turn the mid-20s U.S. DES sales declines that we experienced in fiscal 2017 into meaningful growth this fiscal year. In our Minimally Invasive Therapies Group, which grew 6%, we had high single digit growth in Surgical Solutions driven by new products in Advanced Energy and Advanced Stapling. In Advanced Energy, we continue to rollout three new LigaSure instruments with a nanocoating that helps reduce instrument cleaning, which improves surgical procedure efficiency. And, we continue to see strength in the Valleylab FT10 energy platform. In Advanced Stapling, results were driven by the sustained adoption of our endo stapling specialty reloads. We also launched Signia, our new, single-handed powered surgical stapler that provides surgeons with real-time feedback during surgery. These new products continue to facilitate the move of open surgical procedures to minimally invasive, resulting in better patient outcomes and lower healthcare costs. In Patient Monitoring & Recovery, our above-market growth was driven by strength in our PB980 ventilator, our Capnostream 20 bedside capnography monitor, capnography disposables, as well as our Nellcor pulse oximetry products. Our Restorative Therapies Group grew 5% this quarter, with strong contributions from our Spine, Brain, and Specialty Therapies divisions. Our Spine division grew 3% and again gained market share. Core Spine grew in the low-single digits, continuing to benefit from our Speed to Scale initiative as we continued to launch a series of new products, including the Solera Voyager and Elevate expandable cage. In addition, Infuse sales were strong, growing in the double digits. Our Brain Therapies division grew 9%, driven by double-digit growth in Neurovascular and Neurosurgery. In Neurosurgery, our StealthStation S8 surgical navigation system received strong surgeon enthusiasm at the American Academy of Neurological Surgeons annual conference last month. While we launched it late in the fourth quarter, we expect it to result in accelerating sales growth next fiscal year. Turning to our Diabetes Group, the growth rate at 4% decelerated sequentially as we predicted, ahead of the full launch of the MiniMed 670G hybrid closed loop system. Despite this, we gained insulin pump share in both the U.S. and international markets, driven by strong clinician and consumer demand for our 6 series pumps. In the U.S., direct pump shipments to consumers grew over 20%. In CGM, we grew in the low-20s and are seeing strong growth globally as more patients transition to our sensor-augmented pumps. Regarding the U.S. launch of the MiniMed 670G, we have approximately 750 people taking part in our Customer Training Phase. The feedback has been extremely positive with a continued increase in patient satisfaction levels. We are preparing for a broader launch in June to the more than 20,000 pump users that are enrolled in our Priority Access Program. As stated before, we do not expect revenue growth to ramp substantially until after we have fulfilled the Priority Access orders, given the low revenue associated with the upgrade program. Our product pipeline remains robust across all our groups, with a number of important near-term growth catalysts. We remain confident that our new therapies can drive sustainable growth next fiscal year and beyond. Next, let’s turn to Globalization. Emerging markets grew 10%, as we continue to expand access to our products and services around the world. In addition to ongoing traditional market development, we are executing on differentiated strategies, namely structuring partnerships with both governments and the private sector, as well as optimizing our distribution channels. We believe that these initiatives will not only position us for long-term leadership in emerging markets, but also will accelerate growth and lead to sustained market outperformance. In the Middle East, we continued to face challenges in the macroeconomic environment, causing our revenue to decline in the mid-single digits. However, in Saudi Arabia, our largest market in the region, we are encouraged by the relatively stable sequential revenue we have delivered for the past two quarters, albeit at a lower base, given the large year-over-year declines experienced earlier this fiscal year. In other regions around the world, we delivered strong, double-digit growth in China, Latin America, and Southeast Asia, and high single-digit growth in Eastern Europe. In China, we grew in the low teens, with double-digit growth across CVG, MITG, and RTG, largely driven by strong growth in pacemakers, advanced stapling, and neurovascular. In addition, we are seeing success from our expansion into Chinese tier 2 cities and private hospitals. In Latin America, we had high-teens growth led by strong results in RTG, Surgical Solutions, and Coronary & Structural Heart. Brazil, Mexico, Chile, and Argentina all grew double digits. In Southeast Asia, which grew in the low-20s, we executed a number of channel optimization initiatives, including moving to direct distribution models in certain businesses in Indonesia and the Philippines. Overall, the consistency of our Emerging Market performance benefits greatly from geographic diversification, reducing dependence on any single market. We continue to believe that the penetration of existing therapies into Emerging Markets represents the single largest opportunity in MedTech over the long-term. Turning now to our third growth strategy, Economic Value. We continue to see success in our Hospital Solutions business, which grew double digits, as we are now managing cath labs and operating rooms for more than 130 customers around the world. Also, we continue to execute our value-based healthcare signature programs. One of these is TYRX, our anti-infection envelope for implantable devices, which is an example of where a technology change directly results in clear and measurable value to the healthcare system, without any dependence on other variables. Since launching our value-based program for TYRX earlier this calendar year, we have outcome-based contracts in place at over 140 accounts, helping drive over 20% revenue growth in TYRX in the fourth quarter. Infection control for implantable devices is a large opportunity, as in the U.S. alone, over 6,000 patients are affected annually. We are aggressively developing other unique, value-based healthcare solutions across each of our groups. And while we are still early in this journey, we remain focused on leading the shift to healthcare payment systems that reward value and improved patient outcomes over volume. As always, we expect to do this in a way that benefits patients, healthcare systems, as well as our shareholders. Before turning the call over to Karen, I would like to highlight the agreement that we reached in the fourth quarter to divest a portion of our Patient Monitoring & Recovery division to Cardinal Health. We were pleased to receive clearance from the U.S. Federal Trade Commission last week and continue to expect this transaction to close in our second quarter of fiscal year 2018. This is a positive transaction for all involved, including our shareholders and employees, who, we believe, will thrive under this change in ownership. We are committed to disciplined portfolio management, and we reached the conclusion that these businesses, while truly meaningful to patients in need, are best suited under ownership that can provide the investment and focus that these businesses require. Upon closing, this transaction will have an immediate positive impact on our revenue growth rates and margins, with modest near-term earnings dilution. We intend to continue investing over the long-term in internal and external opportunities that are more directly aligned with our growth strategies and focus on strong financial returns. With that, let me ask Karen to now take you through a more detailed look at the drivers of our fourth quarter financial results.

Thank you, Omar. Our fourth quarter revenue of $7,916 million increased 5%, both as reported and on a constant currency basis. Foreign currency had a negative $37 million impact on fourth quarter revenues, and acquisitions contributed approximately 110 basis points to revenue growth. GAAP diluted earnings per share were $0.84. Non-GAAP was $1.33. After adjusting for the $0.2 negative impact from foreign currency, non-GAAP diluted EPS grew 6%. Our operating margin for the quarter was 30.7% on a constant currency basis, representing a year-over-year improvement of 40 basis points. With the impact of currency included, our fourth quarter non-GAAP operating margin also improved, increasing 10 basis points year-over-year. We continued to cover the earnings dilution from our recent acquisitions, which means we maintained earnings expectations while realizing incremental acquisition revenue. Taking into account currency and the acquisitions that we have done in the past year, our operating margin improvement on an organic basis was approximately 70 basis points in the quarter. The operating margin improvement was driven in part by efficiencies as we continue to deliver on our Covidien synergies. This was partially offset by purposeful investments we made in sales and marketing ahead of upcoming product launches. Net other expense was $48 million compared to income of $21 million in the prior year, due in large part to lower net gains from our foreign exchange hedging programs. Our full year operating margin improved 140 basis points on an organic basis, which takes into account the impact of foreign currency, acquisitions we have done within the past year, and the impact of the extra week in fiscal 2016. This solid operating margin improvement was within our expected range for the year. Below the operating profit line, net interest expense was $196 million, a sequential increase driven in part by our debt issuance in March. At the end of the fourth quarter, we had $33.4 billion in debt and $13.7 billion in cash and investments, of which approximately $6 billion dollars was trapped. Our non-GAAP nominal tax rate on a cash basis was 17%, in line with our expectations. Fourth quarter average daily shares outstanding, on a diluted basis, were 1,381 million shares. Turning to shareholder payout, in fiscal 2017, we paid $2.4 billion in dividends and repurchased a net $3.1 billion of our ordinary shares. This represented a total payout ratio of 86% on non-GAAP net income and 136% on GAAP net income. Keep in mind, our payout ratio is elevated as we have been continuing to not only return 50% of our annual free cash flow to shareholders, but also execute the $5 billion incremental share repurchase commitment we made through fiscal year 2018. Before moving to our income statement guidance, I want to reinforce our commitment to strong free cash flow generation, which we recognize is an important driver of long-term shareholder value. In fiscal year 2017, our free cash flow was $5.6 billion, in line with our guidance, and representing very strong year-over-year growth of 35%. This growth was well above our long-term expectation to grow free cash flow in the high single digit range, roughly in line with earnings and is primarily due to the timing of litigation and tax items that affected our income statement in fiscal 2017 but won’t impact cash flow until fiscal 2018. As you know, cash flow is subject to large swings in discrete items and, as we have demonstrated this year, can also be affected by timing. Going forward, we will talk about cash flow growth against a longer, multi-year view, and as such would expect our free cash flow to grow in the high-single digits, compounded annually, from fiscal year 2016 to fiscal year 2018. Now, looking at the picture ahead. To avoid confusion, our guidance for this next fiscal year does not take into account the impact of the planned divestitures. We intend to update our guidance upon close of the transaction. For fiscal year 2018, we expect constant currency revenue growth to be in the range of 4 to 5%, on both an organic basis and after taking into account the year-over-year benefit from the acquisitions we completed early last fiscal year. By business group, we expect CVG to grow in the range of 5 to 6%, MITG to grow in the range of 3 to 4%, RTG to grow approximately 4%, and Diabetes to grow in the 10 to 12% range, increasing from the first half to the second as we fully launch 670G beyond our Priority Access Program. Looking at the first quarter, we would expect total Medtronic revenue growth to be similar to the annual range. But, keep in mind that in the first quarter, we will be fulfilling the 670G Priority Access Program, so we would expect Diabetes growth to be similar to the past quarter and ramp throughout the year. We expect solid operating margin improvement in fiscal year 2018, with greater strength in the back half of the fiscal year. We expect our gross margin on a constant currency basis to be flat to slightly improve throughout the fiscal year, with modest pricing pressure offset by operating improvement. Given historical and current foreign exchange rates, we expect currency to negatively affect the gross margin in the first half of the year, with a greater impact in the first quarter than the second. SG&A, as a percent of revenue, is expected to improve next fiscal year, particularly in the back half as we continue to realize additional Covidien synergies in our enabling functions and transition to centers of excellence. However, in the first half of the fiscal year, we expect SG&A as a percent of revenue to remain relatively flat from the first quarter to the second, as we invest in sales and marketing for important new indications and product launches, including TAVR intermediate risk, Resolute Onyx and the 670G. Given our recent debt issuance and the purposeful liquidation of some of our investments, we expect net interest expense to moderately increase over the level just reported in the fourth quarter. And, while difficult to predict given the dependency on our stock price movement, we expect a slight tax benefit from the accounting change for excess benefits on stock options we will implement in fiscal year 2018. With respect to earnings, we expect fiscal year 2018 non-GAAP diluted earnings per share to grow in the range of 9 to 10% on a constant currency basis, with higher growth in the back half of the year as we fully launch important new products and realize additional savings in SG&A as mentioned. In addition to these items, given the tax benefits we had in the first half of fiscal 2017 that are not expected to repeat, we would expect first quarter EPS to be in the upper end of the high single-digit range, with the second quarter in the mid-single-digit range, both on a constant currency basis. While the impact from currency is fluid and therefore not something we forecast, if recent exchange rates, which include a $1.12 euro and 111 yen, remain stable for the fiscal year, our full-year revenue would be positively affected by approximately $75 to $175 million. Given historical and current rates, the impact from foreign currency would be a headwind in the first half of the fiscal year including approximately $10 to $60 million negative impact to revenue in the first quarter, and shift to a tailwind with the comparison against a stronger dollar in the second half. Full-year EPS would be negatively affected by approximately $0.05 to $0.10, including a negative impact of approximately $0.03 to $0.05 in the first quarter. As Omar mentioned, we expect the divestiture of a portion of our Patient Monitoring and Recovery division to Cardinal Health to close in our second fiscal quarter. As stated upon announcement, the transaction is expected to result in modest net dilution to our fiscal 2018 non-GAAP earnings per share in the range of approximately $0.12 to $0.18, with the exact amount primarily dependent on the closing date of the transaction. The transaction is expected to improve our comparable, constant currency revenue growth rate and non-GAAP comparable, constant currency operating margin by approximately 50 basis points each. As previously stated, we intend to allocate $1 billion of the after-tax proceeds to an incremental share repurchase in fiscal 2018, with the balance used to reduce debt.

Thanks, Karen. To conclude, Q4 was a strong finish to the fiscal year, with balanced, diversified growth across our groups and regions. Along with the mid-single digit revenue growth, our organization delivered meaningful operating margin improvement and double-digit EPS growth, as well as growth in free cash flow in fiscal 2017. Looking ahead, I want to reiterate our longer-term commitment to drive not only mid-single digit constant currency revenue growth and double-digit constant currency EPS growth, but also our focus on long-term value creation through strong free cash flow and strategic capital allocation, balancing return of cash to our shareholders with disciplined reinvestment to fuel future growth. We will now open the phone lines for Q&A. In addition to Karen, I’ve asked Mike Coyle, President of CVG; Bryan Hanson, President of MITG; Geoff Martha, President of RTG; and Hooman Hakami, President of our Diabetes Group, to join us. We want to try to get to as many people as possible, so please help us by limiting yourself to one question, if necessary, a related follow-up. If you have additional questions, please contact Ryan and our Investor Relations team after the call. Operator, first question, please?

Good morning. Two strategic questions to start off and I’ll jump back in queue. The first is on capital deployment, the second one on margins. And maybe Omar or Karen, on capital deployment, if we think about the last access to cash you have between Puerto Rico and in the Cardinal assets, it’s $8 billion, 7 of that is going to go into debt repayment. So, can you just talk about the messaging for shareholders here about repaying that debt, is simply a commitment to debt holders, what does it tell us about your interest in growth-minded M&A or frankly larger, what someone would call more transformational M&A? And then I have a quick question on margins. Thank you.

First of all, we’ve stated our capital allocation policies and we’re kind of following that. Second, we’ve got a big transaction with this divestiture that you’re - that’s coming up, and we’re really focused on that. Third, our strategy for acquisitions, we’ve said all along, which is a disciplined strategy of looking at companies that fit our strategic goals that give us returns above our cost of capital over the long term and that either don’t have any or minimize any dilution to present income. And those are the strategies we look at and the sizes, secondary and all of that through the strategic goals of the company and whether it fits or not is what we look for. But right now, our focus really is on the divestiture.

I would just add that in the near term we’re focused on fulfilling our commitment to reduce our leverage post the Covidien acquisition, and that’s exactly what we’re doing. Over the longer term, we’re focused on reinvestments to drive stronger growth and better margins in the longer term.

Okay. That’s very clear. And then, Karen, just come on fiscal 2018 guidance, by our math, it applies about 80 or 90 basis points of margin expansion and that’s sort of the lower hand of the placeholder, you set down, or the Company set down last year sort of 70 to 140 basis points. So, is this sort of nearly a refinement as we get closer to the year, some conservatism? What does it tell us about your commitment to delivering those longer-term targets of 500 to 600 basis points or better? Thank you.

Thanks for the question, David. We’re very focused on driving operating margin improvement and leverage. And we cannot get to our double-digit bottom line on our mid-single-digit top line without driving that operating leverage improvement. We’re focused on driving solid plans going forward and executing against those solid plans to ensure that we deliver. As I said before, we will focus on the top line and bottom line, recognizing we need to get the leverage in between, but not focus as much as on the exact basis points of leverage in between because that can vary in any period.

Karen, I want to address a couple of financial items first. The first is the IRS appeal regarding the decision on Puerto Rico and the apparent delay in its resolution. How does this affect our debt pay down plan and the assumptions we have regarding cash flows for FY18?

So, the IRS did recently request to appeal the tax court decision. We do expect this to delay the ultimate outcome and the movement of cash. Until the IRS files its opening brief, which we expect in the first quarter, we won’t have a better estimate on the length of the delay. We do still believe our initially filed returns were correct and we continue to defend that position. In terms of the movement of cash and the debt pay down, we do anticipate to use obviously the proceeds from the divestiture to pay down debt. And our leverage target of getting to around three times at the end of this fiscal year and continuing to be focused on maintaining an A credit rating do not include the expected proceeds of the Puerto Rico settlement.

Okay. That’s perfect. You made a comment about the impact on tax issue 2016 09 adoption; what is the EPS impact, given estimate of $0.05?

Yes. It is included in our guidance of 9% to 10% EPS growth. And so, we are not giving an exact amount on that, mainly because it is dependent on our stock price movement, on the exercise of our options which are inherently very difficult to predict. We do expect that change to give us a slight tax benefit in the next year.

Okay. Then last item just on 670G launch. So, I want to make sure we are all thinking about just the timing of this ramp, not only in terms of what it means for revenues but in terms of share gains. Is it fair to assume that you really don’t want to be aggressive going what I would characterize as non-Medtronic patients more in the second half of FY18 versus the first half because right now, you are obviously dealing with the initial customer feedback to launch and in June you are going to the existing Medtronic patients, will be more second half of the year before you are really in a position to go out and take market share?

Hey, Mike. This is Hooman. I’ll answer the question. First, maybe a little bit of perspective on the fourth quarter because we were going through Priority Access there. And as was indicated in the commentary, even with Priority Access, we actually saw strong performance relative to the market and our peers. So, with the 630 and Priority Access, we gained over 4 points of durable pump market share in the fourth quarter. The other thing I would point out that I think is worthy of note is that globally our CGM sales grew in the low-20s because of the sensor attachment to all of these pumps. So, even though we are going through Priority Access fulfillment right now, in Q1 and we expect as Karen mentioned a ramp from Q1 to Q4, I think we’re going to really put ourselves in a position to continue to take market share. And as we think about the full year, we feel really good that we are going to be able to end the year, not only with market share gains but also double-digit growth.

So, I just wanted to first of all congrats on a strong finish to the year. I guess for my first question, I just wanted to clarify the fiscal 2018 guidance because there wasn’t actually an EPS given. So, I think I’ve got this straight but you are saying off of a 460 number for fiscal 2017, underlying earnings growth of 9% to 10% less the $0.05 to $0.10 from FX, and then there is obviously the $0.12 to $0.18 we need to think about for Cardinal. So, question number one is, is that right; do I have all the moving pieces correct? And then this is nitpicking a little bit but I’m just curious on fiscal 2018, why the 9% to 10% is just a little bit below the double-digit goal that you talk about long-term?

Thanks for your question, Bob. You’ve got the details right. We mentioned that we will revise our guidance after the divestiture closes, which may have caused some confusion. The dilutive effect on EPS, which you mentioned as being $0.12 to $0.18, depends on when we finalize the acquisition. We still anticipate the closing to happen in the second quarter, but we can’t specify if it will be early or late in that quarter, hence the range. Regarding the EPS growth of 9% to 10%, we are fully committed to achieving mid single-digit revenue growth and double-digit earnings growth in the long run. For this fiscal year, the upper end of our expectation is certainly double digits. The lower end of the range is influenced by a temporary rise in our interest expense this year due to a slight increase in our debt, as we work on paying it down with the proceeds. This impact is temporary. Additionally, we are making intentional investments in SG&A during the first half of the year as we prepare to launch a significant new product.

And then, Omar, one bigger picture question for you. Love to get your views on something that we’ve been trying to ask a lot of MedTech management teams lately, given how well the medical device space is doing. If you look at the earnings reports from hospital companies, their volumes aren’t really doing much. But the medical device space, it seems like surgical procedure volumes are growing at a very nice clip. So, what are you seeing out there as you exited your fiscal year in terms of surgical procedure volumes and kind of what’s your look for the rest of this year? And again, I ask the question because it just seems like MedTech is different than hospital volumes right now? I think your observation is correct. And as you said, our surgical volumes are hanging in there, they are stable. I won’t say that they are going in upward trend or anything, but they’re certainly stable. And I see that to continue. I would like to point out though that MedTech markets do swing a little more based on new product introductions, especially in the U.S., which is what we are looking at. And so, like we have had some pretty important launches in the last six months or so, and also important ones going forward as we have mentioned. So, I think you should probably think that into account that the technology introductions do give a swing to the MedTech space that probably hospitals in general wouldn’t see. I think that’s the best I can do.

I guess maybe on the guidance, Karen, that 4% to 5% constant currency growth for our fiscal 2018. It looks like maybe M&A is less than 50 bps, but I just want to make sure the organic for fiscal 2018 is still about 4% and that’s what the guidance is implying?

Yes. That’s correct, Vijay. Our guidance for revenue would be on an organic basis and including the impact from acquisitions that will benefit us more in the first part of that year, given that we acquired these assets at the beginning of last fiscal year.

Omar, I have a question for you. Margin expansion has been a significant priority for the Company. The gross margin performance this quarter was quite impressive. For us, CVG, which includes your highest margin segments, met expectations, while MITG and RTG exceeded them, with gross margins also performing well. Can you share your insights on the margins and your confidence regarding margin expansion in the medium term? Thank you.

As we've previously stated, as we move from gaining margin improvement from the Covidien synergies to the future, enhancing gross margin through operations consolidation will be one of our main growth drivers in that area, along with our productivity enhancements. As we implement this, there will be benefits to all groups since operations consolidation leverages common facilities, leading to a proportional increase in various sectors. I would highlight that this is a key strategic priority for us; it is a significant transformational aspect of our productivity that we are concentrating on as we exit the Covidien synergy phase, which we anticipate will conclude by the end of the next fiscal year. We expect to see ongoing improvement in gross margin, and as Karen indicated in the guidance, we also foresee some enhancement in the upcoming year.

I wanted to start with a big picture question on 2018 guidance. Could you just speak a little bit to your underlying assumptions for the CapEx and utilization backdrop in the U.S.? There is clearly a lot of policy uncertainty out there. I appreciate sort of your baseline assumption there.

Our business is generally less reliant on capital expenditures. However, it's important to note that our CapEx is closely associated with procedures. These are not merely diagnostic procedures, but actual therapy procedures, which are typically financed through the growth of those procedures. Therefore, it's more appropriate to view our business in relation to the volume of procedures rather than focusing solely on capital expenditures. This perspective offers a clearer understanding of our business dynamics compared to just looking at CapEx investments.

In terms of capital expenditures affecting our cash flow, we expect to spend about $1 billion over the next two to three years, which aligns with our spending from the past couple of years. Our expenses on IT investments are likely to decrease over the next one to two years, but this will be balanced by our investments in the strategy for consolidating manufacturing.

Thanks for that. To clarify my question, Omar, I was really not focused on capital equipment purchasing but rather on the general tendency for hospitals to invest in new technology while also considering the overall healthcare volume.

I believe that when significant new technology is introduced in our field, it typically comes with strong clinical evidence demonstrating its meaningful benefits for patients. Generally, if there is appropriate reimbursement, which we ensure, we see good adoption of new technology. This leads to an increase in both the market and our share with the launch of these new products. Therefore, I consider this to be the primary factor influencing market fluctuations within the MedTech sector in the U.S.

So, two financial questions for me. So, Omar, you grew about 5% in fiscal 2017 on a constant currency week adjusted basis and you are guiding to 4% to 5% in fiscal 2018, despite the fact you have a lot of new product launches and important new indications. So, the question is kind of why didn’t you feel comfortable kind of guiding to 4% to 6%? It’s a little bit like Bob’s earlier question on the 9% to 10%; it’s a little bit nitpicky. And so, what areas might slow in fiscal 2018 relative to fiscal 2017?

Look, we just wanted to provide a slightly tighter range than a generic mid-single digit range which we could have, but we just wanted to give a slightly tighter range. And I think that’s where that came from. I think that what we’ve seen this past fiscal year is we’ve seen some movement in the quarter, there is some level of uncertainty in marketplaces always. So, we just wanted to make sure that we again can hit the guidance that we put out there. I think the trend that we have right now, the new products would suggest that we should be able to deliver within that range.

No, the only thing that I would add is that we are focused on delivering consistent reliable growth.

A couple of quick questions for Mike and then one for Omar. So, Mike, your PCR and I was really struck by the net clinical benefit of left atrial appendage closure. Given the limitations of oral and quad therapy, is Medtronic in play and how big do you think that market gets? Secondly, it was kind of hinted that the U.S. pivotal four transcatheter mitral valve replacement might start this year 2017, how big is that trial; how long might it take? And then for Omar, I met with a TAVR company from China yesterday and the price point is 25 grand but reimbursement is only to the tune of 30% or so. So, the question is, should we forever think of some of these emerging markets as low technology or basic technology plays or might that situation for high-tech stuff change over time? Thanks so much.

Bruce to answer your question, just starting on LAA, that’s the segment we don’t currently participate in; that’s a segment that our business development team keeps a pretty close watch on. We think there are puts and takes with the existing technology we think there maybe some better ways to go about this, we haven’t seen anything yet that has caused us to want to jump in. But it’s like anything else, we continue to look at it and then the progress follow the market and then technology that it is available. And then on your question around TMVR, it would be pretty mature to talk about this specific study design. We’re still in discussions with FDA and what that might look like. We are now at essentially 50 implants with our existing intrepid system. We are increasingly enthused that we have the right design to go into clinical trials and we are working on the study design with FDA and will probably have more to say about that over the next quarter or two.

I think on the China question, that’s actually a very good question, in terms of emerging markets in general. As these markets go to universal coverage, there will be a tendency to kind of homogenize the products. I think that’s sort of encouraged us to take our value based healthcare analysis and business models to these emerging markets much more rapidly and in a much more accelerated fashion than we were thinking because the key to getting the differentiated pricing, if you like, is to demonstrate differentiated outcomes, which we think we can. And so that’s how this is going to go and play there as well. We will demonstrate additional value with these differentiated products. If there is no value, we shouldn’t be getting more price. And so, I think that’s the way we’ve reported and it’s really a slight sort of reprioritization of our own strategies in the sense of the value based healthcare effort is now getting increasing traction in some of these emerging markets. We’ve previously thought that that was an access-only situation but we think now access couple with value-based healthcare, in fact making sure that we get differentiated products with fair pricing in all these markets as universal coverage kicks in.

Before we end Q&A, I want to correct a statement that I made on the guidance around the quarterly gating. We do expect revenue growth for the full year, as I said, to be in the 4% to 5% range and looking at the first quarter, I had said the fourth quarter but I meant to say the first quarter. Looking at the first quarter, we would expect total Medtronic revenue growth to be similar to that annual range.

Okay. Thank you, Karen. And thanks to all of you for your questions. On behalf of the 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 in our Q1 call which we currently anticipate holding on Tuesday, August the 22nd. Thank you all very much.