Medtronic Plc (MDT) — Q1 2019 Earnings Call Transcript

Thank you. 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 first quarter which ended on July 27, 2018. 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. During this earnings call, many of the statements made may be considered forward-looking statements and actual results may 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.medtronic.com. References to quarterly results increasing, decreasing or staying flat are in comparison to the first quarter of fiscal year 2018 and references to organic revenue growth exclude the impact of material acquisitions, divestitures, and currencies. References to pro forma exclude the impact of material divestitures. Unless we say otherwise, quarterly growth rates and ranges are given on a comparable constant currency basis, which adjust for material divestitures as well as the impact of foreign currencies. All of these adjustment details can be found in the reconciliation tables included with our earnings press release. Finally, our EPS guidance does not include any charges or gains that would be reported as non-GAAP adjustments to earnings during the fiscal year. 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. I am pleased to announce that this morning we reported strong first quarter results. Revenue grew 6.8% on an organic basis marking the third straight quarter of 6.5% or better organic revenue growth, with strong growth across all four groups and regions. Operating profit grew 7% and non-GAAP diluted EPS grew 13.6% pro forma and 8.7% adjusted for currency. We are executing against our strategies. We are growing our markets and driving share gains across multiple businesses and multiple geographies. Businesses that were challenged 12 months ago are now headed in the right direction as evidenced for the past three quarters. We continue to execute in emerging markets and with our differentiated programs that deliver improved economic value to payers and providers. Our execution is not only in the top line but also down the P&L. We delivered margin expansion for our Enterprise Excellence program while increasing our investment in R&D to fuel future growth. Looking at our group results in the first quarter, each of our operating groups delivered strong results, with over 6.5% growth in RTG, mid single-digit growth in CVG and MITG, and mid-20s growth in diabetes. Our Cardiac and Vascular Group grew 5%, led by 10.9% growth in Coronary and Structural Heart. CSH had strong high-teens growth in transcatheter valves driven by sustained global demand for our Evolut PRO valve. CSH also continued to see very strong adoption of the Resolute Onyx drug-eluting stent, including low 30s growth in the U.S. In cardiac rhythm and heart failure, we had robust growth in Infection Control, AF Solutions and our Mechanical Circulatory Support businesses. Additionally, our pacemaker business had mid single-digit growth driven by the continued rollout of our Micra Transcatheter Pacing System and the Azure next-generation family of pacemakers. In our Aortic, Peripheral & Venous division, our endoVenous business grew in the mid-teens driven by growth of our VenaSeal closure system. Across CVG, we are seeing great success from multiple new value-based business models that directly link our therapies to improving outcomes. We now have nearly 1,700 active customers participating with associated revenue from these programs representing an increasing percentage of our U.S. CVG revenue. Our Minimally Invasive Therapies Group grew 4.9% led by 5.8% growth in surgical innovations as we capitalize on the conversion of surgical procedures from open to minimally invasive driven by new products. In Advanced Energy, strong adoption of our recently launched enhancements of the LigaSure vessel sealing instrument resulted in low double-digit growth. In Advanced Stapling, we grew in the mid-single digits driven by sales of our innovative Signia powered surgical stapling system and our Tri-Staple 2.0 reloads. Our Restorative Therapies Group posted the best quarterly performance in its history, growing 6.8%, led by mid-teens growth in our brain and pain divisions. In Brain Therapies, both neurovascular and neurosurgery grew in the high teens, with the adoption of our endovascular stroke treatments driving growth in neurovascular and the strength of our imaging, navigation, robotic and ablation systems driving growth in neurosurgery. In pain therapies, our spinal cord stim business growth accelerated to the low-20s this quarter, including high-20s growth in the U.S. driven by customer preference for our new offerings including the Intellis stimulator, Evolve workflow algorithm and our Snapshot reporting. We also had low-teens growth in Targeted Drug Delivery as we have delivered the best quarter of SynchroMed II sales growth in over 6 years. In Spine, while growth was flat this quarter, when our spine revenue is combined with our sales of spine enabling technologies that are reported in our neurosurgery business, our overall revenue grew 4%. We believe this is a more relevant comparison of our spine results against our competition and an indication that our surgical synergy strategy is working, driving above-market growth. Our Diabetes Group had its best quarterly performance in more than a decade with 26.3% growth driven by sustained strong demand for our MiniMed 670G hybrid closed-loop system. We now have over 97,000 trained active users of our 670G system. Outside of the U.S., our Diabetes Group grew in the high teens, driven by sales of the MiniMed 640G and we are now just beginning to commercialize the 670G in international markets. Our strong global results led to over six points of share gain this quarter in pumps. In standalone CGM, the U.S. launch of our Guardian Connect product is off to a solid start, taking share in the $1 billion standalone CGM market. With the Sugar.IQ assistant, Guardian Connect is the only Smart CGM using the cognitive computing capability of IBM Watson to give personalized insights and predictive alerts. The higher CGM sensor attachment and utilization that we are seeing with integrated pump users combined with the sensors that are used with Guardian Connect are not only driving strong CGM sales growth which was nearly 50% this quarter but also creating a consistent long-term annuity stream for our Diabetes Group. Turning to geographic revenue growth, we are continuing to execute well in emerging markets which grew 11% and represented 15% of our revenue this quarter. Several markets drove our performance reflecting broad diversification: China grew 12%, the Middle East and Africa grew 16%, Southeast Asia grew 14%, Eastern Europe grew 10% and South Asia grew 11%. Our differentiated strategies of public and private partnerships and optimizing the distribution channel are making a difference in emerging markets around the world. Today, Medtronic has leadership positions in almost all of the fastest growing markets in med tech and as a management team we are intentionally allocating our capital to higher growth markets and new opportunities. We have seen the early benefits of our top line performance in the last three quarters with the bigger picture, which we outlined at our June Investor Day. We are increasing our RAMware, our weighted average market growth rate by shifting our mix of businesses to faster growing therapies and geographies. As we invest in these opportunities, our goal is not just to continuously innovate but also to invent and disrupt, and our intention is to lead in all three areas. This is reflected by the technology pipeline which we detailed in our Investor Day to mention just a few of the highlights. In CVG, we are investing in Micra AV, which will allow us to access over half of the pacemaker markets with our disruptive transcatheter pacing systems. During Q1, we had first-in-human implants of our extravascular ICD system. We are also funding clinical programs to bring therapies to market in transcatheter mitral valve replacement and renal denervation for hypertension, both of which have the potential to be multibillion dollar markets. In MITG, we remain on track with our robotic-assisted surgery platform as we discussed at Investor Day. In RTG, we are investing in next-generation premium mounted and closed-loop DBS systems. In diabetes, we are developing a destructive closed-loop ecosystem with advances in pump therapy, CGM and informatics to drive dramatic improvements for people to manage their condition more easily. I could go on with dozens of additional programs in every one of our groups, but suffice to say, we are executing on the strongest pipeline in Medtronic’s nearly 70-year history. In addition to driving our top line growth, we are also executing in our Enterprise Excellence program as evidenced by margin expansion this quarter. As a reminder, this program is still just in its early stages and is expected to drive sustained cost savings while also allowing for greater reinvestment in R&D over the next several years. We are working to leverage our breadth in many areas from global manufacturing and technology sharing to our clinical and regulatory expertise, shared services and global distribution. As I mentioned at the start, the message overall is that we are executing. We are allocating our capital across our business and focusing incremental resources on our biggest growth opportunities. In the process, we are driving our RAMware upwards to the right while at the same time driving operating leverage and margin expansion. Finally and importantly, we are putting the processes in place to improve our free cash flow conversion, which will create additional capital that can be returned to shareholders and reinvested to drive future growth, all with the goal of creating long-term shareholder value. With that, let me ask Karen now to take you through a discussion of our first quarter financials.

Thank you, Omar. Our first quarter revenue of $7.384 billion represented organic growth of 6.8%. Foreign currency had a positive $78 million impact on first quarter revenue. Non-GAAP earnings per share was $1.17. After adjusting for the divestiture, non-GAAP diluted EPS grew 13.6% pro forma and 8.7% constant currency. While we came in $0.06 above the midpoint of our guidance range, it’s worth noting that $0.03 was driven by stronger than expected foreign exchange tailwinds and $0.01 was upside from tax. Given this, we would characterize $0.02 as operational outperformance reflecting better-than-expected revenue in the quarter. Non-GAAP operating margin was 27.3%, increasing 80 basis points pro forma and reflecting a slight improvement on a constant currency basis in line with our outlook. We are expanding margins and at the same time investing more in research and development to enhance our pipeline resulting in first quarter R&D expense growing 100 basis points faster than revenue as we focus on driving long-term value. Non-GAAP SG&A as a percent of sales this quarter declined by 90 basis points pro forma and 70 basis points constant currency, early evidence that we are executing on our companywide Enterprise Excellence program. Net other operating expense, which is included in our operating margins, was $60 million compared to $42 million pro forma in the prior year, with the increase primarily due to the year-over-year change in currency gains and losses related to our hedging program. Our non-GAAP nominal tax rate was 13.3%, better than expected given favorable tax resolutions and expirations. For the remainder of the fiscal year, we expect our tax rate to be 15% plus or minus modestly higher than our previous expectations. First quarter free cash flow was a robust $1.4 billion. Improving our cash generation is a priority at Medtronic from the top of the company on down. We can vary from quarter-to-quarter given timing of payment, so we don’t want you to extrapolate our first quarter results for the full year. That said, we are pleased with our performance over the last two quarters and are beginning to see the benefit of our increased focus and discipline around cash flow. We remain committed to disciplined capital deployment, balancing reinvestment with returning a minimum of 50% of our annual free cash flow to our shareholders. We increased our dividend by 9% in June making it our 41st consecutive year delivering a dividend increase. We repurchased a net $374 million of our ordinary shares in the first quarter. Our total shareholder payout ratio was 66% on non-GAAP net income and 98% on GAAP net income. The increased investment in organic R&D that I mentioned earlier is an example of our reinvestment focus to increase our return on invested capital and create long-term shareholder value. Before turning the call back to Omar, I would like to update our annual revenue growth and EPS guidance. For the full fiscal year, we are increasing our organic revenue growth guidance from a range of 4% to 4.5% to a range of 4.5% to 5%. I will go a step further in saying we are comfortable with the higher end of this upwardly revised range. For the year, we now expect CVG, MITG and RTG to grow 4% to 4.5% versus our prior expectation of 4% plus or minus. We expect diabetes to grow in the low to mid-teens, up from low double-digits previously with a stronger first half versus second half based on prior year comparisons. It’s worth noting that while we have had three straight quarters of 6% to 7% revenue growth, we don’t expect to grow 6% to 7% every quarter. Some of our businesses faced tougher comparisons particularly in the back half of the year and others are in more challenging markets. Our guidance takes all of that into account along with the diversification of our end markets, and strength of Medtronic. Turning to margins, we continue to expect operating margin expansion in the full fiscal year of approximately 50 basis points on a pro forma constant currency basis, driven by our Enterprise Excellence initiatives. With respect to earnings, we are increasing our fiscal year ‘19 implied constant currency EPS growth forecast from a range of 8% to 9% to a range of 9% to 10% on the heels of our strong quarter. However, recent rates of foreign exchange looks to be neutral to full year EPS versus a $0.05 benefit prior. So despite the increase in our constant currency EPS forecast, given the recent currency volatility, the ongoing discussions around trade tariffs and the fact that it is still early in our fiscal year, we have elected to leave our non-GAAP EPS guidance unchanged in the range of $5.10 to $5.15. While the impact from currency is fluid, if recent exchange rates hold, our full year revenue would be negatively affected by approximately $420 million to $520 million. Despite the incremental headwinds on the top line, given the benefit of our hedging programs, foreign exchange is still a slight positive to fiscal ‘19 operating margins and neutral to earnings and free cash flow. For the second quarter in particular, we expect organic revenue growth to be in the range of 5.5% to 6%. We expect CVG to grow approximately 4%, RTG and MITG to be in the range of 5% to 5.5% and diabetes to grow 20% plus or minus. Given the impact of the hurricane and infusion set recall in the prior second quarter, we expect our operating margin improvement this upcoming quarter to be a little more than the full year. We expect non-GAAP diluted EPS in the range of $1.13 to $1.15. This guidance reflects solid revenue growth and margin expansion offset by a higher tax rate and an FX headwind of $0.02 at recent rates which is $0.03 unfavorable to what we had expected at the time of our last earnings call. If recent rates hold, revenue would be negatively affected by approximately $100 million to $150 million. Operating margin would have a slight benefit and EPS would have a $0.02 headwind as previously mentioned. Finally, on free cash flow, we continue to expect to generate between $4.7 billion and $5.1 billion in fiscal year ‘19. As we mentioned at our Investor Day, over the next couple of years, we expect to make significant progress in improving our conversion of earnings into free cash flow as litigation and tax payments are expected to diminish based on what we know today and we benefit from programs we have put in place to improve working capital. The past couple of quarters are a great start towards delivering on this goal. Now, I will return the call back to Omar.

Thanks, Karen. Before we go to Q&A, I want to thank our more than 86,000 employees for their tireless work ethic and relentless execution once again this quarter. This was another strong quarter for Medtronic, not just in terms of the headline numbers of organic growth, margin expansion, and cash flow generation, but as importantly, we are executing in our strategies and positioning the company to create long-term shareholder value. One, our pipeline has never been stronger. As I outlined in June, everything at Medtronic starts with technology. We are innovating, we are inventing, and we are disruptive. With the advancements in our pipeline in the last few months, I have never been more excited about our end-markets, our opportunities, and our competitive position. Second, we are allocating capital efficiently across our business. Third, we are leading the development of emerging markets for our therapies and we are capitalizing on our leadership and value-based healthcare to our investments in the higher growth markets and higher growth geographies, we are shifting our RAMware upwards and to the right. Lastly, we are consistently improving our free cash generation and we are in the early stages of implementing our multi-year Enterprise Excellence program, which should enable us to drive multi-year margin and reinvestment for long-term growth. We know there is much work to be done, but I am excited about our progress and our positioning. With that, let’s now open the phone calls up for Q&A. In addition to Karen, I have asked Mike Coyle, President of CVG; Bob White, 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 questions as possible, so please help us by limiting yourself to only one question and 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, Omar. Good morning, everybody. Congrats on the excellent quarter for sure, but I want to focus if I could first on the sales outlook. I appreciate it’s early in the year, Karen, you certainly helped us understand that and then you want to stay conservative. But – and you have just got us to 5.5% to 6% for the second quarter. If I focus on the second quarter, help me understand to be as I think about the second quarter very similar to the fiscal first quarter in terms of comparisons, I mean, the tremendous pipeline performance, ongoing cost reductions, etc. Maybe if you could give us a little more color on why the fiscal second quarter wouldn’t be even better than that guidance of 5.5%, especially given the relatively easy comps, the hurricane impacted year ago numbers. Is it something maybe we need to understand better about some of the headwinds out there that keep you more in the 5.5% to 6% range?

Let me take that. First, thanks for the questions. One thing that I want to mention is that overall, we feel very good about this business. Our momentum is strong. Our end-markets are good, and we are in the right end markets, and that’s why we increased our FY ‘19 overall revenue growth assumptions. And we are really confident in our ability to deliver this strong growth profile this year. That said, it still is very early in the year. We are focused on setting guidance that we have a high degree of confidence in and if we can deliver, I think that’s important to note. But overall this business is performing, there are no major concerns from a business perspective. We are excited about our pipeline and excited about our execution across the board. We look forward to a business that can consistently deliver, and we have a great deal of confidence that we can indeed do that.

I would just add, Rick, that on the second quarter in particular, we did say that we expect 5.5% to 6% organic growth in the second quarter, which is higher than the other quarters given the comparison. Keep in mind we do have the anniversary of some major product launches, particularly in CVG and Resolute Onyx and Evolut PRO. We also have some pricing pressures in certain geographies this fiscal year, most notably Japan and Australia, and all of that is baked into our guidance.

Great. And just a follow-up on diabetes, another outstanding quarter here, best in a decade as you say. Again I assume this was as you mentioned 670G driven, but you launched the standalone sensor in mid-June, do we expect this growth to simply continue with these kinds of levels given this performance? When I reflect on it seems still early in the launch of the Guardian sensor, you highlighted the OUS rollout, why wouldn’t growth actually accelerate from here in Diabetes and maybe just give us a little color on how widely available the Guardian sensor is at this point?

Yes. Let me take that again. First of all, we are excited about diabetes and we are leading and creating a market that is going to go through a tremendous amount of change. We expect to be right in the leadership position in that. The Guardian sensor is launched exceptionally well, and we have to add that our sensor is differentiated by the addition of Sugar.IQ, which is a cognitive decision support system that provides insights to patients. But having said that, our position in the hybrid closed loop is something that is really setting the standards as to how patients with type 1 diabetes, in particular, can manage themselves. We are just at the beginning of that journey and we expect that this product will continue to innovate over time, leading that innovation roadmap. Now, we are coming up against some pretty difficult comparisons because if you recall we went through a period last year where we had a shortage in our sensors. We have overcome that according to our plans. Although we expect diabetes to maintain a mid-teens growth profile for the year, the present rate benefits of the comparisons that we have had over the last year, but we expect it to remain an exciting double-digit growth business certainly for this year and over the long-term a business that will set the standards for growth for Medtronic. That’s what we expect from it.

Thanks, Omar.

Well, great. Thanks for taking the question. I just wanted to ask about emerging markets; obviously it’s been a source of tremendous growth for the company and just over the course of the last three months to four months, it’s been a period of extraordinary volatility in certain emerging markets. So Omar, I was wondering if you wouldn’t mind just commenting on emerging market trends in the quarter and the sustainability of those trends as we look forward, given all that’s going on. Thank you.

Thanks Bob. First of all, I couldn’t agree more. Emerging markets have been stable and strong deliverers of growth for us over the years and something that will be sustained. I do think we set a leadership profile in the med tech industry as to how to approach these emerging markets by going direct to our customers and helping these markets develop their own healthcare systems. The need in these emerging markets is tremendous. You just need to look at the amount of penetration that our technologies have in these markets even with people who can afford these therapies. That need is always going to be there. Despite economic uncertainties, there is a certain degree of base stability in these markets that we depend on and that we have seen happen. In addition to that, we have a very diversified profile within emerging markets where China is clearly our biggest market with consistent delivery. We also have strong positions in the Middle East and Africa, Latin America, Eastern Europe, and Southeast Asia. Putting all that together, the inherent stability of these markets because of the disease needs and our diversified positions gives me great comfort that the baseline we have established of double-digit growth in the emerging markets will continue in the foreseeable future. I have complete confidence on that and I am really excited about what we can do there.

Terrific. I appreciate the detail and clarity. One follow-up for Karen; congrats on the outperformance on the margin side. I just want to dig a little bit deeper on the margin performance in the quarter. It looks like on an operating margin basis, excluding the impact of currency, operating margins were roughly flat year-over-year on an underlying basis. It looks like you took the opportunity to spend more in R&D given the strength in the overall business. I was wondering if that’s the right read or were there other moving pieces in the quarter that impacted underlying operating margins? Thank you.

You have the right read. Thank you for the question. We did increase our investment in R&D in the quarter, particularly in CVG and diabetes. In CVG, we had ahead of plan enrollment in some key clinical trials including RDN and mitral. In diabetes, we purposely accelerated our focus on driving an advanced hybrid closed loop system. In fact, our R&D investment by our calculations was 30 bps higher than Street consensus. We did also absorb a mix impact on our gross margin, which I talked about where we saw some revenue strength from some lower margin businesses that did impact our gross margin, and we drove strong SG&A improvement that more than offset it. We still did have a slight improvement in our overall operating margin, which we were pleased with and was in line with our original outlook.

Okay. Thanks for taking the questions.

Thanks Bob. Next question, Lorie?

Good morning. Just a couple of questions. Karen, I want to start with you on the organic growth outlook and I noticed some questions on the second quarter, but if you think about this year, I mean, your guidance sort of implies 6% performance in the first half and maybe 4% performance in the second half. So, I wanted to focus more on the second half; if your first-half guidance is sort of correct, you still need to see some momentum acceleration in the business in the back half of the year to deliver on that 4% type number? Can you just sort of talk about some of the drivers of how you get that momentum acceleration in the back half just given the very material difference in sort of first half versus second half comparables?

Yes, thanks for the question, David. Appreciate it. In the second half, as Omar mentioned first and foremost, we are really pleased with the performance of our business, the strength of our underlying end-market and the momentum that we have. We do expect that momentum to continue throughout the year. We have increased our overall revenue growth guidance for the year as a result of that. Keep in mind, as we have talked about in the back half, we do come across some tougher comparisons from the prior year. We do have the anniversary of some key product launches that impact us even more in the back half and we have got some pricing pressures from certain geographies that I noted Japan and Australia. But we are very excited about the continued momentum underlying; it’s really just the comparison in the back half.

Okay. And just to follow up, Karen, on free cash, we appreciate that conversion this quarter was obviously materially higher than what you had suggested it would be by this point, but I know we are not going to make this a trend, but how should free cash trend? What are some of the factors that would sort of erode the relative run-rate of free cash across the year? And then kind of related to that, could you just update us on the Puerto Rico tax settlement? There were some new dynamics that played out late last week, and maybe just remind us of the path forward on Puerto Rico and any impact on tax rate or payment scenarios? Thanks so much.

Yes, thank you David. We were really pleased with our performance on free cash flow in the quarter. This is a focus as we have talked about from the top of the company on down to drive free cash flow improvement and we have been able to do that in the last two quarters, the fourth quarter last year and the first quarter this year. In terms of trend, keep in mind that free cash flow can be lumpy and it does depend on the timing of larger cash payments, particularly in tax and legal. So I certainly wouldn't want you to extrapolate this first quarter for the rest of the year, but we are focused on delivering free cash in our full year guidance of $4.7 billion to $5.1 billion. We are confident in our ability to do that. We have been focused on working capital improvement in this quarter which drove improvement in both accounts receivable and accounts payable in particular. So we are confident in our ability to deliver on this free cash flow and improve the earnings conversion. In terms of Puerto Rico and the settlement last week, we did have the appellate court rule basically remanding the case back to the lower court for additional fact finding. I would say it’s important to note that this was merely a procedural decision, it is not a ruling based on the merit. The appellate court determined that it needed additional analysis from the tax court in order to rule on the merits. We still believe our initially filed tax returns were correct and we will continue to defend our position. In terms of what that means on the impact on cash flow, given that the case has been remanded back to the lower courts and it will take some time; we don’t expect at this stage any additional tax payments related to this case this fiscal year.

David, let me also just add a little color to the question on the growth profile. There are some quarterly dynamics that Karen went through, and we are setting guidance that we have confidence in delivering. But let me tell you our pipeline has never been stronger, and in the next 12 months or so I am really excited about what we can do in our pain business. Our Intellis and Evolve workflow is really hitting the mark. Our Micra, which I have talked about a lot before, is a disruptive technology; we are the only player in this space. It’s a market that we created and now we are disrupting ourselves. It currently addresses only 20% of the single-chamber market and we have got the roadmap to make this 100%. The core valve Evolut R is another that is building on the success of the original launch of the platform, and finally the Guardian Connect in the 670G, as I mentioned earlier, are highly differentiated. I just want to lay that out; these are not promises for the future, these are right now. We are extremely excited about these technologies, and we expect sustained growth and leadership positions in all of these areas. I had to make that point, David.

Thanks, Omar, for clarity on the second half. Thanks, Karen as well.

Thanks, David. Take the next question please.

Great. Thanks for taking the question. Congrats on the good quarter. Karen, maybe just a follow-up on free cash flow. We all saw that the performance this quarter, we know it’s now part of the compensation for management, so clearly a priority. Can you run us through some of the changes strategically and operationally the company is making to improve free cash flow over the long term?

Sure Robbie. Thank you for the question. We talk about it being a focus from the top of the company on down. It is a clear focus in all of our monthly financial reviews. It’s the clear focus in our quarterly business review. Honestly, when we had our recent officers meeting, we spent the entire day talking about how we could improve free cash flow. There is a very strong focus and, as you already noted, it’s an important part of our compensation; it will represent about a third of our compensation, our annual incentive compensation.

I think in addition maybe I can add a few things more. We are creating systems, sort of IT systems through which we can track free cash flow better, rolling it down across our businesses to a pretty granular level. We are creating systems to reach our forecasting processes using the latest tools in IT NAI for that matter. This is an area of continued focus for us and continued upgrade of our capabilities. It’s something that we are confident to deliver and improve over the next few years.

Okay, great. And as a follow-up maybe a two-for-robot question; we saw very strong performance in the brain therapies division you called out the Mazor X robot as one of the drivers. Maybe you can give us some early insights on that and then at the same time, it’s been a few months since the Analyst Day; any update on the robot in surgery, anything you can add in terms of functionality or timing or viewpoint on it? Thanks a lot.

Let me just give a short overview and then I will let both Bob and Geoff comment on their specific robots. The integration of capital equipment in this case, the robot, with implants and high-value consumables is a unique competence that we are delivering and it sets us apart from competition. It’s an area that we are really focused on and really excited about the progress that we are seeing, but more importantly, I am excited about the future. So with that, I will let Bob go first and then Geoff.

Sure. Thanks, Robbie. We are excited about where we are at with the surgical robot. We remain absolutely on track with what we talked about during Investor Day. We continue to get very good surgeon feedback. In fact, we have got additional surgeons in this week who are providing us feedback on the system. Our program remains on track and we continue to get good feedback. We are doing it in a way that is based on input on the features that our surgeons want most. We are well-positioned to deliver what we said we were going to do.

For sure, the capital equipment within our brain business is one of the two big drivers of that in neurovascular, but it’s more than Mucorex. For us, it’s a suite of enabling technology, the navigation, the intra-operative imaging, which is our O-Arm, the Mucorex, the robotic arm, and our Midas Rex powered instruments. One other key competency, in addition to what Omar said, is that we are doing and integrating these tools so that for the surgeon workflow, it delivers. The robotic tailwind has increased surgeon interest, driving for us is increased interest in navigation. Folks that weren’t looking at navigation before are now looking at it, which has been a tailwind for all of our enabling technology. The more revenues coming from the O-Arm and navigation in Midas Rex and the whole integrated suite, we are excited about that for that reason alone; it’s more than just the robot concerning spine. It’s all of these other enabling technologies that are integrated together.

Appreciate it. Thank you.

Thanks, Robbie. Next question please.

Hi, good morning, guys. Two questions. First, for Omar, another good quarter with free cash flow, but the company has been very quiet on the M&A front here recently. Is this more a function of the targets, the valuations for some of the targets, the discussions that you are having, the valuations are too rich? So maybe talk a little bit about the pipeline and why we haven’t seen much on the M&A front lately? And then I have a follow-up.

Sure. Thanks a lot, Glenn, for the question. First of all, M&A remains important to us. We have got a strong balance sheet and we expect to use it as we generate, and our free cash flow profile improves. Let me also tell you a few other things though. First of all, let’s not take our eye off our performance in organic growth; that’s the highest return investment we can make and we can do it. M&A supplements that, and our focus in M&A has been tuck-in acquisitions; that will remain our focus. There is a lot of activity in that area, and we continue to monitor the space. When the right opportunity comes along, we will act. We are very active there, and that will complement what we are doing organically. It’s also important to note that, like I said earlier, tuck-in acquisitions are our major focus because that’s where our size and scale can immediately complement any other company without benefiting from that size and scale. So that is our focus, and we are in a strong position to execute on that, and you will see activity from us but we will do it in a disciplined fashion, protecting our margin profile, moving up into the right, and making sure that we have both the financial and management bandwidth to execute. So these are things that we have said before and continue to do, and we certainly have our eyes wide open as to what’s available out there. We expect to be a strong player in this space.

Alright. And then you had very strong numbers out of surgical innovations up mid-single digits. Is this a signal that surgical volumes accelerated in the second quarter or is this more a function of market share capture? Thank you.

First of all, the overall healthcare market is pretty stable. I am not sure that there was any significant inflection point in the growth of procedures or anything like that; it’s more or less stable both in the U.S. and other developed markets around the world. I think our technology innovation continues, and that helps us drive this growth profile. In surgical innovations, we have a stream of technologies that come out all the time. Our momentum has been pretty consistent. I do think that our technology leadership has played a role there. I have spent a lot of time with the surgical innovation group understanding the technology and what they are doing. I can tell you I am very impressed by this technology; these sophisticated closed-loop systems that give feedback to the surgeons, and there is a lot of room for innovation in these end effectors and we will continue to invest in and lead over time.

Okay, thank you. Thank you for answering the question.

Thanks Glenn. Next question please, Lori.

Hi. Thanks for taking the questions and congrats on the strong results here in fiscal Q1. I was hoping to start off, maybe for Omar and possibly Geoff, just to get updated thoughts on how you see your orthopedic efforts proceeding. Do you feel the need or desire to get bigger in orthopedics over time? Any update on the progress you are making with your current offerings in knee and whether you have hip approval yet and whether or not there is any opportunity with the ultimate transition to my procedures and to the outpatient setting?

I will let Geoff comment on that in a minute, but let me just say that our portfolio right now is strong and robust. We have got diversified positions in high growth market segments, and that’s our priority to maintain that, to continue to grow that and add to that in terms of tuck-in acquisitions. The orthopedic space is an adjacent space, and there are areas where we can add value and we have done some early work in that area. Geoff, do you want to say a few words about orthopedic?

First, it’s the Micra comment; do we feel a need to run orthopedics? I would say no, it’s not a need. If there is an opportunity for us to be disruptive and scale the business in a disruptive way, then we think we can do that and be more aggressive. We are evaluating that and looking at it from several angles. One device side, our knee is out there, and we have a limited release getting some clinical experience. The hip is not yet approved; it’s coming in the next couple of months. We did the same with that, get some limited release, get some feedback and we are evaluating. We are looking at spine ortho bundles and unique business models. But again, until we see something that is a disruptive path forward and it has to be a better opportunity than some of the other organic opportunities that we have. That’s where we are.

Understand. And thanks for that answer. And just maybe a follow-up for Mike Coyle; just thinking about the CVG performance in the quarter, can you help us understand what went better than expected? Minus 4% was the guidance; you guys hit 5% organic growth. Can you also touch on your performance in TAVR specifically and your outperformance of the market? What do you think are the drivers there? Thanks for taking the questions.

Thanks, Josh. Coronary and structural heart was the big leader for us in the quarter, both on the TAVR side and in the coronary side. Onyx continues to do extremely well in the United States, and we are at sort of all-time high shares for our coronary business. The transcatheter valve business continues to have very good strength with nearly 20% growth on a global basis. That’s driven by the Evolut PRO product release that’s now available both in Europe and in the United States. We have supplemented that with the EnVeo delivery system, which is well received across the geographies. We have had strong share capture in both Europe and Japan, and share momentum in the United States. In Japan, we are about to release the Evolut PRO there as well. So, we expect that momentum to continue. Even in CRHF, we continue to see very strong growth in the atrial fibrillation business. Our LVAD business with HVAD now has the thoracotomy indication in addition to destination therapy, and then within the APV business, the endovenous business is really doing extremely well. We haven’t seen quite the hit we expected from the reimbursement reduction on drug-eluting balloons as the patient benefit of that has really been seen clearly by our customers. We've done quite a bit better than we expected in the plan despite that reimbursement change.

Thanks, Mike.

Thanks, Josh. Next question please, Lori?

Thanks and congrats on the quarter. Karen, you mentioned the ongoing noise around trade tariffs as one reason for some caution in the full year outlook. Could you spend a minute on how you are thinking about the potential impact on the business from what’s going on there and maybe highlight any particular product categories where you see exposure?

Let me first give you a little overview and then I will let Karen take over. First of all, the sorts of things that we sell are inherent needs for patients, and we are confident that the healthcare systems around the world will need our products, and therefore, the core demand we will fulfill will continue. That said, clearly, there are areas that are in the news and trade discussions that go on; we are a global company and we are affected by that. However, our overall confidence in our outlook and the way we are planning internally, we are confident we can offset any real pressures in that area. In the end, you have to remember that the inherent demand for our technologies is something that no country can walk away from, and it’s something we feel responsibility to fulfill for patients around the world. But Karen, maybe you can give a little more color on that.

Sure. I would just add from a trade tariff perspective, it depends on where we manufacture and where we export to China. It’s mostly impacting right now our MITG and RTG businesses; to a lesser extent it’s impacting CVG. As Omar said, we are focused on offsetting that as best we can. As we noted, we did not change our EPS guidance, taking into account the impact of the trade tariffs as they sit today.

It's a modest impact, one that we feel we can cover.

Thank you, that’s helpful. And then one question for Hooman, another very strong diabetes result this quarter, so can you comment on the impact of the Animas wind down and the pace at which that’s progressing? You guys are offering some on-warranty patients the opportunity to switch early; is that accelerating this process to the point where we might see the bulk of that benefit here in the first year versus the 3 or 4 years that it would have taken just based on the timing of warranty expirations?

So, Chris, thanks for the question. The transition is actually going pretty smoothly and we are really working well together with J&J on that. Your question is around the in-warranty but let me remind you that there are actually three parts to the dynamic with Animas. They had roughly 90,000 patients in their installed base; the majority of those patients were under warranty and were coming off of warranty at a steady cadence. Now, starting this quarter, there are three ways that we are driving revenue. The first is for all the patients that are under warranty and remain under warranty; we are supplying those patients with consumables and we are recording that revenue. That revenue will start to anniversary in Q3 of this year. Second, for all the patients that are out of warranty, we are working to convert those patients to Medtronic; that’s going extremely well and we are converting them at least at the rate of our share position. The final one, which your question touches on, is where we take certain in-warranty patients who have an Animas pump and we upgrade them to a Medtronic pump. For those, we get compensated by J&J for that. The way that that is going is actually well, and it’s ramping up; this was the first quarter where that’s taking effect and we expect it to accelerate, but I think you have to offset it with some of the other dynamics I mentioned like the anniversary of the consumables.

Thanks.

Thanks, Chris. Next question please.

Good morning and thank you for taking the question. Can we spend a little bit of time on your Pain Therapies business and discuss the uptake of Intellis? If you could also parse that a little bit, the difference between what’s going on in the United States and what’s going on internationally, that would be helpful.

Thanks, Joanne for the question. The second part of the question is specifically about Pain Therapies.

Sure. What we are seeing is a combination and the uptake is a combination of Intellis; the system based on the features of the system combined with the Evolve workflow, which is driving the outcomes. We are getting very strong global growth, but even stronger growth in the U.S.; we are still seeing 20% growth outside the U.S. The U.S. market is based on some of the opioid crisis and other things; there is more of a tailwind and we are seeing faster pickup. The outcomes of that are being supported by some data that has been released, and we plan to release some more interim data at NANS in January. We are very excited about it.

Thank you. As a follow-up in September, we are going to see both TCT and NASS. Is there anything you can comment on that we should look forward to? Thanks.

Mike, you want to take the TCT and Geoff on NASS. Go ahead, Mike.

TCT will provide valuable insights into the long-term performance of our TAVR products. We will present five-year data on the core valve U.S. pivotal high-risk patient cohort, highlighting the durability of outcomes and demonstrating the robustness of our products. Additionally, we will present two-year data on the real-world results randomized to TAVR. These data points will be crucial as we approach the more significant meeting at ACC in the spring, where we will unveil data on the low-risk patient cohort in TAVR and the quick results for our TYRX products. These important data flows will take place throughout the remainder of our fiscal year.

Geoff?

We have a couple of things at NASS. One is the Mazor X Stealth Edition. This will be the Mazor X with our Stealth Navigation System fully integrated; providing a better workflow and ultimately we think better outcomes. We are very excited about that. The second is our navigated Infinity system for spine. Our Infinity is our posterior cervical fixation system, and again it is being released with a good workflow with our enabling technologies. It’s navigated, so those would be two things I would highlight for NASS.

Thank you.

Thanks, Joanne. We will take one more question please, Lori.

Hey, guys. Congratulations on a nice quarter here and thanks for squeezing me in. So maybe one first starting off on the guidance; so Karen, it looks like FX was incrementally $0.05 worse or about 100 basis points of headwind. It looks like the top line was up by 50 basis points. So, what’s top line improved by 50 basis points, but FX was a 100 bps drag and despite that your EPS was maintained. Can you just comment on whether this underlying margin expansion is coming from? Just given Q1 trends?

Sure. Thanks for the question, Vijay. We have got the intra-quarter timing of rate movements and mix that impacted our results both on the top line and on the bottom line. The benefits from our hedging program at this stage are what’s positively impacting our earnings.

Well, I guess I meant for guidance; FX was a 100 bps headwind but the top line was just up by 50 bps. It implies operating leverage should be coming in better than expected in the back; is that the underlying assumption?

Yes. Clearly, we are focused on delivering operating margin improvement, and we are committed to that 50 basis points margin improvement. Where we can, we would like to continue to invest more in R&D to accelerate R&D like we did in the first quarter. We will continue to focus on that through the rest of the year. Obviously, we did have the $0.05 impact on our bottom line, which we have noted.

Vijay, let me also just add to that; like I have said several times before, we feel very good about this business from both a top line perspective and our programs in margin expansion that we are executing on to our enterprise expense efforts. Although it’s still early, we are beginning to see results there. We want to set guidance that we have a high degree of confidence that we can deliver in. Please read that into what we are saying here, and we expect to execute and deliver; we feel really good about this business from a top line perspective and the margin expansion program perspective.

I appreciate those comments, Omar. And just one quick follow-up to maybe Mike Coyle; so Mike, maybe your commentary around the TAVR side is talking about pricing competition in Europe. Maybe from your perspective, can you comment on any changing and comparative pricing dynamics? Is it worsening, has it stabilized, or what’s going on in Europe? Thank you.

Pricing is reasonably stable in Europe. There is a small segment in the market that reacts to price, driven by some of the smaller players in the market, but the major players have had really good pricing discipline. We expect that to continue throughout the balance of the year.

Okay. With that, I want to thank everyone for your questions. On behalf of the entire management team, I would like to thank you for your continued support and interest in Medtronic. We are excited about this business; as you can hear, we are excited about our pipeline, our growth trajectory, and our margin expansion programs, and we look forward to updating you on our progress in our second quarter earnings call, which we currently anticipate holding on Tuesday, November 20. Thank you all very much.