Medtronic Plc (MDT) — Q3 2019 Earnings Call Transcript

Thank you. Good morning and welcome to Medtronic’s third 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 third quarter, which ended on January 25, 2019. 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 the revenue by division summary. We also issued an earnings presentation that provides additional details on our performance and outlook. During today's 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 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, investorrelations.medtronic.com. Unless we say otherwise, references to quarterly revenue growth rates and ranges are given on an organic basis, which exclude the impact of any material acquisitions, divestitures, and foreign currency, and are in comparison to the third quarter of fiscal year 2018. All of these adjustment details can be found in the reconciliation tables included in 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'm now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Omar Ishrak.

Thank you, Ryan, and thank you to everyone for joining us. This morning, we reported another quarter of solid top and bottom line performance. Revenue grew 4.4% organically, reflecting the benefits of our diversified model. We leveraged our top line to grow adjusted operating profit 7.7%, and adjusted diluted EPS 10.3% or 8.5% at constant currency. Execution is our top priority, and in Q3 we executed on multiple fronts to deliver a strong quarter despite difficult comparisons we were facing in the back half of our fiscal year. Revenue outperformance in MITG and RTG, driven by a number of recent product launches, offset the challenges in CVG that we talked about in January. The other big driver was emerging markets, which grew 14%, reflecting a strong quarter across all businesses and geographies. Down the P&L, we saw the benefit this quarter from our focus throughout the organization on margin improvement, resulting in 140 basis points of operating margin expansion, including a benefit from currency. We continue to execute on free cash flow, working to improve our cash conversion and ultimately drive greater shareholder value. Through the first three quarters of the year, we generated over $4.1 billion of free cash flow compared to $2.9 billion in the prior year. We made significant progress on this front, and I really appreciate the engagement of the entire Medtronic team. Overall, it was another good quarter for Medtronic, but what continues to be even more exciting than our results is the progress we're making in our pipeline. As I commented last quarter, we believe we have more opportunities for growth than at any time in our company's history. I'll come back to the pipeline shortly. But first, let's review our performance this quarter in a little more detail. I'll start with our Minimally Invasive Therapies Group. MITG had an outstanding quarter growing 6.6% with outperformance in both SI and RGR divisions. Our Surgical Innovations division grew 6.4% with strong growth in both Advanced Energy and Advanced Stapling. Advanced Energy products grew in the low double digits, driven by the adoption of enhanced LigaSure vessel sealing instruments and the Valleylab FT10 energy platform. In Advanced Stapling, we grew in the high single digits as our Tri-Staple 2.0 endostapling reloads and Signia surgical stapling system continued to perform well in the minimally invasive surgery market. Our Respiratory, GI, and Renal division grew 7%, with strong results across all businesses. G.I. grew mid-single digits, led by strength in Beacon endoscopic ultrasound products and Bravo reflux testing systems. Respiratory had high single-digit growth, driven by Puritan Bennett 980 ventilators and Nellcor pulse oximetry products. Renal care grew in the mid-teens with solid sales of Bellco and renal access products. Next, our Restorative Therapies Group had another strong quarter, growing 5.5%, driven by sustained momentum in the Brain Therapies division. Brain grew 13.2% with high teens growth in both Neurovascular and Neurosurgery. In Neurovascular, we’re seeing broad strength across our stroke franchise with double-digit growth in stent retrievers, flow diverters, neuro access, and embolic products. In Neurosurgery, we delivered high-30s growth in capital equipment driven by StealthStation navigation, O-arm imaging, Mazor Robotics, and Midas Rex powered surgical systems. We launched our Mazor X Stealth Edition robotics guidance platform last month, and we've received early enthusiastic feedback for this combination of best-in-class robotics and navigation capability. We believe our strong capital equipment sales supporting our Brain Therapies growth are a leading indicator for future growth in our Spine business as customers choose to link future spine implant purchases with the capital equipment that they're acquiring. As we execute more of these contracts, we would expect our core spine implant sales to grow over the coming quarters. In our Spine division, while results were flat this quarter, when combined with sales of our capital equipment used in spine surgery, which is the way many of our competitors report their results, our Spine division grew 4.6% including 5.4% growth in U.S. core spine. In Brain Therapies, our performance was driven by high-single-digit growth in spinal cord stimulation as the market continues to appreciate the differentiation of Intellis with its evolved workflow algorithm and Snapshot reporting. Our Diabetes Group grew 6.5% this quarter. As expected, this group is facing difficult year-over-year comparisons in U.S. pump sales in the back half of this fiscal year. Despite this, we grew 5% sequentially from Q2 including high-single-digit sequential growth in insulin pumps specifically. Our performance outside the U.S. was especially strong, with Western Europe, Latin America, and China growing 25%, 17%, and 16% respectively. CGM as a category grew over 30% this quarter with over 60% growth in Western Europe. Our recently launched standalone CGM system, the Guardian Connect, posted its third consecutive quarter of triple-digit growth. Our Cardiac & Vascular Group grew 1.6% this quarter, in-line with the revised forecast we provided in early January with mid-single-digit growth in both CSH and APV divisions. Coronary & Structural Heart had another strong quarter in transcatheter valves with 16% TAVR growth in the U.S. and 15% in international markets. We're seeing solid momentum in share gains in the U.S., and in other global markets because of the clinical performance characteristics of our Evolut PRO valve and we're the market leader in many regions around the world including Western Europe. In Aortic, Peripheral, & Venous growth was driven by the continued launch of the Valiant Navion thoracic stent graft system as well as mid-teens growth in both VenaSeal vein closure systems and IN.PACT Admiral drug-coated balloons. In Cardiac Rhythm & Heart Failure, with mid-single-digit growth in pacemakers and the strength of our Micra transcatheter pacing system, and the Azure wireless pacemaker. This was offset by mid-teens declines in heart failure, primarily due to a mid-40s decline in LVADs as a result of market share loss and heart transplant guideline changes. AF Solutions grew in the mid-teens, driven by continued growth in cryo-balloons. We also announced the acquisition of EPIX Therapeutics. EPIX is developing what we believe is a highly differentiated technology for the over $3 billion focal catheter segment of the ablation market. When combined with our leading cryo-balloon technology, EPIX provides us with a complete portfolio of best-in-class AF ablation catheter technology. It's worth noting that CVG services and solutions faced a number of comparison headwinds, including a revenue recognition change that started in the second quarter, a large order from the U.S. Department of Veterans Affairs in the Q3 of last year, and the exit of a product line in Q1 this fiscal year. Excluding services and solutions, CVG's growth would have been 110 basis points higher and CRHF's growth would have been 180 basis points higher. Now turning to emerging markets, our performance continues to be strong, growing 14% this quarter and now representing 16% of Medtronic revenue. Our strength has diversified across multiple geographies with China growing 13%, South Asia by 23%, and the Middle East and Africa by 20%. In addition, Eastern Europe grew 12%, Southeast Asia 11%; and Latin America 9%. Our differentiated strategies of public and private partnerships and optimizing the distribution channel are paying off and making a real difference in emerging markets around the world. In addition to our solid performance in the quarter, I remain excited about the unprecedented opportunities for growth that our pipeline presents. We are building up in leadership positions in several of the fastest growing markets in med tech by intentionally allocating our capital to high-growth markets and new opportunities. As we invest in these opportunities, we're doing much more than simply improving today's products and therapies. We are disrupting existing markets and inventing new ones. And when we do this, when we successfully disrupt and invent markets, we distance ourselves from the competition and raise our weighted average market growth rate. All of this creates significant value for patients, for physicians, for healthcare systems, and for our shareholders. It's worth highlighting some of the most exciting elements of our pipeline that we expect to bring to market in the near future. In RTG, as I mentioned earlier, we're just launching the Mazor X Stealth, our integrated robotics and navigation platform, which we expect to drive growth in our Neurosurgery business along with creating demand for our core spine implants. In Neurovascular, we're now in limited market release of our 071 react catheter and continuing the launch of our Riptide Aspiration System. We expect to launch our next-generation solitaire stent for ischemic stroke by the end of FY 2019. In FY 2020, we intend to launch our DBS primary cell device, with unique sensing capabilities. The first of a series of disruptive product launches planned in our DBS business. In CVG, we're awaiting the presentation of two landmark clinical trials at the American College of Cardiology meeting on March 17th. The first is the interim results of our low-risk TAVR study, which has the potential to expand indications for our transcatheter valve therapy to the largest segment of the market. The second is the results of the rapid trial of our TYRX antibacterial envelope, which could enable guideline changes in cardiac rhythm implantables. In FY 2020, we're expected to launch our next-generation TAVR valve, the Evolut PRO plus, which features a lower profile and improved predictability of placement for enhanced ease-of-use. We also expect to launch a next-generation insertable cardiac monitor, the Reveal LINQ 2.0, which will include Bluetooth connectivity, five-year battery longevity, and the ability to monitor additional physiological parameters. In the second half of FY 2020, we're planning to launch new conventional ICD and CRT-D product families based on our Polaris high-powered technology platform and we expect to receive a new drug-coated balloon indication in the U.S. for the AV fistula market. Finally, around year-end FY 2020 we're expecting FDA approval for our Micra AV transcatheter cardiac pacemaker, which would enable us to access and disrupt over 55% of the eligible pacemaker market, up from 16% today. The pipeline at MITG is equally impressive. We're currently expanding into key specialty areas of our Tri-Staple technology and we're launching our new Microstream advanced capnography solutions for the Capnostream 35 Portable Respiratory Monitor. We are also currently launching a next-generation Sonicision ultrasound dissection system. Regarding our robotic-assisted surgery platform, we're hitting key milestones that are on track for an expected launch in FY 2020. We've had several resubmission meetings with regulatory bodies around the world, including the U.S. FDA. More than 100 surgeons have used the system and provided us with very positive feedback. We're also partnering with physician societies to develop guidelines for use of the platform. We believe this robotic-assisted surgery platform combined with our industry-leading surgical instruments and surgeon training centers around the world will expand the market for minimally invasive surgery. In Diabetes, we're continuing the introduction of 670G into new geographies around the world. In FY 2020, we expect to launch our advanced hybrid closed-loop system with Bluetooth, which we're calling the MiniMed 780G. The 780G will feature next-generation algorithms designed to improve time in range to over 80% by automating insulin delivery following a snack or meal. In addition, the system will reduce the burden of carb counting and enable remote monitoring and remote software downloads. We also expect to submit our application for non-injective designation for our Guardian Sensor 3 in the next few months. So we expect the next five quarters or so to be very exciting, as we bring these innovative pipeline products to market. However, I'm equally excited about our longer-term pipeline. In CVG, we're developing several technologies that will create large and important new markets, including the Intrepid Transcatheter Mitral Valve Replacement System and the Symplicity Spyral renal denervation system for hypertension. We also expect to disrupt existing markets with our pulsed field ablation technology for AF and the Extravascular ICD. When launched, all of these new products are expected to create multiple new multi-billion-dollar growth opportunities. In RTG, we are developing InterStim micro, a 3CC sacral nerve micro-stimulator for bladder control with full-body MRI compatibility. In DBS, we expect to build on our sensing technology to develop a closed-loop deep brain stimulation system. In addition, we're planning to introduce a cranial mount DBS system, leveraging our differentiated miniaturization and battery technology. I'm really excited about our plans to disrupt the deep brain stimulation market with the series of new products and make a real impact on patients. In MITG, we continue to develop disruptive products for these markets too, with our portable hemodialysis system, as well as the next-generation capsule endoscopy product called PillCam Genius. Overall, we expect to launch more than 90 products over the next five years in MITG. In Diabetes, I hope you saw our announcement this morning that the FDA has granted breakthrough device designation for our personalized closed-loop system. This system will feature real-time personalized algorithms that are designed to automate insulin delivery on a personalized basis that continuously adapts to the user. The system will also provide insights and predictive diagnostics, unique to the individual, all of which will dramatically simplify diabetes management for the patient. In addition to this product, we're also advancing our CGM sensor pipeline by reducing the need for calibration and making the sensors smaller and longer-lasting, all while using cognitive computing to enhance personalized insights. Of course, our pipeline is deeper than the few highlights that I've mentioned today. But the key takeaway is that we're executing well on the strongest and most exciting pipeline in Medtronic's near 70-year history. Let me now ask Karen to take you through a discussion of our third-quarter financials. Karen?

Thank you, Omar. Our third-quarter revenue of $7.546 billion represented organic growth of 4.4%. Foreign currency had a negative $149 million impact and adjusted diluted earnings per share was $1.29 and grew 10.3%. Adjusted operating margin was 29.2%, increasing 140 basis points in the quarter and 120 basis points through the first nine months of the year, including tailwinds from currency. We continue to drive underlying operating margin improvement as we execute on our company-wide Enterprise Excellence Program, driving improved efficiency, cost savings, and generating leverage on solid sales growth. As a result, our SG&A this quarter improved by 70 basis points. Our adjusted nominal tax rate was 13.4%, which is better than expected due to the increased benefits associated with the finalization of taxes owed on certain returns. For fiscal 2019, we expect our tax rate to be in the range of 13.5% to 14%, including the nonrecurring tax benefits that we have received year-to-date. Excluding those benefits, our full-year adjusted nominal tax rate would be approximately 15%. And with the addition of changes associated with U.S. tax reform, we continue to expect a tax rate of 16% to 17% in fiscal year '20. Third-quarter free cash flow was $1.8 billion. Improving cash generation is a priority for all of us at Medtronic, from the top of the company on down, and you've seen the results of our increased focus on cash flow in our performance over the last several quarters. We remain committed to disciplined capital deployment, balancing reinvestment with returning a minimum of 50% of our annual free cash flow to our shareholders. Year-to-date, we have returned $3.9 billion to shareholders, including $1.8 billion of net share repurchases, resulting in a total shareholder payout of 77% on adjusted net income. We also remain focused on increasing our return on invested capital through strong execution with our disciplined investment process around R&D and tuck-in acquisitions, including three we recently announced, Mazor, Nutrino, and EPIX. We believe that this focus combined with our strong and growing dividend can create long-term value for our shareholders. Before turning the call back to Omar, I would like to update our guidance. For fiscal year 2019, we are raising our organic revenue growth guidance to 5.25% to 5.5%, which is the top half of our prior range. This reflects continued strength in MITG and RTG offsetting the second half headwinds in CVG and difficult comparisons in Diabetes. For the year, we now expect RTG to grow 5.5% to 6%, up from 5% to 5.5%; and MITG to grow 5.5% plus or minus, up from 5% plus or minus. We continue to expect CVG to grow 3% to 3.5% and Diabetes to grow in the low to mid-teens. For the fourth quarter, we would expect growth for MITG and RTG to be between 3.5% and 4%. For CVG to look similar to the third quarter and for Diabetes to look roughly flat year-over-year. I would highlight that our expected fourth-quarter growth for Diabetes is a bit of an anomaly given the prior year comparison when we were able to finally clear our large backlog for 670G and Sensor orders. And on a two-year stack basis, the fourth-quarter growth in Diabetes should look more normal. Most importantly, as we move into next year, we believe fourth-quarter growth represents a likely bottom, and as such would expect growth to improve for both Diabetes and the company. Turning to margins, we continue to forecast 50 basis points of four-year underlying operating margin expansion as we deliver to more than absorb the impact from product mix headwinds, China tariffs, and the dilution from the Mazor acquisition. With respect to earnings, given our operational performance through three quarters, including our ability to offset the headwinds I just mentioned, we are increasing our fiscal year 2019 adjusted EPS guidance to $5.14 to $5.16, up from $5.10 to $5.15. While the impact from currency is fluid, if recent exchange rates hold, our full-year revenue would be negatively impacted by approximately $425 million to $475 million. And despite the headwinds on the top line, given the benefits of our hedging program, FX is expected to be a modest positive to fiscal 2019 operating margins, earnings, and free cash flow. Finally, on the heels of strong free cash flow performance over the last nine months, we are increasing our expected fiscal 2019 range to $5 billion to $5.2 billion, up from $4.7 billion to $5.1 billion. And in fiscal year 2020, we expect to make additional progress on improving our conversion of non-GAAP earnings into free cash flow as we continue to drive increased focus across the organization. Now I'll return the call back to Omar.

Thanks, Karen. Before we go to Q&A, I want to take a moment to thank all of our employees around the world for executing to deliver another strong quarter and fulfilling the Medtronic mission. As I mentioned at the start, this was another solid quarter where we delivered the top line, along with strong adjusted operating profit and EPS growth. You're also seeing our ability to generate strong free cash flow. This is important as it enables us to both reinvest and return to our shareholders. As a reminder, we continue to allocate our capital to our biggest growth opportunities as we focus on driving our WAMGR, our weighted average market growth rate upwards and to the right. Our investments are resulting in a pipeline of numerous growth opportunities that has never been stronger. We expect to develop and bring to market the innovation that will improve the lives of millions of people around the world, help health care systems become more efficient and ultimately grow the intrinsic value of Medtronic. And when we do this, we expect our shareholders to benefit as well. We know there's much work to be done, but I'm excited about where Medtronic is headed. With that, let's now move to Q&A. In addition to Karen, our four group presidents; Michael Coyle, Bob White, Geoff Martha, and Hooman Hakami are also here to answer your questions. We want to try to get to as many questions as possible, so please help us by limiting yourself to one question and if necessary a related follow-up. If you have additional questions, please contact Ryan in our Investor Relations team after the call. Operator, first question please.

Good morning. Thanks so much for taking the question. Just two quick ones for me here. Karen, and then Hooman, as a related follow up. So, Karen, very helpful on tax guidance for 2020 as well as currency. Can you just help us think about margin guidance next year, Karen, when I think about gross margin mix headwinds, slower growth relative to SG&A savings, is 50 basis points still a decent way of thinking about 2020? And then Hooman for you, I appreciate the fourth-quarter commentary. How should we think about Diabetes heading into next year? Is this still going to be a high-single-digit growth business for Medtronic or should we start thinking more about mid-single digits as you anniversary the first wave of 670G? Thanks so much.

Good morning, David. Thanks for the questions. So on margin for next year, we are confident in our long-range plan and that continuing into next year of our ability to deliver between 40 and 50 basis points of underlying annual operating margin expansion.

David, I’ll take the next one. Before discussing FY 2020, I think it’s useful to address the comparisons we’re facing in Q3, as they affect both Q3 and Q4. We’ve seen a slowdown in year-over-year growth compared to the previous four quarters, but we’ve been clear all year that we are encountering more challenging comparisons. I’d like to highlight a few key points. Last year, in the latter half, we increased CGM capacity, which helped us meet the pent-up demand for both pumps and CGM from the first half of that year. Additionally, in Q3 of this year, we compared against Animas, meaning that all the consumable revenue and out-of-warranty conversions no longer contribute positively year-over-year. Furthermore, last Q3, we had one of the last large commercial payers approve the reimbursement for 670G. These three factors distorted the year-over-year performance in Q3 and will continue to do so in Q4, primarily within the U.S. To provide some perspective on the impact of these comparisons, last quarter, Diabetes generated $583 million in revenue with a growth of 27%. This quarter, we’re reporting $610 million in revenue, a 5% increase from the previous quarter, with a growth rate of 6.5%. This illustrates the challenging comparisons we’re facing, and it will carry into Q4. You’ve heard the outlook from Karen for Q4, but we firmly expect Q4 to be the low point for Diabetes growth. We anticipate the comparison dynamics to stabilize and predict a return to growth in Q1 of next year. For FY 2020, we are confident that the full-year comparison effects will normalize, and we believe Diabetes will grow above the corporate average as we’ve stated consistently.

Thanks, David. Next question please, operator.

Good morning and thank you for taking the questions. As we go back to our models and take a look at fiscal year 2020, could you please remind us of some of the puts and takes as we think about all of that? I know you've previously commented on foreign exchange and tax, but I just want to make sure that street numbers get set up correctly as we head into next year? Thank you.

Thank you, Joanne, for your question. We are currently working on our annual plan, so it is too early for us to provide a full-year outlook, which we will share during our fourth-quarter call. However, based on our current insights, we are confident in achieving over 4% organic revenue growth, even though our pipeline is more focused on the latter half of the year, which aligns with our long-term strategy. Additionally, we are optimistic about maintaining an annual underlying operating margin expansion of 40 to 50 basis points, in line with our long-range plan. I suggest that you continue to expect our tax rate for next year to be between 16% and 17%. We are still optimizing that tax rate and other financial factors, but we are comfortable with the current consensus. Regarding foreign exchange, it has been a challenge for us in the fourth quarter, and we anticipate that will continue into next year. From an FX standpoint, we expect it to have a significant negative impact on revenue and a modest effect on profitability.

Hi, thank you. And good morning. So just one clarification, either Omar or Karen, I think you said a couple of times on the call that fourth quarter organic revenue growth rate would kind of be the low point for Medtronic. So I just - to be specific what is - could you just remind us what is your specific Q4 organic revenue growth rate? And I just want to confirm that I heard that correctly, you think going forward that's the low point?

Yes. So when you look at our full-year forecast or our full-year guidance for revenue growth, that would imply about 3% plus or minus for the fourth quarter Bob. And that's what we're referring to as our low point.

Okay. I wanted to follow up on the upcoming ACC meeting and see if you could help us set expectations for that meeting. Any comments on this would be appreciated. Additionally, regarding TYRX, if that study yields positive results, could you outline the market opportunity and how you might bundle it with ICDs? Specifically, if the trial is positive, what incremental opportunities should we consider? Thank you.

Okay, Mike.

So Bob, obviously the two late clinical trial presentations that we have coming up at the ACC are the low-risk TAVR study and TYRX. Both of those have been accepted, and we’ll also have simultaneous publication. On the TYRX in particular, we would estimate right now about one-third of what we would consider high-risk device implant actually use the TYRX product. So that would imply that if we have obviously a 7,000 patient study, we do have the power to answer the question of who is going to benefit from this. That would give us, if positive, ammunition to basically highlight the sets of treatment standard of care in what we consider to be high-risk in order, what we consider high-risk is in large device implants on ICD or CRT device, CRT-P device, or any de novo implant of those or any replacement procedure, including pacemakers. So again, right now we have a utilization of about one-third of our cases that are actually using a TYRX by being able to add about $1000 per procedure and given the unique nature of this technology, it's only available from us. We think we can use it to drive market share as well in terms of both initials and potentially even on replacement basis. So we consider it to be a very important technology and a very important study.

Thanks. Next question, please.

Hi. Thanks for taking the question. So I appreciate you talked about a lot of big pipeline drivers coming up here in fiscal 2020. And I was curious if you could get any kind of update on your surgical robotics program? That's one where investors have a lot of focus and we're still waiting for some more details on what that looks like and when it might come into the fold. So can you give us the latest and greatest there? And just how you're feeling about that program?

Bob, go ahead.

Thanks, Matt. And appreciate the question. So as Omar mentioned during his commentary, we had actually over 100 surgeons use our robotic systems and in fact, just a couple of weeks ago I had a chance to sit in when one of them during our preclinical labs as we did a partial nephrectomy. And as I chatted with the lead surgeons you could tell, it was a really impressive experience, both from the aspect of the way the system performed, the procedure, the workflow associated with the system. And so, as we previously communicated, we're absolutely on track for FY 2020 launch. But importantly, and I think interesting to you is once procedures have begun and we're collecting additional clinical data, they will arrange opportunities for you to experience one of these cases live. So we're excited about our progress. We're excited about the feedback we get, and we're excited to bring the system.

Okay. Thank you very much.

Next question please, operator?

Hi. Thanks for taking the question. I'll keep it to one. So for Karen, you mentioned that just maybe for background, the changes you talked about in January to the tax rate and the impact on the bottom line growth. Clearly, non-op impact and you've reiterated here just a couple of questions ago, I think the top line growth of 4% plus and the 40 to 50 basis points of margin improvement. So operationally, if we look at 2020, I guess I'm asking a question, but kind of confirming that it's fair to think about operationally the sort of long-range plan in effect and hitting on those metrics. I guess, the question is below the line you mentioned some financial opportunities and I guess, I'm thinking below the line either in the deadline or other non-up line to sort of help offset the non-impact of tax. If you could maybe flush out what some of those might be and perhaps what some of those were as you're heading into the end of the year is to have how you can potentially offset that be very helpful? Thanks.

Yes. Thanks, Matt. Appreciate your question. And I definitely appreciate the fact that you got that our long-range plan holds for next year on an operational performance basis. Below the line there are additional financial levers. Looking at our tax rate and what we can do to work to improve that. Also looking at our interest expense and income line item, and then obviously share repurchase. We will focus on all of those levers and when we have updates on that we'll be sure to give them to you.

Let me just try to put a little word here. I understand operationally all the things that Karen just said and you understood, and I can confirm that, but let's not forget about the pipeline. Our pipeline is extremely exciting. We have some really exciting new product introduction next year, the micro EVs one that I'm really excited about, the robotics, and so on. So let's not forget that. Operationally, we'll be there, but the pipeline sets us up normally for next year but for the future as well.

Terrific. Thanks.

Thanks, Matt. Next question please, operator?

Good morning. Very impressive short-term and long-term pipeline of new products, I will sit back and look at the R&D center this whole – I think it's a – potential revenues. It's been pretty consistent despite the strong pipeline. So two questions, the first one, with the strong pipeline ahead does it make sense to increase R&D spend to take advantage of your momentum? You have a new products. And second from a process perspective how is IR tracking versus your own internal expectations? And how has that changed over the last few years?

Let me just take on that. And then Karen maybe can add to it. First of all, our pipeline is funded. So we're spending R&D money to fund our pipeline and we will make sure that that happens. As we see overall operational success, the first place we put our money is into organic R&D spending because that's the highest return that we can get out of any kind of investment that we make. Having said that, we also always look at continued R&D productivity. We look at sharing between different groups, transferring of technology between one group and another that makes our R&D more efficient and it actually accelerates pipeline, miniaturization technology and back technology are the two biggest examples where our fixed capability can move across different groups and make that R&D quite efficient. So that's the way we look at that and I think from a return perspective there's certainly within our projections, the organic ones and I think most of the acquisitions too have had returns that are better than our cost of capital. So Karen, you want to add to that?

Well said. The only thing I would add is that we're focused on improving our overall return on invested capital for the whole company and obviously our R&D pipeline is a big part of that. And as we look at tuck-in acquisitions, we’re focused on making sure that those ROICs are strong and accretive for the company too.

Thanks, Pito. Next question please.

Thank you for taking my question and congratulations on a solid report. I will limit myself to one question, but it may have two parts. Omar, regarding the company's organic growth, it appears very strong, approaching 5.5% for fiscal 2019. You mentioned the pipeline. For the first half compared to the second half of next year, should we anticipate the first half at the lower end of your guidance of four to five, and possibly the second half at the higher end? When the pipeline opportunities materialize, will we see an acceleration in organic growth in fiscal 2021? And Karen, quickly on margins, you mentioned an increase of 40 to 50 basis points at constant currency, but I think you indicated that foreign exchange headwinds could impact by a few hundred million dollars, albeit more modestly. Does this suggest that foreign exchange will provide a benefit drop in margins next year? Thank you.

Okay. First of all, I think you're right about the pipeline that it is back-end loaded towards the second half of the year and as the quarters progress you'll see the benefit of that in our growth rates and I think you read that correctly. But I think more importantly the other point that you made is that product introductions are the starting point. These things carry through into FY 2020, 2021 and filling these products will get approval in other countries and other new products will also come up towards FY 2021. So again from a product introduction perspective you'll see a gradual increase, back-end loaded like you mentioned, and the growth rate will correspondingly follow that lower end of the first half, higher in the second half. I think that's the right way to look at it.

And then the other thing I would add, Vijay, is that we mentioned that we think that our fourth quarter growth rate is a low point for us and so you can think about that as you look ahead next year too. And then from a benefit, your question about benefit on FX on operating margin line. We see FX as being a headwind for us and you can expect a little bit of a headwind on the operating margin line right now, at least where we are today and where our hedging is right now.

All right. Thank you, guys.

Thanks, Vijay. Next question please, operator.

Great. Thanks for the question. Hooman, I wanted to circle back to diabetes and you talked about the outlook for 2020. But I want to touch on the breakthrough designation you got this morning for the Personalized Closed Loop pump. Maybe talk about what the recently acquired Nutrino Health adds to this? When we might see data and approval of this in the U.S. and outside the U.S.? Is there a new hardware involved on the CGM and pump side? And maybe touch on how this compares to where you think the competition is in next-generation systems? Thanks.

Okay. Thanks Robbie. What I'll say is there's probably not enough time on this call to do first-line closed loop justice, but I'll give you kind of a flavor for it. We really think that Personalized Closed Loop is going to be a system that truly paves the way for a true closed-loop system. And because of that, we just - we don't feel that closing a loop is aspirational any longer; it's actually achievable. And if you really think about today's algorithms, Robbie, they essentially behave the exact same way for every single patient even though every single patient is different. Personalized Closed Loop changes all that. It's a real-time system. It automates all facets of insulin delivery in a way that is personalized and adaptive to the user. In addition, the system is going to provide unique insights to help the patient, help them with predictive diagnostics, which we think is going to dramatically simplify diabetes management for the patient. And so we really think this is going to be a transformative system and we're thrilled to have received breakthrough designation for it from the FDA. Now, as far as launch date goes and all of that, we just received a breakthrough designation. For competitive reasons, I think it would be premature to talk about launch dates, but what I will say and you touched on this is that we're investing heavily in Personalized Closed Loop. Our acquisition of Nutrino was made with Personalized Closed Loop in mind. We are fully resourced from an R&D standpoint to drive this program as aggressively as possible, and we're excited to share more details with you as we progress with the program.

Is that something we might see data at ADA 2020?

Yes. At ADA 2020, we will provide you with more details about the Personalized Closed Loop. As we begin to explain what the system is and its capabilities, you will see that it is completely unique compared to what exists today and what is on the horizon.

Thanks.

Thanks Rob. Operator, next question please.

Good morning. Thank you for the question and congratulations on a very balanced quarter despite the challenges. I have a question for Mike. I understand that the upcoming trials at ACC are under embargo, but could you help investors consider whether superiority in terms of death and stroke is necessary to shift the paradigm from surgery to TAVR in the low-risk population? This is significant because there are likely around 3,000 surgeries that could be affected. What are your thoughts on whether surgery might be great, or does TAVR need to be superior to influence the conversation between patients and practitioners? Thank you.

Well, certainly, we've seen patients be highly enthusiastic about less invasive approaches to therapy. And so there is a large patient pool that is associated with these technologies in TAVR and ultimately, in the mitral space. So I think non-inferiority is certainly a good starting point at this stage, if that's where it ends up. But over time, from my perspective, as we get more experience with these technologies and we see durability in the technology, we're going to see significant patient pool to expand in the market.

Thanks so much.

Good morning, guys. Thank you. Omar, I had a question, I guess, for you and both Karen, on expense growth in the context of your margin goals. You have a number of pretty compelling technologies on the table between robotics, the TAVR market expansion, diabetes, heading into next year. So I'm interested in how you - if you could help frame the way in which you're going to fund those growth initiatives whilst delivering the margin expansion? Are there other couple areas of obvious savings on the SG&A line that would help a lot with that? Thank you.

You're correct. We focus on two key areas. In SG&A, we're enhancing productivity in our go-to-market strategies, primarily by consolidating our commercial back office, which results in significant cost savings. We're also adopting new technologies to process tasks more efficiently. The commercial back office and support for our go-to-market efforts represent a valuable opportunity that will yield substantial benefits. Additionally, we've consistently mentioned our program to reduce the number of manufacturing sites from around 80 or 90 a few years ago to approximately 50 to 60, which undoubtedly improves productivity. We also continue to enhance efficiency in each factory through various quality processes that we are constantly refining and implementing in new sites as they prepare for production. These are our primary drivers for cost reduction. We're focusing on the back office, commercial operations, and the cost reduction initiatives related to manufacturing sites. Our overall supply chain, both indirect and direct, is also a leverage point, as are our service functions like HR, finance, and legal. We closely monitor these services against benchmarks for companies of our size, and we aim to be best-in-class in one or two areas, if not more, due to our integration efforts. In the coming years, we plan to elevate these services to best-in-class status, which will free up additional funds for R&D, which is our focus. I believe I covered everything. Karen, do you have anything to add?

You totally covered it. I would just say that our Enterprise Excellence Program is specifically designed to drive that operating margin expansion and enable us to continue to invest heavily in R&D.

Thanks, Isaac. Next question, please.

Good morning. Thanks for taking the question. One for Karen, one for Mike. So, Karen, on the guidance in fiscal Q4 is about 3% organic you said and you expect that to be at the bottom. I guess my question is, when we look at a first half of fiscal 2020, why would it be higher than that 3%? What drives the improvement? Anything besides the diabetes comps getting easier? And then Mike, I think drug-coated balloon that mid-teens growth this quarter came in better than people expected. Just any color or commentary on the outlook for that business? Thanks for taking the questions.

Sure, thanks Larry. You already noted the comps which is a big deal. We had very tough comps in the back half and that changes as we move into next quarter. When we think about CVG too, we expect that to improve as we launch new products. But also keep in mind that we will anniversary the revenue recognition change that we made to the services and solutions part of CVG in the first quarter. And then we'll also anniversary the MCS decline in the third quarter. So hopefully those things help you.

We are quite pleased with the growth profile of our drug-coated balloon business. In January, we had some concerns when a medical analysis indicated that certain accounts were hesitating to utilize the product as they awaited further data. However, communication from manufacturers regarding their own detailed data, particularly our randomized controlled data from both the U.S. pivotal trial, the Japan trial, and our Global Registry Data, has been beneficial in providing a patient-level analysis. Additionally, independent publications, such as a recent one in JAMA, have shown through claims databases that there is no correlation with risk associated with paclitaxel. As more data becomes available, it has been reassuring the market regarding the technology's performance. We recognize its significant efficacy advantages over standard balloon technology. Looking ahead, we are planning to expand its indications for use into new areas, with a goal of achieving U.S. approval for the AV fistula indication in fiscal year 2020 and continuing our work on below-the-knee applications. We view this technology as a crucial long-term growth driver for our AVF business.

Thanks for taking the questions.

Thank you, Larry. Next question please.

Hey, good morning, guys. Thank you so much for taking the question. Mike, a quick question for you on heart failure business and as expected, we saw some weakness in LVAD. Just curious how you're seeing that continue to play out there? How much of that would you characterize was impact from competition versus the change in the transplant guidelines? Just trying to get a sense of the go-forward outlook just for that market and for that business overall? And then I had one quick follow up. Thanks.

Sure. The two issues identified at the JPMorgan Meeting occurred almost concurrently: the approval of the competitive HeartMate 3 product and changes to heart failure guidelines. During the recent quarter, the initial part experienced the most significant market correction. We believe the U.S. market declined by 20% to 25% as patients with LVADs were deprioritized in favor of heart transplants. Many of these patients are now being supported by technologies like ECMO while awaiting transplants. The critical question will be how these patients perform in their transplant surgeries when relying on a less robust support system over time. This will take several quarters to fully understand its impact on the overall market. The more pressing issue for us has been the competitive share shift we observed. Competitors introduced a substantial improvement over their previous technology, generating significant market interest. We've noticed some accounts returning, but a major correction has occurred. Previously, we estimated about a 35% market share before the new product launch, but during this quarter, it dropped to around 20%, and globally, it has stabilized at roughly a 25% share for us. This perspective is likely a good way to anticipate the market's direction moving forward. We have many initiatives underway concerning a less invasive surgical placement for our HVAD technology, along with several key technology developments aimed at improving complication rates and increasing our market share. However, in the near term, this will likely pose a challenge for us over the next few quarters.

Okay. And you answered my follow-up on what's next. So thank you so much.

Thanks, Danielle. Next question please.

Hey. Good morning, everybody. Thanks for taking my question. Karen, I just wanted to quickly make sure I understood your comments correctly on the consensus EPS for next year. I think you had said you're comfortable in that and that implies about – I guess 5.6%-ish growth. I thought in January you guys were saying that it might be 150 basis points off the CAGR. How should we just think about that overall kind of growth for next year? And then just longer-term, I think in the breakout commentary Mike had mentioned something about growth perhaps coming in a little bit higher in 2021, because of some of the new products and just want to kind of flush out how should we really think that 8% mark?

Thanks for the question, Kristen. So FY 2020, we've talked about – we've got the big headwind of our tax rate. We also have some FX headwinds that I mentioned. So at this point, yes, we are comfortable with current street consensus and we will give our annual outlook on our fourth-quarter earnings call. We're continuing to work our long-range plan. But at this point, I would say, we're comfortable. As we think about the strength of our pipeline though, it is weighted towards the back half of next year and beyond. And so we're really excited about that and beyond piece of it.

Yes. Just to sort of confirm that, Kristen. Clearly as the pipeline comes through, it's going to – the growth rate is going to accelerate, and we're very confident in the plan that we've laid out the 4%-plus growth rate over time. It's too early to talk about – tell you what our plans are, but clearly the expectation is as the quarters go by here, the rate will grow – will rise, and just the pipeline itself would imply that. So we're confident in increasing growth profile over time as we look into the future.

Okay. And then I think the two things that you mentioned on the pipeline, Intrepid and Simplicity longer term. Just quickly on that, Intrepid, are you now able to do that transeptly and any sort of data that we could be expecting on neither that program or Simplicity in the near-term?

We are continuing to enroll in the APOLLO study for Intrepid, and we are pleased that enrollment rates have remained steady despite recent data releases. Currently, we are focused on advanced technologies and products. We are also working on the pipeline for transfemoral approaches, considering how to minimize the device profile, whether it will be transfemoral or transseptal, as it is a significant technology. The decision about developing a smaller solution for market or clinical trials is still underway. Regarding the Simplicity trial, we are actively enrolling for both the off-med and on-med pivotal trials, which will provide the data necessary for PMA approval, with results expected to be available early in fiscal year 2021.

Thanks, Kristen. Operator, we’ll take one more question please.

Hi, thank you. Good morning. Omar, can you provide insights on emerging markets? You've had another strong quarter, contributing a bit over two points to your growth this quarter. Could you clarify which specific products are driving this success? Additionally, how can we ensure the sustainability of this contribution moving forward?

I'm glad you brought that up. I was going to mention it anyway because our pipeline is indeed exciting. The performance and consistency of the emerging markets, along with its gradual increase over time, is something we feel quite positive about. The demand is clearly rising, and there's a significant opportunity to enhance penetration of existing products that have been approved for years. Over time, we've developed core expertise in aligning patient awareness, building infrastructure, training physicians, and deploying our technologies. Our strategy involves optimizing our go-to-market approaches in these emerging markets. This process takes time to cultivate, which we have done over the past five to seven years. We have a strong understanding of how to sustain growth on that platform, and we are confident in maintaining consistent double-digit growth in emerging markets. While there may be macroeconomic fluctuations, the healthcare needs are largely unaffected, and our geographic diversification has been beneficial in demonstrating consistency. Therefore, we are very confident in our ability to maintain the double-digit growth profile that we have established and gained experience in.

Great. That’s very helpful. Thank you.

Thanks, Raj. Omar, do you want to finish?

Yeah, sure. Thanks. Thanks everyone. Thanks for your questions. And on behalf of the entire management team, thanks for your continued support and interest in Medtronic. We look forward to updating you on our progress and the results for a full year on our Q4 earnings call, which we currently anticipate holding Thursday, May 23. So thanks again to everyone for participating and for your support.