美敦力 (MDT) 2017 Q1 法說會逐字稿

Good morning. My name is Jackie and I will be your conference operator today. At this time would like to welcome everyone to the Medtronic first-quarter earnings conference call.

(Operator Instructions)

Thank you. I would now like to turn the conference over to Ryan Weispfenning. Please go ahead.

Great. Thank you, Jackie. Good morning and welcome to Medtronic's first-quarter conference call and webcast. During the next hour Omar Ishrak, Medtronic Chairman and Chief Executive Officer, and Karen Parkhill, Medtronic Chief Financial Officer, will provide comments on the results of our FY17 first quarter, which ended on July 29, 2016. After our prepared remarks we will be happy to take your questions.

First, a few logistical comments. Earlier this morning we issued a press release containing our financial statements and a revenue by division summary. We also issued an earnings presentation that provides additional details on our performance and outlook.

You should note that many of the statements made during this call may be considered forward-looking statements and that actual results might differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports and other filings that we make with the SEC and we do not undertake to update any forward-looking statement. In addition, the reconciliations of any non-GAAP financial measures are available on our website investorrelations.Medtronics.com.

Unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the first quarter of FY16 and all year-over-year growth ranges are given on a constant currency and constant weeks basis, which adjust for the negative effect of foreign currency translation and the extra week that was in our prior-year first quarter.

As previously disclosed, we estimate the extra week had an approximate $450 million impact on revenue and $0.08 to $0.10 impact to earnings per share. The extra week impact for each business or region was estimated by adjusting Q1 FY16 revenue by the prorated total Company impact.

The constant currency adjustment details can be found in the reconciliation tables included with our earnings press release. With that I am now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Omar Ishrak.

Good morning and thank you, Ryan, and thank you to everyone for joining us. This morning we reported first-quarter revenue of $7.2 billion and non-GAAP diluted earnings per share of $1.03 representing another quarter of strong top and bottom line growth. All our business groups and regions delivered strong growth, resulting in Company-wide revenue growth over 5%.

In addition, our continued focus on both operating and financial leverage drove solid double-digit EPS growth and strong cash flow generation as we continue to strategically deploy our capital against our priorities of reinvesting with discipline in M&A and R&D, returning substantial cash to our shareholders and deleveraging our balance sheet. We feel very good about our momentum to start our fiscal year and are confident in our ability to the sustain this performance over the coming quarters. Now let's turn to the drivers of our revenue growth.

We have three specific growth priorities stemming from our overall strategies. New therapies, emerging markets and services and solutions with quantified growth expectations for each. In New Therapies we delivered results at the upper end of our goal in Q1 contributing over 300 basis points to our total Company growth. In our Cardiac and Vascular Group, which grew in the mid single-digits, we continue to complement our steady cadence of differentiated products with market-leading breadth, scale and technology innovation.

In CRHF, our AF Solutions and Diagnostic Businesses again delivered impressive growth. AF Solutions grew in the mid-30%s, well above market growth on the strength of Arctic Front Advance cryoballoon and our recent FIRE AND ICE clinical data.

In Diagnostics, which grew in the low double-digits, market acceptance of our Reveal LINQ insertable loop recorder had strong momentum resulting in increased pacemaker pull-through. In our core CRHF and [peripherals] business revenues were flat in the global market that, in our estimation, was down in the low single-digits.

In the US low single-digit growth in initial implants as well as our shared gains in high-power implants offset mid-single-digit declines in device replacements. We continue to take share in the US with MRI safe systems and our recently launched Visia AF ICD.

In Q1 we started shipments for MICRA Transcatheter Pacing System, the world's smallest pacemaker at 1/10 the size of the traditional device. Concurrently, we initiated physician training in the US and we look forward to obtaining a national coverage decision from CMS for this transformative therapy by the end of the fiscal year.

We also look forward to a number of new product launch catalysts over the balance of the fiscal year, including Claria MRI CRT-D system with effective CRT pacing in the US and Japan, Visia AF in Japan, Reveal LINQ in Japan and our CRT-P quadripolar pacing system in Europe.

We closed our acquisition of HeartWare earlier this week, a leading innovator of miniaturized circulatory support technologies for the treatment of advanced heart failure. We are pleased to now significantly broaden our range of therapeutic options for heart failure patients with the addition of HeartWare and we expect it to add meaningful revenue growth to CVG throughout the balance of the fiscal year and beyond.

Not only do we have complementary technologies and service capabilities, including infection control, physiological sensors and algorithms, remote patient monitoring and patient management and integrated diagnostics, but we also have experience with rechargeable battery technology and implantable controllers that can accelerate the development of reliable, fully implantable, LVAD systems. In CSH, our Resolute Onyx XDES and Euphoria balloons are driving solid mid single-digits international growth in our coronary business but we experienced declines in the US from competitive product launches.

We anticipate FDA approval and market release of Resolute Onyx in the US around the end of FY17. In structural heart, the global TAVR market is robust, growing 40%. We continued to gain share in international markets with our CoreValve and CoreValve Evolut R valves. However, the lack of a large-size Evolut R is limiting our share in the US market. We expect approval of our Evolut R XL valve early in the calendar year 2017.

Earlier this month, Evolut R was the first system to be granted CE Mark for intermediate risk patients and we are on track to submit our SURTAVI data for US intermediate risk indication expansion approval in Q4 this fiscal year. In APV we had strong high single-digit growth in our aortic business with Endurant IIs aortic stent graft, Heli-FX EndoAnchor system and Valiant Captivia thoracic stent graft technologies all fueling growth. In our peripheral business growth was driven by our IN.PACT Admiral DCB, which continues to outpace and lead the fast-growing drug coated balloon market on the strength of its handling characteristics and differentiated clinical data.

Our Minimally Invasive Therapies Group grew in the mid single-digits with consistent quarterly performance stemming from five key growth drivers, open to minimally invasive surgery, or MIS, gastrointestinal diseases, lung cancer, end stage renal disease and respiratory compromise. Open to MIS grew in the high single-digits in Q1 driven by the recent product introductions in our advanced energy portfolio like the Valleylab FT10 energy platform as well as the continued adoption of Endo GIA Reloads with Tri-Staple Technology portfolio, specifically the Endo GIA reinforced reloads.

G.I. diseases and lung cancer also grew the high single-digits with solid growth in our G.I.Solutions business resulting from the continued launch of the Barrx 360 Express RF Ablation balloon catheter. Our focus on end-stage renal disease is benefiting from the fiscal Q4 acquisition of Bellco, a pioneer in hemodialysis treatment solutions.

Respiratory compromise grew in the low double-digits. We were pleased to return both the Puritan Bennett 980 ventilator and the Capnostream 20 patient monitor to customers and patient following ship holds that were put in place last fiscal year.

We continue to supplement MITG with tuck-in acquisitions. Earlier this month we closed on the acquisition of Smith & Nephews fast-growing gynecology business that will complement our existing global GYN product line. We also closed on our agreement to acquire majority ownership position in the Netherlands Obesity Clinic, or NOK, which I will cover in more detail later.

Across MITG, we are developing solutions that span the entire care continuum, aspiring to enable earlier diagnosis, better treatment, faster, complication-free recovery and enhanced patient outcomes through less invasive solutions. In our Restorative Therapies Group, we are reinvigorating therapy innovation across all of our disease-focused businesses, delivering a consistent cadence of solutions across the patient care continuum resulting in mid single-digit growth this quarter.

In Spine, we grew in line with the market with mid single-digit growth in the US offsetting an international decline. Outside the US, we were mainly affected by the macroeconomic challenges in the Middle East, where we have strong market share and where the continued BMP in Europe, which we believe should be resolved by the end of the fiscal year.

In the US, we continue on an upward trajectory, delivering another quarter of sequential improvement in our growth rate. Our speed to scale strategy is producing tangible results as we launch a steady cadence of procedural innovation like our OLIF procedure and new products including the SOLERA VOYAGER, ELEVATE and PTC interbodies for key lift and mid-lift procedures. Last month we obtained two-level FDA approval for our Prestige LP, which we expect will help drive adoption of cervical disk arthroplasty procedures in the US.

In addition, to speak to scale our focus on surgical synergy which combines enabling technology with our spine implants to deliver integrated procedural solutions is starting to show results. In fact, the combined growth of our spine business and our spine imaging and navigation capital equipment in our Neurosurgery Business was in the high single-digits in US in Q1. We believe this is an indication of our overall growth in spine procedures and a more relevant comparison of our spine results against several of our competitors.

We are also excited about our partnership with Mazor Robotics, which is generating significant surge in interest, and together we are set to introduce the Mazor X at NASS later this year.

All our businesses in our Brain Therapies division delivered a strong quarter. In Neurovascular, our Solitaire FR mechanical connectivity device is delivering strong results even after the anniversary of the New England Journal of Medicine articles last year, solidifying our leadership position in the rapidly expanding ischemic stroke market.

In Brain Modulation, our DBS products had a solid quarter and we just received CE Mark for SureTune2, which provides patient-specific visualization to aid in DBS programming. In Neurosurgery we saw a robust sales of the recently launched O-arm 02 surgical imaging system as well as the StealthStation S7 surgical navigation system.

While our Pain Therapies division declined in the low single-digits due to continued competitive pressure in our spinal cord stimulation products, our drug pumps grew in the mid single-digits. Our Interventional business showed continued strength growing in the low single-digits with our OsteoCool RF spinal tumor ablation system driving solid growth and generating pull-through of our balloon catheter plasty products. And all of our business in our Specialty Therapies division, ENT, Pelvic Health and Advanced Energy, collectively grew in the low double-digits.

Turning now to our Diabetes group. We delivered high single-digit growth in the quarter with solid growth in our Intensive Insulin Management division driven by strong adoption of our MiniMed 640G system outside the US. While the US market remains competitive, we were pleased to receive FDA approval for our MiniMed 630G earlier this month and we expect to see strong US growth of this platform just like we have seen with the 640G outside the US.

The 630G features a new, contemporary pump hardware platform including a waterproof case, HD full-color screen, and remote bolus capability directly from the meter, along with several enhancements to our Enlite Sensor. The new platform also integrates continuous glucose monitoring with SmartGuard technology, which is the only technology available in the US that not only takes specific action against lows but also reduces the frequency of nighttime low episodes by a third.

In addition to our current offerings we submitted the PMA for our hybrid closed loop system with the Enlite 3 CGM sensor to the FDA in June of this year. In our non-intensive diabetes therapy division we saw another quarter of very strong growth as we continue to promote our iPro2 professional CGM system to type II patients being cared for by primary care physicians through our partnership with Henry Schein.

Our NDT pipeline is centered on a steady cadence of product applications and informatics innovation to enable primary care physicians and patients to make better, more informed choices in the management of type II diabetes. In our Diabetes Services and Solutions division, we saw solid growth from both our consumables business and from Diabeter, which I will cover in a moment.

We are excited about the recent CE Mark approval for our Guardian Connect standalone CGM system with our current enhanced Enlite sensor and expect initial product availability in fiscal Q3. In the US, we have submitted our PMA application to the FDA earlier this year and expect to launch Guardian Connect together with the next generation sensor in the second half of this fiscal year. Guardian Connect allows us to provide both type I and type II patients in multiple daily injections with a standalone real-time glucose monitoring solution.

We also continue to make strong progress with our partnership with IBM and remain on track to launch our Sugar.IQ personal diabetes assistant powered by Watson in the next few months. When you combine our diabetes devices with our applications in cognitive computing capabilities that we will bring to our partnership with IBM, we expect to provide both type I and type II patients with not just a sensor but a comprehensive diabetes management solution.

Across all four of our groups, CVG, MITG, RTG and Diabetes, our new product pipeline is robust and we are confident we can drive sustainable growth of our new therapies growth vector within our 200 to 350 basis point goal.

Next let's turn to emerging markets, which delivered double-digit growth contributing over 150 basis points to our total Company growth in line with our expectations. We continue to execute against our strategies of channel optimization, government agreements and private partnerships. We feel that these initiatives have the ability to accelerate growth and lead to sustained market outperformance.

In Q1, our businesses in South Asia, Latin America, Eastern Europe and China all grew in the mid-teens or higher. In China, our latest -- our largest emerging market, we continued to outperform the overall market with our unit growth rates from all four of our business groups growing in the mid-teens.

Latin America also had strong broad-based growth across our major markets, Brazil, Columbia, Mexico, Chile and Argentina. Brazil was particularly strong from both recent distributor conversions and solid product growth in MITG.

In South Asia, of which India is the largest market, we achieved low 20%s growth with all of our groups delivering double-digit growth. We won important tenders in several product categories and are engaged in multiple private -- public partnership opportunities across India.

The only region with pressure in emerging markets in Q1 was the Middle East and Africa where we had declines in Saudi Arabia as a result of the macroeconomic environment in that country that is causing government budget controls, product license delays and tender delays. Overall however, the consistency of our emerging market performance benefits strongly from increased geographic diversification reducing dependence on any single market. We continue to believe strongly that the penetration of existing therapies into emerging markets represents the single largest opportunity in med tech over the long term.

Turning now to our services and solutions growth vector, which contributed approximately 30 basis points to Medtronic growth. While this overall result was below our goal of 40 to 60 basis points, services and solutions continues to achieve strong revenue growth mostly from CVG related offerings. We expect to further improve our growth contribution as this model's expanded across all our business groups.

We continue to see success in our hospital solutions business through which we provide expertise and operational efficiency as well as daily administrative management of hospital cath labs and operating rooms. In Q1 our service revenue growth from hospital solutions was in the mid-40%s.

We have now completed a total of 97 long-term managed service agreements with hospital systems representing more than $2.1 billion in contracted service and product revenue over an average span of six years. While the majority of our activity is in Europe, we continue to expand into other regions including Latin America and the Middle East and Africa.

Our Care Management Services business, which is primarily focused on remote monitoring of high cost and chronic disease patients with comorbidities grew in the high single-digits in Q1. Driven by strong interest and growth from payers as well as providers moving towards value-based care models. Care Management Services represents an important platform for us especially as post-acute care services become even more critical in bundle payment models for different interventions.

We are now also managing chronic conditions in diabetes and obesity through our acquisition of Diabeter and majority stake in NOK. Diabeter, our holistic diabetes care management organization that is currently operating for centers in the Netherlands, delivered revenue growth over 50% in Q1 and we are now treating over 1,700 patients.

We are currently developing plans to expand the Diabeter model into other countries. NOK is a chain of clinics in the Netherlands for morbidly obese patients undergoing bariatric surgery offering integrated comprehensive care model including extensive screening, pre-care program, bariatric surgery, post surgery program and long-term follow-up.

We plan to gain critical insights from NOK's methodology and expand into more countries providing broader patient access to their multidisciplinary teams of specialists thereby improving patient outcomes. We expect all of these new businesses will start to contribute significantly to the services and solutions growth vector moving it to our expected range over the next few quarters.

Turning now to our Q1 P&L. We grew revenue more than 5% in non-GAAP diluted EPS approximately 14% to 16%, which resulted in EPS leverage of approximately 1,000 basis point. Our strong revenue growth and high profitability is generating significant accessible free cash flow and we remain committed to returning a minimum of 50% of our adjusted free cash flow through dividends and share repurchases.

Before turning the call over to Karen, I'd like to note that we continue to refine our thinking on value-based healthcare solutions. As you know, CMS in the US is shifting payments for certain episodes of care for fee-for-service to bundle payments over longer time horizon. Our recently formed orthopedic solutions business continues to refine, together with our surgeon partners, our compelling comprehensive solution for CMS's first episodic bundle in joint replacement.

Last month CMS announced their plans to expand bundle payments beyond hips and knees to AMI and CABG procedures where we have significant market presence and clinical expertise. We are analyzing the details of these proposed bundles and intend to submit our comments CMS as we move toward expected finalization of these payment models.

While we are still early in the journey to value-based healthcare, we remain focused and fully understanding and leading the shift to healthcare systems that reward value and patient outcomes over volume. And we continue to develop partnerships and insights into how we can utilize our expertise to play a role in this evolution. We feel appropriate application of medical technology can help address inefficiencies and improve outcomes in healthcare delivery driving new forms of value creation for both our customers and our shareholders.

With that I will now turn the call over to our new CFO, Karen Parkhill, who I am pleased to welcome to Medtronic, and she will take there a more detailed look at our first quarter financial results. Karen?

Thank you, Omar. Our first quarter revenue $7.166 billion decreased 1% as reported or increased over 5% on a constant currency, constant week basis. Foreign currency had a negative $7 million impact on first-quarter revenue and acquisitions and divestitures contributed approximately a net 70 basis points to revenue growth.

GAAP diluted earnings per share were $0.66. Non-GAAP was $1.03. After adjusting for the $0.04 impact from foreign currency translation and the $0.08 to $0.10 estimated impact from the extra week last fiscal year, non-GAAP diluted EPS grew approximately 14% to 16%. EPS came in slightly above our expectations due to a $0.01 to $0.02 tax benefit. In addition to the $376 million after-tax adjustment for amortization expense, non-GAAP adjustments to earnings on an after-tax basis were a $79 million net restructuring charge and a $39 million charge for acquisition-related items, both stemming mostly from our continued integration of Covidien.

A $52 million litigation charge and a $31 million net benefit related to the resolution of several tax matters with the IRS, including a benefit from our Tyco tax issue and a charge for a proposed agreement resolving matters stemming from several acquisitions. The net tax benefit does not include any impact related to our Puerto Rico royalty rate dispute with the IRS which has not yet been resolved. (Technical difficulty) for the quarter was 27.4% on a constant currency basis.

Adjusting for the extra week, the operating margin showed an approximate 100 basis point improvement over the prior year. Our operating margin included a gross margin of 68.9%, SG&A of 34% and R&D of 7.8%, all on a constant currency basis. While our gross margin was down slightly, mainly due to revenue mix, we drove improvement in SG&A, largely a result of execution on our Covidien synergies.

We are pleased with the smooth completion of our SAP implementation in Europe in the first quarter and will continue with implementations across other regions over the next several quarters. Separately and collectively these conversions help drive future synergies. We remain on track to deliver $225 million to $250 million of synergy savings this fiscal year and expected to deliver on our commitment of $850 million of savings by the end of FY18.

Our efforts to realize the Covidien synergies are also serving as enablers to catalyze other leverage programs designed to deliver additional long-term margin expansion. Looking ahead at our operating margin, keep in mind that recent acquisitions, including hardware, while not expected to be dilutive to EPS on a net basis could impact the operating margin percentage by an estimated 25 basis points in the second quarter and 35 basis points for the full year. However, we remain committed to our plans to generate 130 to 210 basis points of improvement in our operating margin this fiscal year as outlined at our investor day.

When we take into account currency it is also worth noting that net other expense of $39 million, which is included in the operating margin, reflects about $55 million in reduced foreign-exchange gains versus the prior year. However, the elimination of the US medical device tax offset that by an almost equal amount within net other expense.

While we hedge into the majority of our operating results in developed market currencies to reduce earnings volatility from foreign-exchange, a growing portion of our profits are unhedged, especially emerging-market currencies. As we have said before, that can create modest volatility in our margins.

Below the operating profit line, net interest expense was $179 million. At the end of the first quarter we had $32.1 billion in debt and $12.8 billion in cash and investments, of which approximately $5 billion was trapped.

Our debt did increase by just under $1 billion as we issued short-term debt to manage minor timing differences between sources and uses of cash. Our non-GAAP, nominal tax rate on a cash basis was 15.7%. This was an improvement to our forecast as it included the benefit from several operational tax adjustments for the quarter.

Free cash flow was $1.2 billion. We are deploying our capital strategically, consistently and with discipline with a balanced focus on reinvestment, debt reduction and return to our shareholders.

We paid $599 million in dividends and repurchased in net $1.5 billion worth of ordinary shares in the first quarter. At quarter end we had remaining authorization to repurchase approximately 51 million shares. First-quarter average daily shares outstanding on a diluted basis were 1.407 billion shares.

We remain committed to returning a minimum of 50% of our adjusted free cash flow to shareholders and deleveraging our balance sheet. As an S&P dividend aristocrat we expect to deliver dependable long-term dividend growth. In June our Board approved another double-digit increase to our dividend, which brings our payout ratio to 40%. With regard to reinvestment, our investments, particularly M&A, must not only meet high financial return hurdles with minimal shareholder dilution but also provide a line of sight to improving outcomes and allow for Medtronic to add value.

Before turning the call back to Omar, let me conclude by reiterating our outlook. Our revenue outlook and EPS guidance for FY17 has not changed. We continue to expect revenue growth to be in the upper half of the mid single-digit range at 5% to 6% on a constant currency, constant weeks basis, which excludes the estimated negative $450 million impact from the extra selling week we had in the first quarter of last fiscal year.

While the impact from currency is fluid, and therefore not something we predict, if current exchange rates, which include EUR1.13 and JPY100 remain stable for the remainder of the fiscal year, our full-year revenue would be positively affected by approximately $275 million to $325 million.

With respect to earnings, we expect FY17 non-GAAP diluted earnings per share to grow 12% to 16% after adjusting for the estimated $0.08 to $0.10 impact from the extra week last fiscal year as well as a negative foreign currency impact of $0.20 to $0.25. This EPS growth implies non-GAAP diluted EPS of $4.60 to $4.70. All of this is in line with prior guidance.

Looking at the second quarter only, we expect our revenue growth to be within our full-year growth range of 5% to 6% and our EPS growth to be in the lower half of our full-year growth range of 12% to 16%, both on a constant currency basis. Again, while currency impact is not something we predict, if exchange rates remain stable, we estimate our second-quarter revenue would be positively affected by $25 million to $75 million. Other than as noted, our EPS guidance does not include any charges or gains that would be recorded as non-GAAP adjustments to earnings doing the fiscal year.

We feel good about the performance of our operations, the overall state of our markets, the diversification of our portfolio and geographies and our ability to execute. All of which give us confidence in our ability to deliver on our annual and long-term commitment.

As you know, our focus is to consistently deliver revenue growth in the mid single-digits and EPS growth in the double-digits on a constant currency basis. Our guidance for this fiscal year remains consistent with that long-term focus. Omar?

Thanks, Karen. And we will now open the phone lines for Q&A. In addition to Karen, I've asked Mike Coyle, President of our Cardiac and Vascular Group; Bryan Hanson, President of our Minimally Invasive Therapies Group; Geoff Martha, President of our Restorative Therapies Group, and Hooman Hakami, President of our Diabetes Group, to join us.

(Caller Instructions)

If you have additional questions, please contact Ryan in our investor relations team after the call. Operator, first question please.

Mike Weinstein, JPMorgan.

Thank you for taking the question. Just maybe, Omar, I wanted to start with HeartWare, which you just closed. Could you just spend a minute on why now on HeartWare? I think that was the biggest question people had is, is people understand the franchise but why did you do the transaction today? And then second, there was obviously some dilution that comes with buying HeartWare, given the burn in the company, how did you offset that?

Okay, why now? Well when you do deals there are opportunistic elements which can come through so that was clearly one. The others we really felt that we were in a position where heart -- we were getting critical mass around our expertise in heart failure.

And where HeartWare was positioned as a company, we felt that we could add immediate value and through that combination drive up significant revenue, not only in the first year but in the next couple of years through real milestones that the company can meet, such as reaching approval for destination therapy and then other new products. So that was, we felt, a good timing for us.

And besides you can't plan acquisitions to the month here. It depends on a variety of circumstances and things just fell into place. We felt we had the Management bandwidth to do this. The team was well-prepared, had the right capabilities and we had additional synergies that we could add in many different ways, so we felt this was absolutely the right time.

And in terms of the dilution, that obviously comes along with an acquisition of this size. There are offsets that the Cardiac and Vascular Group made and I'll let Mike comment on [what we're thinking on] that.

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

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

As it relates to ICDs I think probably the thing that is impacting the overall market is US replacements and that we saw a pretty stable low single-digit growth in initial implants for ICDs. But we are now getting to a point where year-over-year comparisons on, frankly, replacements are down in sort of the low double-digit kind of range. Which is obviously a function of what happened to initial implants five to eight years ago, depending on whether you're talking about CRT to standard ICDs. So that's obviously putting some strain on the overall market growth.

We actually took share in the ICD market as we continue to get the benefit of the MRI-safe technologies rolling into not just the standard ICDs but now also into CRT-D. And that's something that we think will continue. We think we're very much on the front end of, basically, the mix shift toward use of MRI in standard high-powered and CRT-D.

And we also obviously have a very robust set of new products that are just hitting the market and will be added to over the course of the next several quarters including the Visia AF in the single chamber segment as well as the Claria CRT-D device which adds the effective CRT algorithm to our overall set of offerings.

So, we think, obviously, the market is going to provide a bit of a headwind because of the replacements but we think we're in a good position to continue to take share and mitigate some of that. And it was particularly encouraging to me that we could get to that mid single-digit growth when we're seeing that kind of stress, not just in the ICD market but obviously we're in a little bit of an off-segment on our DES market as well and yet are able to still get into mid-single-digit growth. So we think it speaks to the importance and value of the breadth of the portfolio.

Hooman? On the 607G.

Yes. With respect to the 670, Mike, the PMA is with the FDA. It's really hard to predict when they're going to approve it. Obviously, it's in their hands now. We're working actively with them to answer the questions that they have regarding our submission.

But as you know, and as Omar talked about in the commentary, in the meantime we launched the 630G. We received approval and have launched the 630G and we're excited about this. This is going to address some of the biggest requests we've seen from patients, color screen, waterproof, remote bolus capability. And so it's a chance for us to really bring additional enhancements to our patients while the 670 process goes on. So we're excited about the new product that we have and in the meantime we're working actively with the FDA on the 670.

Understood. I will let some others jump in. Thanks.

David Lewis, Morgan Stanley.

Just a couple of questions here. Omar, the last four quarters, as you know, organic growth has been extremely stable within Medtronic. And this quarter there were a couple of areas, Mike mentioned one of them, but the stent franchise, US geography broadly, and a little bit the emerging market geography.

I wondered if you could sort of address those few areas and maybe a couple different people. But just more specifically after that four quarters of significant stability of organic growth, can that organic growth number get better here over the next several quarters and I have a quick follow-up after that.

Look, we've always said that one of our main strengths is the diversity of, not only our portfolio, but our geographic presence as well as the nature of the sources of revenue that we have from emerging markets from Services Solutions and New Therapies. And that, by definition, means that there will be areas which are strong one quarter and weak in others. But overall we're pretty confident -- very confident that we can maintain even just organically the mid-single-digit range within the full range of mid single-digit.

We expect acquisitions to supplement that and give us more confidence in holding that range. But our new product introductions and so on, as well as the geographic expansion, should enable us to do that. Now specifically to your question, we were really in a bit of a down product cycle if you like, in the US, where most of our new products have the biggest impact.

We think we'll get a bonus of new products in the coming quarters and that will pick it up again. But the slight drop in US revenue from our -- typically we've been doing about four to about three, this quarter is primarily that. We think, in many areas, we continue to show strength, particularly in surgical procedures and in -- within the MITG portfolio and that really hasn't changed.

And like Mike pointed out a little earlier, we're in a down product cycle actually both in cardiac and in diabetes, which we think will come back in the next two quarters. So that's the dynamics in the US market in New Therapies.

And also the other thing I would like to point out is RTG, our Restorative Therapies growth, led by spine, which we are watching carefully, we are encouraged to see good strength there or early strength. It's -- we've got to demonstrate sustained capability of mid single-digit growth there but we're pleased to see the way that RTG is moving now and offsetting pressures, even in that portfolio, with strength in other areas.

And in emerging markets, actually, again we are quite pleased. China went through all kinds of gyrations in the last two years, if you like, and through that we've maintained either double-digit growth plus and minuses a little bit in that geography.

Then the other geographies have balanced each other out. Middle East and Africa has been a very strong contributor of emerging market growth over the last several quarters. This quarter there were conditions there but then other geographies such as Latin America showed considerable strength, and China for that matter, to offset that.

So we're very confident that the projection that we made of sort of low- to mid-teens double-digit growth in the emerging markets is something that is quite sustainable despite macroeconomic challenges that may come about. I think I covered your points David.

You did, Omar, thank you. And just a quick follow-up on earnings and margins broadly, for Karen and the broader team. So just to avoid any confusion we've had a last couple of quarters, your commentary, Karen, thinking about consensus in the second quarter earnings number, we kind of come around a $1.15 number plus or minus a penny. I wonder if you just comment about your comfortability with the consensus or that number?

And then just broadly, if you take a step back from the Analyst Day, margins were the real focus and I wonder, you're giving us 12% to 16% for this year but your confidence that we continue to see the durability of that 12% to 16% or sort of mid-teens earnings growth and of all those plans and restructuring plans you refer to, when does the investor really start to see the inflection in those plan where they could really get the sense of the sustainability of this long-term double-digit teens profile? Thank you.

Thanks, David. I don't comment specifically on consensus numbers but happy for any of you to follow up with Ryan to go through your models at any point in time. In terms of our confidence in delivering our long-term bottom line EPS growth, I think this Company has a very strong ability and we are very confident in our ability to deliver our commitment.

Not only do we have significant growth on the top line, particularly from emerging markets, as Omar noted, but we have been driving strong synergies from the Covidien acquisition and we are focused on delivering additional leverage beyond the Covidien acquisition through significant focus on managing our costs efficiently. And we -- I feel very confident in our ability to do just that.

I think maybe if I could just add to that. Your question about when to watch for inflection points, well listen, like we've said before, the Covidien synergies, if we hit our $850 million projection that alone takes us through the double-digit EPS projection, by definition, in FY17 and mostly in FY18.

Now as we transition beyond that, we are, like I mentioned in the Investor Day, working on other efficiency programs in operations and in functions and in many other areas which will then sustain that level. So those programs that we worked on right now, but clearly the real results will prove themselves beyond FY17.

Great. Thank you very much.

Bob Hopkins, Bank of America.

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

Well, yes. I mean if you add the deals up, its something like that. Probably a little less than that. But you know the main point though here is that the range that we projected really balances out issues that may arise, market issues and other issues that arise in our business. We feel confident that, even organically, that we will be in the mid-single-digit range and the whole range.

And we feel that acquisitions give us increased confidence that we will hit that. And then probably in the higher end of that range. I mean certainly this year with HeartWare we've got increased confidence for that. But that's the way in which we are looking at this.

You know it's probably, if you want to direct answer to your question, it is probably slightly under one point that the acquisitions are adding but that - - things roll off. Other things come in. It's a pretty dynamic picture and believe it or not there are some divestitures, as well, like the drug business and other things that go out of our portfolio. So net-net it's probably a little less than a full point.

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

This quarter.

Great. Thank you. No, I understand the philosophy around the guidance. I just wanted to make sure I had a good understanding of all the moving parts. And then for a second question, just on the product side, I was wondering if Mike could talk a little bit about the upcoming MRI-safe competition?

We've started to see a little bit of that role in. Just, Mike, your confidence in mid single-digit growth now that we're about to see a steady cadence of MRI-safe competition? And then quickly on the diabetes side, I heard the timelines for 670G but I just wanted to make sure, there's no change in timelines on 670G from your perspective?

Mike, you want to go first and then we'll let Hooman go?

Sure. So on MRI, we obviously think this should become standard of care and right now we would -- if you just look at the most mature products we have in that segment are in the dual chamber pacing area and they are in the mix is still new US, which is the most developed market in this sense. There's still only 70% of our businesses is actually MRI-safe and recognizing that we're just a little over half the pacing business, that means that less than half of the patients who are getting pacemakers in the United States and are getting MRI-safe devices.

And as you go into the other product lines, in ICDs it's more like a 50% penetration rate for us. And when you get to CRT-D, it is more like a 30% penetration rate for us -- or mix for us. So these penetration rates are very low and so we still think there's plenty of upside to go in those spaces. But you know as competitors catch up to this, which still it's only happening on the Brady side right now and is expected to take still several quarters into next year -- next calendar year before we see ICD competition, CRT-D competition, in those areas.

We are continuing to advance the ball. I mean obviously on the pacing side, it's MICRA, right? Where we basically have an opportunity to significantly shift to a very much value-added product in the single chamber segment as we get our reimbursement in place for that, which is going to happen before the end of the fiscal year. And the standard ICD segment for single chamber, the addition of Visia AF is being very well received in the marketplace. It is the only single chamber device that could actually do monitoring of atrial fibrillation without having a lead so it gives a very significant benefit beyond simply the MRI-safe characteristics of the products.

And then in the CRT-D side, we're obviously adding significant therapeutic value with things like adaptive CRT and effective CRT, which basically improve response rates in CRT, and because our hardware platforms, Amplia in particular, are basically positioned to be able to do multi-point pacing, we're going to add multi-point pacing capability to that Amplia product with software downloads before the end of the fiscal year. So we continue to advance the offerings that we have beyond MRI as competitors catch up in MRI.

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

Sure. There's absolutely no change or any indication that things are going to push out on the 670G. And maybe, Bob, just additional point of clarification, we didn't launch the 630 because we thought there was a risk to the 670 timeline. So the 670, as I said, we're working very, very closely with the FDA. The relationship is outstanding and we're actively engaged with them. We launched the 630, not due to anything related to the 670, but because of two things.

One, it gives our patients the request that they've asked for, and I touched on what some of those were from waterproof to color screen, and at the same time what it does is it refreshes our product line in the US. The 530G was launched in of September 2013, that's three years ago. And we've held our own with this product, even at its long anniversary. But if you take a look at how well the 640 has done outside the United States, we felt that by bringing these patient-centric features and a new hardware platform into the US now, we could really refresh our product line and really drive growth in the US while we wait for the 670.

Great. Thank you very much.

Kristen Stewart, Deutsche Bank.

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

Thank you, Kristin. Happy to answer that. I'm thrilled to be a part of this great team. Medtronic is an amazing Company with a very strong mission that clearly spoke to me personally. I think we are a leader in the industry from a vision perspective and I'm excited to be at a company that is leading not just the medical device industry but the healthcare industry in general.

And I'm thrilled to be at a team where we're focused on growth and efficiency. In terms specifically of the operating margin, as you know our focus is to drive a stronger growth in our bottom line than we have in our top line and the only way you do that is through efficiency in our margins. We are very focused on that. We talked about driving the Covidien synergies through to completion and ultimately achieving the $850 million commitment that we have put out there.

And then on top of that, as we said, we are focused on driving efficiencies throughout the Company, looking at all of our processing, bringing in lean Six Sigma to make us better and more efficient, centralizing resources where we can and ultimately driving double-digit bottom-line growth, which is much stronger than a very impressive mid single-digit top line growth.

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

Sure. Happy to talk about those. I'm excited to step into the very big shoes of Gary and I intend to steer the ship very much in the same direction that he has. I do come from a financial industry background most recently, though I've had experience in many industries within financial services.

Obviously, one of the key things that we had been doing in an ultra low rate environment was focused on efficiency and driving strong bottom-line. And so that's exactly what we'll be doing here.

In terms of capital deployment, I think the highest and best use of our capital is to grow the intrinsic value of the Company through reinvestment first and foremost. But beyond that I think it's very important to have a dividend that is strong and that does steadily grow with earnings. And then on top of that, where we can have meaningful pay back to our shareholders through share repurchase.

And that's exactly what we're doing with our commitment to deliver a minimum of 50% of our free cash flow to our shareholders in the form of share repurchase. In addition to the ability of us un-trapping more cash, we have an additional $5 billion commitment over a three-year period from FY16 to FY18. So obviously, I firmly believe in all that we are doing with the Company and hope that helps.

Okay.

Let me also add it's a pleasure to welcome Karen onto the team. She's made a great start and really, if nothing else, we value the fresh thinking and a fresh angle. That is very useful for us as we go forward.

Okay. Thanks so much. Welcome aboard.

Larry Biegelsen, Wells Fargo.

Thanks for taking the question. Omar, I wanted to start with a big picture question for you. In calendar Q1 2016, it was generally a strong quarter for the large cath med tech companies, and we actually saw an acceleration in the weighted average organic growth for the large companies, it's about 5% to 6%, depending on whether you include Edwards and Intuitive.

So the question I have for you is, what do you think is driving improvement in the industry growth? How sustainable is it? Could you actually see growth improve for the industry from here or do you think 5% to 6% is the new norm? And that I have a follow-up.

Well look, the industry is very broad so it's tough to be specific about this stuff but just a few reflections on this. First of all, if you're in healthcare, your entitlement is growth because the opportunities in healthcare are limitless.

If you look at it both from a clinical innovation perspective, the number of problems that have to be solved that patients will value, that create a real difference in people's lives, driving equity in health care around the world. The opportunities there are again limitless and we're just scratching the surface.

And then on top of that, like we've talked about, the challenge of addressing wastage in healthcare, We're literally wasting across the world hundreds of billions of dollars in total healthcare spend, of which there's inefficiency in delivery primarily because of payment models and so on around the world.

So if you look at all that collectively, the fact that the healthcare industry's growing is really not a surprise in many ways. It's an entitlement that the healthcare industry should have. And I think the fact that there was momentum this last quarter and last couple of quarters, that's - - it's too tough to call on something with that short a timeline.

But I've every expectation that all stakeholders in healthcare, if they get their heads around these opportunities, will drive a steady increase in the growth profile in healthcare. I think that's our entitlement. I think that's the only real comment I can make. I think all the companies that you listed are good companies with innovation driving and creating new markets.

We expect to be an equal player in many of those areas. But there are lots of people out there with great sense of purpose and inventiveness in driving the solution. So again I just put it in the perspective of overall healthcare. This is not one that should ever be a down market if we, as players and stakeholders in the healthcare market, can get our heads around this.

Thanks, Omar, that's very helpful. Thank you. And, Mike, the intermediate risk indication for CoreValve's in the CE Mark approval, and (technical difficulty) mentioned earlier that people expected. What do you think the implications are for the market and for CoreValves for that intermediate risk indication.

And just, Karen, the net other expense or income for the remainder of the year, it was a little bit lower this quarter than we expected and the tax rate as well, could you comment on that please? Thanks a lot.

As it relates to intermediate risk, we were certainly expecting these developments, both in terms of the (technical difficulty) Edwards approval in the United States. We reflected that in our estimates for the overall market, which we showed at the analyst meeting. So I wouldn't necessarily change what we said at that time other than to say it's obviously good to see these developments tending to happen sooner rather than later in terms of regulatory organizations looking at these compelling data and basically making sure these technologies are available to patients in the intermediate risk group.

And so we look forward to, obviously, finishing the SURTAVI study, working with the FDA to get label indications for that in the United States and we think the growth profile of the overall TAVI market, which was very robust in Q1, is going to continue to be a very impressive driver of growth for us and for med tech in general.

Okay.

Yes, on net other expense we did mention the fact that her medical device tax does flow through that line item and, obviously, that was down year-over-year about $55 million. We did have currency gains that run through that line item as well. Those were down year-over-year, too.

In terms of our tax rate, we did have several discrete tax benefits in the quarter that did push our overall tax rate down to 15.7% for the year. We do still do expect our tax rate to be within the range that we talked about before of 16.5% to 17.5%.

Thanks, guys.

Bruce Nudell, SunTrust Robinson Humphrey.

Omar, we recently revisited the surgical practice patterns in orthopedics and some things don't seem to change. There seems to be just some (technical difficulty) for the status quo and some of the intricacies of gain sharing in terms of re-basing, of internal savings, pose another impediment to change. Should we be thinking about Medtronic's orthopedic initiative principally on the basis of broad solutions including management of patients and post-acute care or is really the implant side of the business really seminal to your thinking.

No, I think it's the former. It is the broad solution that is necessary. And we feel that there is a lot of cost. The majority of cost in that overall episode is actually in the post-acute space. And so we think we can make a considerable difference.

But let's not just put that in a single bucket because an overall process includes proper risk stratification of the patients and that risk stratification drives a very specific care pathway to which adherence must be made.

And then following that, a clear handoff to post-acute care in the most efficient manner possible and finally a clear measurement and accountability for the outcome of the patient. Those four things that I've just outlined are not things that today are looked at holistically. And I think in each one of those areas there's considerable inefficiency and we believe that putting technology and using technology will not only create an inflection point in the short term but will actually create long-term sustainability of savings in that process because as you improve outcomes, you improve your cohort selection and risk stratification.

Your care pathways improve and then through all of that implants will play a role. In terms of providing the most effective implant at the appropriate cost than when there's innovation in those areas we use them to drive up outcomes. So that's the way we look at it but you have to start with the holistic view and implant is a -- only a portion of that and that is our view. Geoff, do you want to add anything to that? Anything that I missed?

No, I think you're right. And we look at this holistic view, we look at it in several areas like the segmentation of the patients and the risk analytics, the pre-procedure patient engagement and education, the inter-operative technologies, not just the implants but different surgical tools that can be used that can lower the procedure cost during the hospital stay or downstream.

And then the post-acute, remote patient monitoring and then finally the patient reported outcomes, the data collection and the reporting on that. And look, we're seeing examples of, Bruce, for example I was just our with Advanced Energy business yesterday in Portsmouth, New Hampshire, and they have the technology that actually adds almost $500 to the cost of the procedure. And when they, over the last year, with the advent of knowing that CGR was coming, they really had to -- they revamped their go-to-market strategy, did that patient segmentation that Omar was talking about, was very clear to their surgeon partners in the health systems they were selling into, what patient cohort this -- the hemostasis technology what patient cohorts it added value to downstream and what it did not.

Okay. So they did that patient segmentation. They published some papers on the value of the technology downstream for those cohorts of patients, both clinically and economically. And they've seen a big boost in their business. So we're seeing the impact when you look at it holistically and you can document it.

And I think it's a matter of time, you'll see certain technologies separate themselves that way and -- both good and bad, up and down. And so I take your point on the -- what would you call it? The built-in forces that are keeping things stable. But I think over time as hospitals and health systems and payers become more sophisticated in looking at this holistic approach and looking at the clinical and economic impact across the 90 day period, in this case, I think you're going to see separation. I just don't think people fully grasp it yet.

Thank you and just a follow-up for Mike. Mike, you know there were reports of vascular injuries with CoreValve. I'm presuming that was mainly a training issue not a class affect related to the longer size of the self expanding kind of devices?

And a second follow-up on -- I'm presuming you pull the trigger on HeartWare being pretty comfortable that HVAD is going to be competitive until the pipeline evolves and just any thoughts you might have on the pipeline.

Sure. So on the field action we took, obviously we monitor all the patients that are being treated with our products and, in that particular case, we saw some overlap between specific anatomic issues and an increase in vascular trauma. So it was in fact only about training that this field action was done. It was to improve sensitivity to those particular aspects when screening patients and making sure that care is taken in terms of the delivery of the device.

I would point out that our instance of vascular injuries is actually below what is in the TBT registry. So if a very low threshold for identifying these issues and when we think we can help improve outcomes we obviously take action to do it. So there was no change to the product. There was no issues with manufacturing. It basically was a training issue.

On HeartWare, obviously we were very bullish on the HVAD system as it is. We think that device -- it performed very well. We were obviously able to see details of the clinical evidence that they've generated in support of their US approval in advance of making the decision to acquire the company.

And I think you seen, especially in their most recent quarterly earnings results, that in Europe there is beginning to see, after the initial trialing, a nice bounce back in terms of overall share, which obviously is consistent with our view that this product with its smaller size and its performance characteristics should be able to compete very effectively in that space.

We continue to look at the MVAD device and decide how aggressively we want to pursue that and we're working closely with the leadership team there. Very impressed with the people who are doing that work and we look forward to being a leader in this space for decades to come.

Thanks so much.

We'll take time for one more question here.

Vijay Kumar, Evercore ISI.

Thanks for squeezing me in. So maybe one I had a guidance clarification question and one follow-up. I guess when you look at, sequentially, 1Q versus 2Q, 1Q we came at the high end on a constant currency, constant week EPS growth. 2Q, we're sort of looking at the bottom end of the 12% to 14% range. So can you just talk to sort of what changed 1Q to 2Q?

And then when I look at the annual guidance rate, 1Q of revenue came in 200 basis points above internal plans, right? So we're looking at low half of the annual sort of 5% to 6%, but we came in north of 5% and so revenues came in better in 1Q. But I'm just curious why -- how EPS, we sort of re-created on the EPS guidance?

Sure. Happy to answer that Vijay. In terms of first quarter versus second quarter, yes, our first quarter we did come in at the high end of that 12% to 16% growth range and we did give guidance that we expect second quarter to be at the low end of that 12% to 16% range.

The key reason is the tax rate. We expect our tax rate from the second quarter last year to second quarter this year to be about 50 basis points higher. And in terms of revenue growth rate, obviously we do expect our second-quarter to be in the same line as our overall annual growth rate of 5% to 6%. Clearly we've got the HeartWare acquisition closing that gives us confidence around that range.

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

Obviously, it's always a very political discussion with FDA and I have been very impressed with the way they have adapted their views in the TAVR space to the quality of the clinical evidence and have been flexible in terms of timing on approvals in the space generally. I think we saw that again here with the Edwards intermediate approval. And so this group, I think, is extremely effective at balancing the therapeutic benefit of products with their risk and trying to get good new therapies to the market as quickly as they can.

So we will, as you point out, continue to basically look at one year and two year cuts on the data there with the large number of patients that we have, we've obviously completed enrollment. As we have said we expect, around ACC, to be reviewing those data publicly. And obviously we'll continue to work with the FDA and they will ultimately be the ones who decide when the product is approved.

Okay.

Okay. Thanks to all of you for your questions and, in conclusion, let me just reiterate that we're focused and consistently delivering on our three commitments, mid single-digit constant currency revenue growth, double-digit constant currency EPS growth and returning a minimum of 50% of our adjusted free cash flow to our shareholders.

And as I noted earlier, we feel that the appropriate application of medical technology that can help address inefficiencies and improve outcomes in healthcare delivery driving new forms of value creation. With our differentiated growth platforms and leadership in these strong end markets, we believe that we are well-positioned to capture this to, ultimately create a long-term, dependable value for our shareholders.

With that, and on behalf of our entire Management Team, I'd like to thank you again for your continued support and interest in Medtronic. We look forward to updating you in our progress on our Q2 call, which we currently anticipate holding on Tuesday, November 22. Thank you all and have a great day.

Thank you. This concludes today's conference call. You may now disconnect.