美敦力 (MDT) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Medtronic third-quarter earnings call.

(Operator Instructions)

Thank you.

I would now like to turn the conference over to Mr. Ryan Weispfenning, Vice President, Investor Relations.

Please go ahead, sir.

Great.

Thank you, Paula.

Good morning and welcome to Medtronic's third-quarter conference call and webcast.

During the next hour, Omar Ishrak, Medtronic's Chairman and Chief Executive Officer, and Karen Parkhill, Medtronic's Chief Financial Officer, will provide comments on the results of our FY17 third quarter, which ended on January 27, 2017.

After our prepared remarks, we'll 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 detail on our performance and outlook.

You should note that many of the statements made during this call may be considered forward-looking statements, and that actual results might differ materially from those projected in any forward-looking statement.

Additional information concerning factors that could cause actual results to differ is contained in our periodic reports and other filings that we make with the SEC, and we do not undertake to update any forward-looking statement.

In addition, the reconciliations of any non-GAAP financial measures are available on our website, InvestorRelations.

Medtronic.com.

Unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the third quarter of FY16, and all year-over-year growth rates and ranges are given on a constant currency basis.

Other than as noted, our EPS growth and guidance does not include any charges or gains that would be recorded as non-GAAP adjustments to earnings during the fiscal year.

These adjustment details can be found in the reconciliation tables included with our earnings press release.

With that, I'm now pleased to turn the call over to Medtronic's Chairman and Chief Executive Officer, Omar Ishrak.

Omar?

Good morning, thank you, Ryan, and thank you to everyone for joining us.

This morning we reported third-quarter revenue of $7.3 billion, representing growth of 6%.

Q3 non-GAAP operating profit grew 10%, and non-GAAP diluted earnings per share were $1.12, growing at 10% and representing EPS leverage of 480 basis points.

In Q3, we achieved solid results across all of our groups, with mid single-digit growth in CVG, MITG and RTG, and high single digit growth in diabetes.

Geographically, we also demonstrated solid performance, with mid single-digit growth in the US, high single-digit growth in the non-US developed markets including Western Europe and Japan, and double-digit growth in emerging markets.

At the same time, we delivered meaningful operating profit growth, executing on our synergy programs from the Covidien integration, and our operating excellence initiatives.

Our revenue and operating profit growth resulted in continued strong free cash flow.

As stated before, we expect to deploy this capital by balancing returns to shareholders with disciplined reinvestment in our business.

We remain confident in our ability to deliver mid single-digit constant currency revenue growth, and double-digit constant currency EPS growth, not only in our current fiscal year, but also into the future.

Our solid revenue performance resulted from crisp execution on our three growth strategies: Therapy innovation, globalization, and economic value.

These strategies are designed to create competitive advantages for Medtronic, by capitalizing on the long-term trends playing out in healthcare.

Namely, the continued desire to improve clinical outcomes, the growing demand for expanded access to care, and the optimization of cost and efficiency within the healthcare systems.

When combined with the demographics of an aging population, they produce secular growth tailwinds, that we believe will create sustained long-term opportunities for Medtronic.

Now, let's discuss each of our growth strategies.

In therapy innovation, we are seeing strong adoption of our innovative new products across all our businesses.

In our Cardiac and Vascular Group, which grew 6%, our new therapies are helping to create important rapidly growing med tech markets such as LVAD, TAVR, drug-coated balloons, AF ablation and insertable diagnostics.

At the same time, our innovations are driving share growth in some of our base businesses.

In cardiac rhythm implantables, we believe we are capturing share as a result of our differentiated 3G MRI technology, our unique diagnostic and therapeutic algorithms, and our proprietary TYRX anti-infection envelopes.

In TAVR, we had strong growth, both sequentially and year over year, on the launch of the Evolut R 34-millimeter valve.

Looking ahead, we expect to present our SURTAVI data at ACC next month, which we which will use to support our submission for TAVR indication expansion into the US intermediate risk population.

In coronary, we are anticipating FDA approval of the Resolute Onyx drug-eluting stent around fiscal year-end, which we expect will turn the mid-20s US DES sales declines into meaningful growth for FY18.

And in cardiac rhythm implantables, we expect the recent CMS reimbursement coverage for Micra, the world's smallest pacemaker, to accelerate our sales in the US, driving both pacemaker market growth and share capture.

In our minimally invasive therapies group, which also grew 6%, we have strong high single-digit growth in surgical solutions, as we focused on moving surgical procedures from open to minimally invasive, driven by our ongoing new product launches in advanced energy and advanced stapling.

While we continue to experience some pressure from reprocessing in advanced energy, it has been tempered by the launch of additional ligature instruments, as well as the continued rollout of our Valleylab FT10 Energy Platform.

In advanced stapling, Q3 results were driven by the continued adoption of our Endo stapling specialty reloads.

To drive growth going forward, we just announced the launch of Signia, our powered surgical stapler, representing a major advance in stapling technology, by providing surgeons with real-time feedback on tissue variability, coupled with automated response by adjusting the stapler's speed.

In our patient monitoring and recovery division, we not only had solid growth from the continued adoption of the PB980 ventilator, and the strength of our Nellcor pulse oximetry products, but also benefited from the Bellco acquisition, with growth in dialyzers and other consumables.

Our restorative therapies group grew 4% this quarter, with strong contributions from our spine, brain, and specialty therapies division.

Our spine division again showed improvement, growing 3%, the strongest rate in over seven years, as we continue to gain share.

The improvement is being driven by an initiative we first told you about on our earnings call a year ago, called Speed To Scale, which involves faster innovation cycles and launching a steady cadence of new products at scale, with sets immediately available for the entire market.

We're also seeing success in our surgical synergy strategy, resulting in spine implant growth, in conjunction with strong sales of our navigation and imaging equipment in neurosurgery.

Neurovascular also had a solid Q3, growing 13%, driven by strong performance in flow diversion and coils.

As we forecasted, our pain therapies business results are still declining.

However, we were pleased by the initial physician enthusiasm with our new Evolve workflow, which balances high dose and low dose settings for spinal cord stimulation.

We're also expecting approval of our next generation spinal cord stimulator, Intellis system, in the first half of the next fiscal year.

We expect Intellis to be the smallest rechargeable spinal cord stimulator on the market.

Turning to our diabetes group, which grew 7%, we had strong sequential improvement in our US business, with our highest consumer in pump growth in 10 quarters.

We're capturing share and experiencing strong US clinician and consumer demand for our 6-series pumps through purchases of the innovative MiniMed 630G insulin pump system, as well as enrollment in the 670G priority access program.

This program gives users first in line access to our MiniMed 670G hybrid closed loop system, when it begins to ship this spring.

While difficult to predict, it is worth noting our diabetes growth could slow somewhat in Q4, due to postponed purchases, as we get closer to the full launch of the 670G.

As mentioned last quarter, we do expect diabetes to deliver double-digit growth next fiscal year, once the 670G is fully launched.

Our product pipeline remains robust across all our groups.

We have a number of important near-term growth catalysts, as well as a deep pipeline of innovation that we expect to bring to market through the balance of the decade.

We remain confident that our new therapies can drive sustainable growth, both over the coming quarters, and over the long term.

Next, let's turn to globalization.

Emerging markets grew 11%.

We continued to make progress in structuring both public and private partnerships, aimed at rapidly increasing patient access, as well as our ongoing efforts to optimize our distribution channels.

We feel that these initiatives have the ability to accelerate growth and lead to sustained market outperformance.

The Middle East macroeconomic environment challenges persisted in Q3, and our revenue declined in the low single digits.

In Saudi Arabia, our largest market in the region, revenue continued to decline on a year-over-year basis, although we saw some sequential improvement.

That said, we have strong results in other parts of the world, China, Latin America and Eastern Europe showed sustained strength, growing in the mid teens or higher.

In China, our largest emerging market, we grew in the mid-teens with MITG in the low 20s on the strength of our advanced stapling platform, and CVG in the double digits, as we capitalized on our market development efforts in private hospitals in tier 2 and tier 3 cities.

Latin America had mid-20s growth, driven by key tender wins and channel optimization programs, specifically in Brazil, Mexico and Argentina.

Eastern Europe also grew in the mid-teens, with strength in Russia, where we started shipping our coronary stents and balloons as part of the public partnership agreement we reached last year.

Overall, the consistency of our emerging markets performance benefits strongly from increased geographic diversification, reducing dependence on any single market.

We continue to believe that the penetration of existing therapies in emerging markets represents the single largest opportunity in med tech over the long term.

Turning now to our third strategy, economic value.

We continued to see success in our hospital solutions business, which grew in the high teens.

Hospital solutions delivers annuity revenue by providing expertise in creating efficiency in managing cath labs and operating rooms for more than 100 customers.

We continue to expand our hospital solutions offerings globally, beyond Europe, with 30 accounts now in the Middle East, Africa, Latin America and Canada.

It is also worth noting that in Q3, we signed our first US contract with University Hospitals in Cleveland.

We continue to grow our chronic care management business models, including Diabeter for type 1 diabetes and NOK for morbid obesity.

We're aggressively pursuing global expansion of our opportunities for each of these unique value-based healthcare businesses.

While we're still early in the journey to value-based healthcare, we remain focused on fully understanding and leading the shift to healthcare payment systems that reward value and patient outcomes over volume.

As always, we expect to do this in a way that creates value for healthcare systems, as well as for our shareholders.

With that, let me ask Karen to now take you through a more detailed look of the drivers for our third-quarter financial results.

Karen?

Thank you, Omar.

Our third-quarter revenue of $7.283 billion increased 5% as reported, or 6% on a constant currency basis.

Foreign currency exchange had a negative $40 million impact on third-quarter revenue, and acquisitions and divestitures contributed approximately 150 basis points net to revenue growth.

GAAP diluted earnings per share were $0.59.

Non-GAAP was $1.12.

After adjusting for the $0.05 impact from foreign currency, non-GAAP diluted EPS grew 10%.

Our operating margin for the quarter was 29.1% on a constant currency basis, representing a strong 130 basis point year-over-year improvement.

With the impact of currency included, our third-quarter operating margin also improved, increasing by 40 basis points year-over-year.

And we continue to cover the earnings dilution from our recent acquisitions, which means we maintain operating profit expectations, while realizing the incremental acquisition revenue.

Taking into account acquisitions that we have done in the past year, our operating margin improvement on an organic basis would have been approximately 170 basis points in the quarter.

This meaningful margin improvement was driven in part by efficiencies in SG&A, as we continued to deliver on our Covidien synergies.

It is worth noting that our extensive effort to move Covidien onto Medtronic's global ERP system is underway and meeting our expectations.

As we have outlined, this activity is an enabler, driving a portion of the cost savings we expect to realize in the latter half of the synergy period.

We remain on track to deliver $225 million to $250 million of synergy savings this fiscal year, and expect to deliver on our commitment of $850 million of savings by the end of FY18.

Beyond our integration efforts, we will remain focused on driving additional operating excellence initiatives, to deliver continued margin improvement.

Net other expense was $46 million, compared to $9 million in the prior year, due in large part to lower net gains from our foreign exchange hedging program.

Below the operating profit line, net interest expense was $180 million.

At the end of the third quarter, we had $32.1 billion in debt and $11.5 billion in cash and investments, of which approximately $6 billion was trapped.

Our non-GAAP nominal tax rate on a cash basis was 17%, in line with our expectation for the second half of the fiscal year.

Free cash flow was $1.8 billion.

We paid $590 million in dividends, and repurchased a net $566 million of our ordinary shares in the third quarter.

This represented a total payout of 74% on non-GAAP net income, and 141% on GAAP net income.

Keep in mind, our payout ratio is elevated, as we have been continuing to not only return 50% of our annual free cash flow to shareholders, but also execute the $5 billion incremental share repurchase commitment we made through FY18.

We did accelerate our share repurchase activity, by shifting the vast majority of the remaining activity for the fiscal year into the third quarter, given our share price.

Third-quarter average daily shares outstanding on a diluted basis were 1.383 billion shares.

Regarding our dispute with the IRS related to quarterly [legal] transfer pricing, the tax court issued their final ruling late last month.

Under the terms of the decision, we would experience an increase to our annual accessible cash generation of approximately $225 million, as well as the movement of approximately $3 billion of cash on our balance sheet from trapped to accessible.

The decision could be appealed, but if it is not, we could begin to see movement of a portion of the trapped cash in FY18.

As previously stated, we intend to use the cash released to pay down our debt.

Second to our dividend, debt pay down remains a near-term capital allocation priority, as we remain committed to a strong balance sheet, and target an A credit profile.

We also expect to maintain our disciplined approach to pursue value-creating tuck-in acquisitions.

And of course, share repurchase is another tool we will continue to employ to provide meaningful return to our shareholders, when our cash flows and business reinvestment priorities allow.

Before turning the call back to Omar, let me conclude with our revenue outlook, EPS guidance, and free cash flow outlook, which has not changed for the full fiscal year.

Consistent with our long-range expectations, we continue to expect full-year revenue growth to be in the mid single-digit range, and EPS growth to be in double digits, both on a constant currency, constant weeks basis.

For the final quarter of the year, we expect revenue growth to be in the lower half of the mid single digit range on a constant currency basis.

This is solid growth, especially when you consider the strong 6% constant currency growth we delivered in the fourth quarter last year.

We expect both CVG and MITG to grow in the mid single-digits.

However, keep in mind that CVG had a particularly strong fourth quarter last year, with peak levels of customer bulk purchases of cardiac rhythm implantables, which we do not expect to repeat.

And MITG will no longer benefit from the inorganic revenue contribution of the Bellco acquisition starting in the fourth quarter.

We expect RTG to grow in the low end of the mid single-digit range, consistent with the third quarter, and we expect diabetes to grow in the mid to high single digits, with a potential for postponed purchases that Omar mentioned earlier.

While the impact from currency is fluid and therefore not something we predict, if current exchange rates, which include $1.06 Euro and JPY113 remains stable for the remainder of the fiscal year, we expect fourth-quarter revenue to be negatively affected by an estimated $20 million to $40 million, and EPS by an approximate negative $0.05.

Regarding cash flow, we continue to expect our free cash flow for the fiscal year to be in the range of $5 billion to $6 billion.

While we intend to give our FY18 guidance on our fourth-quarter earnings call in May, it is worth noting that if current exchange rates remain stable through next fiscal year, we would expect FY18 revenue to be negatively affected by approximately $100 million to $300 million, an improvement from the update we gave in January.

Given this improvement, we would now expect the FX impact on FY18 EPS to be in the range of $0.05 to $0.15, again, if current exchange rates remain stable through next fiscal year.

Now I will turn the call back to Omar.

Thanks, Karen.

To conclude, Q3 was a solid quarter, and I was pleased by the revenue growth and sequential improvement in our groups and regions.

Along with revenue growth, our organization delivered meaningful operating margin improvement, and double-digit constant currency EPS growth, as well as growth in free cash flow.

Looking ahead, we remain confident in our ability to deliver mid single-digit constant currency revenue growth, and double-digit constant currency EPS growth, not only in our current fiscal year, but also into the future.

With our differentiated growth platforms, leadership, in strong end markets and disciplined capital allocation, we believe we are well-positioned to create long-term dependable value for our shareholders.

We will now open the phone lines for Q&A.

In addition to Karen, I've asked Mike Coyle, President of CVG; Bryan Hanson, President of MITG; Geoff Martha, President of RTG; and Hooman Hakami, President of our Diabetes Group to join us.

We want to try to get to as many people as possible, so please help us by limiting yourself to only one question, and if necessary, a related follow-up.

If you have additional questions, please contact Ryan and our Investor Relations team after the call.

Operator, first question, please?

Your first question comes from Kristen Stewart of Deutsche Bank.

Just a quick one for Karen.

Just on the topic of the IRS transfer pricing dispute, with fee change, with the increase in cash and the movement of trapped debt, what does that also do to the tax rate longer term?

Yes, it doesn't really impact the tax rate longer term.

We continue to expect a 17% cash tax rate, both for the rest of this fiscal year, and likely going forward.

Okay, perfect.

Just a bigger picture question for you, Omar.

If there had been some conjecture during the quarter, just in terms of the medical supplies business.

Maybe if you could just, from a bigger picture perspective, just talk about now that we're two years past the anniversary of Covidien, maybe just talk more broadly about how the acquisition has gone, and just generally, if there are some assets that may be better monetized outside of the portfolio, whether it's with Covidien or just looking at the whole portfolio?

And just your thoughts on how that's added value to Medtronic.

Thanks.

Well, first, we are, as I've noted several times before, quite pleased with the way the Covidien acquisition has gone through.

It's been a very complex transaction, as you know.

It's one of the biggest in medical devices, perhaps the biggest.

And we're now into year three of our integration process, and we've done it exactly the way we planned it, preserving our revenue, optimizing our costs and beginning to transfer healthcare through this process, and employee satisfaction ratings are high.

We've had good retention ratings.

So we've really hit all the strategic and tactical objectives of the Covidien acquisition, and we continue to do so.

We've still got a year more to go, and as Karen outlined, we're optimistic about the rest of the integration.

I'm not going to speculate on the future of specific products and businesses.

What I will say is that as part of good portfolio management we ask a series of questions, what value does Medtronic add to that product or business, what value does that product or business add to Medtronic overall, and is the business appropriately resourced, given Medtronic's overall priorities.

We look at these questions across all our portfolio, and we will take action, both in terms of divestitures and acquisitions on that basis.

I think that's the best way to comment on this subject, Kristen.

Thanks very much.

Your next question comes from Mike Weinstein of JPMorgan.

Let me start, Omar, with your comments, where effectively you reiterated the outlook that you gave back last June at the analyst meeting.

You said we remain confident in our ability to deliver mid single-digit constant currency revenue growth, and double-digit constant currency EPS growth, not only in the current fiscal year but also into the future.

And I think I want to draw your attention to that, because obviously that's an important statement, I think on the back of last quarter and the lowering of FY17 guidance.

I think the confidence in the LRP had waned on the street.

Could you spend a few minutes, and Karen chime in here, on why you're still confident in not only the mid single digit top line but I think where the Street has always struggled on the margin expansion piece, the ability to go after the significant margin opportunity that you've talked about, and deliver double-digit EPS growth over the next several years?

Thanks.

Well, first of all, from the mid single digit growth, we restated in our Q2 call that a lot of that was a result of some unrelated market factors, some of which still persist, but also, related to the timing of some of our new product launches, which are not playing through as expected.

The mid single digit revenue growth is more or less in line with what we had always projected on a yearly basis, and we will have expectation to maintain that into the future.

In terms of the operating margin, we're delivering according to what we talked about, including acquisitions for that matter, in terms of the operating margin rate.

We still have a year's more of Covidien synergies to deliver on, and like I stated at the analyst meeting and subsequently, we're using that opportunity to build a structure through which we can look at other opportunities throughout the Company, as we leverage our scale, starting with the consolidation of several manufacturing operation plants, reducing that from over 100 to something between 50 and 60.

If you do the math on all of that, plus centralizing some of our support functions and comparing it against industry benchmarks for the size of business that we are, we get to a number that we talked about at the analyst meeting.

So nothing fundamentally has changed from that.

Karen?

And maybe I'll bring Karen in.

So Karen, as you've had a year now, or coming up on a year to get further into the business, and to get your own arms around the numbers, your confidence in the ability to go after what was 500 to 650 basis points of margin expansion over a five-year period, that number at this point appears achievable or reasonable to you?

Mike, we remain focused on delivering on our commitment of double-digit EPS growth and there's no way that we can get there without meaningful margin improvement.

So we are focused on it and we have plans in place in the near term around Covidien synergies, and then beyond Covidien synergies in the longer term, to continue on that effort.

Okay.

Perfect.

I'll let some others jump in.

Thank you.

Your next question comes from David Lewis of Morgan Stanley.

Let me start Omar, with you, and then move on to Karen.

Omar, we've seen some recovery in the US businesses of many of your peers this quarter.

Your US business this quarter was really stable on a comp-adjusted basis, no material improvement, but your ex-US business was much stronger than we thought.

Could you walk us through US, ex-US dynamics this quarter, and how you see the future unfolding?

We felt pretty good about our US business.

We've had some significant product launches which at least sequentially for us has made a big difference, and those are progressing on plan.

We also see new products coming out into the fourth quarter, into early next year in several areas across the board, from CVG, diabetes, MITG and RTG, which we think will sustain that growth, and the US is most sensitive to growth as new products are launched, because that's usually where they're accepted first.

Outside the US, we've done well.

I think Europe continues to grow in a consistent fashion.

I think some of our hospital solutions efforts, although the hospital solutions represents a relatively small portion of our overall business, it does drive meaningful share and performance in those accounts.

And outside of Western Europe, I think let me just re-emphasize that our strategy -- our consistent strategy of focus on emerging markets, of building both public and private partnerships, and optimizing our channels is resulting in sustained growth, and we've been through several market macroeconomic-related market fluctuations in many geographies, and still delivered double-digit emerging markets revenue growth.

And I think we have plans in place to sustain that.

So I think that's really all I can say, a repeat of perhaps what I said in the commentary.

David, I would just add, you had mentioned US growth being stable, in the third quarter, with US growth at 3.5%, that represented a meaningful improvement over the last couple of quarters.

Sure.

Karen, I just meant stable on a comp adjusted basis.

Sorry if I was being confusing.

Looks stable to us, around 30 basis points of improvement comp adjusted versus the optical acceleration -- thank you.

Quick question for you, Karen.

You've been very clear on Puerto Rico, that cash is going to be used to by pay down debt.

I know we're not going to get you to talk about what's being divested or could be divested, but to the extent that we see a material divestment in FY18, are you committed to using the proceeds of that divestiture to repurchase shares to offset dilution, or is there a chance that you still would use that cash to further pay down debt?

Thanks so much.

I can't speculate on anything potential in the future, because any potential cash inflow will depend on the circumstances, and the timing unique to that situation.

But just to reiterate, our capital allocation philosophy in general, we do remain focused on both reinvestment and return to our shareholders.

I did note around the Puerto Rico proceeds that debt pay down does remain a near-term priority, but we will also continue to focus on acquisition strategy and to allocate additional resources to share repurchase when appropriate.

Thank you.

Your next question comes from Bob Hopkins of Bank of America.

Congrats on a solid revenue growth quarter in Q3 here.

Just wanted to get a little better sense for the drivers of that growth.

So maybe broadly speaking, can you just talk about, was the strength balanced across the months of the quarter?

Can you talk about the environment for surgical procedure volumes?

Trying to get a sense for the degree to which this was Medtronic execution, versus a positive environment, and just what happened over the course of the quarter?

Thanks.

I think the new product launches that we had planned for this time in the quarter had a meaningful impact, especially sequentially.

And we stated that before.

I think the market conditions weren't that different.

We still had macroeconomic issues in the Middle East, and at the same time, the US overall procedural volume remained more or less stable.

However, as I noted earlier, as you introduce new products, the US gets the biggest benefit and we realize that.

In terms of new products, just to be specific, in CVG we launched the new 34-millimeter CoreValve, and that really contributed towards growth.

We really expect some continuance of this, as we introduce the Evolut Pro and the Resolute Onyx in the US toward the fiscal year end.

We also achieved Micra reimbursement, which was significant, that's the small pacemaker.

In MITG, we have launched over 50 new products in the second half of FY17 to drive growth.

And as I mentioned, in RTG, with the launch of our consistent level of launches and the speed to scale methodology that Jeff has introduced, we are really beginning to see some benefits of that.

So these things put together, and obviously the traction on the diabetes 6-series pump, right now with the 630G which you recall in Q2 we barely launched, and really hadn't started selling.

So that has gained some traction.

And our priority access program is also getting a good degree of interest for the 670G.

You put all of that together, those are meaningful set of product launches.

What we're really excited about is that we expect that momentum to continue, in terms of product launches in Q4, and have a good pipeline into next year.

So I think that's the best way to think about the differences.

Great.

Thank you.

I appreciate that.

And then just quickly for Karen, can you give us some quick thoughts on the accounting change that you'll be implementing at the beginning of FY18?

How much does that add to earnings, and do you have any preliminary thoughts on the impact from tax reform and what that means to Medtronic?

If you're talking about the accounting change around stock compensation.

Right.

We will be implementing that next year.

The impact would be very dependent on stock price and option exercise, so very difficult to tell.

But it will be part of our overall tax planning for next year.

So wouldn't expect any positive or negative from that to fall to the bottom line.

In terms of tax reform, we outlined at the JPMorgan healthcare conference the fact that if we look at the overall Republican blueprint, which has the most detail, but still not enough detail to really assess the impact out there, we do think that we would be -- we would benefit slightly from that blueprint, and benefit in the nearer term on just tax rate, in the longer term, it could be a slight detriment as interest deduction on debt going forward may no longer apply.

But the biggest benefit to us, as we talked about at the conference, would be the potential repatriation of our cash.

Today, we have about 55% accessibility to our ongoing cash that we generate, and if we were able to have 100% accessibility, that would be meaningful to us.

Just for this fiscal year alone, that could be another approximately $2.5 billion of cash accessible, and obviously we anticipate growing our cash every year, so that could be very meaningful.

Thanks very much.

Your next question comes from Danielle Antalffy of Leerink Partners.

Congrats on a great rebound this quarter.

I just wanted to follow-up on some of the revenue commentary, and as we look into FY18, and you do have some incremental headwinds coming online, you have been very transparent about the replacement headwind for your high power devices.

You've got some competitors coming on the MRI-C side as well, persistent competitive headwinds in spinal cord stimulation.

You've got another transcatheter heart valve coming in the US.

Can you talk about how you're thinking about what the drivers will be, to manage through those headwinds, and keep you at that mid single digit top line growth trajectory?

You've got to understand that while there are -- there is competitive new product activity, we also have new product activity, and we've used our lead, for example, in the cardiac MRI space by launching differentiated products in the cardiac rhythm implantables.

We've got approval now for 3T MRI, which our competitors don't.

We've got a series of new algorithms in our cardiac rhythm implantable products, that again are unique and differentiated.

We've got the Micra, the smallest pacemaker which no one else has, and recently got reimbursement and only beginning its growth trajectory.

Just in the cardiac rhythm space, we've got ammunition too, against our competitors.

Now, it will have to play out in the marketplace, and we certainly don't take our competition lightly, but we're not exactly sitting still.

In the transcatheter valve area, again, there is new competition, but we just came out with our second or third generation of these valves, building on the live clinical experience that we have built over the past two years in that space.

So again, product launches coming out toward the end of this fiscal year and well into next year.

We have the -- in diabetes, we have the 670G hybrid closed loop system, which we think in FY18 will gain full traction and will be a meaningful growth driver for Medtronic into next year.

Recall that this is a unique hybrid closed loop pump product, which in many ways promises to be revolutionary in the treatment of type 1 diabetes patients.

Again, we haven't really benefited from that successful approval in the middle of last year.

And then in the neuro space, there is significant competition, and we've got our work cut out for us there, but we are also launching products.

We just talked about the [Evolut] workflow that we just launched, which has got good physician enthusiasm, which we are just beginning to get traction on.

We've got the [Intelius] implantable neurostimulators, which is the smallest stimulators there are in the market, which again will have an impact.

In MITG, a series of new launches led by the ligature instruments, our stapling products.

All of this put together, together with a cadence of launches like I said earlier, about 50 new launches in MITG in the second half of this year alone, that's a pretty big list, which is broad and diverse.

We expect this will make a difference.

No, that's very helpful, Omar.

Just following up on that, you've broken out what you expect the new products' growth vector to contribute.

Is it still -- should we still be thinking about that as a contributing what it what has in the past, or do you think that's going to be a bigger contributor going forward, because of all that you just listed?

I think our growth efforts are to some degree diversified, although the new product segment, or the new therapy segment, is the biggest portion of our growth.

We've talked before about new therapies contributing something like between 200 to 350 basis points of growth to Medtronic every year, and that remains on track.

In addition to that, we've had steady performance from our emerging markets, and we expect 150 to 200 basis points of contribution from that, and delivering in the low double digits will give us that.

In services and solutions, and driven by annuity revenue from hospital solutions, as well as some of our value-based healthcare business models, also contribute meaningfully to our growth.

So we've got a balanced growth effort across these different areas, but of course, new therapies form the heart and the core of our growth, and they also in fact lead to future emerging market and economic value growth.

Thank you so much.

I appreciate the response.

Your next question comes from Brooks West of Piper Jaffray.

Thanks for taking the questions.

I want to start with Hooman, if I could.

A lot of moving pieces in the diabetes market right now.

Hooman, I'd love to get your thoughts on the market overall, especially given J&J's recent announcement.

We're trying to connect the dots in terms of how we should think about the ramp of your business.

You've talked about spring launch for 670G, but you have talked about that being a controlled launch.

You've got the priority access program.

I'm just wondering how that all works as we think about the launch cycle of that device?

And then last, just how should we think about the contribution from the UNH relationship?

Thanks.

Sure.

Okay.

So a few pieces there, Brooks.

I'll try to take them one at a time.

As far as the market overall, as you pointed out, it's a dynamic market, and certainly over the last, call it, 90 days, a significant number of competitive announcements.

But what I would say is if you take a look at that market, and you look at our positioning in that market, we feel great about where we are.

We've got the 630 in the US, we've got the 670 that we're going to launch in the spring, number one.

Number two, we have a standalone sensor that we anticipate getting approval on towards the end of this fiscal year, beginning of next fiscal year, which will signal our entry into that market.

And then on top of that, our international growth continues to be good.

So you put all of those pieces together, on top of the work that we're doing in value-based healthcare in type 2, we really like how we're positioned in the marketplace overall.

Now, in terms of the 670G specifically, you pointed it out.

The launch is spring, as planned, absolutely no deviation from that.

It is going to be a staggered launch, as we've talked about before, and the reason we're doing the staggered launch is to make sure that we're rolling this out in a methodical way, so that we do the right thing for patients and physicians, make sure they get the proper training.

And then also it's staggered because we do have a priority access program.

We want to make sure that the participants in the priority access program are first in line for this new technology, our employees, as well, and then as we conclude with payers and manufacturing capacity, we'll open it up, and really get the full capacity.

And then I think your -- the last part of your question, Brooks, on United HealthCare, that relationship continues to go well.

We're very pleased with how that has gone.

It really was our first step into value-based healthcare with a payer, and we were thrilled to be able to do it with United, and we've been able to have ongoing discussions about how we can continue to broaden that partnership, and so that landscape looks well.

You touched on other payers.

I'm not going to comment on specifics related to other payers, but I would say as other payers look forward, they're also looking to ensure that they are driving not only costs, but also outcomes, and that's going to continue to be very important.

Thanks.

Let me just follow up if I could on the 670G launch.

I'm curious, how as a patient do you get into the priority access program, how does that work?

And given the four year cycle around pumps, how many patients in your installed base, broad numbers, do you expect will be in that priority access program?

And then if I think about, when are you going to hit full launch on 670G?

Is that by year-end?

Is it further out than that?

Just a little bit more clarity would be helpful.

Thanks.

Sure.

So on the 670G, the priority access program essentially -- so let me provide some additional background.

Back in August, we received approval from the FDA for the 630G product.

Literally less than a month later, we received approval for the 670G product, which was far faster than what we had anticipated.

And if you remember, we had submitted the 670G to the FDA in June of last year.

So a far accelerated time line by the FDA for the 670 approval.

So literally in less than a month, we had two products approved right on top of each other.

We created the priority access program so that patients who purchased the 630G would be first in line for the 670G, once it was released in the spring.

And so that's really how you get on the priority access program.

As far as the uptake question that you have, Brooks, we don't disclose the actual number of participants that have chosen to enter into the priority access program.

But I think, as Omar talked about in the commentary, we're very pleased with our US results, as we really start to get into the swing of things here, first full quarter with the priority access program, and the uptake continues to be great.

And there's a number of things that need to happen in order for us to really get to full launch, not the least of which is payer coverage, which we're actively working, and it's hard to estimate how that's going to go.

But those are the things that we're working on in order to ramp up as fast as we can.

Thank you so much.

Your next question comes from Joanne Wuensch of BMO Capital Markets.

Can you give us a little bit of an update of you how you're approaching entering the United States with your hospital solutions business?

Obviously you've got your first contract here in public on the print.

How do you think about pushing that business further in the US?

Well, again, in a measured fashion, we're going after significant accounts where there is an interest in our overall capability.

We think the US, given the strong innovation platform that we have here that these accounts can serve as launching pads for future value-based healthcare programs, where we really work on the value of some of our new therapies on these platforms.

And again, we're doing this in a measured way.

I think a lot of the efficiency initiatives that we have in other regions around the world, the US hospitals do by themselves.

So again, we're being selective about where we go, but there is a considerable degree of interest, and we are going to be adding a few more accounts in the coming months.

And then as my second question, there's a lot of moving parts, some coming out this weekend at ACC in the TAVR space and structural heart.

Can you give us an update on what your view is on that market, and particularly where you are in [mitral]?

Thank you.

I think Mike Coyle is best positioned to comment on this.

Mike, go ahead.

Sure.

We continue to expect the market growth that we outlined at the analyst meeting back in June, so the growth profile is really going to be driven by the expansion of indications of use into the intermediate risk group at ACC, at late-breaking clinical trials, we will be presenting the SURTAVI data, which will be the basis of our clinical module for support of that indication for use in the US.

So everything we see is pretty much on track for what we described as $4.5 billion to $5 billion market opportunity around 2021.

In terms of mitral, we continue to do the feasibility enrollments for the Intrepid product.

We're now up to about 40 implants, and those continue to go well.

We are sitting down with FDA to talk about pivotal study design, and we expect to kick that off in FY18.

Thank you.

See you at ACC.

Your next question comes from Matt Taylor of Barclays.

I want to ask about two product factors, specifically.

One is, the last couple quarters you've called out this replacement headwind.

I was wondering how that impacted results in this quarter, and how you see that playing out in your results over the next couple of quarters.

That's kind of the first one.

This replacement headwind in cardiac rhythm?

That's right.

Yes.

Mike, do you want to?

We actually saw improvement in the replacement growth this quarter, from the standpoint that I pointed out last quarter.

We were seeing high single-digit declines.

We expected that to get marginally better, just by the modeling of where we were in the replacement cycle.

But we also benefit in the quarter from two additional things: One is there was a fairly significant competitive recall that took place, and that actually drove some competitive replacements for us, that we typically don't get.

But we also had unrestricted release of TYRX in the quarter, which is our anti-infective envelope.

It actually is particularly valuable in replacement procedures, and especially high-powered replacement procedures.

Actually the replacement growth was a low single digit decline this quarter versus what we saw in Q2.

Great.

And then one product that we haven't heard much about in a while, but could be a bigger one over the next year or so, is the surgical robotic system.

I was hoping we could get an update there on timing, or if you want to give us any preview in terms of the features and benefits, and how you think that will compete?

I'll let Bryan comment on that.

Go ahead.

Great.

No real change from the time that we talked to everybody in June.

I still am very bullish on the project.

We will be launching on a limited basis in specific countries towards the end of FY18, and then as I've said before, I would expect material revenue coming in FY19.

The real difference between what we're going to launch and what you're going to see out there is the end effectors.

The robotic system itself, I think, will be interesting, and will be unique in certain ways, but the end effectors is where we bring a lot of value to our end users today.

There's a lot of confidence in those end effectors, and to be able to combine that with a full suite of end effectors at launch in a robotic system will be a big benefit to us.

The other thing outside of robotics by itself, and I think this is important, as much as I'm excited about robotics as a microcosm, I've got to look at the macro.

And when we do launch robotics, we'll be the only organization will have a full suite of instruments in open surgery, traditional MIS, and robotics.

And the combination of those things will be unique to us, and the value then as a result of that we can bring to the customer will be beyond what anybody else can.

That's probably the thing I've most excited about.

Robotics by itself, very interesting.

That broader portfolio is the thing that really gets me excited.

Thanks, Bryan.

Thanks, Mike.

Your next question comes from Vijay Kumar of Evercore ISI.

Congratulations a nice quarter here.

So maybe my first one, for maybe Mike Coyle, is probably better suited for this one.

Mike, back when you launched CoreValve for the high risk group, we had this massive market expansion, patients on the sidelines.

There's been -- do you think there's a large pool of patients sitting on the sidelines, and when you launch the intermediate risk, will it have a similar effect on the market?

When we do our modeling, we basically see the approval, general approval of intermediate risk expanding the prevailing high and extreme risk patient population, by another 50%.

So you'd almost think about it as a third, a third, a third, in terms of the distribution of these patients.

So obviously, getting the data out, and then having that adopted to drive penetration is going to be the key item.

But that's the way we would outline it.

And then of course we've begun the low risk clinical trials, as well as have some others in the space, and so we would expect that to be the next wave of expansion, as those data become available.

Great.

And maybe one for maybe Omar and both Karen can pitch in on this one.

I think Omar, when you look back on that question on operating margins, I think the thought process was, you manage to an operating dollar on the profit equation.

Has anything changed on that metric?

The way you're thinking about the business given Karen's comments and, look, we're focused on margins.

Obviously from our side of the suite, we look at margins, versus how you are modeling or running the business internally.

So I'm just wondering if there's been any change in the thought process.

Thank you.

No real change in our thought process.

We have said consistently that for sustained EPS growth, you need to do that through operating margin.

That doesn't mean that there aren't other vehicles, which we could use intelligently, and which we will use, and that's financial leverage.

But at the end of the day, the majority of our improvement will have to come through operating improvement in the business.

We outlined, and I said earlier in the call, what things we're looking at.

I do think that the manufacturing consolidation is one of our biggest and most significant strategic moves in that area, and as that comes to play, we'll give you more details, but that's one that we're working on very, very actively, and we think will be the platform which will give us sustained operating margin improvement in the future.

That's essential.

And then like I said before, the scale and size of our Company is such that many of the support functions have never been integrated, and with the introduction of the IT systems around the world -- which are now not complete, but well on the way to being complete, leveraging those will give us further capability to drive the efficiencies in that regard.

So operating margin remains our focus.

That's where we provide the most detail.

Again, let's not forget that we sit on a lot of other assets, and some degree of financial leverage that we can get to shore up our EPS growth, I think, is something that's the right thing to do.

Great.

Thanks, guys.

Your next question comes from Bruce Nudell of SunTrust.

I had a question for Mike, and then a follow-up for Omar.

So Mike, could you just talk about the growth rate in the LVAD market?

I know it's a small acquisition, but a space we're historically interested in, and US, ex-US growth, and also the competitiveness of HVAD.

I know the data's coming up at ISHLT, but just given the very low thrombosis rates seen with HeartMate 3, how do you think HVAD will compete, even if the stroke rate is changed in the ISHLT presentation?

Overall the growth of the market is low double digits, so very of much in line with what we had expected, when we did the acquisition.

In terms of the overall performance of HVAD, we are very bullish on its performance, and I think the data sets that we will be using to get the destination therapy results, or the landing indications in the US, I think will show a high degree of comparability between the two products, and we think the size advantages of the product, as well as its long-term ability to be done in a thoracotomy procedure we think offers some significant advantages, and we're hooking forward to competing in the segment.

Thanks for that.

Omar and Karen, the Company has successfully initiated an impressive globalization effort, but with that, you institutionalize currency risk.

And can you foresee -- firstly, do you foresee any secular changes, or do you think that negative stuff today will become positive stuff tomorrow?

And secondly, what's the philosophy going to be, in terms of just delivering cash EPS quarter on quarter, irrespective of currency?

Thanks so much.

The currency is clearly an issue, and we do have exposure.

That is true.

We've got some hedging programs which softens the peaks and valleys in the currency rates, but in the end, that's all it does.

We are, however, beginning to put together, in accordance with our manufacturing operations optimization, a natural hedging program, which will allow us to have cost and revenue in the same geography, or at least in the same currency.

That is the only ultimate protection against currency swings.

But having said that, I will say that we're very early in that journey, and it will take a while before that strategy really plays out.

But that's the project.

Karen, you want to add?

I would just add on natural hedging, that it's not just where we place our centers, but it's also how we negotiate contracts with both our vendors and our customers.

We are focused on driving as much natural hedging as we can into the business.

That said, we will always have currency risk, just being a big global Company.

We recognize that currency risk is not something that we can control, but something which we do indeed need to manage.

And that's what we're focused on.

Thanks so much.

Your next question comes from Josh Jennings of Cowen and Company.

Just had a follow-up for Mike Coyle on ACC and the SURTAVI data.

I was wondering if you could help us just think about how the data's going to be presented.

There's been numerous revisions to the inclusion criteria.

It is an interim look, and a statistical analysis.

I was hoping you could answer these specifics: With the interim analysis prespecified, is there any statistical penalty for the look?

Secondarily, what types of sub-group analysis should we think about being presented at ACC in terms of low risk [4Ts] score patient groups, as inclusion criteria was expanded?

And then also the two different valves being in the studies, is there going to be an Evolut R specific subgroup analysis as well?

Josh, obviously these are all embargoed data, and this is a late breaking clinical trial presentation.

I'm not going to go into any real detail on it, until the data have presented.

We'll be doing an analyst discussion at ACC, following the presentation of the data.

I would just say that this Bayesian analysis and design criteria and intermediate look were all designed into the original study in 2012, so there's nothing new here.

So we're looking forward to presenting the data, and being able to discuss it afterward.

Great.

Thanks.

And Karen, just a follow-up on the operating margin expansion trajectory, and the FX impact.

Any way you can provide us with any directional guidance for FY18, just in terms of where currency rates are now, and how you're hedged?

And whether or not your positions will be a headwind or tailwind to reported operating margins in FY18?

So we will give full FY18 guidance on our next earnings call, but just from an FX impact perspective, if currency rates remain stable to where they are today, we would expect a negative impact on revenue of between $100 million and $300 million, and on EPS of $0.05 to $0.15.

Is that helpful?

Oh, great.

Anything specific to the other income line?

Yes, we are not going to give line item guidance at this stage on FY18, but expect more guidance on our next earnings call.

Okay.

Thanks a lot.

Your next question comes from Raj Denhoy of Jefferies.

Wonder if I could ask a bit about emerging markets.

It's about 14% of sales now.

Still growing low double digits.

You're still seeing some headwinds in Saudi Arabia and some countries in that area.

Maybe you could give us an update on when you'll see that potentially rebound, and where you think that 14% of revenue from emerging markets could eventually get to over time?

Well, in terms of the Middle East first, year-over-year the decline is significant.

Like I said, in Saudi Arabia alone, it's like 30% down year-over-year.

But on a sequential basis, it's stabilized.

So a lot of this is to do with built up inventory of implantable devices in the Saudi system itself, which they're cleaning out right now.

We're helping them optimize the deployment of these devices into the market.

We see that action happening today, so therefore, this stabilization, the sequential stabilization will lead to anniversarying of this decline by fiscal year-end.

At that point, we expect to return to growth, although I think it will be measured, because there's still some inventory in the system, and I think the healthcare systems there are responsibly deploying that inventory over time.

So that's what I'd expect out of the Middle East.

I don't think we'll see major declines and start to begin to see growth come back early into next fiscal year, at least that's our expectation today.

In terms of where this could be, our target is in the low double digits, and aiming to get to the mid-teens.

I think that's an entitlement, given the size of that market.

It isn't as easy as it sounds, given the size of its market, because the infrastructure just isn't there.

But we're working in a very focused fashion, with both the public authorities in many of these countries, as well as private providers, as well as other interested stakeholders in trying to develop inflection points in growth in singular countries.

So those are the approaches we're taking.

Each country is different.

The macroeconomic conditions vary.

There could be surprises in any one country at any time.

But I think we're getting increasing confidence the level of diversification that we have, and the size of our emerging markets business across Latin America, Middle East, China, Asia-Pacific, Eastern Europe including Russia, all of that put together, that diversification gives us some level of confidence that double-digit growth in the emerging markets can continue.

And if you put that math together, that 14% ratio probably goes up a point or so every year.

So just to put a finer point on it, as the Middle East improves over this fiscal year, and you move into 2018, is that mid double-digit growth from emerging markets, is that something we should expect even as soon as next year?

Again, I cannot comment on that, because like I said earlier, we look at this diversified portfolio for emerging market countries, and you don't know what's going to happen where.

So the whole object of diversification is that you balance upsides and downsides.

So I think sticking to the double-digits is what we're seeing, and you'll have occasional quarters where we do better, but I think we've shown that we've held the double-digit line, even through bad circumstances.

And that's just our historical performance, based on factors that in many instances are outside our control.

So that's the best I can comment.

I think it's not prudent to speculate on what's going to happen, only from an upside perspective in these markets.

That's helpful.

Thank you.

Your final question comes from Matt Miksic of UBS.

Congrats on a really nice job, sequential improvement.

So I have one follow-up here on TAVR, and one if I could on spine.

So on TAVR, increased market awareness and market development is emerging as an important driver for this new intermediate risk segment, you talked about earlier.

Mike, would love to hear you maybe talk about the cadence data, new products, and importantly your efforts and initiatives, or if you see that as important, when we can start to see that activity in the market?

And I mentioned I have one follow-up.

Sure.

I think just in terms of cadence of things that are going to drive growth for us, the 34-millimeter valve that we talked about, Omar talked about in his commentary, continues to roll out in the US, and that segment is 25% to 30% of our historical segment, so it's been important in terms of its contribution to our overall growth.

And it requires training, and basically we are only in 200 of our 400-plus centers, with fully trained access to the product in Q3.

So there's still growth opportunity in the US for that.

And then of course, we just released that product in Europe.

So we will get full quarter benefit of that here in Q4.

In addition, our next generation product, the Evolut Pro, is basically expected to come into the market in the first half of the fiscal year next year.

So that will provide us a growth opportunity in advance of other competitors coming into the market.

And then the SURTAVI indication, or the intermediate risk indication is something that we expect in FY18, and of course we can talk more about that and its impact on the market after the data are released.

So I think those are the main catalysts I think that I would point to for that business over the course of Q4 and into next year.

And Mike, just to make -- one of the things we're hearing in the market place is this need for getting back out into the community.

Is that something you've started, that you expect to start?

Is that something that comes after SURTAVI or with the new launches?

Well, I think market development activities will follow when we have indications for use to pursue them.

We can talk about that, in fact, Rob will be discussing our general program here at ACC, so that might be a good place to have that discussion.

Great.

And then if I could, just on spine.

The robotic initiative, the partnership you've struck up with Mazor, from their commentary, appears to be working quite well.

Your spine business appears to be tracking a bit better.

I would love to get your view just on spine robotic surgery, and then robotic surgery in general.

Given that you're coming at this a little bit differently than a standalone robotic surgery player, in that you're a leader, trusted provider in both spine and general surgery, maybe if you could talk about some of the key elements, considerations as a market leader, that you're running into, or see as advantages, or see as considerations as you look to roll those systems out, or drive further into that part of the market?

Yes, I don't know if you heard Bryan Hanson's response on his view of robotics and a broad portfolio but I take a similar viewpoint on this.

For the spine market, we're looking at it holistically in terms of implants and enabling technology.

Enabling technology has several different layers, intraoperative imaging, navigation, surgical tools, and robotics.

So we believe -- you mentioned our spine business is doing better and that's just a result of us introducing -- that has no impact from Mazor.

This is a result of introducing a lot of new technology over the last several quarters, launching that technology at scale.

When we launch it, we have enough of the inventory and instruments to support the cases.

So that's really what's -- and then finally I guess rep engagement.

Our US team in particular, where he have 65% of our spine business, is humming on all cylinders.

That's what's driving our growth.

As we move forward, our goal in spine first was to get back to market growth, and now start to take some share.

But as we move forward, what we need is to grow the spine market, and we believe that the combination of this enabling technology, which robotics is just one piece of, combined with our market -- that combined with our implants, we believe we can improve outcomes, both from a clinical perspective and an economic perspective, and robotics fits right in there.

What we're most excited about with Mazor is their pre-surgical planning software that helps physicians plan pre-operatively versus intraoperatively, which happens a lot today, and the surgical -- the robotic arm capabilities that also will help do things a little bit more consistently.

And we believe this will help democratize good spine surgery, not just in the US, but outside of the US.

So, it's a holistic viewpoint.

Mazor is one part of our enabling technology strategy which we call -- as you integrate that into our implants, we call that surgical synergies.

We are excited about the Mazor relationship.

It is going better than we anticipated, in terms of faster uptake.

Our physicians are very interested in this enabling technology strategy and how robotics fits in, and I think that's upside to our future results.

Thanks so much.

This concludes the question-and-answer session of today's program.

I will now turn the floor back over to management for any additional or closing remarks.

Thank you all for your questions, and on behalf of the entire management team, I would now like to thank you again for your continued support and interest in Medtronic.

We look forward to updating you on our progress in our Q4 call, which we currently anticipate holding on Thursday, May 25.

Thank you all very much.

Thank you.

This concludes your conference.

You may now disconnect.