美敦力 (MDT) 2017 Q4 法說會逐字稿

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

(Operator Instructions) Thank you.

I will now turn the conference over to Mr. Ryan Weispfenning.

Please go ahead.

Great.

Thank you, Crystal.

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

During the next hour, Omar Ishrak, Medtronic Chairman and Chief Executive Officer; and Karen Parkhill, Medtronic Chief Financial Officer, will provide comments on the results of our fourth quarter and fiscal year 2017, which ended on April 28, 2017.

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

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

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

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

Unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the fourth quarter of fiscal year 2016, and rates and ranges are given on a constant currency basis.

References to annual results increasing or decreasing are in comparison to fiscal year 2016 and rates and ranges are given on a constant currency and constant week basis, which adjusts for the negative effect of foreign currency translation and the extra week that was in the first quarter of fiscal year 2016.

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

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

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

Good morning, and thank you, Ryan.

Thank you to everyone for joining us.

This morning, we reported fourth quarter revenue of $7.9 billion, representing growth of 5%.

Non-GAAP diluted earnings per share were $1.33, growing at 6%.

Before providing more detail on our quarterly performance, I'd like to recap fiscal 2017, a solid year for Medtronic.

We delivered record revenue of $29.7 billion, growing approximately 5% in the mid-single digits for the fifth consecutive year.

We made progress in each of our growth strategies.

In therapy innovation, we executed a steady cadence of meaningful product launches as well as introducing some groundbreaking new technologies.

In globalization, we expanded access to our therapies in emerging markets, resulting in double-digit growth.

And in economic value, we continued to extend our industry leadership in developing value-based health care solutions.

The integration of Covidien progressed as planned.

We have now realized over $600 million in synergy savings and remain on track to deliver our goal of $850 million of total cost savings by the end of the next fiscal year.

This operational productivity, coupled with our revenue growth, were key contributors to delivering double-digit EPS growth and generating over $5.5 billion of free cash flow.

We strategically deploy our capital in line with our stated priorities, balancing the return of cash to our shareholders together with disciplined reinvestment in our businesses.

We met our commitment of returning greater than 50% of our free cash flow to shareholders in the form of dividends and net share repurchases.

In addition, we invested approximately $1.5 billion in several strategic investments and 5 tuck-in acquisitions, and we expect these acquisitions to further enhance our revenue growth and improve returns over time.

Finally, late in the fiscal year, we announced the sale of a portion of our PMR division to Cardinal Health for $6.1 billion as part of our disciplined portfolio management strategy.

But most importantly, in fiscal year '17, together with our physician partners, we served 70 million patients, more patients in more places around the world than any year in our history.

It is incredible that 2 patients around the world are benefiting from Medtronic therapies and services every second.

I am very proud of our more than 88,000 dedicated employees for all that they accomplished in fiscal '17 and all that we can accomplish going forward as we continue to fulfill the Medtronic mission.

Moving now to fourth quarter performance.

We had a strong finish to our fiscal year '17, delivering over 5% revenue growth.

CVG, MITG, RTG and Diabetes all grew in the mid-single digits.

Geographically, we also demonstrated solid, balanced performance with mid-single-digit growth in the U.S. and non-U.

S. developed markets and double-digit growth in emerging markets.

Complementing our solid revenue growth, our operating margin and cash flow continued to improve as expected.

Our performance continues to be fueled by our 3 growth strategies: therapy innovation, globalization and economic value.

We're creating distinct competitive advantages and capitalizing on the long-term trends in health care, namely, the desire to improve clinical outcomes, the growing demand for expanded access to care and the optimization of cost and efficiency within health care systems.

These trends, along with an aging population in most countries, produce secular growth tailwinds that we believe represents sustainable long-term opportunities for Medtronic.

Now let's discuss our fourth quarter performance against each of our growth strategies.

In therapy innovation, we continue to see strong adoption of our innovative products across all our groups.

In our Cardiac and Vascular Group, which grew 5%, we're leveraging the breadth of our products and services as well as our strong positions in important rapidly expanding markets to drive sustainable growth.

Combined, our TAVR insertable diagnostics, AF ablation, LVAD and drug-coated balloons are now annualizing at nearly $3 billion and growing at over 20%.

In our cardiac rhythm implantables business, we recently received CMS approval for reimbursement coverage in the U.S. for Micra, the world's smallest pacemaker.

Also, as announced last week, we now have U.S. approval for the first MRI-safe quadripolar CRT pacing system.

In TAVR, we delivered mid-30s growth and increased our market share sequentially in both the U.S. and Europe, and the continued launch -- on the continued launch of our Evolut R 34-millimeter valve.

In Coronary, we just received FDA approval of the Resolute Onyx drug-eluting stent at the start of the fiscal year.

And looking ahead, we expect continued strong growth in TAVR, driven by the Evolut PRO valve and intermediate risk integration expansion.

And in Coronary, we expect the recent approval of the Resolute Onyx will turn the mid-20s U.S. DES sales decline that we experienced in fiscal '17 into meaningful growth this coming fiscal year.

In our Minimally Invasive Therapies Group, which grew 6%, we had high single-digit growth in Surgical Solutions driven by new products in Advanced Energy and Advanced Stapling.

In Advanced Energy, we continued to roll out 3 new LigaSure instruments with a nano coating that helps reduce instrument cleaning, which improves surgical procedure efficiency.

And we continue to see strength in the Valleylab FT10 energy platform.

In Advanced Stapling, results were driven by the sustained adoption of our endostapling specialty reloads.

We also launched Signia, our new single-handed powered surgical stapler that provide surgeons with real-time feedback during surgery.

These new products continue to facilitate the move of open surgical procedures to minimally invasive, resulting in better patient outcomes and lower health care costs.

In Patient Monitoring & Recovery, our above-market growth was driven by the strength in our PB 980 ventilator, our Capnostream 20 bedside capnography monitor, capnography disposables as well as our Nellcor pulse oximetry products.

Our Restorative Therapies Group grew 5% this quarter with strong contributions from our Spine, Brain and Specialty Therapies division.

Our Spine division grew 3% and again gained market share.

Core Spine grew in the low single digits, continuing to benefit from our Speed to Scale initiative as we continue to launch series of new products including the Solera Voyager and ELEVATE expandable cage.

In addition, INFUSE sales were strong, growing in the double digits.

Our Brain Therapies division grew 9%, driven by double-digit growth in Neurovascular and Neurosurgery.

In Neurosurgery, our StealthStation S8 surgical navigation system received strong surgeon enthusiasm at the American Academy of Neurological Surgeons' annual conference last month.

While we launched it late in the fourth quarter, we expect it to result in accelerating sales growth next fiscal year.

Turning to our Diabetes Group.

A grow rate of 4% decelerated sequentially as we predicted, ahead of the full launch of the MiniMed 670G hybrid closed-loop system.

Despite this, we gained insulin pump share in both the U.S. and international markets driven by strong clinical -- by strong clinician and consumer demand for our 6 series pumps.

In the U.S., direct pump shipments to consumers grew over 20%.

In CGM, we grew in the low 20s and are seeing strong growth globally as more patients transition to our sensor-augmented pumps.

Regarding the U.S. launch of the MiniMed 670G, we have approximately 750 people taking part in our customer training phase.

The feedback has been extremely positive with a continued increase in patient satisfaction levels.

We're preparing for a broader launch in June to the more than 20,000 pump users that are enrolled in our Priority Access program.

As stated before, we do not expect revenue growth to ramp substantially until after we have fulfilled the Priority Access orders given the lower revenue associated with the upgrade program.

Our product pipeline remains robust across all our groups with a number of important near-term growth catalysts.

We remain confident that our new product -- that our new therapies can drive sustainable growth next fiscal year and beyond.

Next, let's turn to globalization.

Emerging markets grew 10% as we continued to expand access to our products and services around the world.

In addition to ongoing traditional market development, we are executing on differentiated strategies, namely, structuring partnerships with both governments and the private sector as well as optimizing our distribution channels.

We believe that these initiatives will not only position us for long-term leadership in emerging markets, but also will accelerate growth and lead to sustained market outperformance.

In the Middle East, we continued to face challenges in the macroeconomic environment causing our revenue to decline in the mid-single digits.

However, in Saudi Arabia, our largest market in the region, we are encouraged by the relatively stable sequential revenue we have delivered for the past 2 quarters, albeit at a lower base given the large year-over-year declines experienced earlier this fiscal year.

In other regions around the world, we delivered strong double-digit growth in China, Latin America and Southeast Asia and high single-digit growth in Eastern Europe.

In China, we grew in the low teens, with double-digit growth across CVG, MITG and RTG largely driven by strong growth in pacemakers, Advanced Stapling and Neurovascular.

In addition, we are seeing success from our expansion into Chinese tier 2 cities and private hospitals.

In Latin America, we had high-teens growth led by strong results in RTG, Surgical Solutions and Coronary & Structural Heart.

Brazil, Mexico, Chile and Argentina all grew double digits.

And in Southeast Asia, which grew in the low 20s, we executed a number of channel optimization initiatives including moving to direct distribution models in certain businesses in Indonesia and the Philippines.

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

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

Turning now to our third growth strategy, economic value, as we continue to see success in our Hospital Solutions business, which grew double digits, as we are now managing cath labs and operating rooms for more than 130 customers around the world.

Also, we continue to execute our value-based health care signature programs.

One of these is TYRX, our anti-infection envelope for implantable devices, which is an example of where a technology change directly results in a clear and measurable value to the health care system without any dependence on other variables.

Since launching our value-based program for TYRX earlier this calendar year, we have outcome-based contracts in place at over 140 accounts, helping drive over 20% revenue growth in TYRX in the fourth quarter.

Infection control for implantable devices is a large opportunity, as in the U.S. alone, over 6,000 patients are affected annually.

We are aggressively developing other unique value-based health care solutions across each of our groups, and while we are still early in this journey, we remain focused on leading the shift to health care payment systems that reward value and improved patient outcomes over volume.

As always, we expect to do this in a way that benefits patients, healthcare systems as well as our shareholders.

Before turning the call over to Karen, I'd like to highlight the agreement that we reached in the fourth quarter to divest a portion of our Patient Monitoring & Recovery division to Cardinal Health.

We were pleased to receive clearance from the U.S. Federal Trade Commission last week and continue to expect this transaction to close in our second quarter of fiscal year 2018.

This is a positive transaction for all involved including our shareholders and employees who we believe will thrive under this change in ownership.

We're committed to disciplined portfolio management and we reached the conclusion that these businesses, while truly meaningful to patients in need, are best suited under ownership that can provide the investment and focus that these businesses require.

Upon closing, this transaction will have an immediate positive impact on our revenue growth rates and margins with modest near-term earnings dilution.

We intend to continue investing over the long term in internal and external opportunities that are more directly in line with our growth strategies and focus on strong financial returns.

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

Karen?

Thank you, Omar.

Our fourth quarter revenue of $7,916,000,000 increased 5%, both as reported and on a constant currency basis.

Foreign currency had a negative $37 million impact on fourth quarter revenue and acquisitions contributed approximately 110 basis points to revenue growth.

GAAP diluted earnings per share were $0.84, non-GAAP was $1.33.

After adjusting for the $0.02 negative impact from foreign currency, non-GAAP diluted EPS grew 6%.

Our operating margin for the quarter was 30.7% on a constant currency basis, representing a year-over-year improvement of 40 basis points.

With the impact of currency included, our fourth quarter non-GAAP operating margin also improved, increasing 10 basis points year-over-year.

We continued to cover the earnings dilution from our recent acquisition, which means we maintained earnings expectations while realizing incremental acquisition revenue.

Taking into account currency and the acquisitions that we have done in the past year, our operating margin improvement on an organic basis was approximately 70 basis points in the quarter.

The operating margin improvement was driven in part by efficiencies as we continued to deliver on our Covidien synergies.

This was partially offset by purposeful investments we made in sales and marketing ahead of important upcoming product launches.

Net other expense was $48 million compared to income of $21 million in the prior year due in large part to lower net gains from our foreign exchange hedging program.

Our full year operating margin improved 140 basis points on an organic basis, which takes into account the impact of foreign currency, acquisitions we have done within the past year and the impact of the extra week in fiscal '16.

This solid operating margin improvement was within our expected range for the year.

Below the operating profit line, net interest expense was $196 million, a sequential increase driven in part by our debt issuance in March.

At the end of the fourth quarter, we had $33.4 billion in debt and $13.7 billion in cash and investments, of which approximately $6 billion was trapped.

Our non-GAAP nominal tax rate on a cash basis was 17%, in line with our expectations.

Fourth quarter average daily shares outstanding on a diluted basis were 1,381,000,000 shares.

Turning to shareholder payout.

In fiscal '17, we paid $2.4 billion in dividends and repurchased a net $3.1 billion of our ordinary shares.

This represented a total payout ratio of 86% on non-GAAP net income and 136% on GAAP net income.

Keep in mind, our payout ratio is elevated as we have been continuing to not only return 50% of our annual free cash flow to shareholders, but also execute the $5 billion incremental share repurchase commitment we made through fiscal year '18.

Before moving to our income statement guidance, I want to reinforce our commitment to strong free cash flow generation, which we recognize is an important driver of long-term shareholder value.

In fiscal year '17, our free cash flow was $5.6 billion, in line with our guidance and representing very strong year-over-year growth of 35%.

This growth was well above our long-term expectation to grow free cash flow in the high single-digit range, roughly in line with earnings and is primarily due to the timing of litigation and tax item that affected our income statement in fiscal '17, but won't impact cash flow until fiscal '18.

As you know, cash flow is subject to large swings in discrete items, and as we have demonstrated this year, can also be affected by timing.

Going forward, we will talk about cash flow growth against a longer multiyear view, and as such, we would expect our free cash flow to grow in the high single digits compounded annually from fiscal year '16 to fiscal year '18.

Now, looking at the picture ahead.

To avoid confusion, our guidance for this next fiscal year does not yet take into account the impact of the planned divestitures.

We intend to update our guidance upon close of the transaction.

For fiscal year 2018, we expect constant currency revenue growth to be in the range of 4% to 5% on both an organic basis and after taking into account the year-over-year benefit from the acquisitions we completed early last fiscal year.

By business group, we expect CVG to grow in the range of 5% to 6%, MITG to grow in the range of 3% to 4%, RTG to grow approximately 4% and Diabetes to grow in the 10% to 12% range, increasing from the first half to the second as we fully launch 670G beyond our Priority Access program.

Looking at the fourth (sic) [first] quarter, we would expect total Medtronic revenue growth to be similar to the annual range, but keep in mind that in the first quarter, we will be fulfilling the 670G Priority Access program, so we would expect Diabetes growth to be similar to the past quarter and ramp throughout the year.

We expect solid operating margin improvement in fiscal year '18 with greater strength in the back half of the fiscal year.

We expect our gross margin on a constant currency basis to be flat to slightly improved throughout the fiscal year with modest pricing pressure offset by operating improvement.

Given historical and current foreign exchange rates, we expect currency to negatively affect the gross margin in the first half of the year with a greater impact in the first quarter than the second.

SG&A as a percent of revenue is expected to improve next fiscal year, particularly in the back half as we continue to realize additional Covidien synergies in our enabling functions and transition to centers of excellence.

However, in the first half of the fiscal year, we expect SG&A as a percent of revenue to remain relatively flat from the first quarter to the second as we invest in sales and marketing for important new indications and product launches, including TAVR immediate risk, Resolute Onyx and the 670G.

Given our recent debt issuance and the purposeful liquidation of some of our investments, we expect net interest expense to moderately increase over the level just reported in the fourth quarter.

And while difficult to predict, given a dependency on our stock price movement, we expect a slight tax benefit from the accounting change for excess benefits on stock options we will implement in fiscal year '18.

With respect to earnings.

We expect fiscal year 2018 non-GAAP diluted earnings per share to grow in the range of 9% to 10% on a constant currency basis with higher growth in the back half of the year as we fully launch important new products and realize additional savings in SG&A as mentioned.

In addition to these items, given the tax benefits we had in the first half of fiscal '17 that are not expected to repeat, we would expect first quarter EPS to be in the upper end of the high single-digit range with the second quarter in the mid-single-digit range both on a constant currency basis.

While the impact from currency is fluid and therefore not something we forecast, if recent exchange rates, which included EUR 1.12 and JPY 111, remain stable for the fiscal year, our full year revenue would be positively affected by approximately $75 million to $175 million.

Given historical and current rates, the impact from foreign currency would be a headwind in the first half of the fiscal year, including approximately $10 million to $60 million negative impact to revenue in the first quarter, and shift to a tailwind with the comparison against a stronger dollar in the second half.

Full year EPS would be negatively affected by approximately $0.05 to $0.10 including a negative impact of approximately $0.03 to $0.05 in the first quarter.

As Omar mentioned, we expect the divestiture of a portion of our Patient Monitoring & Recovery division to Cardinal Health to close in our second fiscal quarter.

As stated upon announcement, the transaction is expected to result in modest net dilution to our fiscal 2018 non-GAAP earnings per share in the range of approximately $0.12 to $0.18 with the exact amount primarily dependent on the closing date of the transaction.

The transaction is expected to improve our comparable constant currency revenue growth rate and non-GAAP comparable constant currency operating margin by approximately 50 basis points each.

As previously stated, we intend to allocate $1 billion of the after-tax proceeds to an incremental share repurchase in fiscal 2018 with the balance used to reduce debt.

Now I will return the call back to Omar.

Thanks, Karen.

To conclude, Q4 was a strong finish to the fiscal year with balanced, diversified growth across our groups and regions.

Along with the mid-single-digit revenue growth, our organization delivered meaningful operating margin improvement and double-digit EPS growth, as well as growth in free cash flow in fiscal '17.

Looking ahead, I want to reiterate our longer term commitment to drive not only mid-single-digit constant currency revenue growth and double-digit constant currency EPS growth, but also our focus on long-term value creation through strong free cash flow and strategic capital allocation, balancing return of cash to our shareholders with disciplined reinvestment to fuel future growth.

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

In addition to Karen, I have 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.

(Operator Instructions) If you have any additional questions, please contact Ryan and our Investor Relations team after the call.

Operator, first question please?

(Operator Instructions) And your first question comes from the line of David Lewis with Morgan Stanley.

Two strategic questions to start off and I'll jump back in queue, the first is on cap deployment, the second one on margins.

And maybe Omar, Karen, on capital deployment, if we think about the last access to cash you've had between Puerto Rico and in the Cardinal assets, it's about $8 billion, $7 billion of that is going to go into debt repayment.

So can you just talk to us about the messaging for shareholders here about repaying that debt?

Is it simply a commitment to debt holders?

What does it tell us about your interest in growth-minded M&A or, frankly, larger, what some would call, more transformational M&A?

And then I have a quick question on margins.

Well, first of all, we've stated our capital allocation policies and we're kind of following that.

Second, we've got a big transaction with this divestiture that's coming up and we're really focused on that.

Third, the -- our strategy for acquisitions, we've said all along, which is a disciplined strategy of looking at companies which fit our strategic goals that give us the returns above our cost of capital over the long term and that either doesn't have any or minimizes any dilution to present income.

And those are strategies we look at and the size is secondary and all of that.

It's really the strategic goals of the company and whether it fits or not is what we look for.

But right now, our focus really is on this divestiture.

Karen, do you want to...

I would just add that in the nearer term, we are focused on fulfilling our commitment to reduce our leverage post the Covidien acquisition and that's exactly what we're doing.

Over the longer term, we are focused on reinvesting to drive stronger growth and better margins in the longer term.

Okay, that's very clear.

And then, Karen, just, I want to come on fiscal '18 guidance, by our math it implies about 80 or 90 basis points of margin expansion, and that's sort of the lower [hand] of the placeholder you set down or the company set down last year, sort of 70 to 140 basis points.

So is this sort of merely a refinement as we get closer to the year?

Some conservatism?

And what does it tell us about your commitment to delivering those longer-term targets of 500 to 600 basis points or better?

Yes, thanks for the question, David.

We are very focused on driving operating margin improvement and leverage.

We cannot get to our double-digit bottom line on our mid-single-digit top line without driving that operating leverage improvement.

So we are focused on driving solid plans going forward and executing against those solid plans to ensure that we deliver.

As I've said before, we will focus on the top line and the bottom line, recognizing we need to get the leverage in between, but not focus as much as on the exact basis points of leverage in between because that can vary in any period.

Your next question comes from the line of Mike Weinstein with JPMorgan.

Karen, a couple of financial items first.

First one, the IRS appeal of the decision on Puerto Rico and that apparent delay to the resolution of that, how does that impact that debt paydown plan and basically the assumption on cash flows -- your use of cash flows in FY '18?

Yes, thank you for the question.

So the IRS did recently request to appeal the Tax Court's decision.

We do expect this to delay the ultimate outcome and the movement of cash.

Until the IRS files their opening brief, which we expect in the first quarter, we won't have a better estimate on the length of the delay.

We do still believe our initially filed returns were correct and we continue to defend that position.

In terms of the movement of cash and the debt paydown, we do anticipate to use, obviously, the proceeds from the divestiture to pay down debt and our leverage target of getting to around 3x at the end of this fiscal year and continuing to be focused on maintaining an A credit rating do not include the expected proceeds of the Puerto Rico settlement.

Okay, perfect.

You made a comment about the impact on tax of ASU 2016-09 adoption.

What is the EPS impact?

Do you have an estimate?

Is it about $0.05?

Yes, we are -- it is included in our guidance of 9% to 10% EPS growth and so we're not giving an exact amount on that mainly because it is dependent on our stock price movement and on the exercise of our options, which are inherently very difficult to predict.

We do expect that change to give us a slight tax benefit in the next year.

Okay.

Then last item, just on 670G launch.

So I want to make sure we're all thinking about just the timing of this ramp not only in terms of what it means for revenues, but in terms of share gains.

Is it fair to assume that you really go on the offensive going at what I would characterize as non-Medtronic patients more in the second half of FY '18 versus the first half?

Because right now you're obviously doing what the initial commercial -- the initial customer feedback side of the launch.

Then in June, you're going to the existing Medtronic patients.

Will it be more second half of the year before you're really in a position to go out and take market share?

Mike, this is Hooman, I'll answer the question.

First, maybe a little bit of perspective on the fourth quarter because we were going through Priority Access there.

And as was indicated in the commentary, even with Priority Access, we actually saw strong performance relative to the market and our peers.

So with the 630 and Priority Access, we gained over 4 points of durable pump market share in the fourth quarter.

The other thing I'd point out that I think is worthy of note is that, globally, our CGM sales grew in the low 20s because of the sensor attachment to all of these pumps.

So even though we are going through Priority Access fulfillment right now in Q1 and we expect, as Karen mentioned, a ramp from Q1 to Q4, I think we're going to really put ourselves in a position to continue to take market share and as we think about the full year, we feel really good that we're going to be able to end the year not only with market share gains, but also double-digit growth.

It comes from the line of Bob Hopkins with Bank of America.

So just wanted to -- first of all, congrats on a strong finish to the year.

I guess for my first question, I just wanted to clarify the fiscal 2018 guidance because there wasn't actually an EPS given.

So I think I've got this straight, but you're saying off of a $4.60 number for fiscal '17, underlying earnings growth of 9% to 10% less the $0.05 to $0.10 from FX and then there's obviously the $0.12 to $0.018 we need to think about for Cardinal.

So question number one is, is that right?

Do I have all the moving pieces correct?

And then this is nitpicking a little bit, but I'm just curious on fiscal '18 why the 9% to 10% is just a little bit below the double-digit goal that you talk about long term?

Yes.

No, thanks for the question, Bob.

You have the right ins and outs and we did say that we will update the guidance post the close of the divestiture just to avoid confusion so, but the impact from -- the dilutive impact on the EPS you have right.

That $0.12 to $0.18 is dependent on when we close the acquisition.

We still expect close in the second quarter, but we don't know if it'll be the beginning of the second quarter or the end of the second quarter.

So that's why we have the range.

In terms of the $0.09 to $0.10 EPS growth...

9% to 10%.

9% to 10% EPS growth, we obviously are fully committed to our mid-single-digit top line and double-digit bottom line growth over the longer term.

In this fiscal year, our top end of that range is clearly double digit.

Impacting the lower end of that range is the fact that we have a temporary increase in our interest expense this fiscal year given the slight increase in our debt as we focused on repaying it down with the proceeds, so it's a temporary impact.

And then we also do have purposeful investment in SG&A in the first half of the year as we get ready to launch very important new products.

Great, that's very helpful.

And then, Omar, one bigger picture question for you.

I'd love to get your views on something that we've been trying to ask a lot of med tech management teams lately given how well the medical device space is doing.

If you look at the earnings reports from hospital companies, their volumes aren't really doing much, but the medical device space, it seems like surgical procedure volumes are growing at a very nice clip.

So what are you seeing out there as you exited your fiscal year in terms of surgical procedure volumes?

And kind of what's your outlook for the rest of this year?

And again, I ask the question because it just seems like med tech is different than hospital volumes right now.

I think your observation is correct, and as you said, our surgical volumes are hanging in there.

They're stable.

I wouldn't say that they're growing in an upward trend or anything, but they're certainly stable and I see that to continue.

I would like to point out, though, that the med tech markets do swing a little more based on new product introductions, especially in the U.S., which is what I think we're looking at.

And so like we've had some pretty important launches in the last 6 months or so and also important ones going forward as we've mentioned.

So I think you should probably take that into account that the technology introductions do give a swing to the med tech space that probably hospitals, in general, wouldn't see.

I think that's the best I can do.

Your next question comes from the line of Vijay Kumar with Evercore ISI.

I just -- maybe on the guidance, Karen, that 4% to 5% constant currency growth for fiscal '18, it looks like maybe M&A is less than 50 bps.

I just want to make sure the organic forecast for '18 is still about 4%, that's what the guidance is implying?

Yes, that's correct, Vijay.

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

Got you.

And then maybe, Omar, one for you.

Obviously, margin expansion has been a huge focus for the company.

Gross margin performance in the quarter was really impressive and then for me -- for us, we thought CVG, which -- that's your highest margin segment, it sort of came in, in line.

MITG, RTG came in well above -- despite that, gross margins came in well above.

Maybe can you just talk about what's going on within the margins and how confident do you feel about margin expansion over the medium term.

One of -- as we've mentioned before, as we transition out of getting margin improvement from the Covidien synergies to the future, gross margin improvement through operations consolidation is going to be one of our biggest growth drivers in that area -- or productivity drivers in that area.

And as we do that, as you point out, you will see benefit across all groups because operations consolidations takes into advantage -- takes advantage of common facilities and that drives a disproportionate increase in some of the areas.

So I would say that, that is one of our key strategic drivers.

It's one that we're focused on.

It's the first big transformational element of productivity that we're focused on as we come out of the Covidien synergy period, which will really be finished by the end of this coming fiscal year.

So that's what we expect to see and we expect to see continued improvement in gross margin, and as Karen pointed out in the guidance, we expect some improvement in the coming year.

It comes from the line of Isaac Ro with Goldman Sachs.

Wanted to start with a big picture question on 2018 guidance.

Could you just speak a little bit to your underlying assumptions for the CapEx and utilization backdrop in the U.S. There's clearly a lot of policy uncertainly out there, so I appreciate your sort of baseline assumption there.

Well, the CapEx, our business is less -- overall, less dependent on CapEx.

But at the same time, you have to remember that the CapEx that we have is very linked to procedures.

These are not necessarily diagnostic procedures, these are actual therapy procedures and therefore is often funded by growth in those procedures.

So we're somewhat -- I think it's better to see our business more in line with volumes of procedures rather than CapEx investments in general, so I think that's probably a better way to look at our business rather than specifically CapEx investments.

And I would just -- in terms of CapEx hitting our cash flow, we would anticipate approximately $1 billion over the next 2 to 3 years, in line with what we've had over the last couple of years.

Our spending on IT investments should come down over the next 1 to 2 years, but that will be offset by investments in our manufacturing consolidation strategy.

Maybe just to clarify.

My question, Omar, was really not so much -- I appreciate your business [sense].

Wasn't talking so much about capital equipment purchasing, but just the general preponderance for hospitals to spend on new technology and then at the same time utilization in terms of overall health care volume.

Yes.

No, I think, look, the new technology, we've seen that when meaningful new technology comes out in our space, it comes out with good clinical evidence that says that if you deploy these, they have meaningful benefit for patients.

And in general, we've seen, if reimbursement is there, which we usually make sure it is, then there's pretty good adoption when new technology comes in.

And we see the market and basically share go up with the introduction of those new products.

So I think good -- that's really the biggest driver of any market swings in the med tech space in the U.S.

Your next question comes from the line of Larry Biegelsen with Wells Fargo.

So 2 financial questions for me.

So Omar, you grew about 5% in fiscal 2017 on a constant currency, week-adjusted basis and you're guiding to 4% to 5% in fiscal 2018 despite the fact you have a lot of the new product launches and important new indications.

So the question is kind of why didn't you feel comfortable kind of guiding to 4% to 6%?

It's a little bit like Bob's earlier question on the 9% to 10%, it's a little bit nitpicky.

And so what areas might slow in fiscal 2018 relative to fiscal 2017?

Look, we just wanted to provide a slightly tighter range than a generic mid-single-digit range, which we could have, but we just wanted to give a slightly tighter range and I think that's where that came from.

I think what we've seen this past fiscal year is we've seen some movement in the quarter.

There's some level of uncertainty in marketplaces always, so we just wanted to make sure that we can hit the guidance that we put out there.

I think the trend that we have right now with the new products would suggest that we should be able to deliver within that range.

All right, fair enough.

Karen, I'm sorry, were you going to say something?

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

Fair enough.

And then Karen, one for you.

You had FX swing from I think it was negative $100 million to negative $300 million to positive $75 million to $175 million or a swing of about $325 million at the midpoint from negative to positive, but the EPS impact remained at kind of negative 0 -- $0.05 to $0.15.

And I know everybody realizes you hedge, but do we ever, at some point, see the benefit from the change in currency on the top line, do we ever see that benefit on the bottom line?

Thank you for the question.

We do have -- we do expect if current rates remain stable to where they are today, a positive impact to revenue for the year as you mentioned, of $75 million to $175 million and a negative EPS impact of $0.05 to $0.10.

That mismatch is really driven by the fact that the FX impact on revenue is based on rates versus a year ago, put simply.

But the impact on gross margin is based on the time the inventory has been on our balance sheet.

So that can mean you can have differences between the top and bottom line impact, but I think it's important to note for this fiscal year at least, in any case, that $0.05 to $0.10 negative impact on the bottom line is only a small headwind compared to previous years.

Your next question comes from the line of Matt Taylor with Barclays.

I wanted to ask a more detailed question maybe about the CVG guidance because you are forecasting 5% to 6% and outlined a couple of product launches that you're going to be spending behind, so I thought it'd be worth talking about those more specifically with Onyx coming to market here and then intermediate risk and then Micra is new, too.

So could you give us some color commentary on those things and what's really driving the CVG growth?

I'll let Mike answer that question.

So go ahead, Mike.

Yes, we're heading into a particularly, I think, attractive phase for new product -- productive phase for new product introductions.

Obviously, the 34-millimeter valve is now available in the U.S. and in Europe and impacted the fourth quarter.

We got the approval for our Evolut PRO, which is our next-generation valve -- transcatheter valve in the U.S. that really didn't have an impact on Q4, but will in Q1 and that will follow on with European approval in the first half of next year.

And then as you mentioned, Onyx in the U.S. is now approved, didn't really didn't impact Q4, but will for the rest of fiscal '18.

Micra and our CRT-D Quad, the MRI compatibles, CRT-D Quad will also have meaningful impact on the quarter.

And then as we move through the summer, we expect expansion of intermediate risk for CoreValve as well as Onyx approval in Japan.

And then in the second half, we'll be looking at destination therapy for the hardware technology as well as drug-coated balloon approval in Japan.

So those would be the big drivers of our growth in FY '18.

Okay, great.

And maybe just a bigger picture question kind of for Omar and Karen.

I was wondering your emerging market growth was about 10% and you've talked for a long time about aspirational goals that are higher than that.

Obviously, you highlighted a lot of the moving parts with different geographies this quarter, but I guess what do you need to do to be able to push that rate up over time?

Or is it just more of a function of how the macro environment is?

Yes.

I think, look, we intend to move that up.

I mean, that is our goal.

I think the move will be gradual rather than sudden, so expect that from us.

I think there's enough macroeconomic uncertainty that what we've had is the odd region really getting hurt by that.

And I want to point out that these are macroeconomic, but like the Saudi situation was not a reduction in implant rates.

So the procedures actually are pretty stable, but as these countries kind of sort out their own management of inventory and their own ability to deliver these products, they're going through these moves, which drive some constraints in the sale of these products.

So I'm not sure that they're all necessarily bad as these markets stabilize over time.

We're encouraged by the fact that the implant rates actually, at the customer level, continue to grow.

That's one thing.

So the closer we get to these customers and the more direct we become, I think you'll start to see these rates start to go up in a systematic fashion.

If we were to point to one thing, it is our ability to go direct.

I think the more we do that, the higher our growth rates will become not only from the immediate transition, but ongoing growth as we get closer to these customers.

Your next question comes from the line of Glenn Novarro with RBC Capital Markets.

Two questions, first for Mike Coyle.

Mike, it looks like you had a real solid U.S. ICD number in the quarter, and by our math, it looks like you took share and it looks like you're taking share first because you're still the only player with MRI safe and then, second, St.

Jude is still dealing with their recalls.

So how should we think about the ability to continue to capture share in the U.S. through this year?

And how should we think about share capture as we go into calendar '18 when St.

Jude and Boston get MRI safe in the U.S.?

So that's for Mike.

And then for Bryan, can you quickly give us an update on the robot?

I think at SAGES, you still were talking about a launch outside the U.S. for your surgical robot in fiscal '18.

Go ahead, Mike.

So Glenn, on ICDs, we actually did have some meaningful share capture in the U.S. from really 2 sources.

One was initial implant growth, which was approaching mid-single-digit, which is pretty good given that the overall market was probably slightly down in terms of initial implants.

But we also -- and that, as you point out, it's a combination of things, not just the MRI labeling that we have but also some very significant feature differentiation in each of the product categories.

Our Visia AF, the only single-chamber device that can actually detect atrial fibrillation and report it out, so essentially giving you a free link with each single-chamber device.

And then the differentiated algorithms that we have within our CRT system, the AdaptivCRT and the (inaudible) CRT, that have been shown to reduce hospitalizations for recurrent heart failures.

So those are things that we think will continue to maintain differential advantage for us even after competitors match up on the MRI side, which was not the case in [brady] where it was more of an equalization when they came out with the technology.

But the other thing that was occurring during the quarter, and we expect to continue to occur, is that we've actually had a nice improvement in share on the replacement market and that is principally driven by that, as you pointed out, a major competitive recall, but even more important by this TYRX program that was mentioned in the context of the commentary.

Infections are particularly a problem in replacement procedures, especially with ICDs and CRT systems and we instituted this risk-sharing performance guarantee program where an account can actually get, if you will, insurance on a patient coming back with an infection, we will make a major payment, 10x what the TYRX patch is worth, to them to help offset the cost of that reinfection, which they will lose money on given current reimbursement rates and what they have to do to treat those patients.

That's only available if they're actually using the envelope on a Medtronic device and so that has actually resulted in a pretty big spike, a 50% increase, in the number of devices that are going in on competitive leads.

And so that is really helping us to drive growth.

Okay, great.

And then, Bryan, on the robot?

Yes, Glenn.

Thanks for the question.

So we are finally in the fiscal year where we're planning on launching the robotic system and I've got to tell you we're pretty excited about it.

It's at the end of the year, unfortunately.

I wish it was in the beginning, but it's the end of the year.

I will remind everyone that we don't expect material revenue in '18.

We do expect material revenue in '19 as we've been saying, but I want to make sure that we refocus everybody on our intent here.

Though it is a robotic system, our goal isn't necessarily just to compete in robotics.

This is a part of a much broader strategy for us.

The fact is we've got a lot of open procedures today that we truly believe should be done minimally invasively and I'm perfectly fine with them being done minimally invasively in a traditional sense or robotics.

But either way, if we can do that, we can, number one, fulfill the mission of the organization because these patients will be treated in a much better way from an outcomes perspective and all other stakeholders win when we make this move from open to MIS.

The other kind of byproduct of this, though, which we're really focused on is we don't have to add an additional patient to the surgical funnel, but if we can make this shift from open to any form of minimally invasive surgery, we can add a $10 billion marketplace.

So that's a $10 billion prize without a single new patient, just changing the way the patient is treated.

And we do feel that there will be some period of time that we will be the only medical device company in the world that will be able to offer a full complement of products in open, traditional MIS and robotics, and then on top of that, bring these optimization services to the operating room.

So we're pretty excited, obviously, and looking forward to the launch.

And the U.S. launch is still fiscal '19, is that correct?

That's correct, yes.

Your next question comes from the line of Joanne Wuensch with BMO Capital Market.

I actually have two, the first one was to go back to the view towards operating synergies.

As you end the near of -- near the end, I'll get there, of the Covidien synergy opportunity, where else are you going to be able to pull levers to get that leverage?

Well, like I mentioned a little earlier and like we've stated all along, the first area that we're already beginning to see some benefit from is in operations consolidation in reducing our manufacturing footprint, consolidating many of the operations that we've had around the world that we've sort of instituted over time.

So we expect some gross margin improvement as a result of that, and that's our first focus.

Beyond that, through the Covidien integration, we've had the opportunity to put in place a new IT system, an SAP, and I think the benefits of that will play itself out over a longer period in the next few years as we reduce our back office footprint in different centers around the world.

I think those are the 2 big ones.

I think following that, we're also looking at creating more efficient shared services in some of our functions, which, again, the availability of an IT system facilitates that as well.

So those are the approaches that we're going after and we're building a pretty solid strategic road map to execute that.

That's helpful.

And as my second question, we're a little bit over a year on the implementation of the CMS bundled payment program in the U.S. What observationally have you learned?

And how have you incorporated that into your business practices?

Yes.

We're over a year into the first one, the ortho program and the uptake from different hospitals has been relatively slow.

I think they are picking up on it and I think that's progressing.

We've got our own offering that you'll start to hear about more this year.

But in addition, what's equally significant is that CMS has introduced some cardiac bundles and we're also in the process of coming up with offerings in those areas.

We're actually -- we have a lot more experience and clear data that we already have of benefits that we can get by looking at the therapy over an extended period.

So we still are supportive, very supportive, of CMS' move towards these value-based bundled payments.

I think these programs have clear outcome measures.

They identified the patient cohorts that get these treatments and these areas where we can have -- we can make contributions, both in the care pathway itself, working with our physician customers and partners, as well as in technologies.

So we're very supportive of these and we're seeing hospitals beginning to start to implement these procedures.

Your next question comes from the line of Matt Miksic with UBS.

So I've got, one, I wanted to dive a little deeper into the transcatheter valve business and also maybe just to touch deeper into Spine.

So on TAVR, put up a very strong worldwide number, better than we were expecting and highlighted the impact of the larger-sized valve.

Mike, I was wondering if you could provide any color or tone on maybe the market by geography, for example, referrals in the U.S. or other factors and the Lotus recall and other dynamics potentially impacting Europe, and then I had one follow-up on Spine for Jeff.

Certainly, U.S. growth has been robust, high 30s for the U.S. market.

I think it's being driven by 2 things.

One is penetration into the intermediate risk, which, of course, we have not had the opportunity yet to participate in beyond our clinical trial enrollments given that we don't have approval in that segment, but we do expect to get it here by the end of the summer.

And then, secondly, we have been taking share in the extreme and high-risk patient population principally driven by the presence of the 34-millimeter valve.

That was the segment that we've described as being 30% of our mix and that's proving to be true as we now sort of normalize the market.

But the other thing it does when you obviously have that full, now, range of products is it lets you participate more broadly in the accounts.

And so we've been expanding account penetration as well as expanding share in that segment.

And obviously now, the opportunity to bring Evolut PRO to the market, given its improvements in terms of both for rates of PVL as well as reductions in pacemaker rates, we think really position us well to continue to kind of grow and take share there.

Europe was much more of a share-capture story as 34-millimeter came in later there, so it's seeing the same dynamic in the U.S., but we also obviously have the benefit of some market dynamics there with the Lotus recall opening an opportunity for us to take some additional share as well.

So we had meaningful sequential share capture taking place there.

There are obviously other dynamics there with some of the sort of loading of shelves in Germany that was done by one of our competitors that even when we strip that -- when strip that out we see very significant share capture and obviously continuing momentum in the OUS markets at probably low 20s overall growth for TAVR.

So I think that pretty much summarizes where the market is.

And just to clarify, one of your colleagues in the U.S. market had talked about peers, I should say, maybe not colleagues, but talked about smaller centers kind of surprising to the upside in terms of productivity.

Any color on that dynamic, the kind of core centers versus some of the newer TAVR centers?

Well, there's certainly a lot of attention in terms of improving the productivity of patient flow through those centers and we're seeing that, so I think that is opening up capacity.

But we're also seeing more centers actually now being able to qualify to be TAVR centers and so that number is well over 500 now and we continue to participate in probably 450 of those and we're going to expand as we move into intermediate risk.

So I think all centers realize how important it is to be able to participating here given the patient demand and just the clinical benefits for patients to get TAVR technology.

So we continue to see the ability for capacity to grow within existing centers and then for new centers to come onstream.

And then, Geoff, the numbers for Spine were also better than expected in a market that, frankly, in the first quarter was maybe a little slower than we expected when we look across the group in general.

And I wanted to just get a sense, in the U.S. in particular, if we maybe just focus on not so much the double-digit -- low double-digit BMP growth, but the core plants and rest of the business.

The robot, any other initiatives, you mentioned a couple of products, what would you call out in the U.S. that's helping sort of maybe reinvigorate that business a little bit?

Sure.

I'd say, excluding biologics and INFUSE, to answer your question, I'd say there's 3 things.

One, it's a steady launch of these new products in core Spine, so whether it be interbody cages or a fixation, a steady launch of those and doing that, like we've talked about before, at scale.

So it's a more simplified -- we have a big sales force, right?

It's a more -- and a lot of physician partners so we're launching these things in a steady cadence, a purposeful cadence, that's tied to procedures and when we launch them, we launch them at scale, all the sets, all the training.

All that is happening in a tight window, a much tighter window, than we used to.

We used to do this over 9 quarters.

We're now doing it over 2 and that is having an impact in and of itself.

So the number of products, the steady cadence and then the way we're launching it, the Speed to Scale initiative we've been talking about.

The second is the surgical synergy strategy.

So our view on kind of -- a lot of people like to call it robotics, and I think that's kind of a shallow thinking, quite frankly.

As we look at this, it's way beyond the robotic arm.

It's a bunch of inter -- enabling technologies like navigation, interoperative imaging, the robotic arm, surgical planning, all this technology coming together to go after these procedures and lower the cost or improve the clinical outcome.

That -- we are now placing a lot of that technology in exchange for incremental implant volume and so that is having another impact.

So that's the second big impact because we place that equipment in exchange for incremental screw volume.

And then the third is our sales force is reinvigorated.

They're seeing all this coming and what the future holds and so they're very excited.

And a lot of the competitive reps that are coming are also helping as well.

Your final question comes from the line of Bruce Nudell with SunTrust Robinson.

A couple of quick questions for Mike and then one for Omar.

So Mike, I was at EuroPCR and I was really struck by the net clinical benefit of left atrial appendage closure, given the limitations of oral anticoagulant therapy.

Is Medtronic in play?

And how big do you think that market could get?

Secondly, from the podium at the Mitral Conclave, it was kind of hinted at that the U.S. pivotal for transcatheter mitral valve replacement might start this year, 2017.

How big is that trial?

How long might it take?

And then for Omar, I met with a TAVR company from China yesterday and the price point is $25,000, but reimbursement is only to the tune of 30% or so.

So the question is should we forever think of some of these emerging markets as low technology or basic technology plays?

Or might that situation for high-tech stuff change over time?

Just to first answer your question, so just starting on LAA, that's a segment we don't currently participate in.

That's a segment that our business development team keeps a pretty close watch on.

We think there are puts and takes with the existing technology.

We think there may be some better ways to go about this.

We haven't seen anything yet that has caused us to want to jump in.

But it's like anything else, we continue to look at it and monitor the progress of both the market and the technology that is available.

And then on your question around TMVR, it'd be premature to talk about the specific study design.

We're still in discussions with FDA on what that might look like.

We're now at essentially 50 implants with our existing Intrepid system, we are increasingly enthused that we have the right design to go into clinical trials.

And we are working on the study design with FDA, and we'll probably have more to say about that over the next quarter or 2.

I think on the China question, that's actually a very good question in terms of emerging markets in general.

As these markets go to universal coverage, there will be a tendency to kind of homogenize the products.

I think that's sort of encouraged us to take our value-based health care analysis and business models to these emerging markets much more rapidly and in a much more accelerated fashion that we were thinking because the key to getting the differentiated pricing, if you like, is to demonstrate differentiated outcomes, which we think we can.

And so that's how this is going to go in play there as well.

We will demonstrate additional value with these differentiated products.

If there is no value, we shouldn't be getting more price.

And so I think that's the way we have to approach it and it's really a slight sort of reprioritization of our own strategies in the sense that the value-based health care effort is now getting increasing traction in some of these emerging markets.

We previously felt that, that was an access-only situation, but we think now access, coupled with value-based health care, we, in fact, are making sure that we get differentiated products with fair pricing in all of these markets as universal coverage kicks in.

Before we end Q&A, I want to correct a statement that I made on the guidance around the quarterly gating.

We do expect revenue growth for the full year, as I said, to be in the 4% to 5% range and looking at the first quarter, I had said the fourth quarter, but I meant to say the first quarter.

Looking at the first quarter, we would expect total Medtronic revenue growth to be similar to that annual range.

Okay, thank you, Karen and thanks to all of you for your questions.

On behalf of the entire management team, I'd like to thank you again for your continued support and interest in Medtronic.

We look forward to updating you on our progress in our Q1 call, which we currently anticipate holding on Tuesday, August 22.

Thank you, all very much.

This concludes today's conference call.

You may now disconnect.