美敦力 (MDT) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Medtronic Third Quarter Earnings Conference Call.

(Operator Instructions) I will now turn the conference over to Mr. Ryan Weispfenning, Vice President of Investor Relations.

Please go ahead.

Thank you, Crystal.

Good morning, and welcome to Medtronic's Third Quarter Conference Call and Webcast.

During the next hour, Omar Ishrak, Medtronic Chairman and Chief Executive Officer; and Karen Parkhill, Medtronic Chief Financial Officer, will provide comments on the results of our third quarter, which ended on January 26, 2018.

After our prepared remarks, we will be happy to take your questions.

First, a few logistical comments.

Earlier this morning, we issued a press release containing our financial statements and a revenue-by-division summary.

We also issued an earnings presentation that provides additional details on our performance and outlook.

During this earnings call, many of the statements made may be considered forward-looking statements.

And actual results 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 fiscal year 2017.

And rates and ranges are given on a comparable constant currency basis, which adjusts for our recent Patient Care, DVT and Nutritional Insufficiency divestiture as well as the impact of foreign currency.

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

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

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

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

This morning, we reported our third quarter financial results, including revenue of $7.4 billion, representing growth of 7%.

Q3 non-GAAP operating profit grew 8% and non-GAAP diluted earnings per share were $1.17, growing 12% and representing EPS leverage of 580 basis points.

These results reflect a solid quarter for Medtronic, and as we expected, a strong turnaround from the first half of the fiscal year.

We continue to execute on our broad sustainable growth strategy, driving therapy innovation and global market penetration while delivering enterprise synergies to enable margin improvement.

Each of our 4 groups delivered strong results with mid-single-digit revenue growth in MITG and RTG, high single-digit growth in CVG and low-teens growth in Diabetes.

Geographically, we also had a strong diversified performance with mid-single-digit growth in the U.S. and non-U.

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

At the same time, we completed our $850 million Covidien synergy commitment.

We recently launched a new program, Enterprise Excellence, designed to increase our effectiveness and enable reinvestment for growth, along with driving continued margin expansion and EPS leverage.

As we look ahead, we are confident in our ability to deliver meaningful EPS leverage on mid-single-digit revenue growth this fiscal year, just as we have for the past 5 fiscal years.

In therapy innovation, we're seeing a clear acceleration, driven by several important new product launches across our 4 groups as well as our strong positions in some of the fastest-growing therapies in med tech.

Our Cardiac and Vascular Group grew 7% again this quarter, delivering sustained growth by leveraging the breadth of its products and services as well as its strong positions in important rapidly expanding markets.

CVG's impressive new products in infection control, diagnostics, transcatheter pacemakers and AF Solutions, generated combined growth in the mid-20s and now represent about 1/3 of our Cardiac Rhythm & Heart Failure division.

Mid-teens growth in our Coronary & Structural Heart division was led by the launch of our Resolute Onyx drug-eluting stent in the U.S. and Japan as well as our high-growth transcatheter valve business.

In TAVR, we grew in the low 30s with mid-20s growth in the U.S. and low 40s growth in international markets, driven by the strong global demand for our Evolut PRO valve and expanded indications for use.

Our Minimally Invasive Therapies Group grew 6%, driven by 7% growth in Surgical Innovations with strength in new products, including our Signia powered surgical stapling system, our new LigaSure vessel sealing instruments and our Valleylab FT10 energy platform.

Respiratory, Gastrointestinal & Renal grew 3%, driven by broad-based growth in GI and Hepatology, strengthen in Nellcor pulse oximetry sensors, given the high incidence of flu in the U.S. and strong adoption of our Microstream capnography monitoring products.

This offset the decline in our airway and ventilation business.

We're enthusiastic about the development of our surgical robotics platform, which we expect will strengthen our strategy of advancing minimally invasive procedures.

And we continue to make progress towards its launch.

While we had intended first clinical use in humans in the next couple of months, our final software and hardware integration and testing is taking longer than we initially expected.

It is not unusual with systems of this complexity.

We're excited about the product performance that we're already seeing and intend to update timelines as we near the commercial launch.

At our Investor Day in June, we intend to share incremental details on our system and update you on our progress.

As we have mentioned before, the expectation of meaningful revenue from this system will be dependent on regulatory approval in developed markets.

Regardless, we remain confident in our ability to grow MITG in the mid-single digits next year and over the longer term.

Our Restorative Therapies Group grew 5% this quarter with robust growth in our brain and pain divisions.

In brain, the strength of our entire stroke portfolio drove high-teens growth in Neurovascular and strong sales of our StealthStation navigation and O-arm imaging technologies led to low double-digit growth in Neurosurgery.

In pain, we're seeing very positive customer reaction from our Intellis platform and our Evolve workflow algorithm, which together drove high single-digit growth, reversing the declines we've seen for several quarters.

While our Spine division was flat this quarter, it was in line with the global spine market.

Growth in BMP continued to offset declines in Core Spine.

Also when coupling our Spine revenue with the Spine enabling technologies that are reported in our Neurosurgery business, our combined revenue grew over 1%.

We believe this is a more relevant comparison of our Spine results against our competition and an indication of our overall growth in Spine procedures.

We attribute this growth to the ongoing success of our Surgical Synergy strategy, which combines our enabling technologies, such as imaging, navigation, powered instruments, nerve monitoring and Mazor robotics with our spine implants to deliver integrated procedures.

As expected, Diabetes returned to double-digit growth this quarter, driven by the continued adoption of our MiniMed 670G hybrid closed-loop system in the U.S. We now have over 20,000 patients on our 670G system and continue to receive highly positive feedback from patients on this groundbreaking technology with real-world results, consistent with those reported in our pivotal study.

Our growth was further enhanced by the strong international demand for our 640G system.

Our sensor attachment rates with all of our 6 series systems globally remain strong.

And as we continue to shift our customer base from standalone pumps to sensor-augmented pumps, we expect sensors to be a key component of our growth.

Our efforts to increase our sensor capacity are progressing well.

We are now able to meet the sensor demand of our existing customer base and remain on track to fully meet our predicted demand from both existing and new users in the fourth quarter.

In addition, we benefited in the quarter from consumable revenue from legacy Animas users.

And the transition of Animas users to Medtronic continue to progress well.

We're also excited about the prospects of our standalone CGM system, Guardian Connect.

Outside the U.S., we see strong utilization and retention of patients in the system.

And with the expected increase in our sensor manufacturing capacity, we're preparing to increase our customer base.

In the U.S., we've been closely collaborating with the FDA and expect to bring this innovative technology to market shortly.

Guardian Connect features unique predictive alerts.

And in the U.S., we utilize Sugar.

IQ with the cognitive computing capability of IBM Watson to detect important patterns and trends for people with diabetes.

Turning now to our globalization growth strategy.

Emerging markets, which represents 15% of our revenue, again grew 12% in line with our long-term double-digit growth expectations.

Our consistent emerging market performance continues to benefit from geographic diversification with strong balanced results around the globe.

Southeast Asia, Eastern Europe, Latin America, the Middle East and Africa and China all grew double digits.

In addition, through investing in traditional market development, our differentiated strategies of participating in public and private partnerships as well as optimizing our distribution channels are driving our sustained performance.

Emerging markets represent the single largest opportunity in med tech.

Our remaining growth strategy, economic value, is a real accelerator for our therapy innovation and globalization strategies.

We're pleased with our continued progress in creating new value-based business models that directly link our therapies to improving outcomes.

We now have over 1,000 hospitals under contract and over 25% of our U.S. CRHF implantables revenue is covered under our TYRX-related value-based health care arrangement that links total payment to patient infection outcomes.

Beyond TYRX, we have also commercialized 5 other value-based health care programs, covering various therapies, including ICDs, CRTs, AF ablation, drug-coated balloons and aortic stent grafts, where a portion of our payment is tied to specific patient outcomes.

Collectively, these 5 programs, in addition to TYRX, cover over $650 million in mostly U.S.-based device revenue.

Across Medtronic, we remain focused on leading the shift to health care payment systems that reward value and improve patient outcomes over volume.

We're increasingly partnering with additional stakeholders in the health care value chain, including payers, providers and other interested organizations, to lead the change from fee-for-service models to value-based programs.

It is our strong belief that Medtronic is uniquely positioned to leverage our global technical, clinical and disease state expertise to deliver better outcomes to patients while improving efficiency for health care systems around the world.

And we're doing this in a way that we expect to benefit our shareholders as well.

With that, let me ask Karen to now take you through a discussion of our third quarter financials and outlook for the remainder of the fiscal year.

Karen?

Thank you, Omar.

As mentioned, our third quarter revenue of $7,369,000,000 represented a 1% increase as reported and growth of 7% on a comparable constant currency basis, which adjusts for both foreign currency and the Patient Care, DVT and Nutritional Insufficiency divestiture.

Foreign currency had a positive $177 million impact on third quarter revenue.

GAAP diluted loss per share was $1.03.

Non-GAAP earnings per share were $1.17.

After adjusting for the divestiture and the $0.01 negative impact from foreign currency, non-GAAP diluted EPS grew 12%.

The majority of our non-GAAP adjustments were driven by a $2.2 billion tax charge primarily related to the transition tax on our accumulated foreign earnings as part of U.S. tax reform.

This tax will be paid over the next 8 years with less of the cash impact in the first 5 years.

Medtronic has been advocating for U.S. tax reform for many years.

And we are pleased that the final package included the ability to gain access to our future earnings outside the United States.

We now will have access to the vast majority of our cash flow.

And we expect to deploy it with discipline in accordance with our capital allocation strategy of balancing reinvestment for future growth and providing meaningful return for our shareholders.

The operating margin for the quarter was 28.8% on a comparable constant currency basis, representing a year-over-year improvement of 30 basis points.

This was primarily driven by a 40 basis point improvement in SG&A.

As announced last month, we reached our goal of delivering $850 million of synergies from the Covidien acquisition.

We also unveiled our Enterprise Excellence plan that is expected to deliver over $3 billion in annual gross run rate savings over the next 5 years.

We expect this to enable reinvestment for future growth as well as drive continued operating margin expansion and EPS leverage.

Non-GAAP net other expense, which is included in our operating margin, was $94 million versus $20 million on a comparable basis in the prior year.

This change was driven primarily by increased expense related to our currency hedging program.

Foreign exchange in total had an approximate 90 basis point negative impact on our operating margin.

This was more than expected, given current -- currency market volatility in the last month of the quarter, which resulted in a large foreign exchange impact on our inventory in late January as well as increased expense due to net balance sheet remeasurement on certain foreign currency-denominated balances.

These were also the primary reason for the mismatch between the FX benefit on our revenue and FX headwind on EPS.

Our third quarter non-GAAP nominal tax rate was 15.6%.

Based on our current estimates of the impact of U.S. tax reform, we continue to expect our fourth quarter tax rate to be between 15% and 16%.

Third quarter average daily shares outstanding on a non-GAAP diluted basis were 1,365,000,000 shares.

As expected, this was roughly flat sequentially.

And we expect our share count to remain roughly flat for the remainder of the fiscal year.

Combining our $1.6 billion of year-to-date share repurchase activity with the $1.9 billion we paid in dividends over the same period, our total payout ratio was 76% on non-GAAP net income.

Before turning the call back to Omar, I would like to reiterate our annual revenue and EPS growth guidance.

Unless specified, all of my guidance comments are comparable constant currency.

For the full fiscal year, we continue to expect revenue growth to be in the range of 4% to 5% and non-GAAP diluted earnings per share to grow in the range of 9% to 10% from the prior year comparable of $4.37.

For the fourth quarter, we would expect total company revenue growth to be in the range of 4.5% to 5.5%.

Looking at the expected fourth quarter revenue growth by our business groups.

We expect CVG to deliver 4.5% to 5.5% growth and MITG to grow in the range of 3% to 3.5%, both driven by continued strength from new products amidst more difficult fourth quarter comparison.

We expect RTG to grow in the range of 3% to 4%, balancing the impact of a slower spine market with continued growth in Pain Therapies and strengths in Brain Therapies.

Finally, in our Diabetes Group, as we have been forecasting for some time, we expect double-digit growth in the fourth quarter, given increased sensor supply and the strength of the 670G launch in the United States.

With respect to earnings, we delivered strong EPS leverage in the third quarter.

And we expect this to continue in the fourth with EPS growth of 11% to 13% off the prior year comparable of $1.25.

While the impact from currency is fluid and, therefore, not something we forecast, if recent exchange rates remain stable for the fiscal year, our full year revenue would be positively affected by approximately $480 million to $500 million, including an approximate $300 million to $320 million tailwind in the fourth quarter.

Our full year operating margin would be negatively affected by approximately 70 basis points, including approximately 150 basis points in the fourth quarter.

And our full year EPS would be negatively affected by approximately $0.04, including a negative impact of approximately $0.02 in the fourth quarter.

Keep in mind, the effect of FX on revenue, margin and EPS can differ due to the magnitude of the year-over-year change in expense related to our currency hedging program, along with the timing difference of FX and cost of goods sold reflecting inventory turns on our balance sheet.

While we intend to give our fiscal year '19 guidance on our fourth quarter earnings call in May, the fiscal year '19 commentary that I provided on last quarter's earnings call still stands.

Also while we expect to continue to drive operating margin improvement and EPS leverage, keep in mind the following headwinds to our projected EPS growth.

We expect less interest income reflecting planned positioning of our investments for greater flexibility and liquidity in support of capital allocation.

We will anniversary the full year benefit from the accounting change on stock-based compensation.

And we expect to begin to transition services related to our divestiture to Cardinal Health, eliminating the income in the back half of the fiscal year.

Combined, this could amount to a few hundred basis point headwind to EPS growth, which we will be working to partially offset.

In addition, given recent changes to exchange rates, if current exchange rates remain stable through next fiscal year, we would now expect an approximate $500 million positive impact to fiscal year '19 revenue and over $0.10 of benefit to EPS.

Finally, I would like to note that we plan to hold our biannual Institutional Investor and Analyst Day on Tuesday, June 5 in New York City.

Now I will return the call back to Omar.

Thanks, Karen.

And to conclude, Q3 was a solid quarter, where innovation and technology, strong positions in the fastest-growing markets in med tech and enterprise synergies produced solid returns.

We have driven a strong turnaround from our first half results.

And we remain confident in our ability to deliver mid-single-digit revenue yield and meaningful EPS leverage this fiscal year and beyond.

We expect this to lead to robust free cash flow generation that we can deploy with discipline.

Finally, we remain keenly focused on executing to deliver dependable results for you, our shareholders as we continue to leverage our global diversification and scale to fulfill our mission of alleviating pain, restoring health and extending life for millions of people around the world.

Let's now open the phone lines for Q&A.

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

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

And with that, operator, first question, please.

(Operator Instructions) And our first question comes from the line of Bob Hopkins with Bank of America.

A quick question for Karen and then for Omar.

First, Karen, just to start off, thank you for the preliminary thoughts you're providing on 2019.

Since I know I'm going to get a lot of questions on it, as I assume everybody else will, I just want to make sure I hear exactly what you're saying.

My interpretation of what I just heard is that perhaps the FX benefit is roughly offsetting some of those incremental headwinds you talked about and that perhaps high single-digit earnings growth is a rough preliminary way to think about 2019.

So is it fair to say that some of those headwinds you mentioned will be offset by FX and that roughly high single digits is a good preliminary way to think about 2019 earnings?

Yes, that's roughly in line, Bob, at this stage.

We're still working on our annual planning process, and we will give guidance on our fourth quarter call in May.

But your summary is roughly right.

Okay.

And then Omar, I wanted to ask you about revenue growth because obviously this was some of the best and most balanced revenue growth we've seen out of Medtronic for some time, so congratulations on that.

I guess my question would be from a macro perspective, can you talk a little bit about maybe about the drivers of the growth?

How much of this was just particularly strong execution and new products versus strong markets?

Were there any significant onetime benefits in Q3?

Maybe just talk from a macro perspective about the revenue growth in the quarter and the sustainability.

Well, like I've always mentioned, our revenue performance is highly dependent on new product launch process.

And when we've got new products, the revenue growth goes up quite significantly, especially with respect to the market.

Overall, the market, no real major changes since before.

We expect what we said in November is about -- still holds the same in terms of surgical procedures and in terms of other procedures.

Some elective procedures in Diabetes in particular have a ramp-up in December, which then tails down in January.

So these are all normal patterns.

I think the only thing that I'll point out is, of course, we're pleased with the Diabetes business as promised and expected, with the sensor shortage issue being addressed, bounced to double-digit growth, which clearly, just on its own, helps.

The other thing I'll point out actually is our pain division, where again we've been experiencing declines in growth.

And this quarter, we came up to high single digits, which based on new product introductions.

So those 2 are the outstanding drivers.

I mean, CVG as usual performed.

And this was a particularly good quarter with a variety of new products, which I detailed.

And MITG continued with their introduction of products.

So really product pipeline introduction is the main driver that we see in this performance.

And we're quite pleased with what we've seen.

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

Just a couple of items to clarify.

So last quarter, Puerto Rico was about a $60 million headwind to the business.

How much of that do you think you got back this quarter?

And then second, just I think we're probably all a bit surprised by the reduction in the EPS guidance because of FX this quarter.

You commented in your prepared remarks that the fourth quarter, we'll see a 150 basis point headwind to operating margins because of FX.

That's pretty severe.

So could you just spend a minute on that and maybe just help people with, I guess: one, why the FX impact got worse despite the weakening of the dollar from last call; and two, why it's so severe on this fourth quarter?

Sure, Mike.

Thanks for the questions.

So on Puerto Rico, we did realize some incremental revenue from Hurricane Maria in the third quarter, but it was relatively minor.

So the vast majority of the 7% growth in Q3 was related to improved underlying financial performance.

In terms of foreign exchange, this quarter, given the significant volatility in foreign exchange rates, particularly in the last month of the quarter, we did have an impact on our balance sheet from a remeasurement perspective of certain balances late in the quarter.

And then we also did have an impact to our inventory, which given inventory turns, take some time to run through cost of goods sold.

That said, for fourth quarter, we do expect to have a continued foreign exchange headwind, both on margin and the bottom line in the fourth quarter.

We expect in the fourth quarter on the bottom line to have FX, if rates remain stable to where they are today, of negative $0.02 for the fourth quarter.

While we do have a period right now where foreign exchange is benefiting revenue, given the roll-off of our hedging program, we are seeing continued slight negative headwind to the bottom line.

Next year, with the strength of the dollar and the roll-off of most of our older hedging -- hedges, we do expect a foreign currency benefit both on revenue and expense.

And we mentioned at this stage, if rates remain stable for FY '19, a positive impact on revenue up to $500 million and over $0.10 impact positively on EPS.

And maybe just one follow-up on cash flow.

Karen, your guidance had seemed to imply that you would do about $4.3 billion in free cash flow this year.

And that's again going back to that FY '16 base and then adjusting it for the divestiture.

You've done $2.8 billion year-to-date.

Is the expectation that you'll get to that, call it, roughly $4.3 billion target?

Yes, thanks for the question.

We do have a slide in our slide deck on cash flow.

And you'll see free cash flow, operating free cash flow year-to-date of $3.6 billion, and yes, $2.8 billion adjusted but on a comparable basis, $3 billion year-to-date.

And the guidance still stands for the full fiscal year, where we expect to deliver high single-digit growth on a multiyear basis from '16 to '18, which would equate to approximately the cash flow forecast that you mentioned.

Our next question comes from the line of David Lewis with Morgan Stanley.

Just 2 questions, one for Omar and one for Karen.

Omar, I just want to come back to revenue momentum, obviously very strong quarter here in the third.

I think at the top end of your guidance, it sort of implies 5.5% for the fourth quarter.

But also your commentary implies some deceleration in franchises like CVG and RTG.

So were there any onetime dynamics in the third quarter or pull-forward because of the hurricane dynamics?

Or perhaps the fourth quarter reflects some type of conservatism?

Well, I think the hurricane dynamics were relatively minor, there was some of that, but really that was relatively minor on the overall base of our revenue.

I think in Q4, it's mainly tougher comparisons year-over-year that are driving this.

In some areas, like Diabetes, we expect continued strength.

And I think CVG has had a strong high -- almost high single-digit growth rate over past several quarters.

And we're running into a tougher comparison in Q4 so that's lower than it has been running but still well in the mid-single digits, as we expect.

I think with MITG, what you saw in Q4 was a slight enhancement because of our sales in the pulse oximetry business because of the flu season, which was -- and the requirement for that product was particularly high even given historical levels.

That's going to tail down in Q4.

So that's dampening the growth a little bit.

I think those are the key dynamics that I'm looking at.

It's still well in the mid-single digits, well in our guidance.

And we expect to close the year in the range that we had talked about in a fairly tough year.

Okay.

So continued momentum and no major changes across your key franchises, it sounds like, in the fourth quarter?

That's correct.

Yes, it's just a quarter-over-quarter dynamics and some one-off issues here and there.

Okay.

And then Karen, just as to next year's outlook, and I appreciate the commentary you provided, just 2 sort of follow-up questions here.

We don't have great numbers, but it looks like underlying margin performance for fiscal '18 looks like it will come in somewhere around that 30, 50 basis point range, perhaps 40 basis points of underlying margins.

How do you think that number trends into next year?

Can you do better than 30, 40 basis points of underlying margin improvement in fiscal '19?

Is it possible at all to give us some range on the net change in hedging accounting into fiscal '19?

Because that's where the big change on a relative basis.

Okay, sure.

Thanks for the questions.

In terms of margin benefit for FY '18, you're correct.

We did deliver on a constant currency basis, 30 basis points of margin improvement this quarter and would expect that momentum to continue to drive full year margin benefit to be higher than what we had this quarter.

In terms of next fiscal year, we do intend to continue to drive operating margin improvement and strong EPS leverage.

Based on current exchange rates, where they are right now, we would expect a positive impact to the bottom line from FX and also not a headwind on margins, then potentially positive benefit on margins, too.

So we will obviously give our guidance on the fourth quarter earnings call.

But I would expect continued positive momentum on margin from here, particularly driven by our Enterprise Excellence Program, which we announced at the JPMorgan conference.

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

So maybe my first one, Omar, and maybe Mike Coyle can add to this, value-based care, this is something you've spoken ad nauseam, Omar.

It just feels like we're getting more traction.

We had some numbers on the revenues.

Rhythm management, where a lot of, I think, the Street is concerned on this comparative dynamic, you have a huge trial readout coming in, the RAPID trial.

Can you talk about how those value-based contracts, and particularly in CRM, TYRX would change once you get the trial readout?

And are we -- could this possibly lead to more share gains and positive growth in that business in a few quarters?

I know I've spoken a lot about value-based health care, but I'm particularly pleased to see this translate into real numbers, which have real differentiating value for Medtronic.

And the person who's led that actually is Mike Coyle in CVG.

And while TYRX is one example, where our innovation is linked directly to an outcome and we built a business model around it, we've actually got 4, 5 other programs, which are equally interesting but in the starting phases.

But I'll let Mike just comment overall on the subject, then also on to the specific question on TYRX.

Relative to TYRX, we're quite pleased with the level of uptake that we're seeing with over 1,000 hospitals now participating in the program, where we actually have linkage back to essentially make a payment that will go to the account if the patient comes back with a device-related infection within 6 months.

And I think what that has been able to do is TYRX is not separately reimbursed.

And so by doing this, we've been able to create a guarantee that basically is very appealing to accounts who know that they will obviously have a patient who is significantly impacted by an infection.

They will lose money at the provider level, at the hospital level because of that redo procedure that's required.

And of course, the payer is now out 2 separate procedures for payment.

So this really is a win-win-win the way we have structured it.

And I think it's being seen that way by the accounts.

But it also allowed us, by being able to see the appeal of this approach, to then apply it to numerous other parts of our business, including reductions in heart failure rehospitalization with AdaptivCRT, a feature of our CRT devices; our SmartShock performance guarantee program, which basically pays when patients come back with inappropriate shots from an ICD; the drug-coated balloon reintervention -- prevention program, which basically ties to patients coming back for target lesion redos in the SFA disease; and then our CryoAblation business.

Basically, we have a program that pays for patients coming back with either repeat hospitalizations for AF or for repeat procedures for the ablation.

And so collectively, these programs have now been rolled out really just in the last year since the TYRX program really got momentum in January a year ago.

And these newer programs are really only 1 quarter or 2 old.

But as we mentioned in the script, we have over $650 million of revenue mostly in the U.S. tied to these programs.

And we continue to see opportunities to do more of them.

Maybe one follow-up on capital allocation.

Karen, so now you have access to $14 billion plus of cash.

And I think you mentioned for '19, fiscal '19, less interest income.

So I'm just curious, wouldn't debt paydown offset some of that?

Or can you just walk us through the math on how the cash is going to be used and why it should be an interest income headwind for next year?

Sure.

So yes, we do have $14 billion of cash on our balance sheet and we have access to the vast majority of that post tax reform.

I think the biggest benefit to us will be the access to our ongoing cash generation though going forward.

But with respect to the existing cash on the balance sheet, we have been paying down debt this year.

We have another $2 billion of debt to mature in the fourth quarter this year, which we expect to let retire.

And we also have the Puerto Rico tax settlement still waiting out there.

It is under appeal.

We have a hearing date set for mid-March.

And so we're hopeful and feel strongly about our position there.

But should the appeals court uphold the prior settlement, it does mean that we would have to pay a large tax settlement from that transaction.

So the greatest benefit again is our access to our ongoing cash generation going forward.

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

I have 2 pretty straightforward questions.

I'll ask them both now.

Karen, I'm sorry if I missed this, but the tax rate in fiscal 2019, are you assuming 100 to 200 basis points improvement over fiscal 2018?

Sorry if I missed that earlier on.

And Omar, I was struck, when I looked at the JPMorgan slides in January, how few tuck-in M&A deals you've done in fiscal 2018 versus prior year.

So I guess, my question is why is that the case?

And anything -- any color you can provide on what we should expect going forward would be helpful.

Okay, let me take the acquisition one first.

A number of things, first of all, we do acquisitions when it meets certain guidelines.

That means we think that the acquisition will add to our strategies, which are very clear in the disease areas that we've got -- especially tuck-in acquisitions, in the disease areas that we've got presence in and it fills out our overall capabilities.

We've got to have the management bandwidth and the financial bandwidth to do the deal.

And if there's an interesting acquisition, we do it.

And we haven't been shy from doing some reasonably big ones in the past 2 years.

I think improved access to cash that we'll have with the new tax reform will actually help open our financial bandwidth in doing some of these deals.

But remember, they all go together.

This financial bandwidth, this management bandwidth and most importantly the strategic alignment of the tuck-in acquisition and our ability to integrate it properly with the right team.

And I wouldn't read too much into any particular year.

It's really overall we've created a pretty good track record of doing these and we intend to continue.

And Larry, on the tax rate question, our initial estimates indicated that we would benefit from a slightly lower effective tax rate beginning in fiscal year '19.

We did not give the basis point improvement, but we did say we expected it to be slightly lower.

We continue to work through the complexity of the new reform and additional guidelines that come out from the U.S. Treasury to refine our estimates.

And certainly, if in that process, our initial estimates change, we'll certainly let you know.

But at this stage, we expect a slightly lower effective tax rate.

Our next question comes from the line of Kristen Stewart with Deutsche Bank.

I just wanted to go back on the comments on the robotics platform.

I was just wondering if you could expand upon any of those comments that you made earlier, just going on what exactly are some of the delays there.

Well, like I said, Kristen, that's a fairly complicated system with multiple computers being put together.

And it's one that we've had some experience with.

And when you integrate a system of this level of complexity, there may be some timeline shifts as to when we'll be ready for first-in-human use.

And so it's taking just a little longer than we thought earlier.

We're very excited about what we're seeing.

I mean, you've seen this thing operate and the performance is very compelling.

I think it's best if we wait until Investor Day when we'll give you some more insight as to the nature of this product, which we are really excited about.

And also as we get closer to commercial launch, we'll give you some dates.

So I think that's the best way to look at it.

And make no mistake, this product is an outstanding product.

And the sorts of integration hiccups you get are not uncommon at all with systems of this magnitude and one that we know we'll get through and will be ready for launch at a suitable time.

Okay.

But you said do you still expect first-in-human use to be when?

No.

Look, we're not at a stage to give you dates like that.

Why don't we wait until Investor Day, and then we'll give you an update on our overall performance.

And really we'll stick to timelines when we're close to commercial launch.

Okay.

And then just a question on the Diabetes franchise, can you give an update on the continuous glucose monitor program?

Hooman?

Yes, go ahead.

Sure.

The sensor ramp-up is actually progressing well.

It was a key contributor to our growth rate in Q3.

Just to maybe put some additional color on it, our Guardian Sensor 3 production in the third quarter was twice as high as what we experienced in the second quarter.

So that should give you an indication of how things are progressing.

And as the commentary alluded to, we're on track to fulfill all the needs, the sensor needs of our installed base this quarter.

And by the end of this quarter, we'll be able to meet unconstrained demand as we have been saying all along.

Now the other thing I'll just point out is that the performance of the sensor itself, not just the capacity, but as Omar talked about in the commentary, the MARDs that we are seeing on over 20,000 patients in the installed base is fantastic and continues to really essentially mirror what we saw on the pivotal trial.

So we're very pleased, not just in terms of the output but also the quality of the sensor.

Okay, perfect.

The timing in the U.S.?

For the Guardian Connect standalone?

Yes.

Yes.

That one is with the FDA, Kristen.

We are very confident that we're going to be able to get this out shortly.

It's hard to predict exactly when the FDA is going to approve it.

But we're working very closely with them.

And all indications are that we'll have an approval here in short order.

Your next question comes from the line of Isaac Ro with Goldman Sachs.

Kristin (sic) [Karen] A question for you on the $3 billion gross cost savings goal that you guys have set.

If I look correctly at the slide, FY '18 was the base year.

And so now that you guys are most of the way through year 1, could you give us a sense of what net savings have been to date, just so we can try and triangulate how that's translating into margins over time?

Sure, Isaac.

On the $3 billion gross savings, we do expect annually incrementally between $500 million to $700 million each year over the 5-year period.

So next year, you can expect that incremental savings, not all of it will fall to the bottom line because we will be focused on using some of it to offset pricing pressure and to reinvest.

But it is this program that will drive that strong margin improvement and EPS leverage that we have talked about.

And in terms of the $500 million to $700 million annual incremental each year, expect it to be more in the lower half of that range in the beginning years and more in the upper half of that range in the later years.

Okay.

And so when we get to, let's say, the next investor meeting or thereabouts, would you start talking about net savings that you expect out of this program, either cumulative or on an annual basis?

Yes, we will be talking about, every year when we give annual guidance, the net savings that -- at least the impact that we would expect to see from a top to a bottom line.

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

So I wanted to follow up on 2 points and really just put a finer point on 2 areas that you've already touched on.

One is it's encouraging to see the Diabetes turnaround.

And you talked about getting to a point where you're now meeting demand.

I guess, could you help us sequentially understand from here how much improvement you could see in terms of your ability to grow beyond that and actually go after more new customers?

And maybe just touch on in a little bit more detail, the Animas change and how that could help your pump business as a preferred provider?

Sure, Matt.

When we say by the end of this quarter, we'll be able to meet unconstrained demand, that's not only talking about pump users and our ability to satisfy the sensor needs of the patients who are on pumps.

It's also about our ability to go after new markets like standalone sensors, which I had talked about with Guardian Sensor 3 and the pending approval in the United States.

So we really feel confident that by the end of this fiscal year, we'll be in a position to really go after our existing markets as well as start to really penetrate aggressively new markets that we currently don't play in.

That's number one.

As far as Animas goes, I'd say that's progressing very well.

We are generating today consumable revenue from that transaction and we're transitioning patients that are out of warranty from Animas to Medtronic as planned.

And things are going very well with that.

And we're getting some incremental growth out of that.

And the way I would characterize it is even if you exclude Animas, we would have been double digits in Q3.

But we're very pleased with how that's going.

And we look forward to just continuing the transition.

And then just a follow-up maybe for Mike Coyle or anybody else who wants to jump in on CVG, so really encouraged by the growth this quarter and the mid-single-digit expectations going forward.

Could you just touch on specifically whether you're seeing competition from the recent MRI labels of your key competitors and how you're able to offset that?

You talked about TYRX.

But any kind of further color in that one pain point would help.

Yes, Matt.

Obviously, we play in a lot of segments and we see various momentum coming from our new product launches and competitive new product launches.

And we are seeing at the margin some share loss in initial implants in the ICD segment just as MRI has come in for both competitors.

And they're basically going to their user-friendly accounts and getting some of that share back.

Of course, on the flip side, we are taking share in the brady segment of the market because of not only Micra but also because of our CRT-P quadripolar product as well as the strong position we have now with our next-generation wireless pacing technology that just entered the U.S. market.

And obviously, you also saw we're taking market share in both the Coronary and in the TAVR segment.

So basically, when you net it all together, we are really just taking advantage of the size and scale that we have as an organization for diversified growth.

And we think we can continue to deliver above the market growth.

And our segment market growth is between 4.5% and 5%, typically.

So that 4.5% to 5.5% we're talking about next quarter really is just a function of a very strong Q4 a year ago.

And we expect to be able to continue to participate across our broad portfolios at that above-market growth.

Our next question comes from the line of Danielle Antalffy with Leerink Partners.

Omar, I was wondering if you could talk about new growth -- new product contribution to growth in the quarter.

Obviously, new products are a key part of this.

And also how we should think about the contribution of the new product growth vector in fiscal 2019?

Not asking you to give guidance, but it just seems like that's going to become an increasingly important part of the growth story.

Yes.

I think, first of all, I don't have the exact number in front of me.

But that is a major component of the growth in this last quarter and it will be going forward.

And the company is really based around therapy innovations so that's not surprising.

I do want to point out clearly that our value-based health care programs, our economic value programs are all accelerators for our new products.

And we realized that the connection of our technology to demonstrating clear outcome improvements is the way to get value for these products, even in the current fee-for-service environment, and to get differentiated pricing for these products because of the credible promise and commitment to improve the outcome, which the -- which our customers see.

So you'll see an increasing sort of drive towards newer and newer therapies.

But the linkage to the outcome and the value that, that creates is what will give us our differentiated strategy.

And then over time, of course, these products then go into emerging markets and drive further acceptance in those markets and penetration.

But the new products in our business are the fundamental sort of value that we have.

And the linkage to outcomes is what the value is to our customers.

And our ability to join these 2 together as we're successfully able to do now will differentiate us and will give us momentum.

Great.

And just one quick follow-up to that, given the importance of new products, can you talk about the gross margin profile of these new products sort of overall?

Is it in line with or above corporate average?

Is that the right way to think of new products generally?

I think the new products, yes, in general.

I mean, sometimes they're so attractive and the market wants them, we make a tradeoff with price and volume.

But in general, the new feature, the new value and the price is justified by the value that the customers, in an objective way, realize.

And so this is not an arbitrary thing.

If there's value, we get the price.

And in general, you'll see that.

And you'll see it offset older products over time.

So overall pricing, sort of numbers that we put out previously, I think those things still hold.

And our ability to maintain them is dependent on these new products.

Our next question comes from the line of Joanne Wuensch with BMO.

Very nice revenue growth this quarter.

Can we talk a little bit about what you're seeing in the TAVR market?

Your verbiage indicated you're opening up new centers.

And is there anything specific that we should look for at ACC?

Mike, go ahead.

I think the market dynamics have remained very strong there in terms of overall market growth in the low 20s on a constant currency basis.

And that's pretty well balanced across the U.S. and international.

We obviously have been in a share capture mode here in the last couple of quarters based on really the performance of the Evolut PRO product, which is being extremely well received in terms of its lowering paravalvular leak rates, lowering pacemaker rates.

And so it's really being received as an excellent product, but also obviously the expanded indications for use into intermediate risk, and of course, we continue with enrollment in the low-risk patient population.

And of course, we've entered Japan obviously with the Evolut product as well.

So all of those collectively are helping us drive above-market growth in the overall market.

There's nothing particularly new at ACC coming in terms of really it's just additional data in some of our larger registries and studies, which obviously continue to support the performance of the products, and especially Evolut PRO.

So you'll see those at ACC.

And as a follow-up question, your Resolute Onyx is gaining a fair amount of momentum this quarter.

Is there anything qualitatively you can share with us as that product is being rolled out?

Yes, well, we think that is -- our customers tell us it's probably the best handling stent in the marketplace in terms of high visibility or good visibility, it's got great deliverability.

We also expanded the size matrix and have actually some unique sizes that other companies don't have.

And the other thing it does for us is, in conjunction with Resolute Integrity, which is also a very well performing product, gives us a little more balance in terms of how we can provide multiple price points into the market to deal with pricing pressures.

And so collectively, those things have really allowed us to both stabilize pricing and to drive market share capture across that segment.

And of course, it's still a very large product segment and highly profitable, so we're glad to see the growth that we're getting out of the product in both the U.S. and in Japan.

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

Two questions on Spine.

First, it looks like the spine market had another challenging quarter.

Do you guys have any incremental insights?

Anything you may have regarding the challenges that are facing the market?

Anything new you may have picked up in the last 3 months?

And then as a follow-up, sticking with Spine, I'm wondering, how much has the Mazor robot helped drive your business?

And has it helped pull through any incremental hardware and biologic sales?

Go ahead, Geoff.

Yes, Glenn, on the market, no new insights from last quarter.

I mean, the formula that we had been seeing in, I'll call it, FY '17 and even Q1 of FY '18 is more of a kind of 5% procedure growth with maybe 3% price reductions for a net 2% growth on a global basis.

And that formula has come down to maybe a 2%, 3% procedure growth with a 2% or 3% price decline.

It gets you basically flat.

And that's what we've been seeing over the last couple quarters.

We do think that's going to go up from here to another -- 1 point of net growth or so over the next couple quarters is what we're seeing.

But no new insights in terms of what's driving that.

I mean, there is definitely more pricing -- I think there is another point of pricing pressure in here and with hospitals consolidating, getting more sophisticated in their buying patterns and their tendering.

They are consolidating their vendor base.

And for us, it's a tale of 2 cities.

One, given our product breadth in implants plus our enabling technologies, we end up usually a net benefactor when you consolidate vendors.

But it is resulting in some price declines.

So that's why we're gaining, net-net, gaining some share.

In terms of Mazor, it is starting -- I mean, the distribution relationship is relatively new.

And it is starting to pull through revenue.

There's 2 tangible -- we haven't seen the benefit of it yet, we'll see it in the coming quarters.

There's 2 tangible ways that pulls through the revenue.

One is when we place a piece of equipment at an account in return for incremental Spine shares.

So in the last 2 quarters, we've started doing that with Mazor.

And that lags maybe 6 months before those contracts take effect and we actually see that incremental revenue.

So we haven't seen it yet.

But it's locked in, if you will.

And then going forward, around the December or January time frame, we'll be launching an integrated -- we'll have Mazor integrated into our broader Spine enabling technology, so it's fully integrated with navigation and intraoperative imaging or O-arm.

And in that case, the advanced features of that platform will only be -- will only work with Medtronic implants.

So it will be a technology tie-in with the platform that will further pull through.

So it is starting to drive the revenue.

You don't see it in our economics yet.

But it will be coming in the coming quarters.

And those are the 2 reasons why.

Geoff, just one clarification.

Did you say going forward, you thought procedure volume would improve, offset by maybe slightly greater pricing pressure, so net-net, no change in the market going forward on a reported basis?

Well, it's hard to predict this, but we're looking at, net-net, anywhere from no change to maybe 100 basis points improvement net.

Our next question -- our final question comes from the line of Josh Jennings with Cowen.

I was hoping to follow up, Omar, on your comments on your economic value-creation strategy.

Historically, you've talked about 40 to 60 basis points of organic growth contribution coming from the Services & Solutions business.

I was wondering if you could update your thoughts there.

Should we still be considering the annuity revenue growth from Hospital Solutions, some of your pure services business like Cardiocom as well as the value-based programs driving 40 to 60 basis points of organic growth?

Or should we be thinking more about the implant benefit with some of those programs driving growth more on the implant side going forward?

And I have one follow-up.

Sure.

Look, I think both.

We haven't been able to hit the 40 to 60 basis points.

I know we talked about it as a target.

But we're closer to the 20 to 40, I'd say.

And our growth in Hospital Solutions continues.

And we had actually a particularly strong quarter with the VA in our Care Management Services business.

So I mean, those and that annuity revenue actually continues to grow.

We are increasing the number of hospitals.

We're pretty excited about the spread of contracts that we're getting in hospitals around the world now, in Latin America and in the Middle East as well as in Western Europe through our Hospital Solutions.

And that's increased from our Cath Lab Managed Services to our operating managed services as well.

So there's a strong focus in the company around that.

And that will deliver increased annuity revenue.

I think though what we found is that the bigger benefit, and that's a value, but the bigger benefit actually is the linkage with our new therapies, which is then driving incremental share in our new therapies and incremental pricing in some situations where the innovation and value are directly linked.

And so that's why we start to look at this in a much more integrated fashion.

And the contribution of economic value actually to our innovation program is greater than the annuity revenue, although I'm not, by any means, saying we're going away from that in any way.

And just a follow-up, one of the drivers behind the Responsive acquisition for hip and knee offering was the services business and the opportunity there.

Any chance you can give us an update just on the performance of your hip and knee offering relative to internal expectations?

Any updated thoughts on Medtronic's drive to add breadth and scale to be orthopedic unit?

I think we're still in the early phases of that.

And I'm going to ask Geoff to kind of comment on it.

So go ahead, Geoff.

Yes, sure.

As Omar said, I mean, look, we're -- coming into the ortho market, we want to come in, in a disruptive way both from a device standpoint and from a services standpoint.

And so we are -- we remain really encouraged about the opportunity.

But it is taking a little longer than we thought.

We're still working on this.

And we are getting good engagement from customers both on the device side, our knee is out there and is being operated on in a number of centers.

And we've had, I don't know, a number -- 50-or-so patients that it's been implanted in.

But again, we're just continuing to tweak the instrument design on that to get it exactly where we want it.

And the hip is, from an FDA approval standpoint, several quarters out.

So we're continuing to work on that and being encouraged by the demand for the value proposition on the device side.

And on the services side, this is more of a care pathway offering, also very encouraged by the customers we've engaged with, several hospitals and also some outpatient surgery centers.

Again, not ready to fully ramp this because that takes an investment of capital that until we get the exact formula right to be disruptive and scale this in a profitable way, we're not going to aggressively ramp it.

So we are still working on this and we'll update you in the future on this.

Okay.

Thanks to all for your questions.

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

And we look forward to updating you on our progress and results for our full year on our Q4 call, which we currently anticipate holding on Thursday, May 24.

Thank you all very much.

This concludes today conference call.

You may now disconnect.