美敦力 (MDT) 2019 Q2 法說會逐字稿

Good morning.

My name is Zitania, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Medtronic Second Quarter Earnings Call.

(Operator Instructions)

I would now like to turn the conference over to Mr. Ryan Weispfenning.

Sir, you may begin your conference.

Thank you.

Good morning, and welcome to Medtronic's Second 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 second quarter, which ended on October 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 may differ materially from those projected in any forward-looking statement.

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

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

References to quarterly results increasing, decreasing or staying flat are in comparison to the second quarter of fiscal year 2018, and references to organic revenue growth exclude the impact of any material acquisitions, divestitures and currency.

Unless we say otherwise, quarterly revenue growth rates and ranges are given on a constant-currency basis, which adjusts for the impact of foreign currency.

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

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

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

Thank you, Ryan, and thank you to everyone for joining us.

Let me start today's call by taking a few minutes to remember Earl Bakken, the cofounder of Medtronic, who passed away last month.

Earl led our company for 4 decades, retiring as Chairman in 1989.

He remained a beloved figure at Medtronic and continued to serve as Chairman Emeritus throughout his life.

Earl watched the company he started in a modest Minneapolis garage grow into the industry-leading, multibillion-dollar company that we are today.

Earl remained steadfastly committed to the Medtronic mission, which he drafted nearly 60 years ago, and remains the guiding principles of our company today.

I was fortunate to spend some time with Earl and treasure the memories of visiting him over the years.

Earl improved the lives of millions of people, built a major corporation and established an entire industry.

We are excited to continue living his vision every day at Medtronic.

Turning now to Q2.

This morning, we reported another quarter of strong top and bottom line performance.

Organic revenue grew 7.5%, marking the fourth straight quarter of 6.5% or better underlying revenue growth, reflecting once again strong growth across all groups and regions.

Adjusted operating profit grew 11.3% or 10.6% adjusted for currency.

Adjusted diluted EPS grew 14% or 13.1% at constant currency.

This was an outstanding quarter for Medtronic.

As you can see from the numbers and as you'll hear over the course of this morning's call, we're executing on multiple fronts.

Our comparisons will naturally turn more difficult in the back half of the year, but we are growing both our market and our share across multiple businesses and multiple geographies.

Our new product team continues to be robust, with a series of recent launches driving net share gains and new market development.

We're also pleased with our sustained execution in emerging markets, where we grew 13.5%.

Our results this quarter were not just in the revenue line but also down the P&L, delivering 130 basis points of operating margin expansion or 80 basis points when adjusted for currency.

This performance reflects the focus throughout our organization on margin expansion and some early results from our Enterprise Excellence Program.

Our organization is highly focused on improving free cash flow.

In the first half, we generated over $2.4 billion of free cash flow compared to $1.1 billion in the prior year.

In all, an outstanding quarter.

But what I want to share with you today that is even more exciting than our quarterly and year-to-date results is the progress that we're making in our pipeline, where we see more opportunities for growth, both near and longer term, than at any time in our company's history.

I'll cover the pipeline story shortly, but first, let's review our performance this quarter in a little more detail.

It's worth noting that each of our operating groups delivered organic growth ahead of Street expectations for the third consecutive quarter.

Our results are based not just on one business or segment but across multiple businesses and geographies all executing against their plans.

Growth this quarter was led once again by Diabetes, growing 27%, reflecting strong demand for our MiniMed 670G hybrid closed loop system, both in the U.S. and now outside the U.S. as we enter international markets.

We have over 135,000 trained, active users of our 670G system, and we continue to generate strong real-world clinical outcomes with time-in-range exceeding 70%.

Emerging Technologies revenue more than doubled this quarter, driven by the launch of our Guardian Connect stand-alone CGM.

We've continued to be pleased with the introduction of this product as it takes share in the $1 billion stand-alone CGM market.

With the Sugar.

IQ assistant, Guardian Connect is the only smart CGM, using cognitive computing capabilities to provide personalized insights and predictive alerts.

Overall, sales of CGM from both the Guardian Connect and the sensors attached to pumps grew 70%, with over 90% growth in the U.S. Revenue from CGM now exceeds our pump revenue and is establishing a consistent, long-term and dependable revenue stream for our Diabetes Group.

Our Restorative Therapies Group posted another record performance, growing 7.8% with very strong growth in the Pain, Brain and Specialty Therapies divisions.

In Pain Therapies, our growth in spinal cord stim accelerated to the mid-30s this quarter, including mid-40s growth in the U.S. Customer feedback continues to be very positive at Intellis with its Evolve workflow algorithm and Snapshot reports.

In addition, our Targeted Drug Delivery business grew low double digits this quarter, with SynchroMed II continuing to perform well.

Specialty Therapies was led by strong mid-teens growth in Pelvic Health, driven by sales of the InterStim II neurostimulator.

Transformative solutions also grew in the low double digits with strength in Aquamantys sealers and PlasmaBlade dissection devices.

In Brain Therapies, we had another strong quarter, led by mid-teens growth in Neurovascular, reflecting broad-based strength across stroke therapies.

In particular, our Solitaire Platinum stent continues to lead the market, growing in the high 20s.

Neurosurgery also had a good quarter with strong capital sales of navigation and robotic guidance systems.

In September, we announced our intent to acquire Mazor Robotics and plan to close the acquisition in our third quarter.

We believe that integrating the Mazor X robot with our StealthStation navigation and O-arm imaging equipment as well as with our spine implants creates a long-term competitive advantage for us in the spine market, one that we intend to capitalize on.

Our Minimally Invasive Therapies Group grew 6.8%, driven by balanced growth across both our SI and RGR divisions.

Sales of Advanced Energy products grew in the low double digits, driven by the adoption of enhanced LigaSure vessel sealing instruments and the FT10 energy platform.

In Advanced Stapling, we grew in the high single digits as our innovative Signia surgical stapling system and Tri-Staple 2.0 endo stapling reloads continued to perform well in the minimally invasive surgery market.

Our Respiratory, GI & Renal division grew 7.3% with strong results across all businesses.

Our Patient Monitoring business grew in the high single digits, driven by robust sales of Nellcor pulse oximetry, Microstream capnography and BIS anesthesia monitoring.

The GI business grew in the low double digits, including mid-teens growth in GI diagnostics, resulting from the launch of our calibration-free Bravo and the adoption of the Endoflip imaging system.

Our Cardiac and Vascular Group grew 4.4% this quarter, with high single-digit growth in both CSH and APV divisions.

CSH benefited from mid-teens growth in transcatheter valves, driven by global demand for our Evolut PRO valve.

CSH also continues to see strong adoption of the Resolute Onyx drug-eluting stent, posting low-20s growth in the U.S. APV's result were driven by solid growth in drug-coated balloons and improved performance in abdominal aortic stent grafts and the continued rapid adoption of the differentiated VenaSeal vein closure system.

In Cardiac Rhythm & Heart Failure, our pacemaker business grew high single digits, including low double-digit growth in the U.S. and low-20s growth in Japan, on the strength of our Micra Transcatheter Pacing System and AZURE wireless pacemaker.

These offset mid-single-digit declines in Heart Failure, reflecting the headwind of fewer CRT-D replacement sales given our introduction of longer-lasting implants over the last several years.

Now turning to our revenue growth by geography.

As I mentioned earlier, we continued to execute well in emerging markets, which grew 13.5%, representing 15% of Medtronic revenue.

Importantly, our years of experience and investment are paying off in not just one geography but in multiple geographies.

China grew 13% this quarter, Eastern Europe by 27%, the Middle East and Africa by 20%, South Asia by 14% and Southeast Asia by 9%.

Our differentiated strategies of public and private partnerships and optimizing the distribution channel are making a real difference in emerging markets around the world.

Today, Medtronic has leadership positions in most of the fastest-growing markets in med tech, and we're intentionally allocating our capital to higher-growth markets and new opportunities.

As we invest in these opportunities, we're looking to go beyond simply improving and innovating on existing products and therapies.

Our goal is to invent and disrupt markets with our focus squarely on market leadership.

Pleased as I am with our results this quarter, even more important is the progress we're making in our pipeline, which contains more opportunities for growth than at any time in our company's history.

Let me now, first, give you a glimpse of some of what we have coming in the back half of this fiscal year.

In RTG, the launch of the Mazor X Stealth, an integrated robotics and navigation platform, should accelerate our spine and enabling technology growth.

In Brain Therapies, the React catheter and Riptide Aspiration System, along with our next-generation Solitaire revascularization device, should contribute to growth in the back half of the year and into FY '20.

In CVG, our recently approved Valiant Navion thoracic stent graft system is expected to capture share and drive incremental growth, especially in the U.S. and Western Europe.

In Japan, we look forward to the continued rollout of our recently launched CRT-P quad and AZURE line of pacemakers, our IN.

PACT Admiral drug-coated balloon and the third quarter introduction of our HeartWare HVAD system.

We also anticipate the release of 2 landmark clinical trials in the American College of Cardiology meeting in March.

The first is the interim results of our low-risk TAVR study, which has the potential to expand indications to the low-risk patient population.

The second is the RAPID trial of our TYRX antibacterial envelope, which could enable guideline changes in cardiac rhythm implantables.

The pipeline at MITG is equally impressive, with expansion into key specialty areas of our Tri-Staple technology and our Sonicision ultrasonic dissection platform as well as the launch of our next-generation consumables for the Capnostream 35 portable respiratory monitor, all being introduced in the back half of this fiscal year.

And lastly, our Diabetes business should benefit from the global launch of the 670G within multiple markets around the world.

We will also release the next generation of Sugar.

IQ algorithms to accurately predict hypoglycemia up to 4 hours in advance, which will set the standard for predictive alerts.

Everything I just highlighted represents real innovation, enabling us to grow our market and take market share.

We have plenty of such opportunities in FY '20 as well.

The Reveal LINQ 2.0, our next-generation insertable cardiac monitor, is just one example.

This product will include Bluetooth connectivity, 5-year battery longevity and the ability to monitor additional physiologic parameters.

Another example is our next-generation CoreValve platform in TAVR, the Evolut PRO Plus.

The Evolut PRO Plus features a low profile and improved predictability of placement for enhanced ease of use.

But what excites me even more than these examples of continuous innovation are some of the more disruptive CVG technologies that will follow, including: the Micra AV, our transcatheter cardiac pacemaker, which we are targeting for a late FY '20 approval, enabling us to access and disrupt 56% of the eligible pacemaker market, up from 16% today; our Extravascular ICD, where we are nearing the completion of our feasibility study and plan to start our U.S. pivotal in early FY '20; our Intrepid transcatheter mitral valve replacement system, now enrolling its U.S. pivotal; and SYMPLICITY Spyral, our renal denervation system for hypertension patients, now enrolling in a pair of randomized sham-controlled trials and building off the positive clinical results presented at EuroPCR earlier this year.

Each of these disruptive technologies in CVG has the potential to be multibillion-dollar market opportunities.

In MITG, we're preparing for an FY '20 launch of our robotic-assisted surgery platform, one of the largest R&D programs within the company.

We believe this platform, combined with our industry-leading surgical instruments and surgeon training centers around the world, can expand the market for minimally invasive surgery.

In RTG, we're developing next-generation cranial-mounted and closed-loop DBS systems in our Brain Therapies division.

In Pelvic Health, we are developing a micro stimulator that is only 3 cubic centimeters and features full-body MRI compatibility.

In Diabetes, we're developing an advanced hybrid closed-loop system, which we expect to launch in FY '20.

Our next-generation algorithms will improve time-in-range to over 80% by automating insulin delivery following a snack or a meal.

In addition, the system will reduce the burden of carb counting, enable remote monitoring and automatic software downloads.

We're also making advancements in our CGM sensors and expect a steady cadence of innovation that will drive non-adjunctive labeling, reduce the need for calibration, make the sensor smaller and longer lasting, all while using cognitive computing to enhance personalized insights for the patient.

These are just some of the highlights of our robust pipeline.

I could continue, but the key message that I want to leave with you today is that we are executing on the strongest and most exciting pipeline in Medtronic's near 70-year history.

Let me now ask Karen to take you through a discussion of our second quarter financials.

Karen?

Thank you, Omar.

Our second quarter revenue of $7,481,000,000 represented organic growth of 7.5%.

Foreign currency had a negative $95 million impact.

Adjusted diluted earnings per share was $1.22 and, after adjusting for foreign currency, adjusted diluted EPS grew 13.1%.

While we came in $0.08 above the midpoint of our guidance, it's worth noting that $0.03 was driven by stronger-than-expected FX tailwinds.

Given this, we would characterize the balance as operational outperformance, including a $0.02 benefit from a modestly lower tax rate, along with better-than-expected revenue and operating margin expansion in the quarter.

Adjusted operating margin was 27.9%, increasing 130 basis points or 80 basis points on a constant-currency basis.

We are expanding margins and, at the same time, investing more in research and development to enhance our pipeline and create long-term value.

Adjusted gross margin improved by 50 basis points or 10 basis points on a constant-currency basis, and adjusted SG&A as a percent of sales improved 50 basis points.

We continue to execute on our company-wide Enterprise Excellence Program, driving improved efficiency, cost savings and generating leverage on strong sales growth.

Net other operating expense was $73 million compared to $96 million in the prior year, with the decrease primarily due to the year-over-year change related to our currency hedging program.

Our adjusted nominal tax rate was 13.3%, which was better than expected due to increased deductions from the exercise of employee stock options, along with finalizing taxes owed on certain returns.

For the remainder of the fiscal year, we expect our tax rate to be 15%, plus or minus.

Second quarter free cash flow was $957 million versus $661 million in the prior year.

As Omar said, improving cash generation is a priority at Medtronic from the top of the company on down.

We are pleased with our performance over the last several quarters and are seeing the benefit of our increased focus around cash flow.

We remain committed to disciplined capital deployment, balancing reinvestment with returning a minimum of 50% of our annual free cash flow to our shareholders.

Combining our $1.2 billion of year-to-date net share repurchase activity with the $1.4 billion we paid in dividends over the same period, our total shareholder payout ratio was 80% on adjusted net income.

In addition, the increased investment in organic R&D that I mentioned earlier as well as inorganic investments we are making in tuck-in acquisitions like Mazor Robotics are examples of our focus to increase our return on invested capital and create long-term shareholder value.

Before turning the call back to Omar, I would like to update our guidance.

For the full fiscal year, we are increasing our organic revenue growth guidance from a range of 4.5% to 5% to a range of 5% to 5.5%.

Importantly, given the strength of our first half and the upcoming product launches that Omar has mentioned, we are comfortable with the higher end of this upwardly revised range.

For the year, we expect Diabetes to grow in the low to mid-teens; RTG to grow 5% to 5.5%, an increase of 100 basis points from our prior expectation; and MITG to grow 5%, plus or minus, an increase of 50 basis points from our prior expectation.

With regard to CVG, we expect it to grow 4%, plus or minus, which is a slight decline from our prior expectation given a change in the accounting for third-party product going through our integrated health solutions business.

Turning to margins.

We outperformed in the second quarter and are making good early progress on our enterprise excellence initiative, which is offsetting a stronger-than-expected headwind from mix.

Looking at the second half of the year, we remain confident in our ability to deliver on the 50 basis points of full year underlying operating margin expansion despite the mix headwinds and the impact of both China tariffs and expected dilution from the Mazor acquisition.

As Omar mentioned, there are more opportunities to drive accelerated top line growth than at any point in Medtronic's history.

And as such, our intent, wherever possible, is to accelerate R&D spending while still delivering on our margin expansion commitment.

With respect to earnings, as mentioned earlier, our strong operational performance, including tax benefits, have resulted in $0.08 of outperformance in the first half of the year versus the midpoint of our quarterly guidance.

This has allowed us to absorb nearly $0.10 of headwinds, including foreign exchange that is a net $0.05 worse than the beginning of the year as well as the expected second half impact of China tariffs and Mazor dilution.

For these reasons, we have elected to leave our adjusted EPS guidance unchanged in the range of $5.10 to $5.15, which implies constant-currency EPS growth of 9% to 10% at current rates.

As such, we continue to be comfortable with fiscal '19 Street consensus.

While the impact from currency is fluid, if recent exchange rates hold, our full year revenue would be negatively affected by approximately $420 million to $520 million.

Despite the incremental headwind on the top line, given the benefit of our hedging program, FX is still expected to be a modest positive to fiscal '19 operating margins and neutral to earnings and free cash flow.

Moving from the year to the upcoming third quarter.

We expect organic revenue growth to be in the range of 4% to 4.5%.

And while we face tougher comparisons, we are also comfortable with the high end of the range.

We expect Diabetes to grow in the high single digits; RTG and MITG to grow 4.5%, plus or minus; and CVG to grow 3.5%, plus or minus.

We also expect continued operating margin improvement consistent with our full year guidance.

We expect third quarter adjusted diluted EPS in the range of $1.23 to $1.25.

If recent rates hold, revenue would be negatively affected by approximately $120 million to $170 million.

Operating margin would have a slight to modest benefit and the impact to EPS would be neutral.

Finally, on free cash flow, we continue to expect to generate between $4.7 billion and $5.1 billion in fiscal year '19.

And over the next couple of years, we expect to make additional progress on improving our conversion of earnings into free cash flow as we continue to drive increased focus across the organization.

Now I will return the call back to Omar.

Thanks, Karen.

And before going to Q&A, I want to thank all of our employees around the world for another strong quarter of execution and dedication to the Medtronic mission.

As I mentioned at the start, this was an outstanding quarter.

We are executing on multiple fronts.

Our end markets are strong, and we are leading in several of the fastest-growing markets in med tech.

In addition, we're allocating our capital across our business and focusing incremental resources on our biggest growth opportunities.

In the process, we're driving our WAMGR upwards to the right, while, at the same time, driving operating leverage and margin expansion.

We're also improving our free cash flow conversion, with major emphasis on this across the entire organization.

This will create additional capital that can be returned to shareholders or reinvested to drive future growth, creating long-term shareholder value.

Finally, over the balance of this fiscal year and into FY '20, our pipeline contains numerous growth opportunities and has never been stronger.

We expect to develop and bring to market a long list of technology innovations, which will improve the lives of millions of people around the world, help health care systems become more efficient and ultimately, grow the intrinsic value of Medtronic.

We know there is much work to be done, but we are up for the challenge, and I'm excited about these opportunities.

With that, let's now move to Q&A.

In addition to Karen, our 4 group presidents, Mike Coyle, Bob White, Geoff Martha and Hooman Hakami, are here to answer your questions.

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

Operator, first question, please.

Your first question comes from the line of Bob Hopkins of Bank of America.

So first of all, Omar, your tone today on the pipeline and the innovation coming out of Medtronic seems even more confident than you expressed at the Analyst Day earlier this year.

So in light of that, kind of how would you characterize the potential for upside to your goal of 4%-plus revenue growth?

Is there upside to that in light of what you're seeing in your business today?

Thanks, Bob, for the question.

First, look, you're right about the pipeline.

We're more excited today than we've ever been.

And sure, our goal is to make those opportunities count.

And over the long term, certainly, we expect to perform better than what we've said.

That's always been our goal, and that'll continue.

The most important thing is that we're executing, and that gives us increased confidence.

We're executing from a revenue perspective.

We are executing from a margin perspective.

And most importantly, the products are coming out on time.

The products are delivering the impact that we think that they should deliver.

And if you put all that stuff together, we're really optimistic about the future.

At this stage, we have a plan that we presented at Analyst Day.

It's only been 6 months, so we keep it the way it is.

But make no mistake, this company is executing.

We've got a tremendous opportunity pipeline, and we'll deliver.

Great.

And then just one quick follow-up for Karen on the earnings.

Could you just quantify specifically the -- in the back half, the impact of FX, China tariffs and Mazor?

And then maybe give us a sense, will any of those things make it hard for you to meet your EPS growth targets when you look forward into next fiscal year?

Thanks for the question, Bob.

We are excited about the strength of our underlying business and the strong execution that we've had so far in the year.

That strength and that operational performance has enabled us to absorb headwinds that we didn't anticipate at the beginning of the year and still maintain our EPS guidance for the year.

So those headwinds include the impact of FX, which we now believe, for the year, have a negative net $0.05 impact on EPS.

And China tariffs and Mazor combined have another $0.05 impact to our original guidance.

And then for next year, sorry, on any of those, do those -- are those going to limit your ability to achieve your goals next year?

Yes.

So for next year, our fiscal year '20 starts the beginning of May, and so really, we're just in the early phases of our annual planning process.

So it would be premature for me to give you more specifics on next year, but I would use our long-range guidance that we gave at Investor Day as a guide for next year.

And we'll certainly give you more color when we're ready and obviously give our additional guidance for next year on our fourth quarter call.

Thanks, Bob.

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

I'm just going to start quickly with Omar and then a question for Karen.

Omar, I think the key question this quarter -- obviously, a great quarter.

Just given the divestiture last year and the hurricane, it's sort of hard to decipher if the second quarter results reflect a material acceleration in the growth.

And obviously, your guidance implies stable momentum during the back half of the year.

So can you sort of help us characterize how you see the first half of the year for Medtronic relative to the second half of the year for Medtronic?

Should investors think about the business now as being more stable?

Or in your mind, on an underlying basis, is this business accelerating into the back half of the year or there's a potential for it to accelerate on a momentum basis into the back half of the year?

Well, thanks, David.

First of all, the main point to kind of take away from this is that, sure, there were some sort of favorable comps from the hurricane and so on, but the underlying growth that we've delivered in the last few quarters has definitely continued into this quarter and we expect that to continue into the back half.

That's why we're raising the guidance.

And like I said, the underlying growth and the momentum from all the products that we've talked about give us a lot of confidence that we will certainly deliver on that.

The pipeline for the back half, like I mentioned very specifically, is there, and we expect those to convert into real momentum.

So I've got no qualms at all about the underlying growth of the business.

That's steadily getting better as new products come out.

Now, in the back half, obviously, there's some tough comps, but going back to the overall underlying growth and looking at it over the past several quarters and looking at it into the future, there's a steady improvement as we go forward.

Okay, very helpful.

And then, Karen, just thinking about the -- in the first quarter, you talked about second quarter being a better margin improvement quarter for the company.

Obviously, you delivered that with 80 bps of expansion.

You suggested at our conference maybe margins could get even better into the back half of the year.

So can you help us understand, just given your comments on investment, what we saw here in the second quarter?

How should we think about back half margin improvement versus the first half?

And I'll jump back in queue.

Thanks, David.

We are focused on delivering that 50 basis points of margin expansion that we outlined at the beginning of the year.

As we have opportunities, we are also focused on increasing our R&D investment to accelerate our pipeline where we can.

And so as a result, despite the fact that we have worked hard on operating margin expansion and delivered this quarter, we're focused on the 50 basis points for the full year.

That does imply operating margin expansion in the third quarter roughly in line with our guidance for the full year and fourth quarter, slightly higher than that just given the math.

And typically, we deliver more leverage at the back half and in the fourth quarter than we do in the front half.

Thank you, David.

Your next question comes from the line of Robbie Marcus of JPMorgan.

Can you guys hear me, okay?

Yes.

Okay.

Karen, I wanted to ask you about the free cash flow because this is now several quarters in a row where we've seen really nice year-over-year improvement in free cash flow.

So can you talk to the sustainability of this and maybe touch on some of the programs you've put in place to improve that from prior years?

Thanks for the question, Robbie.

We are very pleased with the free cash flow that we've been able to deliver in the first half of $2.4 billion, which is a significant improvement over the first half of last year.

And it's really due, as Omar said, to a very strong focus throughout the company on improving cash, not just through earnings growth but also through working capital improvement.

In the first half, we had some strong improvement in accounts payable and accounts receivable in particular, but also a focus on managing our larger onetime items as best we can and staying within the parameters that we've outlined on those onetime items.

So we're focused on free cash flow.

We believe that this focus is highly sustainable.

It has obviously been built into our incentive comp metrics throughout the company, and we're focused on achieving what we outlined at Investor Day.

Great.

And another question I just wanted to follow up on is, there's been a lot of noise on 2 of your key product lines in the market this quarter, both in Diabetes from some competitors about the timing of your next-generation pump and then in the spinal cord stim market about what the true growth from a volume basis is there.

You put up great results in both, so can you talk about the sustainability of the spinal cord stim market growth and then comment on the reiteration of the fiscal year '20 for your next-generation pump?

Yes.

I'm going to ask Geoff to take the spinal cord stim.

I think he's very anxious to give that reply.

So go ahead.

Yes, sure.

Robbie, appreciate the question.

I was thinking about how I was going to work this in anyway.

Yes, we're seeing really strong market growth that is in the low 20s, and we see that sustaining.

There's just a lot of innovation and new clinical data coming out in the space and with a very nice patient impact, and we see it continuing.

So I saw and read the comments from one of our competitors, and I -- we're just not seeing that.

Obviously, we grew 35% in spinal cord stimulation in Q2 worldwide and 45% in the U.S.

And Robbie, on Diabetes, your question about our advanced hybrid closed loop system, there's been no change to the timing of that product versus what we said at Analyst Day and also at ADA.

We know who's communicating this information, and it's just incorrect.

There's no changes from the time line, and it's just as simple as that.

I'd say beyond those timelines, we're just really excited by what this technology and this product promises to bring.

We've done a lot of work.

We've got 3 feasibility studies done.

Those feasibility studies indicate a time-in-range that is close to 80%.

And to put that in context, a person without diabetes has a time-in-range of 85%, so we're really excited about that.

And when we take a look and compare our performance against published data from what's out there on competitive systems, our nearest competitor is going to have a time-in-range that's less than what we have with our 670G system and with a higher targeted glucose range.

So timelines are holding.

We're making great progress, and we're excited about what the system's going to be able to do.

And let me also add that, look, these 2 that you pointed out, these 2 segments are the ones -- we're excited about many things, but these 2, we're very excited about.

We're going to own these segments, and I'm personally engaged with both of these groups on a very regular basis.

I'm interested in it, and I'm very confident that we will not only introduce these products that we talked about with the features that we talked about but we will lead in these markets.

Thanks, Robbie.

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

So maybe just back to that earlier question on comments on pipeline, increasing confidence on the growth outlook.

So maybe, Omar, in a couple of points that you mentioned, TYRX, that could change guidelines here, some comments on robotics being your largest R&D program, should I just tie into -- tie those 2 comments to the confidence you're expressing here on growth as saying something incrementally changing in robotics and TYRX?

And is this now going to be big drivers for you guys?

Or how should we be thinking of your LRP of 4% to 4.5%, just given all the comments you laid out on the pipeline?

Well, first, with respect to TYRX, what's changed is the fact that these clinical results will be published shortly.

I mean, it's a program that we knew was coming, but the time has come for it to be -- for those results to be released.

And we'll see where we go from there.

That's an important event.

It's something that we planned for.

So in that sense, it doesn't changed, but the fact is that it's happening, and we're executing and it's coming to fruition.

And then, we'll see how the results pan out.

With respect to the robotics program, that was simply a confirmation that we're on track.

It is the most important program in terms of financial commitment for Medtronic at this stage.

It is one that we're really excited about, not just in the short term but in the long term in the way that it will address both the general surgery market and the minimally invasive market.

So we just highlighted those examples.

There are several other examples that we talked about.

But there's nothing to take away from that, that something has changed except our increasing confidence of the delivery of the results emanating from those programs.

Obviously, with the clinical trial, we have to see what the results are.

I think that's the best takeaway here.

Like I mentioned earlier, we just put our long-range plan in place.

We put certain numbers in place.

We've increased guidance for the second half of the year based on our underlying growth.

And I think that's as far as we want to go right now.

We are executing this year, and we're feeling confident about the future.

And Vijay, I would just say that our long-range plan did not have a cap of 4.5% like you mentioned.

It was not a range of 4% to 4.5%.

It was 4% plus, and it was meant to consistently deliver year after year.

And in years where we have very strong pipelines, we can deliver more.

All right.

I'm going to put 4% to 10% now range in my models, Karen.

Just maybe one quick follow-up on the 3Q guide and cap allocation.

So 3Q, is this all the China tariff?

Is that why the EPS is below where Street models are?

And cap deployment, it looks like share repo came down Q-on-Q.

It was $400 million in 2Q versus $800 million.

You have a sizable balance sheet capability.

Can you maybe just comment on priorities for use of cash?

Sure.

Thanks for the question, Vijay.

As you know, we are focused on balancing return to shareholders with reinvestment in our business.

Where we see good reinvestment opportunities, we are focused on driving that because it does drive the long-term value of our company.

We balance that with share repurchase because we do not intend to hoard cash on our balance sheet.

We've had very good reinvestment opportunities not just in our R&D but also in acquisitions.

We just announced the acquisition of Mazor.

And so we're focused on balancing both.

We will continue to repurchase our stock, though, as we see opportunities, and we're committed to delivering at least a minimum of 50% of our annual cash generated to our shareholders.

Thanks, Vijay.

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

Two pipeline questions.

First, for Mike Coyle, on mitral valves, Mike, can you give us an update on where you are with the transseptal approach?

And then can you give us some of your thoughts on the repair market and your plans there?

And then I had one follow-up for Bob on robotics.

Yes.

Thanks for the question, Glenn.

We're still digesting the results that came out here at TCT from both the COAPT study as well as the MITRA-FR study as they both came to some pretty different conclusions about the role of mitral repair.

And so we're trying to digest those relative to the internal investments that we've made.

We are still very strongly sort of leaning toward the use of replacement because of the improved hemodynamics that you get relative to repair.

And we are continuing to execute on our product development pipeline to get to that transseptal product, which we think is going to be very important to the long-term growth of the replacement market.

We're not ready to update timelines on that yet since the work is still -- I would describe it as being in the sort of what we call Phase 0 or feasibility stage.

But we do see a path to getting to a transseptal system, and we are continuing to execute on it.

That said, we think the mitral repair market actually looks quite interesting.

We have a couple of internal programs, 1 purely internal, 1 with an outside incubator, that are also in sort of Phase 0 development stages, and we will decide how we want to proceed with that as we see the results of the technology development.

All right.

And then, Bob, on robotics, so you're reiterating you'll launch in fiscal '20.

Can you give us a little bit more clarity?

Is it the first half of '20, the back half of '20?

And will the first cases be international or U.S.?

Glenn, thanks for the question.

And again, I think the key takeaway message is very consistent with what we talked about at Investor Day, preparing for that FY '20 launch.

I'm not going to get too specific relative to first half or back half, but we feel really good about our progress.

In fact, we've made really important progress across the hardware, software and the verification and validation testing.

So we're proceeding really well across that.

And I will say you can expect that the first launch would be outside of the U.S. We are in active discussion, as you can imagine, with all the competent authorities around the world, but that certainly will happen outside the U.S. first.

Thanks, Glenn.

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

One for Geoff on SCS, one for Hooman on Diabetes.

So Geoff, you've done really well with Intellis, but you start to anniversary the launch.

So how should we think about the sustainability of the growth in this business?

I heard you talk earlier about the market, but your business specifically, what's next for the business from an innovation standpoint?

Would you consider looking externally at emerging SCS technologies?

And I have one follow-up.

Sure.

Like I said to Robbie's question, the market is strong.

We are seeing this low-20s percent growth.

And the other thing I forgot to mention was that -- because I heard this as well, our growth is based on volume not price increase.

So it is a strong market, and there is, like I said, a lot of innovation.

And as we anniversary, we are investing in -- first of all, we have clinical data coming out.

We'll be presenting interim clinical data on our Vectors trial at NANS.

So I think that we've seen the clinical data really move competitive surgeons.

So there's a lot of surgeons for us out there that are kind of waiting for some incremental data from us.

And I -- so we think there's upside for Intellis and the Evolve workflow as that data comes out.

In addition, we're investing in other new indications through some clinical work that we're doing.

And then to your point, there's a number of technology innovations out there that -- internally and externally that we're reviewing.

So I wouldn't say anything's off the table internally or externally, but clearly, we're going to continue to invest in this segment.

One of the things that has really helped RTG overall, you've seen our performance over the last 2 quarters -- or the last several quarters, has been systemically allocating capital to the high-growth segments in our area.

And so this is clearly one that we see sustainability, both technology and clinical innovation.

And so I wouldn't take anything off the table.

Very helpful, Geoff.

And Hooman, just to follow-up on Robbie's question earlier.

First, it looks like the implied second half guidance for Diabetes is mid-single digits.

I know it's high single digits for the third quarter but a little lower in the fourth quarter just on an implied basis.

Is mid-single -- is that how we should think about Diabetes going forward?

And is there any update on the Harmony sensor time line?

And what's the regulatory pathway for Harmony and 690G?

I heard the fiscal 2020 launch.

Right.

So there was a number of different things in there, Larry.

Let me just maybe knock them off one by one.

As far as the back half goes, you heard that we're reiterating, from Karen, the fact that we expect to grow for the full year low to mid-teens.

This obviously translates to an implied deceleration of growth from what we've seen over the past 4 quarters.

There's no doubt about that.

But let me just remind you that when -- if you go back to last year, during the first half of last year, we had CGM capacity constraints that prevented us from not only meeting full CGM demand but also pump and integrated CGM system demand.

Then we started to increase that capacity in Q3 of last year, and were at full capacity in Q4.

And so we had a lot of pent-up demand.

We had some back orders.

And so that revenue catch-up that basically came in the back half of last year is impacting our comps for the back half of this year.

The other dynamic I'd point out, Larry, is Animas.

Animas, we're anniversary-ing 2 out of the 3 revenue components in Q3 of this year.

So all of the consumables revenue, all of the out-of-warranty conversions are really going to no longer provide a year-over-year benefit.

Now that's just commentary on comps.

But if you take a look at it, there's going to be these quarterly fluctuations.

We're really excited about the opportunity that we have here.

We talked about our pipeline, advanced hybrid closed loop in FY '20, which we're committed to delivering.

This is a multiyear growth opportunity for us, for the company, and we keep -- intend to innovate and to lead.

Now very quickly, from a CGM perspective, what you're going to see from us are sensors that are going to come out with non-adjunctive labeling, ICGM standard.

And then following that, what we're going to achieve are smaller sensors, longer-life sensors with continued accuracy that also feed in cognitive capability into it.

And so as far as the sensor pipeline goes, there's really been no change versus what we said at either the Analyst Day or ADA, and the teams are executing against the plan that we laid out.

Your next question comes from the line of Raj Denhoy of Jefferies.

Maybe one on Spine and then one for Karen.

On the Spine business, the underlying growth there, still noted as flat, and you did highlight that with Mazor, now, and the integrated system you hope to launch that maybe we could see an acceleration in that.

Any timelines on when you expect to see improvements in the underlying Spine business?

And maybe you could also comment just on underlying market conditions in Spine, which have been relatively flat recently as well.

Yes.

So this last quarter was not our best quarter in core Spine and biologics, and that -- a big driver of that was INFUSE was down relative to prior year due to some customer buying patterns.

However, the natural demand for INFUSE is strong, mid-single digits, so I'm not concerned.

On the market, the market is -- from our perspective, seems to have stabilized, still slower than it was a year or 2 ago as price declines are now offsetting procedure growth.

So you're getting either flat to low single-digit growth, but it has stabilized and it's starting to inch back up a little bit.

But for us, we do feel we are very well positioned to take share in this market over the next couple of quarters and years.

It's 3 big drivers: one, as you mentioned, Mazor.

So our robotics which is part of our Surgical Synergy strategy, we are seeing the leading indicators of this improvement.

So for example, robotic sales.

We look at every major account as kind of like a socket, if you will, and the key is the robotic sale.

And we are beating our expectations.

And we're 2x the sales -- like in the last quarter, 2x the sales of our competition, and that is before we've launched the Stealth edition.

That's where we integrate our navigation into the Mazor X, which just got approved by the FDA and we'll be launching in January.

And of those robotic sales, 70% of those replacements, meaning that the account chose to pay for them with incremental Spine share over the next 4 years so -- 3 to 4 years, so we're -- these are great leading indicators.

And then utilization of the robot systems is up 10% over the last quarter.

And then finally, use of Medtronic implants with these systems has gone from 28% in Q4 to nearly 50% in Q2.

So all these leading indicators are pointing in the right direction.

The other big driver for us is OUS.

I mean, we have a strong presence outside the U.S. A lot of our competitors aren't as strong outside the U.S, especially in China.

Overall, RTG grew 17% in China.

A big driver of that was Spine.

And then finally, the third one is -- we talked about Speed-to-Scale and the path.

I think we still have upside in our Speed-to-Scale strategy.

We've got a couple of portfolio gaps that we're closing.

And so those 3 things added together, I feel like we're going to take share in the market, whether it's low single digits or what have you, over the next couple of years.

That's very helpful.

And maybe just, Karen, quickly, you did note the potential to increase spending, right, to support a lot of these growth prospects that Omar outlined.

When one thinks about the sort of 50 basis points of margin expansion you've outlined for this year and continued margin expansion into the next couple of years, how much -- if the top line continues to outperform, I mean, will you sort of spend that, in a sense, in order to support that growth?

Or can investors really expect some of that to maybe flow through to the bottom line?

Thanks for that question, Raj.

We're committed to margin expansion.

And as we outlined over the long range, we talked about 40 to 50 basis points for the long range.

For this year, we talked about 50 basis points, so we're committed to that.

We're also focused, through our Enterprise Excellence Program, on driving greater effectiveness and continued efficiency to deliver that margin expansion but also to enable us to increase our investment in R&D wherever possible.

So we're balancing delivering that margin expansion with accelerating our R&D pipeline.

Let me also add to that.

Look, we're -- as you heard me say and all of us kind of comment on, we're extremely excited about our opportunities.

We're excited about the fact that we're executing internally.

So we've got a tremendous internal R&D pipeline, but we're not going to invent everything.

And there are all kinds of opportunities externally as well.

We've got a strong balance sheet.

We've got lots of firepower, and you'll see us moving ahead.

And those are decisions that we'll make over time, but I want to reiterate that the opportunities in med tech today have been stronger than I've ever seen it.

And certainly, our execution deserves us to be able to invest more, and we'll carry this forward.

Having said that, we're committed to the guidance that we have given and the long-range plan that we've talked about.

But I just wanted to point out the opportunity here is tremendous and we'll act accordingly.

Thanks, Raj.

Your final question comes from the line of Kristen Stewart of Barclays.

I just wanted to go back to a question, I think, Bob had asked with respect to guidance from the EPS perspective for the full year.

If I'm looking at the commentary relative to what you reported back in August, it seems that FX is still expected to be neutral.

So I just want to make sure I'm understanding the differences there because it seems like you beat by $0.08, but if I'm listening to you correctly, the only real difference would be the incremental tariffs and then also Mazor, which is $0.05.

So should I think about the guidance as being more conservative?

Or are there other moving parts in other expense or interest expense or even the assumed level of share repurchase that maybe I'm not appreciating?

Sure, Kristen.

I wouldn't read too much into it.

We did have a beat in the second quarter and in the first half.

Part of that beat, we would attribute to better-than-expected FX.

That would be about $0.03 in the second quarter and about $0.06 in the whole first half.

But we do expect EPS to be -- for the full year to be no longer a tailwind -- or a headwind -- excuse me, a tailwind from FX.

We now expect FX to be neutral for the full year.

And because we've had a headwind from FX in the first half and we expect it to be neutral now in the third quarter, that just implies that we'll have a greater headwind in the fourth quarter from FX that we've built into our guidance.

We've absorbed lots of headwinds from an FX headwind to China tariffs and Mazor and maintained our overall guidance, and we expect FX to have a negative impact in the fourth quarter.

Okay.

So it sounds like it was more the timing of FX impact, maybe a little bit more in 2Q than you had previously anticipated.

Maybe that was more of a second half assumption.

Yes, that's correct.

Okay, great.

And then, Omar, just thinking about kind of the commentary around this increased R&D spending.

Where do you think the appropriate level of spending should be?

You're running at around 7.9% for the first half of the year.

Is that a good level that we should think about or something even higher than that?

Historically, Medtronic has been more in the 8% to almost 9%, so just how much more would you increase R&D?

I think the ranges that you're talking about are within the range of movement that we'll see according to the dynamics of the investments we make at a certain point of time.

So that kind of percentage shift, you're going to see.

But the bigger point here is that, indeed, there are opportunities, like I mentioned several times already, both internally and externally, and we'll execute on both.

And we'll take this on a measured way that as we see ourselves executing, as the opportunity that comes along our way is something which we can deliver on, makes sense, is within the strategic alignment of our company, then we'll go forward with it.

And this company is about technology.

It's about R&D.

And -- but we're not going to be stupid about it.

We'll have to be responsible.

But at the same time, as we start to execute, I expect that number to go up, and I would like it to be higher.

But we'll take that on in a measured way, depending on the opportunities that are available, both internally and externally.

Thanks, Kristen.

Omar, do you want to close us out?

Yes.

Thanks, Ryan, and thank you all for your questions.

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

And for those of you in the U.S., I want to wish you and your family a very happy Thanksgiving.

We look forward to updating you on our progress on our third quarter earnings call, which we currently anticipate holding on Tuesday, February 19.

Thank you all very much.

This concludes today's conference call.

You may now disconnect.