Ladies and gentlemen, thank you for standing by. Welcome to the Medtronic First Quarter Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the presentation. If you'd like to ask a question at that time, please press star one on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that while posing your question that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Ryan Weispfenning, Vice President of Investor Relations, to begin.
Thank you. Good morning, welcome to Medtronic's first quarter conference call and webcast. During the next hour, Omar Ishrak, Medtronic Chairman and Chief Executive Officer, Karen Parkhill, Medtronic Chief Financial Officer, will provide comments on the results of our first quarter, which ended on July 27th, 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. 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. 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 first quarter of fiscal year 2018. References to organic revenue growth exclude the impact of material acquisitions, divestitures, and currency. References to pro forma exclude the impact of material divestitures. Unless we say otherwise, quarterly growth rates and ranges are given on a comparable constant currency basis, which adjusts for material divestitures as well as 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. Omar?
Good morning, thank you, Ryan, and thank you to everyone for joining us. I am pleased to announce that this morning we reported strong first quarter results. Revenue grew 6.8% on an organic basis, marking the third straight quarter of 6.5% or better organic revenue growth, with strong growth across all four groups and regions. Operating profit grew 7% non-GAAP diluted EPS grew 13.6% pro forma and 8.7% adjusted for currency. We are executing against our strategies. We are growing our markets and driving share gains across multiple businesses and multiple geographies. Businesses that were challenged 12 months ago are now headed in the right direction, as evidenced by the past three quarters. We continue to execute in emerging markets and with our differentiated programs that deliver improved economic value to payers and providers. Our execution is not only in the top line, but also down the P&L.
We delivered margin expansion through our Enterprise Excellence program while increasing our investment in R&D to fuel future growth. Looking at our group results in the first quarter, each of our operating groups delivered strong results, with over 6.5% growth in RTG, mid-single digit growth in CVG and MITG, and mid-20s growth in Diabetes. Our Cardiac and Vascular Group grew 5%, led by 10.9% growth in Coronary and Structural Heart. CSH had strong high teens growth in transcatheter valves, driven by sustained global demand for our Evolut PRO valve. CSH also continued to see very strong adoption of the Resolute Onyx drug-eluting stent, including low 30s growth in the U.S. In Cardiac Rhythm and Heart Failure, we had robust growth in infection control, AF solutions, and our mechanical circulatory support businesses.
In addition, our pacemaker business had mid-single digit growth, driven by the continued rollout of our Micra transcatheter pacing system and Azure next generation family of pacemakers. In our Aortic, Peripheral, and Venous Division, our endovenous business grew in the mid-teens, driven by growth of our VenaSeal closure system. Across CVG, we are seeing great success with multiple new value-based business models that directly link our therapies to improving outcomes. We now have nearly 1,700 active customers participating, with associated revenue from these programs representing an increasing percentage of our U.S. CVG revenue. Our Minimally Invasive Therapies Group grew 4.9%, led by 5.8% growth in Surgical Innovations as we capitalize on the conversion of surgical procedures from open to minimally invasive driven by new products. In Advanced Energy, strong adoption of our recently launched enhancements of the LigaSure vessel sealing instruments resulted in low double-digit growth. In Advanced Stapling, we grew in the mid-single digits, driven by sales of our innovative Signia powered surgical stapling system and our Tri-Staple 2.0 reloads.
Our Restorative Therapies Group posted the best quarterly performance in its history, growing 6.8%, led by mid-teens growth in our Brain and Pain Divisions. In Brain Therapies, both Neurovascular and Neurosurgery grew in the high teens. With adoption of our endovascular stroke treatments driving growth in Neurovascular and the strength of our imaging, navigation, robotic, and ablation systems driving growth in Neurosurgery. In Pain Therapies, our spinal cord stimulator business growth accelerated to the low 20s this quarter, including high 20s growth in the U.S., driven by customer preference for our new offerings, including the Intellis Stimulator, the Evolve workflow algorithm, and Snapshot reports.
We also had low teens growth in targeted drug delivery as we delivered the best quarter of SynchroMed II sales growth in over six years. In spine, while growth was flat this quarter, when our spine revenue is combined with our sales of spine-enabling technologies that are reported in our neurosurgery business, our overall revenue grew 4%. We believe this is a more relevant comparison of our spine results against our competition and an indication that our surgical synergy strategy is working, driving above-market growth. Our diabetes group had its best quarterly performance in more than a decade, with 26.3% growth, driven by sustained strong demand for our MiniMed 670G hybrid closed-loop system. We now have over 97,000 trained, active users of our 670G system.
Outside the U.S., our diabetes group grew in the high teens, driven by sales of the MiniMed 640G. We are now just beginning to commercialize the 670G in international markets. Our strong global results led to over six points of share gain this quarter in pumps. In stand-alone CGM, the U.S. launch of our Guardian Connect product is off to a solid start, taking share in the $1 billion stand-alone CGM market. With the Sugar.IQ assistant, Guardian Connect is the only smart CGM using the cognitive computing capability of IBM Watson to give personalized insights and predictive alerts.
The higher CGM sensor attachment and utilization that we're seeing with integrated pump users, combined with the sensors that are used with Guardian Connect, are not only driving strong CGM sales growth, which was nearly 50% this quarter, but are also creating a consistent long-term annuity stream for our diabetes group. Turning to geographic revenue growth, we're continuing to execute well in emerging markets, which grew 11% and represented 15% of our revenue this quarter. Several markets drove our performance, reflecting broad diversification. China grew 12%, the Middle East and Africa grew 16%, Southeast Asia grew 14%, Eastern Europe grew 10%. South Asia grew 11%. Our differentiated strategies of public and private partnerships and optimizing the distribution channel are making a difference in emerging markets around the world. Today, Medtronic has leadership positions in almost all of the fastest-growing markets in med tech.
As a management team, we're intentionally allocating our capital to higher-growth markets and new opportunities. You've seen the early benefits in our top-line performance the last three quarters. The bigger picture, which we outlined at our June Investor Day, is that we're increasing our WAMGR, our weighted average market growth rate, by shifting our mix of businesses to faster-growing therapies and geographies. As we invest in these opportunities, our goal is not just to continuously innovate, but also to invent and disrupt. Our intention is to lead in all three areas. This is reflected by our technology pipeline, which we detailed at our Investor Day. To mention just a few of the highlights, in CVG, we're investing in Micra AV, which will allow us to access over half of the pacemaker market with our disruptive transcatheter pacing systems.
During Q1, we had first-in-human implants of our extravascular ICD system. We're also funding clinical programs to bring therapies to market in transcatheter mitral valve replacement and renal denervation for hypertension, both of which have the potential to be multi-billion-dollar markets. In MITG, we remain on track with our robotic-assisted surgery platform as we discussed at Investor Day. In RTG, we're investing in next-generation cranial mounted and closed-loop DBS systems. In diabetes, we are developing a disruptive closed-loop ecosystem with advances in pump therapy, CGM, and informatics to drive dramatic improvements for people to manage their condition more easily. I could go on with dozens of additional programs in every one of our groups, but suffice to say, we're executing on the strongest pipeline in Medtronic's nearly 70-year history.
In addition to driving our top-line growth, we're also executing on our Enterprise Excellence program, as evidenced by our margin expansion this quarter. As a reminder, this program is still just in its early stages and is expected to drive sustained cost savings while also allowing for greater reinvestment in R&D over the next several years. We're working to leverage our breadth in many areas, from global manufacturing and technology sharing to our clinical and regulatory expertise, shared services, and global distribution. As I mentioned at the start, the message overall is that we're executing. We're allocating our capital across our business and focusing incremental resources on our biggest growth opportunities. In the process, we are driving our WAMGR upwards to the right, while at the same time driving operating leverage and margin expansion.
Finally, and importantly, we're putting the processes in place to improve our free cash flow conversion, which will create additional capital that can be returned to shareholders and reinvested to drive future growth, all with the goal of creating long-term shareholder value. With that, let me ask Karen now to take you through a discussion of our first quarter financials. Karen?
Thank you, Omar. Our first quarter revenue of $7,384,000,000 represented organic growth of 6.8%. Foreign currency had a positive $78 million impact on first quarter revenue. Non-GAAP earnings per share was $1.17. After adjusting for the divestiture, non-GAAP diluted EPS grew 13.6% pro forma and 8.7% constant currency. While we came in $0.06 above the midpoint of our guidance range, it's worth noting that $0.03 was driven by stronger than expected FX tailwinds, and $0.01 was upside from tax. Given this, we would characterize $0.02 as operational outperformance, reflecting better than expected revenue in the quarter. Non-GAAP operating margin was 27.3%, increasing 80 basis points pro forma and reflecting a slight improvement on a constant currency basis, in line with our outlook.
We are expanding margins and at the same time, investing more in research and development to enhance our pipeline, resulting in first quarter R&D expense growing 100 basis points faster than revenue as we focus on driving long-term value. Non-GAAP SG&A as a percent of sales this quarter declined by 90 basis points pro forma and 70 basis points constant currency. Early evidence that we are executing on our company-wide enterprise excellence program. Net other operating expense, which is included in our operating margin, was $60 million compared to $42 million pro forma in the prior year, with the increase primarily due to the year-over-year change in currency gains and losses related to our hedging program. Our non-GAAP nominal tax rate was 13.3%, better than expected given favorable tax resolutions and expirations.
For the remainder of the fiscal year, we expect our tax rate to be 15% plus or minus, modestly higher than our previous expectations. First quarter free cash flow was a robust $1.4 billion. Improving our cash generation is a priority at Medtronic from the top of the company on down. It can vary from quarter-to-quarter, given timing of payments, so we don't want you to extrapolate our first quarter results for the full year. That said, we are pleased with our performance over the last two quarters and are beginning to see the benefit of our increased focus and discipline 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. We increased our dividend by 9% in June, making this our 41st consecutive year delivering a dividend increase.
We repurchased a net $374 million of our ordinary shares in the first quarter. Our total shareholder payout ratio was 66% on non-GAAP net income and 98% on GAAP net income. The increased investment in organic R&D that I mentioned earlier is an example of our reinvestment 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 annual revenue growth and EPS guidance. For the full fiscal year, we are increasing our organic revenue growth guidance from a range of 4%-4.5% to a range of 4.5%-5%. I will go a step further in saying we are comfortable with the higher end of this upwardly revised range.
For the year, we now expect CVG, MITG, and RTG to grow 4%-4.5%, versus our prior expectation of 4% plus or minus. We expect diabetes to grow in the low to mid-teens, up from low double digits previously, with a stronger first half versus second half based on prior year comparisons. It's worth noting that while we have had three straight quarters of 6%-7% revenue growth, we don't expect to grow 6%-7% every quarter. Some of our businesses face tougher comparisons, particularly in the back half of the year, and others are in more challenging markets. Our guidance takes all of that into account, along with the diversification of our end markets, a strength of Medtronic.
Turning to margins, we continue to expect operating margin expansion in the full fiscal year of approximately 50 basis points on a pro forma constant currency basis, driven by our enterprise excellence initiatives. With respect to earnings, we are increasing our fiscal year 2019 implied constant currency EPS growth forecast from a range of 8%-9% to a range of 9%-10% on the heels of our strong quarter. However, at recent rates, foreign exchange looks to be neutral to full-year EPS versus a $0.05 benefit prior. Despite the increase in our constant currency EPS forecast, given the recent currency volatility, the ongoing discussions around trade tariffs, and the fact that it is still early in our fiscal year, we have elected to leave our non-GAAP EPS guidance unchanged in the range of $5.10-$5.15.
While the impact from currency is fluid, if recent exchange rates hold, our full-year revenue would be negatively affected by approximately $420 million-$520 million. Despite the incremental headwinds on the top line, given the benefit of our hedging program, FX is still a slight positive to fiscal 2019 operating margin and neutral to earnings and free cash flow. For the second quarter in particular, we expect organic revenue growth to be in the range of 5.5%-6%. We expect CVG to grow approximately 4%, RTG and MITG to be in the range of 5%-5.5%, and diabetes to grow 20% ±. Given the impact of the hurricane and infusion set recall in the prior second quarter, we expect our operating margin improvement this upcoming quarter to be a little more than the full year.
We expect non-GAAP diluted EPS in the range of $1.13-$1.15. This guidance reflects solid revenue growth and margin expansion, offset by a higher tax rate and an FX headwind of $0.02 at recent rates, which is $0.03 unfavorable to what we had expected at the time of our last earnings call. If recent rates hold, revenue would be negatively affected by approximately $100 million-$150 million. Operating margin would have a slight benefit, and EPS would have a $0.02 headwind, as previously mentioned. Finally, on free cash flow, we continue to expect to generate between $4.7 billion and $5.1 billion in fiscal year 2019.
As we mentioned at our investor day, over the next couple of years, we expect to make significant progress in improving our conversion of earnings into free cash flow, as litigation and tax payments are expected to diminish based on what we know today. We benefit from programs we have put in place to improve working capital. The past couple of quarters are a great start toward delivering on this goal. I will return the call back to Omar.
Thanks, Karen. Before we go to Q&A, I want to thank our more than 86,000 employees for their tireless work ethic and relentless execution once again this quarter. This was another strong quarter for Medtronic, not just in terms of the headline numbers of organic growth, margin expansion, and cash flow generation, but as importantly, we're executing on our strategies and positioning the company to create long-term shareholder value. For one, our pipeline has never been stronger. As I outlined in June, everything at Medtronic starts with technology. We're innovating, we're inventing, and we're disrupting. With the advancements in our pipeline in the last few months, I've never been more excited about our end markets, our opportunities, and our competitive positioning. Second, we're allocating capital efficiently across our business. Third, we're leading the development of emerging markets for our therapies, and we're capitalizing on our leadership in value-based healthcare.
Through our investments in higher growth markets and higher growth geographies, we're shifting our WAMGR upwards and to the right. Lastly, we're consistently improving our free cash generation, and we're in the early stages of implementing our multi-year enterprise excellence program, which should enable us to drive multi-year margin expansion and reinvestment for long-term growth. We know there is much work to be done, but I'm excited about our progress and our positioning. With that, let's now open the phone calls up 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. We want to try to get to as many questions as possible, so please help us by limiting yourself to only one question and, if necessary, a related follow-up.
If you have additional questions, please contact Ryan and our investor relations team after the call. Operator, first question, please.
As a reminder, if you'd like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Rick Wise of Stifel.
Good morning, Omar. Good morning, everybody. Congrats on the excellent quarter for sure. I want to focus, if I could first, on the sales outlook. I appreciate it's early in the year. Karen, you certainly helped us understand that, and I know you want to stay conservative. You just got us to 5.5%-6% for the second quarter. If I focus on the second quarter, help me understand it to be, as I think about the second quarter, very similar to the fiscal first quarter in terms of comparisons, the tremendous pipeline performance, ongoing cost reductions, et cetera. Maybe if you could give us a little more color on why the fiscal second quarter wouldn't be even better than that guidance, the 5.5%, especially given the relatively easy comps, the hurricane impacted year-ago numbers.
Is there something maybe we need to understand better about some of the headwinds out there that keep you more in the 5.5%-6% range?
Let me take that. First, thanks for the question. The first thing that I want to mention is that overall, we feel very good about this business. Our momentum is strong, our end markets are good, and we're in the right end markets, and that's why we increased our FY 2019 overall revenue growth assumptions. We're really confident in our ability to deliver this strong growth profile for the year. That said, it still is very early in the year. We're focused on setting guidance that we have a high degree of confidence in that we can deliver. I think that's important to note. Overall, this business is performing. There's no real major concerns from a business perspective. We're in fact excited about our pipeline and excited about our execution across the board.
We look forward to a business that can consistently deliver, and we have a great deal of confidence that we can in fact do that.
I would just add, Rick, that on the second quarter in particular, we did say that we expect 5.5%-6% organic growth in the second quarter, which is higher than the other quarters, given the comparison. Keep in mind, we do have the anniversary of some major product launches, particularly in CVG, in Resolute Onyx, in Evolut PRO. We also have some pricing pressures in certain geographies this fiscal year, most notably Japan and Australia, all of that is baked into our guidance.
Great. Just to follow up on diabetes, another outstanding quarter here, best in a decade, as you say. Again, I assume this was, as you mentioned, 670G driven, you launched the standalone sensor in mid-June. Do we expect this growth to simply continue at these kind of levels, given this kind of performance? When I reflect on it seems still early in the launch of the Guardian sensor. You highlighted the OUS rollout. Why wouldn't growth actually accelerate from here in diabetes? Maybe just give us a little color on how widely available the Guardian sensor is at this point.
Let me take that again. First of all, we are excited about diabetes, we're excited about a market that we're leading and creating. This market is going to go through a tremendous amount of change, we expect to be right in the leadership position in that. The Guardian sensor has launched extremely well, the Guardian Connect, I have to add that our sensor is differentiated by the addition of Sugar.IQ, which is a cognitive decision support system that provides insights to the patients. Having said that, our position in the hybrid closed loop is something that's really setting the standards as to how patients with type 1 diabetes, in particular, can manage themselves.
We're only in the beginning of that journey, we expect that this product will continue to innovate over time, we will be leading that innovation sort of roadmap. Having said that, we are coming up against some pretty difficult comparisons because if you recall, we went through a period last year at this time where we had a shortage in our sensors. We overcame that according to our plans. Although we expect diabetes to maintain, like we said, a mid-teens growth profile for the year, the present rate is really advantaged by the comparisons that we had over last year. Expect an exciting double-digit growth business certainly for this year and over the long term. A business that'll set the standards for growth at Medtronic, that's what we expect from it.
Thanks, Omar.
Thanks, Rick. Next question, Laurie.
Your next question comes from the line of Bob Hopkins of Bank of America.
Oh, great. Thanks for taking the question. I just wanted to ask about emerging markets. Obviously, it's been a source of tremendous growth for the company. Just over the course of the last three to four months, it's been a period of sort of extraordinary volatility in certain emerging markets. Omar, I was wondering if you wouldn't mind just kind of commenting on emerging market trends in the quarter and the sustainability of those trends as we look forward, given all that's going on. Thank you.
Thanks, Bob. First of all, I couldn't agree more. Emerging markets has been a stable and strong deliverer of growth for us over the years and something that we sustain. I do think here, too, we set a leadership profile in the med tech industry as to how to approach these emerging markets by going direct to our customers, by helping these markets develop their own healthcare systems. As you know, the need in these emerging markets is tremendous. You just need to look at the amount of penetration that our technologies have in these markets, even amongst people who can afford these therapies. That need is always going to be there. Despite economic sort of uncertainties and economic variations that will happen, it is an area where there is a continued need, and that need doesn't go away. People fall ill irrespective of economic conditions.
There's a certain degree of base stability in these markets that we depend on and that we've seen happen. Now, in addition to that, what we have in a differentiated way compared to other med tech companies is that we've got a very diversified profile within emerging markets, where China is clearly our biggest market where we've consistently delivered. In addition, we've got strong positions in the Middle East and Africa, in Latin America, in Eastern Europe, and also in Southeast Asia. Putting all that together The inherent stability of these markets because of the disease needs in this market and the amount of penetration that's required for our therapies amongst people who can afford it.
Given the fact that we're diversified across these geographies, given the fact that we're leading the way in creating these markets and working with both public and private partners, gives me a great deal of comfort that the baseline that we've established of double-digit growth in the emerging markets will continue in the foreseeable future, and I've got complete confidence on that and really excited about what we can do there.
Terrific. I appreciate the detail and clarity. One follow-up for Karen. Congrats on the outperformance on the margin side. Just wanted to dig a little bit deeper, though, on the margin performance in the quarter. It looks like on an operating margin basis, excluding the impact of currency, operating margins were roughly flat year-over-year on an underlying basis. It looks like you took the opportunity to spend more on R&D, given the strength in the overall business. I was wondering if that's the right read, or were there other moving pieces in the quarter that impacted underlying operating margins? Thank you.
You have the right read, Bob. Thank you for the question. We did increase our investment in R&D in the quarter, particularly in CVG and diabetes. In CVG, we had ahead of plan enrollment in some key clinical trials, including Ardian and mitral. In diabetes, we purposely accelerated our focus on driving an advanced hybrid closed-loop system. In fact, our R&D investment by our calculations was 30 basis points higher than street consensus. We did also absorb a mixed impact on our gross margin, which I talked about, where we saw some revenue strength from some lower margin businesses that did impact our gross margin , and we drove strong SG&A improvement that more than offset it. We still did have a slight improvement in our overall operating margin, which we were pleased and was in line with our original outlook.
Great. Thanks for taking the questions.
Thanks, Bob. Next question, Laurie.
Your next question comes from the line of David Lewis from Morgan Stanley.
Good morning. Just a couple of questions. Karen, I want to start with you on the organic growth outlook. I know there's been some questions on the second quarter. If you think about this year, your guidance implies 6% performance in the first half and maybe 4% performance in the second half. I wanted to focus more on the second half. If your first half guidance is correct, you still need to see some momentum acceleration in the business in the back half of the year even to deliver that type 4 number. Can you just talk about some of the drivers of how you get that momentum acceleration in the back half, just given the very material difference in first half versus second half comparables?
Yeah, thanks for the question, David. Appreciate it. In the second half, as Omar mentioned, first and foremost, we are really pleased with the performance of our business, the strength of our underlying end markets, the momentum that we have. We do expect that momentum to continue throughout the year. We have increased our overall revenue growth guidance for the year as a result of that. Keep in mind, as we've talked about in the back half, we do come across some tougher comparisons from the prior year. As I mentioned earlier, we do have the anniversary of some key product launches that impact us even more in the back half. We've got some pricing pressures from certain geographies that I noted Japan and Australia. We are very excited about the continued momentum underlying. It's really just the comparison in the back half.
Okay. Just to follow up, Karen, for you on free cash, I know you appreciate that conversion this quarter was obviously materially higher than what you had suggested would be by this point. I know we're not going to make this a trend. How should free cash trend? What are some of the factors that would erode the relative run rate of free cash across the year? Kind of related to that, could you just update us on the Puerto Rico tax settlement? There was some dynamics that played out late last week. Maybe just remind us the path forward on Puerto Rico and any impact on tax rate or payment scenarios. Thanks so much.
Yeah. Thank you, David. We were really pleased with our performance on free cash flow in the quarter. This is a focus, as we've talked about from the top of the company on down to drive free cash flow improvement. We've been able to do that in the last two quarters, the fourth quarter last year and the first quarter this year. In terms of trend, keep in mind that free cash flow can be lumpy. It does depend on the timing of larger cash payments, particularly in tax and legal. I certainly wouldn't want you to extrapolate this first quarter for the rest of the year. We are focused on delivering free cash in our full year guidance of $4.7 billion to $5.1 billion. We're confident in our ability to do that.
We have been focused on working capital improvement, and this quarter did drive improvement in both accounts receivable and accounts payable in particular. We're confident in our ability to deliver on this free cash flow and improve the earnings conversion. In terms of Puerto Rico and the settlement, last week, we did have the appellate court rule basically remanding the case back to the lower court for additional fact-finding. I would say it's really important to note that this was merely a procedural decision. It is not a ruling based on the merits. The appellate court determined that it needed additional analysis from the tax court in order to rule on the merits. We still believe our initially filed tax returns were correct, and we will continue to defend our position.
In terms of what that means on the impact on cash flow, given that the case has been remanded back to the lower courts and it will take some time, we don't expect at this stage any additional tax payments related to this case this fiscal year.
David, let me also just add a little color to the question on the growth profile. Look, there are some quarterly dynamics which Karen went through, and we're setting guidance that we have confidence in delivering. Let me tell you, our pipeline has never been stronger. In the next 12 months or so, I'm really excited about what we can do in our pain business. Our Intellis and Evolve workflow is really hitting the mark here and a strong turnaround, which we expect to continue. Our Micra, which I've talked about a lot before, is a disruptive technology. We're the only player in this space. It's a market which we are disrupting. We created and now we're disrupting ourselves. It currently addresses only 20% of the single chamber market. We've got a roadmap to make this 100%.
The CoreValve Evolut R is another one that is building on the success of the original launch of the platform. Finally, the Guardian Connect and the 670G, like I mentioned earlier, are highly differentiated. I just wanted to lay that out there that these are not promises for the future. These are right now. We're extremely excited about these technologies and we expect sustained growth and leadership positions in all of these areas. I had to make that point, David.
Thanks, Omar, for clarity on the second half. Thanks, Karen, as well.
Thanks, David. Take the next question, please, Laurie.
Your next question comes from the line of Robbie Marcus with J.P. Morgan.
Great. Thanks for taking the question. Congrats on the good quarter. Karen, maybe just to follow up on free cash flow. We all saw the good performance this quarter. We know it's now part of the compensation for management, clearly a priority. Can you kind of run us through some of the changes strategically and operationally the company's making to improve free cash flow over the long term?
Sure, Robbie. Thank you for the question. We talk about it being a focus from the top of the company on down. It is a clear focus in all of our monthly financial reviews. It's a clear focus in our quarterly business reviews. Honestly, when we had our recent officers meeting, we spent the entire day talking about how we could improve free cash flow. It is a very strong focus, and as you already noted, it's an important part of our compensation. It will represent about a third of our compensation, our annual incentive compensation.
I think in addition, maybe I can add a few things more. We're creating systems, IT systems through which we can track free cash flow better, rolling it down across our businesses to a pretty granular level. We're creating systems through which our forecasting process is using the latest tools in IT and AI for that matter. I think this is an area of continued focus for us and continued upgrade of our capabilities. It's something that we are confident we'll deliver and improve over the next few years.
Okay, great. As a follow-up, maybe a two-fer robot question. Saw very strong performance in the brain therapies division. You called out the Mazor X robot as one of the drivers. Maybe you can give us some early insights to that. At the same time, it's been a few months since the Analyst Day. Any update on the robot in surgery? Anything you can add in terms of functionality or timing or viewpoint on it? Thanks a lot.
Let me just give a short overview, and then I'll let both Bob and Geoff comment on their specific robots. Let me tell you this. The integration of capital equipment, in this case, the robot with implants and our sort of high-value consumables, is a unique competence that we're delivering. It's something that'll set us apart and use our scale to really create these markets in a new and differentiated way that'll set us completely apart from our competition. It's an area that we're really focused on and really excited about the progress that we're seeing, but more importantly, excited about the future. With that, I'll let Bob go first and then Geoff.
Sure. Thanks, Robbie. This is Bob. We're excited about where we're at with the surgical robot. We remain absolutely on track with what we talked about during Investor Day. We continue to get really good surgeon feedback. In fact, we've got additional surgeons in this week who are providing us feedback on the system. Our program remains on track. We continue to get good feedback. Importantly, again, with the spiral design process, we're doing it and delivering a system that based on the input and the features that our surgeons want most. I think we're well-positioned to deliver what we said we were going to do. Geoff?
Yeah, Robbie, it's Geoff. For sure, the capital equipment within our brain business is one of the two big drivers, that and neurovascular. It's much more than the Mazor X. For us, it's a suite of enabling technology, the navigation, the intraoperative imaging, which is our O-arm, the Mazor X, the arm, the robotic arm, and our Midas Rex powered instruments. One other key competency that in addition to what Omar said is that we're doing is integrating these tools so that for the surgeon workflow and delivering it. That with the robotic
Tailwind has done is increased. It's gotten surgeon interest in robots, now what that's driving for us is increased interest in navigation. Folks that weren't looking at navigation before are now looking at it's been a tailwind for all of our enabling technology. Quite frankly, the more revenues coming from the O-arm and navigation and Midas Rex and the whole integrated suite. We're excited about that for that reason alone. In addition, look at that as a leading indicator for our spine business, as our implant business. As this technology becomes more proliferated, you're going to see that helping our implant business as well. Again, it's more than the robot when it comes to spine. It's all of these other enabling technologies that are integrated together.
Appreciate it. Thank you.
Thanks, Robbie. Next question, please.
Your next question comes from Glenn Novarro of RBC Capital Markets.
Hi, good morning, guys. Two questions. First, for Omar. Another good quarter with free cash flow. The company has been very quiet on the M&A front here recently. Is this more a function of the valuations for some of the targets, the discussions that you're having, the valuations are too rich? Maybe talk a little bit about the pipeline and why we haven't seen much on the M&A front lately. Then I have a follow-up.
Sure. Thanks a lot, Glenn, for the question. First of all, M&A remains important to us, we've got a strong balance sheet, we expect to use it. As we generate our free cash flow profile improves, we're in a stronger and stronger position to execute on that. Let me also tell you a few other things, though. First of all, let's not take our eye off our performance in organic growth. That's the highest return investments that we can make, we can do it. M&A supplements that, our focus in M&A has been tuck-in acquisitions and will remain to be tuck-in acquisitions, there's a lot of activity in that area. We continue to monitor the space. When the right opportunity comes along, we will act. We're very active there, that'll complement what we're doing organically.
It's also important to note that, like I said earlier, tuck-in acquisitions are the major focus because that's where our size and scale can immediately complement any other company out there without the benefit of that size and scale. That is our focus, and we're in a strong position to execute on that, and you'll see activity from us. We'll do it in a disciplined fashion, like I've said earlier, protecting our margin profile, moving up and to the right in our WAMGR, and making sure that we have both the financial and the management bandwidth to execute. These are things that we've said before and things that we continue to do, and certainly our eyes are wide open as to what's available out there, and we expect to be a strong player in the space.
All right. You had very strong numbers out of surgical innovations up mid-single digits. Is this a signal that surgical volumes accelerated in the second quarter, or is this more a function of market share capture? Thank you.
First of all, the overall healthcare market is pretty stable. I'm not sure that there was any significant inflection point in growth of procedures or anything like that. It's more or less stable, both in the U.S. and in other developed markets around the world. I think our technology innovation continues, and that helps us drive this growth profile. In surgical innovations, we have a stream of technologies that come out all the time. As you've noticed, our momentum has been pretty consistent. I do think that our technology leadership has played a role there. I'll ask Bob to also make a few comments on this because he's really closer to it.
Yeah. Thanks, Omar, and thanks, Glenn, you're right. We had an excellent quarter inside of MITG, seeing really good growth from advanced MIS as well as stapling. We're really pleased by our new product performance. Glenn, we've not seen significant change in the procedural volumes in the U.S. market, particularly in the high acuity space where we participate, seeing that stable procedure growth. It's important to note, I think as Omar alluded to, it's really our product innovation is far more impactful to driving our results than the underlying procedure trends. We're pleased with where we're at, and we're really pleased about the pipeline that we continue to see across our businesses here in MITG.
Let me just add a few more to that. I've spent a lot of time now with the surgical innovations group, understanding their technology and what they do, and I can tell you, I'm very impressed by the nature of this technology. These sophisticated closed-loop little systems that go on that give feedback to the surgeons. There's a lot of room for innovation in these endocutters, one that we will continue to invest in and lead in over time.
Okay. Thank you for answering the question.
Thanks, Glenn.
Thanks.
Next question, please, operator.
Your next question comes from the line of Josh Jennings of Cowen.
Hi, thanks for taking the questions. Congrats on the strong results here in fiscal Q1. I was hoping to start off maybe for Omar and possibly Geoff, just to get updated thoughts on how you see your orthopedic efforts proceeding. Do you feel the need or desire to get bigger in orthopedics over time? And just any update on the progress you're making with your current offerings in knee and whether you have a hip approval yet and whether or not there's any opportunity with the ultimate transition of joint procedures into the outpatient setting.
I'll let Geoff comment on that in a minute. Let me just say that our portfolio right now is strong and robust. We've got diversified positions in high-growth market segments, and that's our priority to maintain that, to continue to grow that, and add to that in terms of tuck-in acquisitions. The orthopedic space is an adjacent space, and there are some areas where we can add value, and we've done some early work in that area, and I'm going to ask Geoff to kind of comment on it. Let's not take our eye off our main goal, which is our core markets, where we intend to, like I've said several times today, intend to set the standards in technology and keep driving those markets up. Geoff, do you want to say a few words about the orthopedic effort?
Yeah. First is the macro comment on do we feel a need to grow in orthopedics. I'd say no, it's not a need. If there's an opportunity for us to be disruptive and scale the business in a disruptive way, and we think we can do that, then we'll move more aggressively. We're evaluating that and looking at it from several angles. One, on the device side, our knee is out there, and we have a limited release getting some clinical experience and feedback. The hip is not yet approved. It's coming in the next couple of months, and we'll do the same with that, get a limited release, get some feedback. We're evaluating, we're still looking at ortho bundles and unique business models.
Again, until we see something that is a disruptive path forward, it has to be a better opportunity than some of the other organic opportunities that we have. That's where we are.
Understood, thanks for that answer. Just maybe a follow-up from Mike Coyle, just thinking about the CVG performance in the quarter. Maybe you can help us understand what went better than expected, -4% was the guidance. You guys hit 5% organic growth. Maybe also just touch on your performance in TAVR specifically and your outperformance of the market and what you think the drivers are there. Thanks for taking the questions.
Thanks, Josh. Certainly, coronary and structural heart was the big leader for us in the quarter, both on the TAVR side and in the coronary side. Obviously, Onyx continues to do extremely well in the U.S., where we're at sort of all-time high shares for our coronary business. Obviously, the transcatheter valve business continues to have very good strength with nearly 20% growth on a global basis. That's really being driven by the Evolut PRO product release that's now available both in Europe and in the U.S. We've supplemented that with the EnVeo delivery system, which is really being well-received across the geographies. We've had strong share capture in both Europe and Japan and have seen share momentum in the U.S. as well.
In Japan, we're just about to release now, or we are releasing here in August, the Evolut PRO there as well. We expect that momentum to continue. Even in CRHF, we continue to see very strong growth in the atrial fibrillation business. Our LVAD business with HVAD now has thoracotomy indication in addition to destination therapy. Within the APV business, the endovenous business is really doing extremely well, we haven't seen quite the hit we expected from the reimbursement reduction in the drug-coated balloons as the patient benefit of that has really been seen clearly by our customers. We've actually done quite a bit better than we expected in the plan despite that reimbursement change.
Thanks, Mike.
Thanks, Josh. Next question please, Laurie.
Your next question comes from the line of Chris Pasquale of Guggenheim.
Thanks, and congrats on the quarter. Karen, you mentioned the ongoing noise around trade tariffs as one reason for some caution in the full-year outlook. Could you spend a minute on how you're thinking about the potential impact on the business from what's going on there and maybe highlight any particular product categories where you see exposure?
Let me first give you a little overview. Then I'll let Karen take over. First of all, the sorts of things that we sell are inherent needs for patients. We're confident that the healthcare systems around the world will need our products. Therefore, in the end, there's a core demand that we will fulfill. That'll continue. Having said that, clearly there are areas that are in the news and trade discussions that go on. We're a global company. We're affected by that. However, our overall confidence in our outlook and the way in which we're planning internally, we're confident we can offset any real pressures in that area.
In the end, you've got to remember that the inherent demand for our technologies is something that no country can walk away from. It's something that we feel a responsibility to fulfill for patients around the world. Karen, maybe you can give a little more color.
Sure. I would just add from a trade tariff perspective, it obviously depends on where we manufacture and where we export to China. It's mostly impacting right now our MITG and RTG businesses. To a lesser extent, it's impacting CVG. As Omar said, we're focused on, at least as the current discussion sits, on offsetting that as best we can. As we noted, we did not change our EPS guidance, taking into account the impact of the trade tariffs as they sit today.
Overall, it's a modest impact and one that we feel that we can cover.
Thank you. That's helpful. Then one question for Hooman. Another very strong diabetes result this quarter. Just comment on the impact of the Animas wind down and the pace at which that's progressing. You guys are offering some on-warranty patients the opportunity to switch early. Is that accelerating this process to the point where we might see the bulk of that benefit here in the first year versus the three or four years that it would have taken just based on the timing of warranty expirations?
Sure. Chris, thanks for the question. Maybe a little bit of sort of color around just the revenue streams from Animas. The transition actually here is actually going pretty smoothly, and we're really working well together with J&J on this. Your question is around the in warranty, but let me remind you that there's actually three parts to the dynamic with Animas. They've got, and they had roughly 90,000 patients in their installed base. The majority of those patients were under warranty and were coming off of warranty at a steady cadence. Starting this quarter, there are really three ways that we're driving revenue. The first is for all the patients that are under warranty and remain under warranty, we're actually supplying those patients with consumables, and we're recording that revenue. That revenue actually will start to anniversary in Q3 of this year.
Second, for all the patients that are out of warranty, we're working to convert those patients to Medtronic. That's going extremely well, and we're converting them at least at the rate of our share position. Then the final one that your question touches on, which really was a program that started in Q1 of this year, is where we take certain in-warranty patients who have an Animas pump, and we upgrade them to a Medtronic pump. For those that convert, we get compensated by J&J for that. The way that is going is actually well. It's ramping up. This was the first quarter where that's actually taking effect, and we expect it to accelerate, but I think you've got to offset it with some of the other dynamics that I mentioned, like the anniversary of the consumables.
Thanks.
Yep.
Thanks, Chris. Next question, please.
Your next question comes from the line of Joanne Wuensch of BMO Capital Markets.
Good morning, thank you for taking the question. Can we spend a little bit of time on your pain therapies business and discuss the uptake of Intellis? If you could also parse it out a little bit, the difference between what's going on in the United States and what's going on internationally, that would be helpful.
Thanks, Joanne, for the question. The second part of the question is specifically about pain therapies?
Yes, please.
Yeah. Okay. All right. Okay, Geoff, go ahead.
Sure. What we're getting, the uptake is a combination of Intellis, the system based on the features of the system, combined with the Evolve workflow, which is really driving the outcomes. As you heard Omar say and Karen say earlier in the commentary is, we're getting very strong global growth, but even stronger growth in the U.S. What's converting is two drivers. One is the better system. It's smaller, faster recharge, and physicians and patients are really seeing the benefits of that. The second is the Evolve workflow, and physicians and patients are seeing real world outcomes, and it's being supported by some data that has been released. We plan to release some more interim data at NANS in January. We're very excited about it. I don't know in terms of the difference between OUS and U.S.
I think look, the U.S. market is, I think based on some of the opioid crisis and other things, there's more of a tailwind, and we're seeing even a faster pickup. Omar mentioned the 30% growth in the U.S., we're still seeing 20% growth outside the U.S. It's pretty much a global phenomenon. There is a stronger tailwind in the U.S. based on the opioid crisis and physicians and patients just looking for solutions to this crisis.
Thank you. As a follow-up, in September, we're going to see both TCT and NASS. Anything you can comment on or that we should look forward to? Thanks.
Mike, you want to take the TCT and Geoff on NASS? Go ahead, Mike.
Yeah. TCT, there will be good information flow coming on just the long-term performance of the TAVR products. We'll be showing five-year data on the CoreValve U.S. pivotal in the high-risk patient cohort, which is important for showing the durability of outcome as well as being able to demonstrate the durability of the products. We'll have two-year data on the SURTAVI real world results randomized to the SURTAVI. Those will be, I think, important data points leading into what will be, I think, an even more important meeting, which is ACC in the spring, where we will be showing the data on the low-risk patient cohort in TAVR as well as the rapid results for our TYRX product. Those are important data flows taking place over the balance of our fiscal year.
Geoff?
Yeah, we have a couple things at NASS. One is the Mazor X Stealth Edition. This will be the Mazor X with our stealth navigation system fully integrated, which will provide a better workflow and ultimately, we think, better outcomes. We're very excited about that. The second is our navigated Infinity system for spine. Our Infinity is our posterior cervical fixation system, and again, it is being released with a good workflow with our enabling technologies. Like I said, it's navigated. Those would be two things I would highlight for NASS.
Thank you.
Thanks, Joanne. We'll take one more question please, Lori.
Okay. Your final question will come from the line of Vijay Kumar of Evercore ISI.
Hey, guys. Congratulations on a nice quarter here, and thanks for squeezing me in. Maybe one, first starting off on the guidance. Karen, looks like FX was incrementally $0.05 worse or about 100 basis points of headwind. Looks like the top line was up by 50 basis points. What's up? Top line improved by 50 basis points, but FX was 100 basis points drag. Despite that, your EPS was maintained. Can you just comment on whether this underlying margin expansion, where it's coming from, just given Q1 trends?
Sure. Thanks for the question, Vijay. We've got the inter-quarter timing of rate movements and mix that impacted our results, both on the top line and on the bottom line. Really the benefits from our hedging program at this stage are the key thing that's positively impacting our earnings.
Well, I guess I meant for the guidance. FX was 100 bips headwind, top line was just up by 50 bips. It implies operating leverage should be coming in better than expected in the back half. Is that the underlying assumption?
Yeah. Clearly, we are focused on delivering operating margin improvement, we're committed to that 50 basis points margin improvement. Where we can, we would like to continue to invest more in R&D and to accelerate R&D like we did in the first quarter. We will continue to focus on that through the rest of the year. Obviously we did have the $0.05 impact on our bottom line, which we've noted.
Vijay, let me also say, just to add to that, like I've said several times before, we feel very good about this business, both from a top-line perspective and our programs in margin expansion that we're executing on through our enterprise excellence efforts. Although that's still early, we're beginning to see results there. Please read that into what we're saying here. We expect to execute and deliver and we feel really good about this business, both from a top-line perspective as well as a margin expansion program perspective.
I appreciate those comments, Omar. Just one quick follow-up to maybe Mike Coyle. Mike, maybe your competitor on the TAVR side is talking about pricing competition in Europe. Maybe from your perspective, can you comment on any changing in comparative pricing dynamics? Is it worsening? Has it stabilized? Or what's going on in Europe? Thank you.
Pricing is reasonably stable in Europe. There's a small segment of the market that reacts to price, which is basically being driven by some of the smaller players in the market. The major players have had really good pricing discipline and we expect that to continue in the balance of the year.
Okay. With that, I want to thank everyone for your questions. On behalf of the entire management team, I'd like to thank you again for your continued support and interest in Medtronic. We're excited about this business, as you can hear. We're excited about our pipeline, about our growth trajectory, about our margin expansion programs, and we look forward to updating you on our progress in our second quarter earnings call, which we currently anticipate on holding on Tuesday, November the 20th. Thank you all very much.
Thank you. That does conclude today's Medtronic first quarter earnings conference call. You may now disconnect your lines and have a wonderful day.