Ladies and gentlemen, thank you for standing by, and welcome to the Medtronic First Quarter Earnings Conference Call. It is now my pleasure to turn the floor over to Ryan Weispfenning, Vice President of Investor Relations to begin.
Thank you. Good morning and welcome to Medtronic's Q1 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 Q1, which ended on July 27, 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 the 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 Q1 of fiscal year 2018 and references to organic revenue growth exclude the impact of material acquisitions, divestitures and currency. References to pro form a 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 and thank you, Ryan, and thank you to everyone for joining us. I'm pleased to announce that this morning we reported strong first quarter results. Revenue grew 6.8% on an organic basis, marking the 3rd straight quarter of 6.5% or better organic revenue growth with strong growth across all 4 groups and regions. Operating profit grew 7% and non GAAP diluted EPS grew 13.6 percent pro form a and 8.7 percent adjusted for currency. We're executing against our strategies.
We're 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 and L. We delivered margin expansion through our enterprise excellence program, while increasing our investment in R and D to fuel future growth.
Looking at our group results in the Q1, 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 EVOLUPRO valve. CSH also continued to see very strong 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 micro 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 Venus Seal closure system. Across CVG, we're seeing great success with multiple new value based business models that directly link our therapies to improving outcomes. We now have nearly 1700 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 Liguashore 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 staples 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 stim business growth accelerated to the low 20s this quarter, including high 20s growth in the U. S. Driven by customer preference for our new Intellis stimulator, the EVOLVE workflow algorithm and Snapshot Reports. We also had low teens growth in targeted drug delivery, we delivered the best quarter of Syncromed 2 sales growth in over 6 years.
In spine, while growth was flat this quarter, when our spine revenues 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 670 gs Hybrid Closed Loop System. We now have over 97,000 craned active users of our 670 gs system. Outside the U.
S, our diabetes group grew in the high teens, driven by sales of the MiniMed 640 gs and we are now just beginning to commercialize the 670 gs in international markets. Our strong global results led to over 6 points of share gain this quarter in pumps. In standalone CGM, the U. S. Launch of our Guardian Connect product is off to a solid start, taking share in the $1,000,000,000 standalone CGM market.
With the SugarIQ 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 are 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 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% and 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 medtech. And 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, but 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.
And 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 micro AV, which will allow us to access over half of the pacemaker market with our disruptive transcatheter pacing systems. During Q1, we had 1st 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 derivation for hypertension, both of which have the potential to be multi $1,000,000,000 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're 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 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 and 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 WAMware 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 that can be returned to shareholders and reinvested to drive future growth, all with a goal of creating long term shareholder value. With that, let me ask Karen now to take you through a discussion of our Q1 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 $78,000,000 impact on 1st quarter revenue. Non GAAP earnings per share was $1.17 And after adjusting for the divestiture, non GAAP diluted EPS grew 13.6% pro form a and 8.7 percent 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 form a 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 1st quarter R and D expense growing 100 basis points faster than revenue as we focus on driving long term value. Non GAAP SG and A as a percent of sales this quarter declined by 90 basis points pro form a 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 $60,000,000 compared to $42,000,000 pro form a 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. 1st quarter free cash flow was a robust $1,400,000,000 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 Q1 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. And we repurchased a net $374,000,000 of our ordinary shares in the Q1. Our total shareholder payout ratio was 66% on non GAAP net income and 98% on GAAP net income. And the increased investment in organic R and 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% to 4.5% to a range of 4.5% to 5%. And 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% to 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 3 straight quarters of 6% to 7% revenue growth, we don't expect to grow 6% to 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 form a constant currency constant implied constant currency EPS growth forecast from a range of 8% to 9% to a range of 9% to 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.
So 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 to $5.15 dollars While the impact from currency is fluid, if recent exchange rates hold, our full year revenue would be negatively affected by approximately $420,000,000 to $520,000,000 Despite the incremental headwinds on the top line, given the benefit of our hedging program, FX is still a slight positive to fiscal 'nineteen operating margin and neutral to earnings and free cash flow. For the Q2 in particular, we expect organic revenue growth to be in the range of 5.5% to 6%. We expect CVG to grow approximately 4%, RTG and MITG to be in the range of 5% to 5.5% and diabetes to grow 20% plus or minus. And 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 $0.13 to 1 0.15 dollars 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.
And if recent rates hold, revenue would be negatively affected by approximately $100,000,000 to $150,000,000 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 $4,700,000,000 $5,100,000,000 in fiscal year 'nineteen. And 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. And 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.
Now, I will return the call back to Omar.
Thanks, Karen. Before we go to Q and 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 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. 2nd, we're allocating capital efficiency across our business. 3rd, 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 and A. In addition to Karen, I've asked Mike Coyle, President of CVG Bob White, President of MITG Jeff Martha, President of RTG and Hooman Hakimi, 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.
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. But 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. But and you've just got us to 5.5% to 6% for the Q2. If I focus on the Q2, help me understand to be, as I think about the Q2, very similar to the fiscal Q1 in terms of comparisons, the tremendous pipeline performance, ongoing cost reductions, etcetera. Maybe if you could give us a little more color on why the fiscal Q2 wouldn't be even better than that guidance 5.5%, especially given the relatively easy comps, the hurricane impacted year ago numbers.
Is there something maybe we need to understand better? 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 5.5% to 6% range?
Let me take that. First, thanks for the question. And 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. And 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.
I think but overall, this business is performing. There's no real major concern from a business perspective. We're in fact excited about our pipeline and excited about our execution across the board. And so 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.
And I would just add, Rick, that on the second quarter in particular, we did say that we expect 5.5% to 6% organic growth in the 2nd 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 and all of that is baked into our guidance.
Great. And just a follow-up on diabetes, another outstanding quarter here, best in a decade, as you say. Again, I assume this was, as you mentioned, 670 gs driven, but 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? But if I when I reflect on it, it seems still early in the launch of the Guardant sensor.
You highlighted the OUS rollout. Why wouldn't growth actually accelerate from here in diabetes? And maybe just give us a little color on how widely available the Guardian sensor is at this point?
Yes. Let me take that again. First of all, we are excited about diabetes and we're excited about a market that we're leading and creating. And this market is going to go through a tremendous amount of change, and we expect to be right in the leadership position in that. The Guardian sensor has launched extremely well, the Guardian Connect.
And I have to add that we're really our sensor is differentiated by the addition of SugarIQ, which is a cognitive decision support system that provides insights to the patients. But 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. And we're only in the beginning of that journey and we expect that this product will continue to innovate over time and we will be leading that innovation sort of roadmap. Now having said that, we are coming up against some pretty difficult comparisons, because if you recall, we went through a period last year this time where we had a shortage in our sensors. We overcame that according to our plans.
And so 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. But expect an exciting double digit growth business certainly for this year and over the long term, a business that will set the standards for growth at Medtronic, and 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.
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. And just over the course of the last 3 to 4 months, it's been a period extraordinary volatility in certain emerging markets.
So Omar, I was wondering if you wouldn't mind just 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 a stable and strong deliverer of growth for us over the years and something that we sustain. And 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 health care 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. And so that need is always going to be there. And despite economic sort of uncertainties and economic variations that will happen, it is an area where there is continued need and that need doesn't go away. People fall ill irrespective of economic conditions. So 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 medtech companies is that we've got a very diversified profile within emerging markets. China is clearly our biggest market where we've consistently delivered. But in addition, we've got strong positions in the Middle East and Africa, in Latin America, in Eastern Europe and also in Southeast Asia. So 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 in R and D given the strength in the overall business. I was wondering if kind of that's the right read or were there other sort of 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 and 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.
And in fact, our R and D investment by our calculations was 30 bps higher than Street consensus. We did also absorb a mix 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 and A improvement that more than offset it. So we still did have a slight improvement in our overall operating margin, which we were pleased and was in line with our outlook.
Great. Thanks for taking the questions.
Thanks, Bob. Next question, Maury?
Your next question comes from the line of David Lewis of Morgan Stanley.
Good morning. Just a couple of questions. Karen, just I want to start with you on organic growth outlook and I know there's been some questions on the Q2. But if you think about this year, I mean your guidance sort of implies 6% performance in the first half and maybe 4% performance in the second half. So I wanted to focus more on the second half.
If your first half guidance is sort of correct, you still need to see some momentum acceleration in the business in the back half of the year even to deliver sort of that 4% type number. Can you just sort of talk about some of the drivers of how you get that momentum acceleration in the back half just given the very material difference in sort of first half versus second half comparables?
Yes, thanks for the question, David. Appreciate it. In the second half, as Omar mentioned 1st and foremost, we are really pleased with the performance of our business, the strength of our underlying end market, 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. And as I mentioned earlier, we do have the anniversary of some key product launches that impact us even more in the back half. And we've got some pricing pressures from certain geographies that I noted Japan and Australia. But we are very excited about the continued momentum underlying. It's really just a comparison in the back half.
Okay. And just a 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 it would be by this point. But I know we're not going to make this a trend. But how should free cash trend?
I mean, what are some of the factors that would sort of erode the relative run rate of free cash across the year? And then kind of related to that, could you just update us on the Puerto Rico tax settlement? There were some dynamics that played out late last week. And maybe just remind us the path forward on Puerto Rico and any impact on tax rate or payment scenarios? Thanks so much.
Yes. 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 and we've been able to do that in the last two quarters, the Q4 last year and the Q1 this year. In terms of trend, keep in mind that free cash flow can be lumpy and it does depend on the timing of larger cash payments, particularly in tax and legal.
So I certainly would want you to extrapolate this Q1 for the rest of the year. But we are focused on delivering free cash in our full year guidance of $4,700,000,000 to $5,100,000,000 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. And so 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. So 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. But let me tell you, our pipeline has never been stronger. And in the next 12 months or so, I'm really excited about what we can do in our paying business. Our Intellis and Evol 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 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 and we've got a roadmap to make this 100%.
The CorVal Revolut R is another one that is building on the success of the original launch of the platform. And finally, the Guardian Connect and the 670 gs, like I mentioned earlier, are highly differentiated. So I just wanted to lay that out there that these are not like promises for the future. These are right now. And 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 in 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 of JPMorgan.
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, so clearly a priority. Can you kind of run us through some of the changes strategically and operationally the company is making to improve free cash flow over the long term?
Sure, Robbie. Thank you for the question. We talked about it being a focus from the top of the company on down. It is a clear focus in all of our monthly financial 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.
So 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, sort of IT systems through which we can track free cash flow better, creating systems through which our forecasting process is using the latest tools in IT and AI for that matter. And so I think this is an area of continued focus for us and continued upgrade of our capabilities. And it's something that we are confident will deliver and improve over the next few years.
Okay, great. And as a follow-up, maybe a 2fer robot question. Saw very strong performance in the Brain 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 Jeff comment on their specific robots. But let me tell you this, the integration of capital equipment, in this case, the robot with implants and or sort of high value consumables is a unique competence that we're delivering. And it's something that will set us apart and use our scale to really create these markets in a new and differentiated way that will put us set us completely apart from our competition. So 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.
So with that, I'll let Bob go first and then Jess.
Sure. Thanks, Ravi. 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. So our program remains on track. We continue to get good feedback. And 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.
So I think we're well positioned to deliver what we said we're going to do.
Jeff? Yes, Robbie, it's Jeff. For sure, the capital equipment within our brain business is one of the 2 big drivers of that in neurovascular. But it's more than it's much than the Mazor X. For us, it's a suite of enabling technology, the navigation, the interoperative imaging, which is our O arm, the Mazor X, the arm, the robotic arm and our Midas Direct powered instruments.
And 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. And so that what the robotic tailwind has done is increased it's gotten surgeon interest in robots, but 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. And it's been a tailwind for all of our enabling technology. And quite frankly, the more revenues coming from the OR and navigation and Midas Rex and the whole integrated suite.
And so we're excited about that that reason alone. But in addition, look at that as a leading indicator for our spine business as our implant business, as this technology comes more proliferated and you're going to see that helping our implant business as well. So 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. But the company has been very quiet on the M and A front here recently. Is this more a function of the targets, the valuations for some of the targets, the discussions that you're having, the valuations are too rich.
So maybe talk a little bit about the pipeline and why we haven't seen much on the M and A front lately? And then I have a follow-up.
Sure. Thanks. Thanks a lot, Glenn, for the question. First of all, M
and A remains important to us. And we've got a strong balance sheet, and we expect to use it. As we generate free 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, and that's the highest return investments that we can make and we can do it.
Now M and A supplements that. And our focus in M and A has been tuck in acquisitions and it will remain to be tuck in acquisitions and 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, and that will complement what we're doing organically.
It's also important to note that, like I said earlier, tuck in acquisitions are the major focus and because that's where our size and scale can immediately complement any other company out there without benefit of that size and scale. So that is our focus and we're in a strong position to execute on that and you'll see activity from us. But 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. So 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 this space.
All right. And then 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 health care 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. And as you've noticed, our momentum has been pretty consistent. And I do think that our technology leadership has played a role there. I do want I'll ask Bob to also make a few comments on this because he's really close to it.
Yes. Thanks, Omar. And thanks, Glenn. And you're right, we had an excellent quarter inside of MITG, seeing really good growth from advanced MIS as well as stapling. So we're really pleased by our new product performance.
And 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. But 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. So 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 spent a lot of time now with the Surgical Innovations Group understanding the technology and what they do. And I can tell you, I'm very impressed by the nature of this technology. There's sophisticated closed loop little systems that go on, that give feedback to the surgeons and there's a lot of room for innovation in these end effectors and 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, Larry.
Your next question comes from the line of Josh Jennings with Cowen.
Hi, thanks for taking the questions and congrats on the strong results here in fiscal Q1. I was hoping to start off maybe for Omar and possibly Jeff 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 Jeff comment on that in a minute. But let me just say that our portfolio right now is strong and robust. And 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 ask Jeff to kind of comment on it. But 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.
So Jeff, do you want to say a few words about orthopedic stuff or to say? Yes.
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 a disruptive and scale the business in a disruptive way then we think we can do that when we'll move more aggressively. So we're evaluating that and looking at it from several angles. 1 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 some limited release, get some feedback and we're evaluating, we're still looking at spine or ortho bundles and unique business models. But again, until we see something that is a disruptive path forward and it has to be a better opportunity than some of the other organic opportunities that we have. And so that's where we are.
Understood. And thanks for that answer. And just maybe a follow-up for Mike Coyle, just thinking about the CVG performance in the quarter, maybe you can help us understand what went better than expected, minus 4 was the guidance you guys hit 5% organic growth? And maybe also just touch on your performance in TAVR specifically and your outperformance of the market and what do 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, On X continues to do extremely well in the United States where we're at sort of all time high shares for our coronary business. But 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 United States.
And we've supplemented that with the INVEO delivery system, which is really being well received across the geographies. And we've had strong share capture in both Europe and Japan and have seen share momentum in the United States as well. And in Japan, we're just about to release now where we are releasing here in August, the Evolut Pro there as well. So we expect that momentum to continue. But 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. And then within the APV business, the Endo Venus business is really doing extremely well. And we haven't seen quite the hit we expected from the reimbursement reduction in the coated balloons as the patient benefit of that has really been seen clearly by our customers. And so 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 and then I'll let Karen take over. First of all, the sorts of things that we sell are inherent needs for patients. And we're confident that the health care systems around the world will need our products. And therefore, in the end, there's a core demand that we will fulfill and that will continue. Now having said that, clearly, there are areas that are in the news and trade discussions that go on, and we're a global company, and 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. And in the end, you've got to remember that the inherent demand for our technologies is something that no country can walk away from, And it's something that we feel a responsibility to fulfill for patients around the world. But 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. And so it's mostly impacting CVG. As Omar said, we're focused on, at least as the current discussion sits on offsetting that as best we can. And as we noted, we did not change our EPS guidance taking into account the impact of the trade tariffs as they sit today.
So overall, it's a modest impact and one that we feel that we can cover.
Thank you. That's helpful. And 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 1st year versus the 3 or 4 years that it would have taken just based on the timing of warranty expirations?
Sure. So 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 and J on this. Now your question is around the in warranty, but let me remind you that there's actually 3 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. Now starting this quarter, there are really 3 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.
2nd, 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. And 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 have an Animas pump and we upgrade them to a Medtronic pump. And for those that convert, there's we get compensated by J and J for that. And so the way that that is going is actually well.
It's ramping up. This was the Q1 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. Thanks,
Chris. Next question please.
Your next question comes from the line of Joanne Wuensch of BMO Capital Markets.
Good morning and thank you for taking the question. Can we spend a little bit of time on your pain therapy business and discuss the uptake of Entellus? And 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.
About yes, okay. All right. Okay, Jeff, go ahead.
Sure. What we're getting, it's a combination the uptake is a combination of Intelis, the system based on the features of the system combined with the evolved workflow, which is really driving the outcomes. As you heard Omar say and Terrence say earlier in the commentary is, it's we're getting very strong global growth, but even stronger growth in the U. S. And so the So what's converting is 2 drivers.
1 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 patients are seeing real world outcomes and it's being supported by some data that has been released. And we plan to release some more interim data at NANS in January. So we're very excited about it.
And I don't know in terms of difference between OUS and U. S. 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, but we're still seeing 20% growth outside the U. S. So it's a pretty much a global phenomenon. But there is a stronger Tier 1 in the U.
S. Based on the opioid crisis and physicians and patients just looking for solutions to this crisis.
Thank you. And as a follow-up, in September, we're going to see on both TCT and NASH. Anything you can comment on or that we should look forward to? Thanks.
Mike, you want to take
the TCT and Jeff on NASH?
Go ahead, Mike. Yes.
TCT, there will be good information flow coming on just the long term performance of the TAVR products. We'll be showing 5 year data on the CorValve U. S. Pivotal in the high risk patient cohort, which is important to showing the durability of outcome as well as being able to demonstrate that the durability of the products. And then we'll have 2 year data on the Sertavi real world results randomized to the SABR.
So 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 products. So those are important data flows taking place over the balance of our fiscal year.
Chip? Yes. We have got a
couple of things at NASS. 1 is the Mazor X Stealth Edition. So this will be the Mazor X with our Stealth navigation system fully integrated, which will provide a better workflow and ultimately we think better outcome. So we're very excited about that. And then 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. So those would be 2 things I would highlight for NASH.
Thank you.
Thanks, Joanne. We'll take one more question please, Laurie.
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. So maybe one, first starting off on the guidance. So Karen, it looks like FX was incrementally $0.05 worse or about 100 basis points of headwind. It looks like the top line was up by 50 basis points.
So what's up? Top line improved by 50 basis points, but FX was 100 bps drag. And 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 intra quarter timing of rate movements and mix that impacted our results, both on the top line and on the bottom line. But really, the benefits from our hedging program at this stage are what's positively the key thing that's positively impacting our earnings.
Well, I guess I meant for the guidance, FX was 100 bps headwind, but top line was just up by 50 bps. It implies operating leverage should be coming in better than expected in the back half. Is that the underlying assumption?
Yes. Clearly, we are focused on delivering operating margin improvement and we're committed to that 50 basis points margin improvement. Where we can, we would like to continue to invest more in R and D and to accelerate R and D like we did in the Q1. So we will continue to focus on that through the rest of the year. And 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, it's we're seeing beginning to see results there. We want to set guidance that we have a high degree of confidence that we can deliver in. So please read that into what we're saying here.
And 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. And just one quick follow-up to maybe Mike Coyle. So Mike, maybe your comp here 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. But 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. And on behalf of the entire management team, I'd like 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 Q2 earnings call, which we currently anticipate on holding on Tuesday, November 20. So 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.