© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by and welcome to the Medtronic's Third Quarter Earnings Conference Call. [Operator Instructions] Thank you.
I would now turn the conference over to Mr. Ryan Weispfenning, Vice President of Investor Relations. Please go ahead.
Thank you, Krystal. Good morning and welcome to Medtronic's third quarter conference call and webcast. During the next hour, Omar Ishrak, Medtronic Chairman and Chief Executive Officer and Karen Parkhill, Medtronic’s Chief Financial Officer, will provide comments on the results of our third quarter which ended on January 26, 2018. After our prepared remarks, we will be happy to take your questions.
First, a few logistical comments. Earlier this morning, we issued a press release containing our financial statements and a revenue-by-division summary. We also issued an earnings presentation that provides additional details on our performance and outlook.
During this earnings call, many of the statements made maybe considered forward-looking statements and actual results might differ materially from those projected in any forward-looking statement. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports and other filings that we make with the SEC and we do not undertake to update any forward-looking statement.
In addition, the reconciliations of any non-GAAP financial measures are available on our website, investorrelations.medtronic.com. Unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the third quarter of fiscal year 2017 and rates and ranges are given on a comparable constant currency basis, which adjust for our recent patient care, DVT and nutritional insufficiency divestiture as well as the impact of foreign currency. These adjustment details can be found in the reconciliation tables included with our earnings press release.
Finally, other than as noted, our EPS growth and guidance does not include any charges or gains that would be recorded as non-GAAP adjustments to earnings during the fiscal year.
With that, I am now pleased to turn the call over to Medtronic's Chairman and Chief Executive Officer, Omar Ishrak.
Good morning, and thank you, Ryan, and thank you to everyone for joining us. This morning, we reported our third quarter financial results including revenue of $7.4 billion representing growth of 7%. Q3 non-GAAP operating profit grew 8% and non-GAAP diluted earnings per share were $1.17 growing 12% and representing EPS leverage of 580 basis points.
These results effected solid quarter for Medtronic and as we expected a strong turnaround from the first half of the fiscal year. We continue to execute in our broad sustainable growth strategy driving therapy innovation and global market penetration while delivering enterprise synergies to enable margin improvement.
Each of our four groups delivered strong results with mid-single-digit revenue growth in MITG and RTG, high-single-digit growth in CVG and low teens growth in diabetes. Geographically, we also have a strong diversified performance with mid single-digits growth in the U.S. and non-U.S. developed markets and low double-digit growth in emerging markets.
At the same time, we completed our $850 million Covidien synergy commitments. We recently launched a new program Enterprsie Excellence designed to increase our effectiveness and enabled reinvestment for growth along with driving continued margin expansion and EPS leverage.
As we look ahead, we are confident in our ability to deliver meaningful EPS leverage on mid-single-digit revenue growth this fiscal year, just as we have for the past five fiscal years. In therapy innovation, we are seeing a clear acceleration driven by several important new product launches across our four groups as well as our strong positions in the fastest growing therapies in MedTech.
Our Cardiac and Vascular Group grew 7% again this quarter delivering sustained growth by leveraging the breadth of its products and services, as well as its strong positions in important rapidly expanding markets. CVG is an impressive new product in infection control, diagnostics, transcatheter pacemakers, and AF Solutions generated combined growth in the mid 20s and now represent about a third of our Cardiac Rhythm & Heart Failure divisions.
Mid teens growth in our Coronary & Structural Heart divisions was led by the launch of our Resolute Onyx, drug-eluting stent in the U.S. and Japan as well as our high growth transcatheter valve business. In TAVR, we grew in the low 30s with mid 20s growth in the U.S. and low 40s growth in international markets driven by the strong global demand for Evolut PRO valve and expanded indications for use.
Our minimally Invasive Therapies Group grew 6% driven by 7% growth in Surgical Innovations with strength in new products including our Signia powered surgical stapling system, our LigaSure vessel sealing instrument, and our Valleylab FT10 energy platform.
Respiratory, Gastrointestinal & Renal grew 3% driven by broad based growth in GI and Hepatology, strength in Nellcor pulse oximetry sensors given the high incidents of flu in the U.S. and strong adoption of our microstream capnography monitoring products. This offset the decline in our Airway and Ventilation business.
We are enthusiastic about the development of our Surgical Robotics platform, which we expect will strengthen our strategy of advancing minimally invasive procedures and we continue to make progress towards its launch. While we had intended first clinical use in humans in next couple of months, our final software and hardware integration and testing is taking longer than we initially expected.
This is not unusual with systems of this complexity. We are excited about the product performance that we already seen and intend to update timelines as we near the commercial launch. At our Investor Day in June, we intend to share incremental details of our system and update you on our progress.
As we mentioned before, the expectation of meaningful revenue from this system which will be depending on regulatory approval in developed markets. Regardless, we remained confident in our ability to grow MITG in the mid-single-digit next year and over the longer term.
Our Restorative Therapies Group grew 5% this quarter with robust growth in our Brain & Pain divisions. In Brain, the strength of our entire strong portfolio drove high teens growth in neurovascular and strong sales of our StealthStation navigation and O-arm imaging technologies led to low double-digit growth in neurosurgery.
In Pain, we are seeing very positive customer reaction from our Intellis platform and our evolved workflow driven, which together drove high single-digit growth reversing the declines we have seen for several quarters.
While our Spine division was flat this quarter, it was in line with the global spine market. Growth in BMP continue to offset declines in core spine, also when coupling our spine revenue with the spine enabling technologies that are reported in our neurosurgery business, our combined revenue grew over 1%. We believe this is a more relevant comparison of our spine results against our competition and an indication of our overall growth of Spine procedures.
We attribute this growth for the ongoing success of our surgical synergy strategy, which combines our enabling technologies such as imaging, navigation, powered instruments, nerve monitoring and Mazor Robotics with our spine implants to deliver integrated procedures.
Unexpected diabetes returned to double-digit growth this quarter driven by the continued adoption of our MiniMed 670G hybrid closed loop system in the U.S. We now have over 20,000 patients of our 670G system and we continue to receive highly positive feedback from the patients from this ground-breaking technology with real world results consistent with those reported in our pivotal study.
Our growth was further enhanced by the strong international demand for our 640G system. Our sensor attachment rates with all of our 6-Series systems globally remains strong and then as we continue to shift to our customer base from standalone funds to sensor augmented pumps, we expect sensors to be a key component of our growth.
Our efforts to increase our sensor capacity are progressing well. We are now able to meet the sensor demand of our existing customer base and remain on track to fully meet our predicted demand from both existing and new users in the fourth quarter. In addition, we benefited in the quarter from consumable revenue from legacy Animas users and the transition of Animas users to Medtronic continue to progress well.
We are also excited about the prospects of our standalone CGM system in Guardian Connect. Outside the U.S., we see strong utilization and retention of the patients from the system and with expected increase in our sensor manufacturing capacity; we are preparing to increase our customer base.
In the U.S., we have been closely collaborating with the FDA and expect to bring this innovative technology to market shortly. Guardian Connect features unique predictive alerts. And in the U.S., we utilized sugar IQ with the cognitive computing capability of IBM Watson to detect important patterns and trends for people with diabetes.
Turning now to our globalization growth strategy, emerging markets, which represent 15% of our revenue again, grew 12% in line with our long-term double-digit growth expectations. Our consistent emerging market performance continues to benefit from geographic diversification with strong balanced results around the globe.
Southeast Asia, Eastern Europe, Latin America, and the Middle East and Africa and China all grew double digits. In addition through investing in traditional market development, our differentiated strategies of participating in public and private partnerships as well as optimizing our distribution channels are driving our sustained performance.
The emerging markets represent the single largest opportunity in MedTech. Our remaining growth strategy economic value is a real accelerator for our therapy innovation and globalization strategies. We are pleased with our continued progress in creating new value based business models that directly linked our therapies to improving outcomes.
We now have over 1000 hospitals under contract and over 25% of our U.S. CRHF implantables’ revenue is covered under a TYRX-related and value-based healthcare arrangements that linked total payment depletion and inflection outcomes.
Beyond TYRX, we have also commercialized five other value-based healthcare programs, covering various therapies including ICDs, CRTs, AF ablation, drug-coated balloons, and the aortic stent grafts, where a portion of our payment is tied to specific patient outcomes. Collectively, these five programs in addition to TYRX cover over $615 million in mostly U.S. based device revenue.
Across Medtronic, we remain focused on leading the ship to healthcare payment systems that reward value and improve patient outcomes of our volume. We are increasingly partnering with additional stakeholders and the healthcare value chain including payers, providers and other interested organizations to lead the change for FIFA service models to value-based programs.
It is our strong belief that Medtronic is uniquely positioned to leverage our global technical, clinical and disease - expertise to deliver better outcomes to the patients while improving efficiency for healthcare systems around the world and we are doing this in a way that we expect to benefit our shareholders as well.
With that, let me ask Karen to now take you through a discussion of our third quarter financials and outlook for the remainder of the fiscal year. Karen.
Thank you, Omar. As mentioned, our third quarter revenue of $7.369 billion represented a 1% increase as reported and growth of 7% on a comparable constant currency basis, which adjusts for both foreign currency and a patient care DVT and nutritional insufficiency divestiture.
Foreign currency had a positive $177 million impact on third quarter revenue. GAAP diluted loss per share was a $1.03. Non-GAAP earnings per share were $1.17. After adjusting for the divestiture and a $0.01 negative impact from foreign currency, non-GAAP diluted EPS grew 12%. The majority of our non-GAAP adjustments were driven by a $2.2 billion tax charge primarily related to the transition tax on our accumulated foreign earnings as part of U.S. tax reform.
This tax will be paid over the next eight years with less of a cash impact in the first five years. Medtronic has been advocating for U.S. tax reform for many years and we are pleased with the final package included the ability to gain access to our future earnings outside the United States.
We now will have access to the vast majority of our cash flow and we expect to deploy with discipline in accordance with our capital allocation strategy of balancing reinvestments for future growth and providing meaningful returns for our shareholders.
The operating margin for the quarter was 28.8% on a comparable constant currency basis representing a year-over-year improvement of 30 basis points. This was primarily driven by a 40 basis points improvement in SG&A. As announced last month, we have reached our goal of delivering $850 million of synergies from the Covidien acquisition.
We also unveiled our enterprise excellence plan that is expected to deliver over $3 billion in annual growth run rate savings over the next five years. We expected to enable reinvestments for future growth as well as drive continued operating margin expansion and EPS leverage. Non-GAAP net other expense, which was included in our operating margin was $94 million versus $20 million on a comparable basis in the prior year. This change was driven primarily by increased expense related to our currency hedging program.
Foreign exchange in total had an approximate 90 basis point negative impact on our operating margin. This was more than expected given currency market volatility in the last month of the quarter, which resulted in the large foreign exchange impact on our inventory in late January as well as increased expense due to net balance sheet remeasurement on certain foreign currency denominated balances.
These were also the primary reasons for the mismatch between the FX benefit on our revenue and FX headwind on EPS. Our third quarter non-GAAP nominal tax rate was 15.6%. Based on our current estimates of the impact of U.S. Tax Reform.
We continue to expect our fourth quarter tax rate to be between 15% and 16%. Third quarter average daily shares outstanding on a non-GAAP diluted basis were 1.365 billion shares. As expected this was roughly flat sequentially and we expect our share count to remain roughly flat for the remainder of the fiscal year.
Combining our $1.6 billion of year-to-date share repurchase activity, with the $1.9 billion we paid in dividends over the same period, our total payout ratio was 76% on a non-GAAP net income.
Before turning the call back to Omar, I would like to reiterate our annual revenue and EPS growth guidance. Unless specified, all of my guidance comments are comparable constant currency.
For the full fiscal year, we continue to expect revenue growth to be in the range of 4% to 5% and non-GAAP diluted earnings per share to grow in the range of 9% to 10% from the prior year comparable of $4.37. For the fourth quarter, we would expect total Company revenue growth to be in the range of 4.5% to 5.5%.
Looking at the expected fourth quarter revenue growth by our business groups. We expect CDG to deliver 4.5% to 5.5% growth, and MITG to grow in the range of 3% to 3.5% both driven by continued strengths of new products amidst more difficult fourth quarter comparisons. We expect RTG to grow in the range of 3% to 4% balancing the impact of a slower spine market with continued growth in pain therapies and strength in brain therapies.
Finally, in our Diabetes Group, as we have been forecasting for some time, we expect double-digit growth in the fourth quarter given increased sensor supply and the strength of the 670G launch in the United States.
With respect to earnings. We delivered strong EPS leverage in the third quarter, and we expect it to continue in the fourth with EPS growth of 11% to 13% of the prior year comparable of $1.25. While the impact from currency is fluid and therefore not something we forecast, if recent exchange rate remains stable for the fiscal year.
Our full-year revenue would be positively affected by approximately $480 million to $500 million, including an approximate $300 million to $320 million tailwind in the fourth quarter. Our full-year operating margin would be negatively affected by approximately 70 basis points, including approximately 150 basis points in the fourth quarter and our full-year EPS would be negatively affected by approximately $0.04 including a negative impact of approximately $0.02 in the fourth quarter.
Keep in mind the effective FX on revenue margin and EPS can differ due to the magnitude of the year-over-year change in expense related to our currency hedging program along with the timing difference of FX and cost-of-good sold reflecting inventory turns on our balance sheet.
While we intend to give our fiscal year 2019 guidance on our fourth quarter earnings call in May, the fiscal year 2019 commentary that I provided on last quarter's earnings call still stands. Also while we expect to continue to drive operating margin improvements and EPS leverage, keep in mind the following headwinds to our projected EPS growth.
We expect less interest income reflecting planned positioning of our investments for greater flexibility and liquidity in support of capital allocation. We will anniversary the full-year benefit from the accounting change on stock based compensation and we expect to begin to transition services related to our divestitures to Cardinal Health, eliminating the income in the back half of the fiscal year. Combined this could amount to a few 100 basis point headwind to EPS growth which we will be working to partially offset.
In addition, given recent changes to exchange rates, if current exchange rate remains stable through the next fiscal year we would now expect an approximately $500 million positive impact to fiscal year 2019 revenue and over $0.10 of benefit to EPS. Finally, I would like to note that we plan to hold our biannual Institutional Investor and Analyst Day on Tuesday June 5th in New York City.
Now I will return the call back to Omar.
Thanks Karen. And to conclude, Q3 was a solid quarter where innovation and technologies, strong positions in the fastest growing markets in MedTech and enterprise synergies produced solid returns.
We have driven a strong turnaround from our first half results and we remain confident in our ability to deliver mid single-digit revenue growth and meaningful EPS leverage this fiscal year and beyond. We expect this to lead to robust free cash flow generations that we can deploy with discipline.
Finally, we remain keenly focused on executing to deliver dependable results for you our shareholders. As we continue to leverage our global diversification scale to fulfill our mission of elevating plain, restoring health and extending life for millions of people around the world.
Let’s now open the phone lines for Q&A. In addition to Karen, I have asked to join us. We want try to get to as many people 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.
With that operator, first question please.
[Operator Instructions] And our first question come from the line of Bob Hopkins with Bank of America.
Thanks for taking the question and appreciate it. A quick question for Karen and then for Omar. First Karen, just to start-off thank you for the preliminary thoughts you are providing on 2019 since I know I’m going to get a lot of questions on it as I assume everybody else will. I just want to makes sure I hear exactly what you are saying.
My interpretation of what I just heard is that perhaps the FX benefit is roughly offsetting some of those incremental headwinds you talked about and that perhaps high single-digit earnings growth is a rough preliminary way to think about 2019. So is it fair to say that some of those headwinds you mentioned will be offset by FX and that roughly high single-digits is a good preliminary way to think about 2019 earnings?
Yes, that’s roughly in line Bob, at this stage we are still working on our annual planning process and we will give guidance on our fourth quarter call in May, but your summary is roughly right.
Okay, thank you for that. And then, Omar I wanted to ask you about revenue growth, because obviously this is some of the best in those balance revenue growth. We have seen out of Medtronic for some time, so congratulations on that. I guess my question to be from a macro perspective, can you talk a little bit maybe about the drivers of the growth? How much of this was just particularly strong execution and new products versus strong markets. You know where there any significant one-time benefits in Q3, maybe just talk from a macro perspective about the revenue growth in the quarter and the sustainability?
Well, like I have always mentioned our revenue performance is highly dependent on new product launch process and when we got new products, the revenue growth goes up quite significantly especially with respect to the market. Overall, the market normally really with major changes since before we expect what we said in November is about still holds the same in terms of surgical procedures and in terms of other procedures, some electric procedures and diabetes in particular have a ramp-up in December, which then tails down in January. So, these are all normal patterns.
I think the only thing that I will point out is of course that we are pleased with the diabetes business as promised and expected with the sense of shortage issue being addressed bows to double-digit growth, which clearly existed on its own helps. The other thing I'll point out actually is Pain division, where again we have been experiencing declines in growth and this quarter, we came up to high single-digits, which based on new product introductions.
So, those two are the outstanding drivers. I have encouraged CBG as usual performed and this was particularly good quarter with a variety of new products, which I detailed and MITG continued with their introduction of products. So really, product pipeline introduction is the main driver that we see in this performance and we are quite pleased with what we have seen.
Great. Thank you.
Thanks, Bob. Next question please, Krystal.
Our next question comes from the line of Mike Weinstein with JP Morgan.
Good morning. Thanks for taking my question. Just a couple of items to clarify. So, last quarter, Puerto Rico was about $60 million headwinds of the business. How much of that do you think you dropped back this quarter? And then second, I think we are probably all a bit surprised by the reduction in EPS guidance, because of FX this quarter. You commented on your prepared remarks that the fourth quarter will see a 150 basis point headwind to operating margins, because of the fact that that’s pretty severe. So, can you just spend a minute on that and maybe just help me with what I guess one, why the FX impact hot worse by the weakening of the dollar from last call and two, why it’s so severe on this fourth quarter? Thanks.
Sure, Mike. Thanks for the question. So on Puerto Rico, we did realize an incremental revenue from Hurricane Maria in the third quarter, but it was relatively minor. So the vast majority of the 7% growth in Q3 was related to improved underlying financial performance. In terms of foreign exchange, this quarter, given the significant volatility in foreign exchange rates, particularly in the last month of the quarter.
We did have an impact on our balance sheet from a remeasurement perspective of certain balances late in the quarter and then we also did have an impact to our inventory, which given inventory turns take some time to run through cost of goods sold. That said for fourth quarter, we do expect to have a continued foreign exchange headwind, both on margin and the bottom-line in the fourth quarter.
We expect in the fourth quarter on the bottom-line to have FX if rates remain stable to where they are today of a negative $0.02 for the fourth quarter while we do have a period right now, where a foreign exchange is benefiting revenue given the roll-off of our hedging program, we are seeing continued slight negative headwind to the bottom line.
Next year, with the strength of the dollar and the roll-off of most of our older hedges, we do expect a foreign currency benefit both on revenue and expense, and we mentioned at this stage, if rates remains stable for FY 2019, a positive impact on revenue up to $500 million and over $0.10 impact positively on EPS.
Thanks, Karen. And maybe just one follow-up on cash flow. Karen, your guidance that seems to imply that you would do about $4.3 billion in free cash flow this year, and that’s again going back to that FY 2016 base and then adjusting it for the divestiture. You have done $2.8 billion year-to-date is the expectation that you will get to that call it roughly $4.3 billion target? Thanks.
Yes, thanks for the question. We do have a slide in our slide deck on cash flow and you will see, operating free cash flow year-to-date of $3.6 billion and yes, $2.8 adjusted that on a comparable basis $3 billion year-to-date. And the guidance still stands for the full fiscal year, where we expect to deliver high-single-digit growth on multiyear basis from 2016 to 2018, which would equate to approximately the cash flow forecast that you mentioned.
Great. Thank you, Karen.
Yes.
Thanks, Mike. Can we get the next question, Krystal please?
Our next question comes from the line of David Lewis with Morgan Stanley.
Great. Good morning. Just got two questions, one for Omar and one for Karen. Omar, I just want to come back to revenue and then some obviously very strong quarter here in the third. If I think that the top end of your guidance sort of implies your 5.5% for the fourth quarter, but also your commentary implies some deceleration and franchises like CVG and RTG. So, were there any one-time dynamics in the third quarter or pull forward, because of the hurricane dynamics or perhaps the fourth quarter reflects some type of conservatism?
Well, I think the hurricane dynamics we rose were minor, but there was some applied, but clearly that was rose to the minor a bit on the overall base of our revenue. I think in Q4, it's mainly tougher comparisons year-over-year that are driving this in some areas like diabetes, we expect continued strength and I think CVGs had a strong high almost high single-digit growth rate over the past several quarters and we are running into a tougher comparison in Q4, so that's a lower that has been running.
But still we are in the mid-single-digits as we expect. I think with MITG what you saw in the Q4 was a slight enhancement, because of our sales and the pulse oximetry business because of the flu season, which was – and the requirement for that product was particularly high even given the historical levels. That's going to tail down in Q4, so that’s dampening the growth a little bit. I think those are the key dynamics that I’m looking at. It’s still well in the mid-single-digit well in our guidance and we expect to close the year in the range that we had talked about in a fairly tough year.
Okay. So, continued momentum and the major changes across your key franchises sounds like in the fourth quarter.
That's correct. Yes, it's just a quarter-over-quarter dynamics and some one-off issues here and there.
Okay. And then Karen, just as far as the next year’s outlook, I’d appreciate the comments you have provided. Just two sort of follow-up questions here. I would have great numbers, but it looks like underlying margin performance for fiscal 2018, it looks like it will comment somewhere around that 30 to 50 basis points range, perhaps 40 basis points of underline margins. How do you think that number trended into next year, can you do better than 30 to 40 basis points of underlying margin improvement, in fiscal 2019 is it possible at all to give us some range on the net change in hedging accounting into fiscal 2019 because that’s sort of the big change on a relative basis? Thanks so much.
Okay. Sure, thanks for the questions. In terms of margin benefit for FY 2018, you are correct, we did deliver on a constant currency basis 30 basis points of margin improvement this quarter and would expect that momentum to continue to drive full-year margin benefit to be higher than what we have this quarter.
In terms of net fiscal year, we do intend to continue to drive operating margin improvement and strong EPS leverage based on current exchanges rates where they are right now, you know we would expect a positive impact to the bottom line from FX and also not a headwind on margins. So it’s been potentially positive benefit on margins too.
So we will obviously give our guidance on the fourth quarter earnings call, but I would expect continued positive momentum on margins from here. Particularly driven by our enterprise excellence program which we announced at the JP Morgan conference.
Great, thanks Karen, thanks Omar.
Thanks David. Next quarter please Krystal.
Our next question comes from the line of Vijay Kumar with Evercore ISI.
Kind of been a nice quarter to you guys. So maybe be my first one Omar and maybe Mike Coyle can add to that. Value based care this is something you have spoken - Omar. It just feels like you know we are getting more traction, you know we had some numbers on the revenue of rhythm management right where a lot of I think the street is concerned on this to compare your dynamics. You have a huge trial coming in, the Rapid Trial. Can you talk about how those value based contracts in particular in CRM, TYRX would change once you get the trial readout and could this possibly lead to more share gains and positive growth in that business in a few quarters?
You know I know I have spoken a lot about value based healthcare, but I’m particularly pleased to see this translate into real numbers which have real differentiating value for Medtronic and the person who read that actually is Mike Coyle in CVG and while TYRX is one example where innovation is linked directly to an outcome when we built a business model around it. We have actually got four, five other programs which are equally interesting, we are in the starting phases, but I will let Mike just comment overall on the subject then also onto the specific question on TYRX.
Sure, relative to TYRX, we are quite pleased with the level of uptick that we are seeing in with over 1000 hospitals now participating in the program where we actually have linkage back to essentially make a payment that will go to the account if the patient comes back with device related infection within six months.
And I think what that has been able to do is TYRX is not separately reimbursed and so by doing this we have been able to create a guarantee that basically is very appealing to accounts who know that they will obviously have a patient who is significantly impacted by an infection. They will lose money at the provider level, at the hospital level, because of that redo procedure that’s required and of course the payer is now out two separate procedures for payments.
So this really is a win, win, win the way we have structured it and I think it’s been seen that way by the accounts, but it also allowed us by being able to see the appeal of this approach to then apply it to numerous other parts of our business, including reductions in Heart Failure re-hospitalization with the adaptive CRT, a feature of our CRT devices.
Our Smart Shot Performance Guarantee program which basically pays when patients come back with inappropriate shots from an ICD, the drug-coated balloon reintervention prevention program which basically tie to patients coming back for target lesion reduced in SFA disease. And then in our cryoablation business, basically we have a program that pays when patients coming back with either repeat hospitalizations for AF, or for repeat procedures with the ablation.
And so collectively, these programs have now been rolled out really just been the last year since the TYRX program really got momentum in January a year ago and these newer programs are really only a quarter or two old, but as we mentioned in the script, we have over $650 million of revenue mostly in the U.S. tied to these programs and we continue to see opportunities to do more of them.
Maybe one follow-up on cap allocation. Karen, you have access to $14 billion plus of cash and I think you mentioned for fiscal 2019 less interest income. So I’m just curious wouldn’t debt pay down offset some of that or can you just walk us with the mat on how that cash is going to be used and why should be an interest income headwind for next year?
Sure. So yes, we do have $14 billion of cash on our balance sheet and we have access to the vast majority of that post Tax Reform. I think the biggest benefit to us will be the access to our ongoing cash generation though going forward, but with respect to the existing cash on the balance sheet, we have been paying down debt this year, we have another $2 billion of debt to mature in the fourth quarter this year, which we expect to let retire and we also have the Puerto Rico tax settlement still waiting out there.
It is under appeal, we have a hearing date set for mid March and so we are hopeful and feel strongly about our position there, but should the Appeals Court uphold the prior settlement, it does mean that we would have to pay a large tax settlement from that transaction. So the greatest benefit again is our access to our ongoing cash generation going forward.
Thank you guys.
Thanks, Vijay. Krystal, next question please.
Our next question comes from the line of Larry Biegelsen with Wells Fargo.
Good morning guys. Thanks for taking the questions. Two pretty straightforward questions I’m asking both. Now Karen, I’m sorry if I missed this, but the tax rate in fiscal 2019 are you assuming 100 to 200 basis points improvement over fiscal 2018, sorry if I missed that earlier on. And Omar, I was struck when I looked at the JP Morgan slide in January, few tuck-in M&A deals you have done in fiscal 2018 versus prior year. So I guess my question is why is that the case and any color you can provided on what we should expect going forward would be helpful. Thank you.
Okay let me take the acquisition one first. A number of things, first of all we do acquisitions when we meet certain guidelines, that means where we think that the acquisition will add to our strategies which are very clear in the disease areas that we have got, especially tuck-in acquisitions in the disease areas that we have got presence in and it fills out our overall capabilities. We have got to have the management bandwidth and the financial bandwidth to do the deal and it is an interesting acquisition we do, then we haven’t been shy from doing some reasonably big ones in the past two years.
I think the improved access to cash that we have with the new tax reform will actually help, open our financial bandwidth in doing some of these deals, but remember they all go together. There is financial bandwidth. There is management bandwidth. There is most importantly the strategic alignment of the tuck-in acquisition and our ability to integrate it properly with the right team. And I wouldn’t read too much into any particular year, it is really overall, we have created a pretty good track record of doing these and we intend to continue.
And Larry on the tax rate question, our initial estimates indicated that we would benefit from a slightly lower effective tax rate beginning in fiscal year 2019. We did not have the basis points improvement, but we did say we expect it to be slightly lower. We continue to work through the complexity of the new reform and additional guidelines that come out from an U.S. treasury to refine our estimates and certainly, if in that process, our initial estimates change, we will certainly let you know, but at this stage, we expect a slightly lower effective tax rate.
Thanks for taking the questions guys.
Thank you, Larry. Krystal, next question please.
Our next question comes from the line of Kristen Stewart with Deutsche Bank.
Hi. Thanks for taking my question. I just wanted to go back on the comments on the robotics platform. I was just wondering if you could expand upon any other comments that you made earlier, just going on what exactly are some of the delays there?
Like I said Kristen, that’s a fairly complicated system with multiple computers being put together and it’s the event that we have had some experience with, and when you integrate a system of this level of complexity, there may be some time line shifts as to when will be ready for first-inhuman use and so it’s taken just a little longer than we thought earlier.
We are very excited about what we are seeing, I mean we have seen the thing operate and the performance is very compelling. I think it’s best if we wait till Investor Day when we will give you some more insights as to the nature of this product, which we are really excited about and also as we get closer to commercial launch, we will give you some dates.
So I think that’s the best way to look at it. It makes no mistake this product is an outstanding product and the sorts of integration hiccups you get are not uncommon at all with systems of this magnitude and one that we know will get through, and we will be ready for the launch of the suitable type.
Okay. But you said do you still expect first-inhuman use to the event?
No. Look we are not at a stage to give you dates like that, but once we wait till Investor Day and then we will give you an update on our overall performance and really, we will stick to timelines when we are close to commercial launch.
Okay. And then just a question on diabetes franchise, can you give an update on the continued growth monitor?
Hi, Kristen. The central ramp-up is actually progressing well. It was a key contributor to our growth rate in Q3. Just to maybe put some additional color on it, our guidance since its reproduction in the third quarter was twice as high as what we experienced in the second quarter.
So that should give you an indication of how things are progressing and as the commentary alluded to, we are on track to fulfill all the sensor needs of our install base this quarter and by the end of this quarter, we will be able to meet unconstrained demand as we have been staying all the long.
Now the other thing I will just point out is the performance of the sensor itself not just capacity, but as Omar talked about in the commentary, the MARDs that we are seeing on over 20,000 patients in the install base is fantastic and continues to really essentially marrow what we saw in the pivotal trial. So, we are very pleased not just in terms of the output, but also the quality of the sensor.
Okay. Perfect. Just timing in the U.S.?
For the Guardian Connect standalone?
Yes.
Yes. That one is with the FDA. Kristen, we are very confident that we are going to be able to get this out shortly. It’s hard to predict exactly when the FDA is going to approve it, but we are working very closely with them and all indications are that we will have an approval here in short order.
Okay. Thanks very much everyone.
Thanks, Kristen. Take next question please, Krystal.
Your next question comes from the line of Isaac Ro with Goldman Sachs.
Good morning guys. Thank you. Kristen, a question for you on the $3 billion growth cost savings goal that you guys have said. If I look correctly, the FY 2018 was the base here and so now that you guys are most the way to year one, could you give us a sense of what net savings have been today just so can triangulate how that translating into margins overtime?
Sure, Isaac. On the $3 billion gross savings, we do expect annually incrementally between $500 million to $700 million each year over the five-year period. So next year, you can expect that incremental savings, not all of that will follow to the bottom-line, because we will be focused on using some of it to offset pricing pressure and to reinvest, but it is this program that will drive that strong margin improvement and EPS leverage that we have talked about. Go ahead.
No, I’m sorry. You were speaking.
In terms of the $500 million to $700 million annual incremental each year, expect it to be more in the lower half of that range in the beginning years and more in the upper half of that range in the later years.
Okay. And so when we get to let’s say next Investor Meeting or thereabout, would you start talking about net savings that you expect out of this program either a cumulative or on an annual basis?
Yes. We will be talking about every year when we give annual guidance, the net savings as we see impact that we would expect to see from a top to a bottom-line.
Okay. Thank you.
Thanks, Isaac. Krystal, next question please.
Our next question comes from the line of Matt Taylor with Barclays.
Good morning. Thanks for taking the questions. So I wanted to follow up on two points that you just put a final point on two areas that you have already touched on. One is, it is encouraging to see the diabetes turn around and you talked getting to a point where you are now meeting demand. I guess could you help us sequentially understand from here how much improvement you could see in terms of your ability to grow beyond that and actually go after new customers and maybe just touch on it a little bit more detail, the enema has changed and how that could help your pump as you said you are the preferred provider?
Sure, Matt. When we say by the end of this quarter, we will be able to meet on constraint demand that’s not only talking about pump users and our ability to satisfy the sensor needs of those patients who are on pumps.
It’s also about our ability to go after new markets like standalone sensors which I had talked about with Guardian Sensor 3 three and the pending approval in the United States. So we really feel confident that by the end of this fiscal year we will be in a position to really go after our existing market as well as start to really penetrate aggressively new markets that we currently don’t plan.
That’s number one, as far as Animas goes I would say that’s progressing very well, we are generating today consumable revenue from that transaction and we are transitioning patients that are out of warranty from Animas to Medtronic as planned and things are going very well with that and we are getting some incremental growth out of that and the way I would characterize it is even - if we exclude Animas we would have been double digits in Q3, but we are very pleased with how that’s going and we look forward to just continuing the transition.
Thanks and then just a follow-up maybe for Mike Coyle or anybody else who want to jump in on CVG. So are really encouraged by the growth this quarter in the mid single-digit expectations going forward. Could you just touch on specifically whether you are seeing competition from the recent MRI labels of your key competitors and how you are able to offset that and talk about TYRX but any kind of further color in that one pain point result?
Yes, obviously we play in a lot of statements and we see various momentum coming from all new product launches and competitive new product launches and you know we are seeing at the margin some share loss in the initial implants in the ICD segment just as MRI has come in for the both competitors and they are basically going to their user friendly accounts and getting some of that share back.
Of course on the flip side we are taking share in the - segment of the market because if not only Micra but also because of the CRT-P quadripolar product as well as the strong position we have now with our next generation wireless facing pacing that just entered the U.S. market. And obviously you also saw we are taking market share in both the coronary and [indiscernible] segments.
So basically when you net it all together, we are really just taking advantage of the size and scale that we had as an organization for diversified growth and we think we can continue to deliver above the market growth and our segment market growth is between 4.5% and 5% typically. So that 4.5% to 5% we are talking about next quarter really is just a function of a very strong Q4 a year ago and then we expect to be able to continue or participate across our broad portfolios that is above market growth.
Thanks Mike.
Thanks Matt. We will take the next question please Krystal.
Our next question comes from the line of Danielle Antalffy with Leerink Partners.
Thanks so much. Good morning guys thanks for taking the question and congrats on a really strong quarter. Omar I was wondering if you could talk about new product contribution to growth in the quarter, obviously new products are a key part of this and also how we should think about the contribution of the new product growth factor in fiscal 2019, not asking you to give guidance, but it just seems like that’s going to become an increasingly important part of the growth story.
Yes, I think first of all I don’t have the exact number in front of me, but that is a major component of the growth in this last quarter and it will be going forward and the Company is really based around therapy innovation, so that’s not surprising.
I do want to point out clearly that our value-based healthcare programs are economic value programs that are all accelerators for our new products and we realized that the connection of technology to demonstrating clear outcome improvement is the way to get value for these products even in the current fee for service environment and to get differentiated pricing for these products, because of the credible promise and commitment to improve the outcome which our customers see.
So you will see an increasing drive towards newer and newer therapies, but the linkage to the outcome and the value that that creates is what will give us our differentiated strategy and then over time of course these products then go into emerging markets and drive further acceptance in those markets in penetration, but the new products in our business are the fundamental sort of value that we have and the linkage to outcome as what the value is to our customers and an ability to join these two together as we are successfully able to do now will differentiate us, will give us momentum.
Great. And just one quick follow-up to that given the importance of new products, can you talk about the gross margin profile of these new products sort of overall is it in line with about corporate average is that the right way to think of new products generally?
I think the new products yes, in general, I mean sometimes they are so attractive in the market when we make a tradeoff with pricing volume, but in general you know with the new feature, the new value and the price is justified by the value that the customers and the objectives we realize. And so this is not an arbitrary thing that the value we get the price and in general you see that and you will see the offset of older products overtime. So overall pricing surf numbers that we put previously I think will takes us hold and our ability to maintain them depends on these new products.
Okay. Thank you so much.
Thank you, Danielle. Next question please, Krystal.
Our next question comes from the line of Joanne Wuensch with BMO.
Thanks for taking the question. Very nice revenue growth this quarter. Can we talk a little bit about what you are seeing in the TAVR market, you had you indicated your opening up new centers and is there anything specific that we should look for at ACC?
Yes, I think the market dynamics have remained very strong there in terms of overall market growth in the low 20s on a constant currency basis and that’s pretty well balanced across the U.S. and international.
We obviously have been in share capture mode here over the last couple of quarters based on really the performance of the Evolut PRO product, which has being extremely well received in terms of its lowering leak rates, lowering pacemaker rates and so it’s really being received as an excellent product.
But also obviously the expand indications for use into intermediate risk and of course we continue with enrollment in the low risk patient population and of course we have entered the Japan obviously with the Evolut product as well.
So all of those collectively are helping us drive above market growth in the overall market. There is nothing particularly new at ACC coming in terms of - really just additional data in some of our larger registries and studies, which obviously continue to support the performance of the products and especially Evolut PRO. So you will see those at ACC.
Thank you and as a follow-up question. Your Resolute Onyx is gaining fair momentum this quarter, is there anything qualitatively you can share with us as a positive being rolled out? Thank you.
Yes. What we think that is one of our customers tell us it’s probably the best handling stent in the marketplace in terms of high visibility, is there a good visibility, it’s got a great deliverability. We also expanded the size metrics and have actually some unique sizes that other companies don’t have.
And the other thing it does for us is in conjunction with resolute integrity, which is also a very well performing product gives us a little more balance in terms of how we can provide multiple price points into the market to deal with pricing pressures.
And so collectively, those things have really allowed us to both stabilize pricing and to drive market share capture across that segment and of course, it’s still a very large product segment and highly profitable, so we are glad to see the growth that we are getting out of the product in both the U.S. and in Japan.
Thank you very much.
Thank you, Joanne. Krystal, next question please.
Our next question comes from the line of Glenn Navarro with RBC Capital Markets.
Hi. Good morning. Two questions on spine. First, it looks like the Spine market had another challenging quarter, do you guys have any incremental insights anything you may have regarding the challenges that are facing the market, anything new you may have picked up in the last three months and then as a follow-up ticking with Spine, I’m wondering how much has the major robot helped drive your business and has it helped pull through any incremental hardware and biologic sales? Thank you.
Glenn, on the market, I have no new insights from the last quarter, I mean the formula that we had been seeing in call it FY 2017 and even in Q1 FY 2018 is more of a kind of 5% procedural growth with maybe 3% price reductions for a net 2% growth on a global basis.
And that formula has come down to maybe a 2%, 3% procedure growth of 2% or 3% price decline to get you basically flat and that’s what we have been seeing over the last couple of quarters. We do think that’s going to go up from here to a point of net growth or so over the next couple of quarters is what we are seeing, but no new insights in terms of what is driving that. I mean there is definitely a more pricing.
I think there is another point of pricing pressure in here and with hospitals consolidating, getting more sophisticated in their buying patterns and they are tendering and they are consolidating their vendor base and for us, its tail 2 cities, one given our product preps and implants plus our enabling technology we end up usually a net benefactor when you consolidate vendors, but it is resulting in some price declines. So that’s what we are gaining from share.
In terms of Mazor, it is starting I mean the distribution relationship is relatively new and it is starting to pull through revenue. There is too tangible. We haven’t seen the benefit of it yet, we will see it in the coming quarters. There is two tangible way that pulls through revenue, one is when we have placed a few sorts of equipments and that accounts in return for incremental spine shares. So in the last two quarters, we have started doing that with Mazor and that it lags maybe six months before those contracts take effect and we actually see that incremental revenue.
So we haven’t seen it yet, but it’s locked in if you will. And then going forward around the December or January timeframe, we will have Mazor integrated into our broader spine enabling technology. So, it’s fully integrated with navigation and operative imaging or O-arm and in that case, the advanced features of that platform will only work with Medtronic implant.
So, it will be a technology type in with the platform that will further pull through. So, it is starting to drive the revenue, you don’t see in our economic shift, but it will be coming in the coming quarters and those are the two reasons why.
Geoff, just one clarification. Did you say going forward, your thought procedure volume would improve, offset by maybe slightly greater pricing pressure so net-net no change in the market going forward on the quarter basis?
It’s hard to project us as we are looking at net-net anywhere from no change to maybe 100 basis points improvement on net.
Okay, great. Thank you, Geoff.
Thanks, Glenn. Now, we will take one more question please, Krystal.
Our final question comes from the line of Josh Jennings with Cowen.
Good morning. Thank you. I was hoping to follow up Omar, on your comment on your economic value creation strategy. Historically, you have talked about 40 to 60 basis points of organic growth contribution coming from the services and solution business. I’m wondering if you could update your thoughts that should we still be considering the annuity revenue growth from hospital solutions, some of your peer services business like Cardiocom as well as the value-based programs driving 40 to 60 basis points, organic growth or should we thinking more about the implant benefit with some of those programs driving growth more on the implant side going forward? And I have one follow-up.
Sure, look I think both. We haven’t been able to hit the 40 to 60 basis points. We talked about it as a target closer to the 20 to 40 I’d say and our growth in hospital solutions continues and we had actually a particularly strong quarter with the VA in our care management services business. So, I mean those have done an easy revenue actually continues to grow. We are increasing the number of hospitals.
We are pretty excited about the spread of contracts that we are getting in hospitals around the world now in Latin America and in the Middle East as well as in Western Europe to our hospital solutions and that’s increased from our cath lab managed services or operating managed services as well. So, there is a strong focus in the company around that and that will deliver increased annuity revenue.
I think though what we found is that the bigger benefit and that’s the value, but the bigger benefit actually is the linkage with our new therapies, which is then driving incremental share in our new therapies and incremental pricing in some situation, where the innovation and value are directly linked.
And so that’s why we started to look at this in a much more integrated fashion and the contribution we can only value actually to our innovation program is greater than the annuity revenue although I’m not, by any means, saying we are going away from that in any way.
Thanks for that and just a follow-up, one of the drivers behind the response of acquisition hip and knee offering was your services business and the opportunity there. Any change if you can give us an update just on the performance of your hip and knee offering relative to internal expectations and the updated thoughts on the Medtronic’s drive to add breadth and scale to the orthopedic unit? Thanks a lot.
I think we are still in the early phases of that and I’m going to ask Geoff to kind of comment on risk management.
Yes, sure. As Omar said, I mean we are coming into the ortho market; we want to come in a disruptive way both from a device standpoint and from the services standpoint. And so we remained really encouraged about the opportunity, but it is taking a little longer than we thought, we are still working on this and we are getting good engagement from customers both on the device side.
Our knee is out there and we are seeing operate it on a number of centers and you know we have had 50 or so patients that has been implanted in, but again we are continuing to tweak the instrument design on that to get it exactly where we want it, and the hip is from an FDA approval standpoint several quarters out.
So we are continuing work on that and be encouraged by the demand for this value proposition on the device side and on the servicer side this is more of a care pathway offering, also very encouraged by the customers we have engaged with. You know several hospitals and also some outpatient surgery centers.
Again not ready to fully ramp this, because that takes in investment of capital that until we get the exact formula right to be disruptive and scale this in a profitable way we are not going to ramp it. So we are still working on this and will update you in the future on this.
Thank you.
Thanks Josh.
Okay. Thanks to all for your questions and on behalf of the entire management team I’d like to thank you again for your continued support and interest in Medtronic and we look forward to updating you on our progress and results for our full-year on our Q4 call which we currently anticipate holding on Thursday May the 24th. Thank you all very much.
This concludes today’s conference call. You may now disconnect.