Medtronic plc

Good morning. My name is Carol and I will be your operator today. At this time, I would like to welcome everyone to the Medtronic fourth quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, we will have a question and answer session. If you'd like to ask a question at that time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. At this time, I would like to turn the call over to Ryan Weiss-Fenning, Vice President, Investor Relations.

Thank you. Good morning and welcome to Medtronic's fourth quarter conference call and webcast. During the next hour, Omar Ishraq, Medtronic Chairman and Chief Executive Officer, and Karen Parkhill, Medtronic Chief Financial Officer, will provide comments on the results of our fourth quarter in fiscal year 2019, which ended on April 26, 2019. 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 today's 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 statements. In addition, the reconciliations of any non-GAAP financial measures are available on our website, investorrelations.medtronic.com. References to organic revenue growth exclude the impact of material acquisitions, divestitures, and currency. References to pro forma exclude the impact of material divestitures. Unless we say otherwise, quarterly rates and ranges are given on a constant currency basis, which compares to the fourth quarter of fiscal year 2018 after adjusting for currency. Unless we say otherwise, annual rates and ranges are given on a comparable constant currency basis, which compares to fiscal year 2018 after adjusting for currency and the fiscal year 2018 divestiture of the patient care, DVT, and nutritional insufficiency business. 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-GAP 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 ISHROK. OMAR?

THANK YOU, RYAN, AND THANK YOU TO EVERYONE FOR JOINING US. THIS MORNING, WE REPORTED A SOLID FINISH TO A STRONG FISCAL YEAR FOR MEDTRONIC. We delivered revenue growth, operating margin, and EPS all ahead of street expectations. Q4 revenue grew 3.6% organic without performance in RTG and MITG, offsetting challenges in CVG and difficult comparisons in diabetes. In addition, emerging markets continued to be a big driver, growing 12%. Our adjusted operating margin expanded 140 basis points, including currency. reflecting our entire organization's focus on enterprise excellence. On the bottom line, we grew adjusted diluted EPS 8.5% or 9.2% at constant currency. For the full fiscal year 2019, revenue, EPS, and free cash flow all came in above the guidance ranges we set at the beginning of the year as we executed against our commitments. Revenue of $30.6 billion grew 5.5% organically. Adjusted diluted EPS grew 10% on a comparable constant currency basis and 11.5% pro forma. Free cash flow of $5.9 billion grew 62%, much faster than earnings, reflecting the focus of our entire organization on improving this important metric. Last June, at our investor day, we set a target to improve our free cash flow conversion to 80% over the next two to three years, and we achieved it in just one year. FY19 free cash flow conversion was 83%, notably above our peer average. In FY19, we invested our capital into future growth platforms with a focus on returns, while at the same time increasing our returns to shareholders through share repurchases and a rising dividend. In Q4, we overcame significant challenges and relied upon the diversification of our business to deliver another quarter of solid top and bottom line results. Let's discuss some of the more important drivers of our performance, starting with our restorative therapies group, which had another very strong quarter, growing 6.5%. The launch of the MissouriX Stealth-navigated robotic system is off to a strong start and building momentum. We saw 26 systems this quarter, increasing our spine robotic market share to more than 70%, with an installed base that is now more than three and a half times that of our closest competitor. While Mazor sales are driving brain therapies growth, we believe they're also a good leading indicator of future growth of our spine division. as customers that are purchasing our Mesor system are also choosing to increase their share of Medtronic spine implants. In fact, in Q4, over 80% of our Mesor systems were sold to customers who chose to enter into combined capital and implant contracts, and the percentage of Mesor robotic cases that use our Medtronic spine implants continued to climb, exceeding 60% in Q4 a double-digit increase from Q3. When you combine our spine division sales with the sales of our capital equipment from our brain therapy division used in spine surgery, our spine division grew 5.6%, with the U.S. core spine business growing 11%. This is how our competitors report and a strong indication that our enabling technologies, robotics, navigation, imaging, and powered surgical instruments will help increase sales of spine implants. In RTG, I'd also highlight neurovascular and pain therapies. In neurovascular, our market-leading stroke portfolio continues to perform extremely well, with double-digit growth in stent retrievers, flow diverters, coils, and neuroaccess products. In pain therapies, we continue to gain market share despite the market's recent slowdown. Our paying STEM business achieved a number one share position in Q4 for the first time in two and a half years, driven by our differentiated IntelliSystem with its evolved workflow algorithm and snapshot reporting. In MITG, we grew 5.1%, driven by strength in advanced stapling and advanced energy. This is an impressive performance. as the surgical innovations business overcame challenges resulting from the shutdown of a major sterilization supplier's facility. I just cannot say enough about how our team stepped up and successfully managed this issue, quickly identifying alternative suppliers and rerouting our supply chain to get inventory to the right place at the right time. We expect to be back to full sterilization capacity late in Q1. In CVG, we grew 1.1%, as we faced challenges in drug-coated balloons and LVADs, as well as CRM replacement devices, given where we are in our replacement cycle. At the same time, multiple product lines showed exceptional strength in the quarter, with high teens growth from our RevealLink insertable loop recorder, and mid-teens growth from both our Micra transcatheter basing system and our Arctic Front AF ablation catheters. We also continued strong double-digit growth in our TAVR franchise. Our Tyrex anti-infection product grew in the high 20s, and we saw a notable pickup in its utilization following the rapid data presentation at the American College of Cardiology meeting in March. In diabetes, we grew 0.6%, an anomaly given difficult prior comparisons that we described on our last earnings call. Despite the challenging comparison, diabetes delivered mid-teens growth in international markets and our fourth consecutive quarter of triple-digit growth in standalone CGM. Looking ahead, we expect diabetes growth to re-accelerate in the first quarter and to be accretive to total company growth in FY20. At the ADA conference in June, we plan on hosting an investor meeting where we will update you on the progress of our pipeline and an exciting series of product launches we have planned over the next 24 months. Now, turning to emerging markets, our performance continues to be strong, growing 12% this quarter and representing 16% of Medtronic revenue. Our strength was diversified across all four groups and across multiple geographies, with China growing 13%, South Asia by 22%, and Southeast Asia by 20%. In addition, Middle Eastern Africa grew 13%, and both Eastern Europe and Latin America grew 8%. Our strategies of public and private partnerships, optimizing the distribution channel, and in some markets, localization of R&D and manufacturing are driving growth and differentiating Medtronic. Overall, it was another solid quarter, despite the noted headwinds, and a really strong year for Medtronic. But as we look forward, we're even more excited about what lies ahead as investments we've been making in our pipeline begin to pay off with accelerating revenue growth and ultimately value creation for our shareholders. We expect our top line to accelerate over the course of FY20 and into FY21, driven by the anniversary of recent headwinds combined with major products that are launching now or will launch over the next 12 months. It's worth highlighting some of these new term launches. I'll start with CVG. In our TAVR business, we're expecting low risk indication expansion in the US, as well as launches of our next generation TAVR valve, the Evolute Pro Plus. We intend to launch this valve across all sizes, including a large 34 millimeter valve. In CRHF, two of the biggest launches we have in FY20 are, number one, our Reveal Link 2.0 insertable cardiac monitor, and number two, our MicroAV transcatheter pacing system. Link two will feature Bluetooth connectivity, five-year battery longevity, enhanced sensing specificity, and the ability to monitor new physiological parameters. MicroAV, which is one of the most disruptive products in our pipeline, is expected to launch around fiscal year-end. It will enable us to access and disrupt over 55% of the eligible pacemaker market, up from 16% today. At MITG, we continue to make great progress with our soft tissue robotics program. We are now preparing for the initial launch in FY20, consistent with our commentary over the last several quarters. Our initial launch activities will occur outside the U.S. and support our clinical and regulatory strategies in geographies around the globe. I know everyone is anxious to see the robot, and for competitive reasons, we've obviously kept this program close to the vest. The good news is that we plan to host an analyst event this fall to show the robot. We're in the process of working on dates, and as soon as we get everything confirmed, we'll be sure to send the analysts an invitation. In RTG, as I mentioned earlier, the launch of the Mazora X stealth is off to a great start. and we expect this will continue to drive growth in our neurosurgery business, along with creating demand for our core spine implants. In neurosurgery, we're preparing for the launch of the Midas Rex MR8 drill platform in the first half of FY20, and we expect its differentiated features to drive share growth. In neurovascular, we just launched our next-generation stent retriever, Solitaire X, and our React 071 aspiration catheter. advancing our leadership in the treatment of ischemic stroke. In pain therapies, we expect a full launch in FY20 of our Accurian nerve ablation platform. In diabetes, we expect to file for a non-injective indication for our CGM sensor in early FY20, thereby allowing us access to the U.S. Medicare market for the 670G. In addition, in FY20, we expect to launch the MiniMed 780G our advanced hybrid closed-loop system with Bluetooth connectivity. The 780G will feature next-generation algorithms designed to improve time and range to over 80%. The system will reduce the burden of carb counting, enable remote monitoring as well as remote software downloads, and include several key enhancements to our CareLink system. What all this means for the company as a whole is that we expect our growth rate to accelerate over the course of FY20, with the second half growing faster than the first, as we, one, anniversary recent headwinds, and two, bring these innovative products to market over the next several quarters. Moreover, we expect our top-line momentum to build heading into FY21, as we get the increasing benefit of FY20 product launches that I just mentioned, as well as the benefit of several products that we expect to launch early next fiscal year, such as our Percept Deep Brain Stimulation System, the very first deep brain stimulator with sensing capabilities, our Diamond Temp Focal Ablation Catheter System, which will initially launch in Europe, and our InterStim Micro 3cc MRI-compatible Sacral Nerve Simulation System, which is fully rechargeable and 80% smaller than our current market leading device. While there isn't enough time today to go through the longer term pipeline, with all of these products launching, the takeaway that I want you to have is that each of our four groups has the potential to see accelerating growth in FY21. Let me now ask Karen to take you through a discussion of our fourth quarter financials. Karen?