Susan Vissers Lisa - Vice President-Investor Relations Michael F. Mahoney - President, Chief Executive Officer & Director Daniel J. Brennan - Chief Financial Officer & Executive Vice President Keith D. Dawkins - Global Chief Medical Officer & Executive VP.

Robert A. Hopkins - Bank of America Merrill Lynch David R. Lewis - Morgan Stanley & Co. LLC Michael Weinstein - JPMorgan Securities LLC Rick Wise - Stifel, Nicolaus & Co., Inc. Imron Shahzad Zafar - SunTrust Robinson Humphrey, Inc. Vijay Kumar - Evercore Group LLC Joshua Jennings - Cowen & Co. LLC Matt Miksic - UBS Securities LLC.

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2016 Boston Scientific Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. And as a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Susie Lisa. Please go ahead..

Thank you, Roxanne. Good morning, everyone, and thanks for joining us. With me on today's call are Mike Mahoney, President and Chief Executive Officer; and Dan Brennan, Executive Vice President and Chief Financial Officer.

We issued a press release earlier this morning announcing our Q1 2016 results, which included reconciliations of the non-GAAP measures used in the release.

We have posted a copy of that release as well as reconciliations of the non-GAAP measures used in today's call to the Investor Relations section of our website under the heading Financial Information. The duration of this morning's call will be approximately one hour.

Mike will provide strategic and revenue highlights of Q1 2016, Dan will review the financials for the quarter and then Q2 2016 and full-year 2016 guidance, and then we'll take your questions. During today's Q&A session, Mike and Dan will be joined by our Chief Medical Officers, Dr. Keith Dawkins and Dr. Ken Stein.

Before we begin, I'd like to remind everyone that on the call, organic revenue growth is defined as excluding the impact of sales from divested businesses, changes in foreign currency exchange rates and sales from the acquisition of the American Medical Systems Male Urology portfolio over the prior year period.

Also of note, this call contains forward-looking statements within the meaning of Federal Securities laws, which may be identified by words like anticipate, expect, believe, estimate, and other similar words.

They include, among other things, statements about our growth in market share, new product approvals and launches, clinical trials, cost savings and growth opportunities, our cash flow and expected use, our financial performance including sales, margins, earnings and other Q1 2016 results and Q2 and full-year 2016 guidance as well as our tax rates, R&D spend and other expenses.

Actual results may differ materially from those discussed in the forward-looking statements. Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs filed with the SEC.

These statements speak only as of today's date and we disclaim any intention or obligation to update them. At this point, I'll turn it over to Mike for his comments.

Mike?.

Thank you, Susie, and good morning, everyone. We continue to perform against our strategic planned goals, and we're encouraged by the consistent strong execution of our global team.

The success of our new product launches across many of our businesses is helping us accelerate expansion into faster growth markets and deliver solutions that address unmet clinical needs.

We continue to believe that Boston Scientific is uniquely positioned to deliver differentiated shareholder value through durable mid-single digit organic revenue growth and double digit adjusted EPS growth through our ongoing operating margin and proven initiatives.

We're very excited about the excellent start to 2016 and our plans to build upon our global momentum in 2017 and beyond. We posted excellent result this quarter with total operational revenue growth of 13% and organic revenue growth of 8%, excluding the impact of the AMS acquisition benefit.

Four of our seven businesses grew revenue double digits organically and we, in turn, leveraged that revenue growth to drive 24% adjusted operating income growth, resulting in adjusted operating margin of 25.1% and a 260 basis point improvement year-over-year.

We delivered adjusted EPS of $0.28, exceeding the high end of guidance and representing 31% growth including the negative impact from foreign currency. Importantly, we're increasing our 2016 guidance for revenue, adjusted operating margin and adjusted EPS.

We're increasing our full-year organic revenue growth guidance from 4% to 7% previously to 6% to 8% full-year operational revenue which includes the benefit of AMS. It is being increased from 7% to 10%, to 9% to 11%. We're increasing our adjusted operating margin guidance to 24% to 24.5%.

And we're also increasing our adjusted EPS guidance up $0.03 over our prior range to $1.06 to $1.10 which now represents 14% to 18% growth. And importantly, this EPS guidance includes an expected $0.05 or $0.06 negative impact from foreign exchange. I'll now provide some highlights on Q1 results and the 2016 outlook.

And in my remarks, all references to growth are on a constant currency, organic, year-over-year basis excluding the benefit of AMS unless otherwise specified.

Our Q1 revenue growth of 8% was broad-based across our businesses and regions, led again by exciting new product launches, continued global expansion and execution of our category leadership strategy.

With the exception of the 3% decline in our Cardiac Rhythm Management sales, all of our other businesses delivered strong organic growth led by Endo at plus 11%, Urology and Pelvic Health, at plus 12%, Interventional Cardiology at 13%, and Peripheral Intervention at 14%. We also saw strong growth globally with Asia delivering 14%, U.S.

7%, and Europe up 6%. Emerging markets sales grew 21% including China sales at 19%. The MedSurg businesses all accelerated from Q4 of last year and delivered adjusted operating margin of 32.6%, up 360 basis points year-over-year.

Endoscopy revenue grew 11% driven by our single-use SpyGlass Digital DS visualization system, the AXIOS stent for drainage of pancreatic fluid and the limited launch of our next generation hemostasis clip, the Resolution 360.

We're also extending our category leadership in endoscopy by developing commercial capabilities in the emerging markets and adding a focus in pulmonary, which helped drive 15% growth in bronchial thermoplasty as it recently launched in both Japan and China.

Urology and Pelvic Health organic growth accelerated at 12% and was broadly based with double-digit growth in kidney stone, pelvic floor and surg/gyn. Our legacy business grew 15% internationally led by 36% growth in the emerging markets.

The AMS remediation and integration are on track and were delivered against our synergy commitments and the global teams are now fully integrated. As expected, standalone AMS sales declined slightly in the quarter and we expect inventory to be appropriate levels in second quarter.

And LithoVue, an innovative single digital ureteroscope that provides customers with visualization and navigation capabilities will be featured in multiple presentations next weekend at the American Urology Association meeting in San Diego.

Neuromodulation revenue growth accelerated 8% in first quarter and sales were driven by the market leading Spectra platform, the most flexible spinal cord stimulation system in the market, the launch of Precision Novi for the primary cell non-rechargeable market, and the solid contribution from our Vercise, our emerging deep brain stimulation platform.

Our U.S. DBS trial is making great progress and we expect a launch in the U.S. in late 2017 or early 2018. In Cardiovascular, our segment sales grew 14% in the quarter and delivered adjusted operating margin at 34.1%, up over 350 basis points both sequentially and year-over-year.

Peripheral sales grew 14%, on strong results in atherectomy, thrombectomy, and our Innova bare-metal and Eluvia drug-eluting stent platforms. The legacy (07:52) Peripheral business continued its recent impressive trend as we grow share in the atherectomy market and see very strong demand for our new Zelante deep vein thrombosis platform.

The Eluvia IDE trial called IMPERIAL is on track to complete enrollment by late 2016 or early 2017, and we look forward to presenting 24-month data from our initial trial, MAJESTIC, which had a 12-month patency rate of 96.1% later this year.

We're also seeing continued progress with our Lutonix distribution agreement and encouraging EU sales of our Ranger drug-coated balloon. We're excited to be the only company developing leading drug-eluting technologies globally on multiple platforms, providing physicians with a variety of tools for treating complex peripheral vascular disease.

Interventional Cardiology turned in another double-digit quarter at 13% growth, led by complex coronary drug-eluting stents, PCI guidance, and Structural Heart. SYNERGY had a very strong quarter and we estimate that we added to our market-leading share position in the U.S. and regained market leadership position in Japan.

DES sales grew 14% in the quarter and we believe SYNERGY is on track to represent approximately 50% of our U.S. DES revenue mix by the end of the year 2016.

PCI guidance again grew double digits on continued share gains on intravascular ultrasound, and we're encouraged by strong feedback and the ease of use of our Comet fractional flow reserve platform. Our leading portfolio solutions for complex high-risk PCI patients continues to drive global growth as well.

The 13% IC revenue growth was also fueled by our strengthening Structural Heart business which includes our Lotus transcatheter aortic valve and a WATCHMAN left atrial appendage closure device. We believe we are uniquely positioned to drive long-term growth in these two fast-growing markets via our differentiated platforms.

Our Lotus valve continues to gain share in Europe, and we are investing significantly to further develop our capabilities.

Most recently, best-in-class paravalvular leakage rates were reported for Lotus at ACC last month with pre-discharge rates of 0.4% for moderate paravalvular regurgitation in the first 750 patients of the respond post market study. We also continue to plan for the U.S. launch with the LOTUS EDGE delivery system at the end of 2017.

And we also completed an enrollment in our REPRISE Japan trial where we targeted a 2018 launch. Importantly, the LOTUS EDGE features a 14 French compatible sheath, more flexibility, simplified deployment and our new depth guard technology which controls depth of the valve in a left ventricular outflow tract.

Studies to demonstrate an improved permanent pacemaker rate with this optimized technique will begin enrollment in mid-2016. Also, in Structural Heart, WATCHMAN sales were strong and procedure growth and new account openings both helped by the finalized national coverage determination.

We're developing additional WATCHMAN capabilities, primarily by adding resources in field clinical support, market development and training courses. Implant success rates and patient outcomes remain very high quality due to our controlled rollout and proven training programs. In the ACC earlier this month, Dr.

David Holmes of the Mayo Clinic presented data from the first 1,600 patients implanted with the WATCHMAN commercially and reveals 96% procedural success and an average procedure time of 50 minutes. So, overall, we're very pleased with our progress in our 2016 revenue guidance of $175 million to $200 million in Structural Heart revenue.

Rhythm Management segment sales declined 2% in the quarter, yet delivered adjusted operating margin of 16.8%, which is up 290 basis points sequentially as improving profitability remains a core focus. In CRM as anticipated, sales declined 3% as we faced competitive launches in the U.S. and replacement cycle headwinds.

We're optimistic for a second quarter and second half 2016 improvement in our CRM performance. Also as projected, we received two key FDA approvals in March for our ACUITY X4 Quad CRT lead and earlier this week for our ACCOLADE brady MRI platforms including the INGEVITY MRI pacing lead.

Pacemaker sales grew 3% globally aided by our recently launched X4 CRT-P Quad device while worldwide ICD sales declined 4%. We continue to be very pleased with the performance of the EMBLEM S-ICD, which is enjoying strong growth in both Europe and the U.S. and is currently launching in Japan.

In electrophysiology, we're encouraged by double-digit growth in Europe led by our RHYTHMIA installations and the recent launches of the IntellaNav OI and IntellaTip MiFi OI ablation catheters.

In the U.S., we're now launching our Blazer Open-Irrigated Therapeutic Catheter for the treatment of Type 1 atrial flutter as we continue to invest in the franchise, launch a portfolio of navigation-enabled therapeutic catheters and build capabilities in capital equipment sales and service.

We have a strong RHYTHMIA customer pipeline as many of our new platform enhancements scheduled for release in 2016. So, to wrap up, our company had an excellent quarter. First quarter results reflect the strength of our portfolio, our ongoing investment and faster growth markets and our globalization efforts.

More importantly, we are well positioned to continue our strong performance in 2016 and beyond. I would like to thank our employees for the continued winning spirit and their commitment to the company. Now, let me turn the call over to Dan for a more detailed review of our financials..

Thanks, Mike. In Q1, we generated organic revenue growth of 8% versus our 4% to 6% guidance range and adjusted EPS of $0.28, exceeding our guidance range of $0.23 to $0.25, and representing 31% year-over-year growth. Adjusted EPS of $0.28 includes a slightly lower than expected tax rate for the quarter due to some discrete tax items.

The strong performance in Q1 was driven primarily by revenue growth upside, gross margin expansion and a lower SG&A rate versus the prior year. And as Mike mentioned, given the outperformance in Q1, we're raising full-year guidance for revenue growth, adjusted operating margin and adjusted EPS.

Consolidated revenue of $1.964 billion represented operational revenue growth of 13% which excludes the impact of a $58-million headwind from foreign exchange. Excluding an approximate 500-basis-point contribution from the AMS Male Urology portfolio acquisition, organic revenue growth was 8% in the quarter.

On an as-reported basis, revenue grew 11% year-over-year. Adjusted gross margin for the first quarter was 72.3%, increasing 100 basis points year-over-year. The increase resulted primarily from cost improvements driven by our value improvement programs and favorable mix, partially offset by price.

And similar to Q4 of 2015, the impact of foreign exchange on gross margins was negligible on the quarter. We continue to expect full year 2016 adjusted gross margin to be in the range of 72% to 73% which we forecast to include approximately 50 basis points of unfavorable FX.

Our Q1 2016 adjusted operating margin of 25.1% represent a 260-basis point improvement over Q1 2015 which marks the seventh consecutive quarter in which we've expanded adjusted operating margin by 100 basis points or more.

There was very modest reinvestment of the medical device tax benefit in Q1, which represents some timing favorability in the quarter, but we are committed to reinvesting substantially all of the full year benefit during the year.

Thus, adjusted SG&A expenses were $698 million or 35.5% of sales in the quarter, down 150 basis points year-over-year with some of the benefit due to our targeted initiatives focused on reducing SG&A, and a portion due to the more modest medical device tax benefit reinvestment I just mentioned.

Our Q1 adjusted SG&A rate was the lowest in the last 12 quarters, and we continue to believe our full-year rate will be between 35.5% and 36.5%, which, at the midpoint, would be a 140-basis-point reduction compared to 2015.

Adjusted research and development expenses were $209 million in the first quarter or 10.7% of sales, which is roughly flat year-over-year. This is another key area for us to reinvest the benefit of the medical device tax suspension. As a result, we expect our full-year 2016 adjusted R&D rate to be between 11% and 12% of sales.

Royalty expense was 1% of sales in both Q1 of this year and last year and consistent with our guidance. On an adjusted basis, operating income was $494 million in the quarter or 25.1% of sales, up 260 basis points year-over-year.

Q1 adjusted operating income grew 24% year-over-year with all three reportable segments expanding adjusted operating margin by at least 250 basis points over Q1 of last year. Of particular focus is Rhythm Management, which delivered an adjusted operating margin of 16.8%, which is up from Q4 2015's 13.9% and the full year 2015 rate of 15%.

For the first half of 2016, we expect Rhythm Management adjusted operating margin to be slightly above 16%. In the second half of 2016, we expect Rhythm Management adjusted operating margin to increase roughly 200 basis points over the first half rate.

This second half improvement is expected to result from realizing the full benefit of 2016 product costs, leveraging the improved top line performance expected of the global CRM and EP business, and realizing the full benefits of our plant network optimization program which is transferring a portion of our EP manufacturing to lower-cost locations.

We continue to believe Rhythm Management is on track to deliver an adjusted operating margin of 20% in 2017. GAAP operating income which includes GAAP to adjusted items of $201 million, was $293 million in Q1 2016.

The primary GAAP to adjusted items for the quarter included amortization expense of $136 million, restructuring related charges of $13 million, acquisition related SG&A expenses of $14 million, and litigation related charges of $10 million. Our total legal reserve was $1.895 billion as of March 31, 2016. Now I'll move on to other income and expense.

Interest expense for the quarter was $59 million compared to $56 million in Q1 last year and the increase was primarily due to the incremental debt raised in Q2 of last year to finance the AMS Male Urology portfolio acquisition. Our average interest rate was 4% in Q1 2016 compared to 5.1% in Q1 last year.

And the lower interest expense rate in Q1 this year was primarily due to lower average cost of debt resulting from the senior notes refinancing which we completed in Q2 last year. Other expense was $10 million and this consisted primarily of foreign exchange losses and investment losses incurred during the quarter.

Our tax rate for the quarter was 11.4% on a reported basis and 11.8% on an adjusted basis. Excluding discrete tax items in the quarter, our adjusted tax rate would have been 13.5% and we continue to expect our full year 2016 adjusted tax rate to be approximately 14%.

On a reported GAAP basis, Q1 2016 EPS was $0.15 and includes net charges and amortization expense totaling $176 million after tax. GAAP EPS of $0.15 compares to break even in Q1 of last year. Moving on to the balance sheet, DSO of 60 days increased one day compared to March of last year.

Days inventory on hand of 162 days was down four days compared to March of last year and one day from year end 2015. Capital expenditures were $59 million in the quarter compared to $46 million in Q1 2015. And as a reminder, we expect full year 2016 capital expenditures to be roughly $350 million.

This is $100 million higher than the full year 2015, primarily due to the construction of our new manufacturing facility and distribution center in Malaysia. And beyond 2016, we expect capital expenditures to return to our more historical run rate of approximately $250 million annually.

Adjusted free cash flow for the quarter was $250 million compared to $118 million in Q1 2015, and this strong start gives us confidence in our adjusted free cash flow target of $1.5 billion which represents 10% growth, and better visibility to our stretch goal of $1.6 billion which would represent 17% growth, even in a year with an incremental $100 million in CapEx spend as I mentioned.

We're also continuing to pursue inventory management initiatives designed to improve the working capital contribution to cash flow. In Q1, we used cash primarily to fund previously agreed legal settlements as well as business development activities.

Consistent with our goal of returning to pre-AMS debt leverage by year end 2016, we still expect to repay $250 million of bank term loans by the end of this year. As of March 31 this year, we had cash on hand of $338 million. Near term, our capital allocation priorities are to prepay debt, manage our contingencies and pursue tuck-in M&A.

We ended the quarter with 1.370 billion fully diluted weighted average shares outstanding. Consistent with our prior guidance, we expect our share count to increase by roughly 5 million per quarter through the end of the year, as we plan to keep the buyback suspended for the balance of 2016.

We would expect this to result in a fully diluted weighted average share count of approximately 1.380 million for the full year 2016. I'd like to conclude with revenue and earnings per share guidance for Q2 and full year 2016.

For the full year, we now expect consolidated revenue to be in the range of $8.075 billion to $8.225 billion which represents year-over-year growth of 6% to 8% on an organic basis, 9% to 11% on an operational basis which includes the AMS revenue, and 8% to 10% on a reported basis.

As a result of a stronger dollar, at current rates we expect foreign exchange to be a headwind of approximately $100 million for the full year 2016. As we move through 2016, we are reinvesting the benefit of the medical device tax suspension into innovation to help treat patients and sustain top line growth over the long-term.

Focus areas will include R&D efforts including clinical trial spend as well as market development, and in Q2, we've already begun to ramp this reinvestment, primarily in the areas of Structural Heart with both Lotus and WATCHMAN, and other durable long-term revenue growth platforms such as the EMBLEM S-ICD, our electrophysiology portfolio, deep brain stimulation and other fast-growing adjacent markets.

In addition, Q2 is our seasonally high SG&A spend quarter, partially due to the highest tradeshow activity of the year.

Thus, for Q2 2016, and consistent with prior years, we would expect a sequential decline in adjusted operating margin to a range of 23% to 24% which, at the midpoint, represents 140 basis points of improvement year-over-year, and puts first half 2016 adjusted operating margin at 200 basis points, up versus the first half of last year.

For the full year 2016, we are raising our adjusted operating margin guidance from 23.5% to 24.5% to a range of 24% to 24.5% now, which also represents a 200 basis point year-over-year gain. This gain is from operational efficiencies and not the med device tax as we are reinvesting the benefits.

Turning to adjusted EPS, we now expect full year adjusted EPS for 2016 to be in a range of $1.06 to $1.10, representing 14% to 18% adjusted earnings growth and an increase of $0.03 to each end of the range compared to our prior guidance. Now, let me walk you through our updated assumptions for the FX impact on adjusted EPS.

Our initial 2016 guidance assumed $0.02 of unfavorable FX on adjusted EPS in Q1 and $0.06 for the full year. In Q1, the combination of exchange rate movements and timing of hedging contracts resulted in an unfavorable impact of $0.01, and we now believe the full year 2016 unfavorable impact will be $0.05 to $0.06.

In addition to the $0.01 in Q1, we would expect the remaining $0.04 to $0.05 of unfavorable FX for the full year to break down into $0.02 in Q2 and $0.02 to $0.03 in the second half of 2016. Excluding the unfavorable foreign exchange, our full year adjusted EPS guidance range represents growth of 19% to 24%.

On a GAAP basis, we expect EPS to be in a range of $0.64 to $0.69. Now turning specifically to Q2 2016, we expect consolidated revenues to be in a range of $2.010 billion to $2.060 billion. If current foreign exchange rates hold constant, the headwind from FX should be approximately $25 million, or 135 basis points relative to Q2 of last year.

We expect consolidated Q2 sales to grow year-over-year in a range of 6% to 8% organically and 11% to 13% operationally. For the second quarter, adjusted EPS is expected to be in a range of $0.25 to $0.27 per share and GAAP EPS is expected to be in a range of $0.14 to $0.17 per share.

Please check our Investor Relations website for Q1 2016 financial and operational highlights which outlines Q1 results as well as Q2 and full year 2016 guidance, including P&L line item guidance. So, with that, I'll turn it back to Susie who will moderate the Q&A..

Thanks, Dan. Roxanne, let's open it up to questions for the next 30 minutes or so. In order to enable us to take as many questions as possible, please limit yourself to one question and one follow-up. Roxanne, please go ahead..

Thank you. Our first question comes from the line of Bob Hopkins, Bank of America. Please go ahead..

Hi, thanks and good morning, and thanks for taking the questions. So, to start out, Mike, obviously this is one of the best growth quarters you guys have had in a while, and congratulations on the great start to the year.

I was wondering if you could talk to us a little bit about just the broader macro environment and the health of the markets you're in, and maybe just talk about the factors driving growth.

And I would really appreciate it if you could talk a little bit about Uro and Endo as well and some of the products that are driving growth in that division because obviously that's where you had some really nice outperformance Thanks..

Yep. Yeah. Good morning, Bob. Thanks for this question. Overall, the market growth we see consistent with what we've mentioned in the past, kind of playing in 3% to 4% growth markets overall for Boston Scientific.

And similar to our Investor Day presentation, we're investing in the faster growth markets that would basically accelerate the growth profile another 100, 200 basis points in the markets that we serve.

So, with kind of similar growth rates in IC and Cardiology and CRM kind of in the low-single-digit range and more in the 4% to 5% market growth rates for our MedSurg. But I guess what we're most proud of is really, across the board, with the exception of CRM, we're growing – and EP, we're growing significantly faster than our competition.

And that's really driven by our product launches and really excellent global execution. We're really pleased with the growth in Asia. Profit almost 15%, very strong growth in Japan, very strong growth in Europe. So, across our businesses or regions, our teams are really delivering.

In terms of your question on Endo and Urology, we're very thoughtful about the AMS acquisition and we're seeing the benefits of the commercial synergies between those organizations given the additional commercial footprint that we have as well as the broadness of the bag.

And you're seeing that with a really acceleration of our legacy Urology division, in part due to the synergies of our AMS business. We continue to invest in physician training for our Stone Institute, and we continue to benefit from the category leadership based on the premise of the AMS acquisition.

In Endoscopy, it's a very innovative division, and we continue to lead innovation with our digital SpyGlass system which is really a terrific platform for us that we can continue to build from, and that also helps drive pull-through of our core portfolio.

So, the R&D teams are executing as well as the commercial teams, and we continue to be committed to our durable mid-single-digit revenue growth, our operating margin expansion, and our double-digit EPS growth over the long term..

Great. Thanks for that. And then a follow-up maybe for Dan.

Dan, can you just help us? Was there any, in your view, selling day mismatch this quarter versus a year ago? And then on the operating margin performance in the quarter, it sounds like over the course of the rest of the year, there's going to be some incremental spending because obviously you're guiding to a lower operating margin than you started out in Q1.

So, maybe just comment on the selling day year-over-year, and then also maybe quantify and describe some of the extra spending that you're going to be undertaking here in the remainder of the year. Thank you..

Sure, Bob. First, quickly on the calendar, no, we don't believe there's an extra impact in Q1. There was obviously a leap year day. But then when you factor in the timing of the Easter holiday, believe it's a true 8% growth for the quarter organically.

Relative to operating margin, so I think when you look at Q1 at the 25%, and then you look at the 24.25% which is the midpoint for the full year, one of the key changes there is, as I mentioned in my prepared remarks, the reinvestment of the medical device tax benefit over the rest of the year.

So, little delayed in Q1 getting off to that start, but committed to reinvesting the entire amount for the rest of the year, so that's one. And I think there's R&D timing as well in Q1, so, our Q1 R&D was 10.7%. If you look at the guidance range, you'd see 11.5% at the midpoint.

Part of that's the med device tax reinvestment, and part of it's just the timing of overall R&D. So, that's another 80 basis points there going from the 10.7% in Q1 to the overall average of the 11.5% for the full year.

So still, as you look at the 24.25%, still significant growth versus last year, 190 basis points, and feel good that we're striking a good balance between delivering differentiated adjusted operating margin and investing for a continually growing top line for the future..

Great. Thanks very much..

And our next question comes from the line of David Lewis with Morgan Stanley. Please go ahead..

Good morning. Just a few quick questions. Mike, I guess the issue for us this quarter is that we expected an inflection quarter sometime this year. Obviously, it's coming earlier. But I guess as we think about the balance of the businesses, we actually thought there could be acceleration from whatever the growth rate was in the first quarter out.

And I wonder, can you point us to tailwinds, headwinds in the business throughout the balance of the year based on this thought of acceleration throughout the year? And then, with specific attention, perhaps, within cardiovascular, you talked about those businesses, but in terms of stents, WATCHMAN, Lotus, what's really driving that strength in cardio? So, acceleration and then, particular cardiovascular, and I have one quick one for Dan..

That is a multipoint question. Thanks, Dave. Just overall we are pleased with our performance in the quarter. We took the guidance up from 4% to 7%, to 6% to 8% organically, not impacting AMS. And as I mentioned, the businesses and regions are performing at a nice level.

As we look, we obviously anticipate a solid second quarter given our 6% to 8% guidance in second quarter. We do face a couple headwinds throughout the year. We do anniversary some key product launches in our Peripheral Vascular as well as our Endoscopy business. We do anticipate some Japan reimbursement cuts that we'll be working through.

And we're very bullish on our WATCHMAN program, but we're also anniversarying the initial launch. So, there are a few headwinds but overall, we have an excellent product cadence. The business is performing well. And we feel comfortable with raising our guidance to 6% to 8%. On the Cardiology side, we're seeing excellent – our strategy play out.

We continue to diversify our Interventional Cardiology portfolio. As we've talked in the future, we really see, in the future, about a third of our business coming from Structural Heart, about a third from Imaging and complex coronary, and about a third from drug-eluting stents.

And across those three slices of the pie, we're doing a nice job of delivering in the short-term and investing for the long-term. Our SYNERGY program is really going as planned. We're on track for SYNERGY to represent about 50% of our mix at a appropriate premium price.

And physicians continue to see the benefit of the deliverability and the excellent zero-step thrombosis at beyond the first 24 hours, so excellent clinical data there. Our Complex Coronary business continues to do well as well as our imaging business. And in Structural Heart as Dan mentioned, I'm actually over in Korea as we speak here.

We just had a live case from Australia today and just physician reaction to the deliverability and low PVL rates of our Lotus valve continues to be very high.

And so, we are really increasing our investment in that category, given the size of the market potential in the future, and also given the differentiation that we believe that Lotus delivers and our commercial capability. So, hopefully that gives you a bit of flavor.

We're pleased with our raise on the guidance and we'll manage our headwinds to continue to hopefully deliver revenue growth at the top tier of our sector..

All right, Mike. That's great color. And Dan, I hate to bore you with a nit here, it was such a good quarter. But we're actually getting your constant currency growth rate this quarter as even higher than you reported. We have a $58 million FX headwind for a 3.3% headwind versus 2%.

Are we missing something here in the quarter? And we can take it offline if we're off our rocker..

No, David. I think it's just the rounding of 3%. The way we see it is 3%. So, it's just a little bit in the rounding of the numbers..

Okay. Thanks so much..

Yep. Thanks, David..

Our next question is from the line of Mike Weinstein, JPMorgan. Please go ahead..

Okay, guys.

So, when's the last time Boston Scientific grew 8% organic? You guys know the answer?.

I'll bet you Dan knows. I don't..

I'd say 10 years, Mike..

2Q 2005..

That's right..

There you go. Let's do it again..

What strikes me in particular is if I look at the U.S. performance and I back out CRM and I back out AMS, I'm getting to about 15% growth for the U.S. business in aggregate, which is obviously very, very strong.

So, I want to circle back first to Bob's question just to make sure you don't think that there's anything kind of unusual going on in selling days, and I heard your answer there. But we are seeing this particular strength, and not just Boston Scientific.

We've seen this in some other end markets over the course of the past week that have come in stronger.

Anything that you think is going on that showed up this quarter in particular that is driving this real increase in volumes? And I'm speaking not just of your own performance, but do you have any theories on the broader market looking stronger this quarter than we've seen in a while?.

Yeah. Good morning, Mike. We don't see a big change in the market from our peers that have reported. We were seeing a 1% to 4% growth rate with the exception of one, which is higher than ours. So, we do feel like we're growing faster than most of our peers.

And I also think we're going through maybe a bit of a cycle of some good innovation and some mix benefit.

We clearly see a lot of enthusiasm, for example, for S-ICD, despite our headwinds in the near term on MRI, which we're pleased with the pace for approval, we're getting nice mix benefit from S-ICD as well as global uptick of the S-ICD, particularly in Japan.

And I think our strategy of category leadership, which we've really stressed for a number of years now is starting to pay off. Many of the large systems in the U.S. are willing and wanting to partner with Boston Scientific given our current platform as well as the pipeline that we've committed to. So, I think the markets are steady.

We have a nice pipeline that's helping some of our mix benefit. And I think, importantly, we're really building up our capabilities outside the U.S. Our Asia business grew very well. And just this year, we've done a grand opening for our Malaysia plant. We have a new R&D center in India. We have new training centers.

So, our capabilities in Asia are significantly stronger than they used to be. So, that's also helping to strengthen our business..

Mike, if I look at the Interventional Cardiology business in the U.S., if I look at the Peripheral Vascular business in the U.S., I mean, both just had exceptional quarters; Interventional Cardiology up 21%, Peripheral Vascular up 13%.

Would you mind just peeling the onion a little bit and help us understand how those businesses are doing as well as they are? Because obviously, that's well above expectations..

Yeah. I think it really speaks the category leadership. So, two words that get used a lot in the industry, but I think we're delivering it. We have an excellent portfolio. Interventional Cardiology, as I mentioned, I'm in Korea here at this large conference. And we believe we have the best drug-eluting stent in the marketplace.

We have an excellent imaging platform with IVUS and we're launching FFR. We're the leaders in chronic total occlusion. We have the WATCHMAN product for interventional cardiologists who want to implant it, and a very promising and differentiated TAVR valve.

So, I think our category leadership strategies are working in cardiology, and similarly in Peripheral Vascular with our – I won't go through all of them, but the Bayer acquisition, really has exceeded the investment models that we've had in terms of synergies and growth.

And our drug-eluting stent platforms with the stents and the balloon are doing quite well..

I'll let some others jump in, but congratulations, guys, on a obviously a fantastic quarter..

Thanks, Mike. Appreciate it..

Thank you..

And our next question is from Rick Wise, Stifel, please go ahead..

Good morning, Mike. Good morning, everybody. Let me turn to one area of weakness. Obviously, CRM, High Power down 4%, Mike. Can you talk a little bit more about that? And specifically, you called out the replacement headwinds. You've been talking about the replacement headwinds in CRM and High Power for a while.

My sense is from your comments in the past is that that – it's going to shift more to neutral or even a tailwind at some point in the not too distant future.

Can you give us any more concrete thoughts about when that happens and the kind of drag it is now and how that could change as we look to 2017 and beyond?.

Yeah. Thanks for the question, Rick. Just regarding our CRM performance broadly and I'll comment on the replacement headwind. It's really as we projected almost a year ago. We knew we were going to have some challenges in the U.S.

Our Asia business, our Japanese business and our European business in CRM are doing quite well and growing either at or above market. And the two launches will help us improve growth, we anticipate, in the second quarter and for the second half.

And also the team continues to improve operating income margins despite negative growth in the quarter which is good to see. On the replacement headwinds, we don't have any additional breakdown of data that we're going to provide on this call.

But I will say – and I think in the future we'll consider providing some additional detail so we can quantify that – but similar to our last call, I do think we have brighter days ahead of us in CRM, with a pacer MRI approval, with a Quad approval. We've also initiated our MRI approval for our defib platform which we see getting approval in mid-2017.

So, the portfolio is very strong. We'll have EMBLEM MRI likely approved in U.S. in third quarter. And so, we do see the headwind of the replacement cycle improving at the end of 2016, which will help us in 2017. So, with a product cadence and improve replacement cycle headwind, we see some brighter days for our CRM business.

And in the future, we'll look at quantifying more precisely some of the benefit of that tailwind on the replacement cycle..

Thanks. And as a follow-up, maybe turn to WATCHMAN. Are you inclined to give us any kind of numbers for the quarter? You're adding field support; you're on track for the next 100 accounts. Was there any stocking? Maybe any more granular detail about the progress you're making and the impact of the NCD? Thanks again..

Yep. WATCHMAN team is doing a nice job. Most importantly, we continue to believe in our $175 million to $200 million in Structural Heart revenue guidance. We're on track as planned to open up another 100 centers, and we, again, continually have very thoughtful training program.

The NCD's a very good outcome for us and it really reassures and strengthens our view as to the potential size of the market. And we invest, as you mentioned, in clinical specialists. We're investing in physician training and really to build up the market the appropriate way.

So, we're really delivering as planned and we're very pleased with the outcomes and the enthusiasm with WATCHMAN globally..

Thanks again..

And Rick, I would probably just add one little bit of color on the replacement headwinds as well. It's kind of a tale of two pieces within the franchise there.

So, as Mike said, as we head into the end of 2016 and more likely 2017, you'll see the – more of a tailwind on the CRT-D side – and then it's more of an ending 2017 into 2018 on the traditional transvenous ICD side. So, there's a little bit of a bifurcation on that one. So, a little bit extra color..

Got it. Thanks, again..

Yep..

And our next question comes from the line of Bruce Nudell, SunTrust. Please go ahead..

Hi. Good morning. This is actually Imron Zafar in for Bruce. Thanks for taking my question. I wanted to ask a couple questions about the TAVR business.

Can you just talk about where you think you are in Europe vis-à-vis market share and where you think you can go in the next, call it, couple years in that geography? And then also, if you could just give any commentary around this litigation with Edwards on transcatheter valves in the U.S.. Thanks..

Yeah. So, on our Lotus program, as Dan outlined, we continue to invest a significant portion of our med device benefit in our Structural Heart franchise. In terms of share, we don't break out our share specifically in Europe. We are more limited versus some of our peers in terms of number of countries we're selling into.

So, we're waiting to get reimbursement still for France. So, that's a large market that will open up for us in the future. But we continue to grow above market in the markets that we're serving, particularly in Germany.

And the physician feedback continues be very strong on the low PVL rates which we believe are best-in-class and really the control and fully achievable and repositional capabilities of the platform. So, we continue to invest and we're excited about the enhancements of our depth guard technology that I mentioned in the prepared comments.

Keith, any additional comments you want to mention on Lotus?.

Yes. So, we've got a pretty rich number of presentations, the EuroPCR next month on Lotus; late-breaking trial on 1,000 patients from the response study, bicuspid valve subgroup from the response study, subclavian approach from the response study, a Lotus symposium, and on the stent side the EVOLVE first human-use five years data for the first time.

And then, obviously, as we said at ACC, coincident with London Valves later this year, we're anticipating launching LOTUS EDGE which has a number of features including 14 French compatibility, more simple implantation procedure, more flexible device, and the depth guide technology which reduces the amount that the valve dips into the left ventricular outflow tract during deployment.

So we have a lot going on with Lotus and then the additional sizes of 21 and 29 millimeter. And we've completed, as Mike said in his statement earlier, the REPRISE Japan study which is important..

Okay.

And can you just give any color on the litigation with Edwards?.

Yeah. Yeah. We're not going to comment on our pending legal matters..

Okay. Thank you very much..

Yep..

Our next question is from the line of Vijay Kumar, Evercore. Please go ahead..

Hey, guys. Congrats on a great quarter. So maybe, the first question I had was maybe a housekeeping question on a – you mentioned ICD declines and double-digit growth in stents.

Was that in both geographies? When you say stents up double-digits, was that double-digit in both geographies, U.S., o-U.S.? And similarly on ICDs, I'm just wondering whether declines was only in the U.S.

or did you see declines in o-U.S.?.

So, Dan, do you want to comment on that one?.

Yeah, Vijay, thanks for the question. We're not going to get too specific in terms of the growth rates by geography. Obviously, we think of Japan, we had approval for SYNERGY early in the quarter, so we're off and running there. We're on offense there. We had SYNERGY in the middle of the fourth quarter in the U.S., so strong growth there in stents.

And Europe which has had SYNERGY for a long time is still doing very well. So, no, I don't want to quote specific numbers for each of the regions there. And I think, overall, I think Mike's commentary around CRM was pretty detailed, that if you think of – we're doing very well in Japan. We're doing well in Europe.

And the CRM softness has been more of a U.S. product gap issue and we've hopefully solved a couple of those product gaps with the recent Quad approval and with the MRI safe brady approval..

Understood. And I just had one follow-up, Dan. When you think about the longer-term operating margin rate, I know you guys have laid out the 25% margin targets for 2017.

Can you just talk about the leverage and your confidence in bending the SG&A line? Because it feels like just looking at the trends, the 25% might be – there's upside to that 25% number for 2017.

And then any comments beyond 2017?.

Sure. We've stated publicly before that by 2020 we believe we'd be at 27% to 28% operating margin, just at operating margin as a company, and the 25.1% is a great start to the year. But as I mentioned, the average for the year should be between 24% and 24.5%.

And as always, we seek to strike that balance between delivering the adjusted operating margin and ensuring that durable consistent revenue growth for the long term.

And if you look at our numbers this year, if you look at 6% to 8% organic revenue growth, 190 basis points of adjusted operating margin expansion at the midpoint of the range and adjusted EPS growth of 14% at the low and 18% at the high end, I think we're effectively achieving that objective.

And as you look at 2017 and beyond, we look to continue to deliver high performance and that's the goal..

Thanks, guys..

Our next question is from the line of Josh Jennings, Cowen and Company. Please go ahead..

Hi. Good morning. Thanks a lot. Wanted to hopefully start off with a question for Dan and just a follow-up on the operating margin discussion and some of the strength you saw in Q1 and particularly in the guidance.

Can you talk about AMS integration and is AMS contributing already to operating margin? And how do you see the AMS contribution going through the year and also as it flows down into the bottom line in the accretion levels that you guys had guided to historically? Are you still on track there?.

Yeah. I think the short answer to that Josh is that we are right on track. So we had talked about $0.03 accretion in the year from AMS. We're on track to achieve that. And then next year, we had talked about $0.07 and we should be on track for that.

And the difference is really some of the integration costs that we have this year with respect to the quality remediation and some of the things like IT and such that are pushing that down a bit this year. And next year, you should see the full power of what AMS can bring to the margin story for the company..

Okay. Great. That's helpful. And then, Mike, I was hoping to just follow up on the CRM business. Clearly you have some nice approvals over the last month and particularly this week on the MRI, filling that MRI-safe product gap on the low-voltage side, and you initiated your MRI-safe trial for high voltage.

I just wanted to get your level of confidence, your team's level of confidence in the timelines there. And maybe just help us think about the steps going forward in terms of times of enrollment and during the enrollment period and follow-up period just to help us think about the safety of that mid-2017 timeline on the high voltage side. Thanks a lot..

Yep. Sure. We feel comfortable with it. I think we've been reasonably accurate on the forecast for some of these big product approvals with the Quad and the MRI pacer. So, we're looking at call it mid-2017, maybe to hedge that a bit, third quarter 2017 for approval of our tachy MRI product..

Roxanne, let's take one more..

Right. And our next question comes from the line of Matt Miksic, UBS. Please go ahead..

Hey, Vic, I'm on. Hi. Thanks for taking our question. So, a couple, if I could. One on WATCHMAN, just a follow-up on some of the questions that have already been asked. But what we hear, I guess, from centers, obviously NCD in place and differentiated device. And I think everyone's excited to see how this rolls out.

But there is some question, I guess, about how profitable this is to some of these centers. For some, it does seem to be a little bit on the tight side for pricing net of reimbursement, but at the same time doesn't seem to be, from what we can tell, a significant impediment to interest or early adoption.

So, any thoughts on how you see that playing out over time or regionally playing out as it begins to pick up steam here? And then I have one follow-up for Dan..

Sure. So the NCD was a nice win for us. And we believe we really have the right sweet spot in terms of the WATCHMAN pricing. It is financially viable at most of the heart centers that we have contracted with. So, we stay very close to that, and it's really part of our category leadership strategy.

So, we want to price it at the appropriate level given the investment that we've made in the platform, as well as future clinical trials that we're supporting as we advance this new therapy. But we do believe it's financially viable and a healthy product with appropriate margins for the vast majority of our hospital that are using this today..

Okay. That's helpful color. And then for Dan, on some of the work you're doing to drive manufacturing efficiencies and working capital efficiencies, net operating asset turnover here, obviously a key driver for ROIC and you do have an opportunity there from what we can tell. It's obviously a focus.

Wondering if you could sketch out how we should see that begin to play out because understanding your manufacturing rationalization or the efforts you have underway, it may not be apparent from the numbers, on a turnover basis, the improvements that you're making.

But would love to get a sense of when that'll start to become apparent and maybe start having an additional impact on returns on capital..

Sure. I think I'd like to believe you'll see some of that impact this year. So, we have a significant emphasis on reducing inventory, and I had mentioned that in some of my prepared remarks, and trying to prove that, from our perspective, we can grow sales at the rate they we're doing but also optimize inventory.

And we have a lot of work ongoing to try and do some things to rationalize that. And from a cash flow as well as the other metrics that you mentioned, reduce inventory overall by the end of the year as a company. So, my goal would be that as we go through the year, you'd see that.

It was pretty reasonable compared to Q4 of last year, inventory this year. And so we've stemmed the tide a bit now and I'd look to, for the last three quarters, to see that reduce which will help all of the turnover and asset metrics as well as the contribution of working capital to cash flow..

Excellent. Thanks so much..

All right. With that, we'd like to conclude the call. Thank you for joining us today. We appreciate your interest and before you disconnect, Roxanne will give all the pertinent details for the replay. Thank you..

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