Good morning. My name is Darla and I will be your conference operator today. At this time, I would like to welcome everyone to Medtronic First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instruction] Thank you.

I would now like to turn the conference over to Ryan Weispfenning. Please go ahead..

Great. Thank you, Darla. Good morning and welcome to Medtronic’s first quarter conference call and webcast. During the next hour, Omar Ishrak, Medtronic Chairman and Chief Executive Officer and Karen Parkhill, Medtronic Chief Financial Officer, will provide comments on the results of our first quarter which ended on July 28, 2017.

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 as well as details related to our patient care, nutritional insufficiency and DVT divestiture to Cardinal Health.

During this call, many of the statements 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 first quarter of fiscal year 2016 and rates and ranges are given on a constant currency basis.

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. These adjustment details can be found in the reconciliation tables included with our earnings press release.

With that, I am now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Omar Ishrak.

Omar?.

open surgery, traditional MIS, robotic surgery and services. Our Restorative Therapies Group grew 2% this quarter. And within RTG, our Spine division grew 1%. We estimate that both the U.S. and global spine markets have slowed modestly.

However, we continue to gain market share which we attribute to the success of our speed to scale new product launch initiative.

We also continue to gain market traction with our surgical synergy strategy growing the number of customer contracts that combine our spine implants with capital equipment for imaging, navigation and powered surgical instrumentation sold by our neurosurgery business.

Our Brain Therapies division grew 7% driven by high-teens growth in Neurovascular and high single-digit growth in Neurosurgery. Brain Therapies continues to see traction from our recently launched StealthStation S8 surgical navigation system and strong low 30s growth of our Solitaire family of revascularization devices for acute ischemic stroke.

Turning to diabetes, while revenue growth declined 1% given the reasons mentioned earlier, we gained global durable pump and consumables share driven by significant clinician and customer demand for our 6 series pumps.

CGM revenue grew in the low 20s, including growth of nearly 50% in international markets driven by demand for our sensor-augmented pumps and improved sensors.

The Guardian Sensor 3s coming off our production line consistently demonstrate the MARD, which is a measure of sensor accuracy of 10.4% in a real world setting in line with the performance we saw in the pivotal studies, with a much larger sample size. Next, let’s turn to our globalization growth strategy.

Emerging markets grew 12% in line with our long-term double-digit growth expectations as we continue to expand access to our products and services around the world. Our consistent emerging markets performance continues to benefit from geographic diversification, with strong results across the globe.

Latin America grew 16% with double-digit growth in Brazil, Mexico, Chile and Argentina with continued strong results in China growing above the market with 12% growth as we continue to consistently perform in a complex environment that we believe will become one of our largest markets.

Southeast Asia delivered 12% growth, with Vietnam, Indonesia and Thailand all delivering robust results. In the Middle East, we grew 12% as we begin to see recovery in the region.

In particular, Saudi Arabia grew in the mid-30s, our first quarter of growth in six quarters as customer inventory levels appear to have normalized and hospitals have to begun to purchase again. Let’s turn now to our third quarter strategy, economic value.

We continue to see success in our Hospital Solutions business, which grew double-digits as we are now managing cath labs and operating rooms for nearly 140 customers around the world, including our first in Mexico.

We are also seeing strong growth in our TYRX value-based program for infection control and implantable devices more than doubling the accounts and the contract in the quarter to 325. Now, approximately 10% of our U.S. CRHF implantables revenue is covered under a TYRX related value-based healthcare risk sharing arrangement.

In diabetes, we were pleased to announce a new outcomes-based agreement with Aetna. We are a component of our pump reimbursement with now successfully meeting clinical improvement thresholds. We are aggressively developing other unique value-based healthcare solutions across each of our groups.

While we are still early in the journey, we remain focused on leading the shift to healthcare payment systems that reward value and improved patient outcomes over volume. As always, we expect to do this in a way that benefits patients and healthcare systems as well as our shareholders.

Before turning the call over to Karen, I would like to highlight that we closed our transaction of Cardinal Health at the beginning of the second fiscal quarter, divesting a portion of our patient monitoring and recovery division.

We expect this transaction to have a positive impact on our revenue growth rates and margins with modest near-term earning solution.

We remain committed to the disciplined portfolio management and capital deployment that balances return to shareholders with reinvestment in internal and external opportunities that are aligned with our growth strategies and are expected to drive strong financial returns.

With that that let me ask Karen to take you through a discussion of our first quarter financials and outlook for the remainder of the fiscal year.

Karen?.

Thank you, Omar. As Omar mentioned our first quarter revenue of $7.390 billion represented an approximate 3% [Technical Difficulty] and approximately 4% on a constant currency basis.

Foreign currency had a negative $33 million on first quarter revenue and tuck-in acquisitions completed almost a year ago contributed approximately 140 basis points to revenue growth, driven in part by the benefit gained from Medtronic ownership. Our revenue fell just shy of 4% growth by approximately $30 million on a total of $7.4 billion.

When we updated our guidance in July, we expected our revenue would be slightly higher, but the IT disruption caused the unique dynamic affecting our visibility through quarter and as we worked to clear the order backlog including higher than expected sensor demand in diabetes.

And as you know given the buying patterns of our customers we tend to have a larger amount of sales in the last few weeks of every quarter in some of our businesses.

Importantly as Omar mentioned the IT system disruption is behind us and we are seeing strong demand for our new technologies giving us confidence in our revenue expectations for the remainder of the year. In the quarter we delivered continued operating margin expansion and strong EPS leverage.

GAAP diluted earnings per share were $0.74, non-GAAP was $1.12. After adjusting for the $0.02 negative impact from foreign currency, non-GAAP diluted EPS grew 11%. Our operating margin for the quarter was 26.9% on a constant currency basis representing a year-over-year improvement of 50 basis points.

With the impact of currency included our first quarter non-GAAP operating margin also improved increasing 10 basis points year-over-year. Taking into account currency any the acquisitions that we have done in the past year, our operating margin improvement on an organic basis was approximately 70 basis points in the quarter.

The operating margin improvement was driven by efficiencies as we continued to deliver on our Covidien synergies. This was partially offset by purposeful investments we are making in sales and marketing in the first half of the fiscal year to support new product launches.

Net other expense which is included in our operating margin was $66 million compared to $39 million in the prior year and negatively affected our operating margin improvement by 30 basis points.

The increase in net other expense was due in part to foreign exchange re-measurement and our hedging program which combined were $5 million loss in the quarter versus the $4 million gain in the prior year. Looking ahead we expect net other expense to be approximately $110 million per quarter and slightly higher than that in the second quarter.

This includes approximately $30 million to $40 million per quarter of hedging expense based on recent exchange rates. Below the operating profit line, net interest expense was $194 million, slightly less than our original expectation as income earned on our cash investments helped to offset debt expense.

Looking ahead, we expect net interest expense to be approximately $180 million to $200 million a quarter. Our non-GAAP nominal tax rate was 13% and benefited from $47 million an operational tax adjustment that became evident and were communicated late in the quarter.

Excluding these adjustments our non-GAAP nominal tax rate would have been 15.7%, in line with our expectations between 15.5% and 16.5% for the remainder of the year. First quarter average daily shares outstanding on a diluted basis were 1.376 billion shares.

We repurchased a net $1.1 billion of our ordinary shares in the first quarter, executing the annual return commitment to shareholders, concluding our incremental $5 billion commitment announced in January 2016, and pulling forward some of our incremental $1 billion repurchase commitment from our divestiture to Cardinal Health given our lower stock price.

We expect shares to continue to come down in Q2 and then stay roughly flat for the remainder of the year given our tendency to purchase shares earlier in the fiscal year. In June, we increased our cash dividend by 7% making this our 40th consecutive year delivering a dividend increase.

Combining our share repurchase activity with the $625 million we paid in dividends in the first quarter, our total payout ratio was 111% on non-GAAP net income and 169% on GAAP net income. Keep in mind, our payout ratio was elevated as we tend to execute the majority of our annually planned share repurchases early in the fiscal year.

Before turning the call back to Omar, I would like to reiterate our annual guidance and updated with the completion of our divestiture to Cardinal Health, which occurred at the start of our second quarter.

For fiscal year 2018, we expect comparable constant currency revenue growth to be in the range of 4% to 5%, which removes the divested revenue from the second, third and fourth quarters of fiscal year 2017 as well as the impact of currency.

On a comparable basis, the divestiture is expected to result in more than a 30 basis point improvement given the partial year impact to our fiscal ‘18 revenue growth. This translates into a full year annualized recurring growth rate benefit of approximately 50 basis points as highlighted previously.

While we recognized the divestiture as a positive impact to our guidance range, the current supply constraint in diabetes will continue to impact growth in that business until later this fiscal year. Looking at revenue growth by our business group, for CVG, quarterly growth rates have typically been between 4% and 7% in recent years.

Given the strength of its near-term pipeline and easing prior year comparison, we now expect CVG to grow in the upper half of its historical range for the full fiscal year. We expect CVG’s growth to be strong in the second and third quarters before facing a difficult comparison in the fourth quarter.

MITG has typically reported growth rates between 3% and 4% excluding the impact of acquisitions and the divestiture is expected to increase growth by about a point. In fiscal ‘18 given the partial year impact of the divestiture and lower growth in the first quarter, we now expect MITG to grow in the range of 3.5% to 4.5%.

For RTG, quarterly growth have typically been in the 3% to 5% range in recent years, balancing strong growth in Brain Therapies against competitive challenges in pain therapies and a strengthening share position in a relatively flat spine market, we now expect full fiscal year growth for RTG to be at the low end of this historical range.

Finally, in our Diabetes Group, historical growth before the recent market disruptions was typically in the high single-digits to low double-digits.

With the impact of the temporary supply constraint, we now expect diabetes to grow in the range of 1% to 4% this fiscal year, with improvement in the second half as we fulfill the new 670G to non-priority access customers in the third quarter and increased our sensor supply in the fourth quarter.

While the growth acceleration has been delayed by a few quarters, we expect to enter fiscal year ‘19 with ultimate strong double-digit growth in diabetes.

Looking at the second quarter, we would expect to be in the lower half of our annual revenue growth range on a comparable constant currency basis with accelerating growth in CVG offset by a decline in diabetes in the high single-digits.

Diabetes revenue is expected to temporarily decline sequentially before improving in the back half of the year for two reasons. First, we expect less deferred revenue recognition in the second quarter from our Priority Access Program as more pump shipments associated with this program occurred in the first quarter.

Second while we will be able to fulfill new 670G customers after we fulfill the Priority Access customers. We anticipate that new sales will be muted until we can ultimately fulfill centers with pump. Only a limited amount of patients are likely to be willing to purchase the pump and wait for the sensors.

With regard to operating margin, we expect solid improvement in the fiscal year with greatest strength in the back half. We expect our gross margin on a comparable constant currency basis to be flat for the year with modest pricing pressure offset by operating improvement.

SG&A as a percent of revenue is expected to improve particularly in the back half of the year as we continue to execute on margin expansion opportunities and enabling functions, transition to centers of excellence and optimize our distribution channel.

With respect to earnings, we continue to expect fiscal ‘18 non-GAAP diluted earnings per share to grow in the range of 9% to 10% on a comparable constant currency basis.

For the second quarter, we would expect temporary year-over-year decline in our growth and operating margin leading to EPS growth flat to slightly up on a comparable constant currency basis.

Given the continued investments we are making to support product launches, the impact of temporary revenue declines in diabetes and the operational tax benefits we received in the prior year that are not expected to repeat. However, we continue to expect EPS growth and operating margin expansion to accelerate in the back half of the fiscal year.

While the impact from currency is fluid and therefore not something we forecast if recent exchange rate which included €1.18 and JPY109 remained stable for the fiscal year.

Our full year revenue would be positively affected by approximately $380 million to $480 million including an approximate $25 million to $75 million tailwind in the second quarter. Full year EPS would be affected by approximately negative $0.03 to a positive $0.01 including a positive impact of approximately zero to $0.02 in the second quarter.

Finally, regarding free cash flow, we continued to expect it to grow in the high single-digit compounded annually from fiscal ‘16 to ‘18 albeit now on a comparable basis given the divestiture. To compare you should adjust for items that are considered part of the divestiture net proceeds like tax and transaction costs that affect free cash flow.

These are expected to be approximately $400 million this fiscal year and $200 million next year. In addition, you should adjust for the loss of free cash flow generated by the divested businesses which was approximately $100 million per quarter.

Without these adjustments free cash flow is expected to grow in the low single-digits compounded annually from fiscal year ‘16 to ‘18. Now I will turn the call back Omar..

Thanks Karen. And looking ahead to the remainder of our fiscal year we have confidence in our guidance and visibility into the acceleration in our innovation cycle as we see momentum coming from several new product launches this fiscal year. And let me remind you of a few them.

In CVG we now have intermediate risk approval in TAVR and are launching our new revenue Evolut profile. We are also in the early stages of market launch for new Resolute Onyx drug-eluting stent our micro transcatheter pacing system and or MR-Conditional Quadripolar CRT pacemaker in our largest global markets.

As we enter the back half of the fiscal year we expect to launch HVAD destination therapy and our next generation Azure [ph] wireless pacemaker family in the U.S. as well as the impact of to Admiral drug-coated balloon in Japan.

In MITG as I mentioned earlier we are launching our Signia powered surgical stapling system and gearing up to release our surgical robot platform later this year. In RTG our product refresh in the spine continues and we are preparing to launch our Solera Voyager 5.5/6.0 fixation system.

We are also seeing great traction with our StealthStation S8 navigation system and our continued partnership with Mazor and their Mazor X system. And in our diabetes group in addition to ramping up the 670G hybrid closed loop launch, we are also preparing to launch our standalone CGM system Guardian Connect in the U.S.

later this year which will be combined with our sugar IQ app that utilizes IBM Watson cognitive computing. Let’s now open the phone lines for Q&A. In addition to Karen I will ask Mike Coyle, President of CVG; Bryan Hanson, President of MITG; Geoff Martha, President of RTG; and Hooman Hakami, President of our Diabetes Group to join us.

We want to try to get to as many 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.

Operator, first question, please?.

Your first question comes from the line of Mike Weinstein with JPMorgan..

Thank you, guys and good morning everybody. I wanted to start with two questions. So, first, there appeared to be somewhat conflicting statements and I understand part of it is legality on the impact of the computer outage.

So, could you try and quantify, because obviously there is a comment in your prepared remarks as well as the press release that says that was not material. So, can you try and quantify what the impact was this quarter? And then second, obviously there is going to be a focus on the diabetes business and the step down to the outlook for the year.

So, can you just spend a little bit more time on what’s going on with the sensors and why now we are looking at effectively a backlog all the way out to the fiscal fourth quarter versus previously fall? Thanks..

Yes. Let me quickly address the diabetes one and then I will let Karen address the IT system question. From diabetes, look, what’s happened is the – our success rate with our products, which all have now sensor attachment, has actually been very high not only with the 670G here in the U.S.

but with also the 640G which we launched in Europe roughly 2 years ago and that plus the Guardian Connect in Europe has really gained traction. And what’s happened is the demand for the sensor really grows by multiple factors compared to just pump revenue, because for every pump, you need to supply sensors for the whole year in an ongoing basis.

And so when you do that demand equation, that number comes to be a very large number and although we are accelerating the plans to add a new line, it just takes a little longer than one would want.

I think that’s all I can say that the attachment rates are much higher than previously envisaged that even a short while ago we were planning the number of customers who want the priority access for the 670G is also significantly higher than we were expecting.

All of this leads to a multiplication of the number of centers that are required and when you do the math, it just comes to a very large number, which we just can fulfill immediately.

But having said that, these are all things that are in our control and we are pretty confident that by the end of the year will be – diabetes will be able to take advantage of these new products which actually we have been driving to and are pretty revolutionary in their own right.

So, Karen, you want to say something on the IT?.

Yes, on the IT outage, it’s very difficult to separate and quantify the impact related to the outage. We did say that it is not material to the first quarter revenue or earnings per share, so very difficult to quantify beyond that..

Okay, alright.

So, just two follow-ups, so one on the sensor side, it appears part of the problem is that as you are moving to a lower MARD, it’s harder to manufacture the sensors, we all are aware of that, but just it sounds like the yields aren’t as good and that the reliability in terms of the life of the sensors isn’t as good, so you are having to include an extra sensor in the packets that we are shipping out.

So, can you comment on that? And then just the other follow-up is the change in the MITG guidance, the increase was less than we were expecting post the divestiture and that part looks like to a weaker performance in general surgery this quarter.

So, could you just comment on the MITG business effectively and say why didn’t guidance move up more there given the divestiture and why was general surgery weak? Thanks. And I will let others jump in..

Okay. First of all, with the diabetes, it is not an issue of yield at all. The yield is perfectly good and in line with our expectations and the number of sensors that are required are the standard number of sensors that we expect for patients to cycle through. So, that is really not the issue at all.

We are extremely confident in our manufacturing, the process, the yields resulting in much more accurate sensor performance. And this is purely an issue of acquiring capital equipment that needs to be approved by the FDA and put in place. And when that happens we will release sensor capacity.

This has got nothing to do with any yield differential of any or need for cycle these sensors any quicker than is normally expected?.

Yes. Mike the only thing I would just add to that if you really take a look at what Omar mentioned with respect to the dynamics this is purely a function of increased demand, not manufacturing output or manufactured performance.

And maybe two statistics to keep in mind, you heard in the commentary our installed base demand for sensors in Europe was 50%. We were expecting growth in Europe, but 50% was more sensor utilization than what we were expecting.

The second that you heard from the commentary is that there were 32,000 priority access patients that signed up that was a 30% increase versus what we expected. So this is purely a function of increased demand not as Omar pointed out of anything to do with yields or lower marks [ph].

Our marks are great, our yields are totally in line with expectation, it’s just our ability to meet demand and this is a temporary thing..

Keep in mind that our diabetes patients on 640G do not need to use the sensor attached. But they are choosing to use it more and more often because of the accuracy with that sensor. And that is one of the reasons that the demand was higher than we originally anticipated.

In regard to MITG, we do expect revenue growth for the year now to be 3.5% to 4.5% and that does include the positive impact of the divestiture for the partial year of about 30 basis points. On a full year basis we would expect that to be about 50 basis points, so we are increasing our guidance in that business line..

Thank you, Mike..

Thank you, Mike.

We will get the next question?.

And from David Lewis with Morgan Stanley..

Good morning. Just a couple of questions for me, the first is for Geoff and then maybe one for Omar.

Geoff, just to talk about just RTG kind of broadly for a second, sort of a tale of two cities, the core spine numbers to us looked better actually, I wonder if you could talk about your share momentum in core spine relative to what we have seen which is industry weakness amounts most of your peers in spine and then of course offsetting that is SCS and TBS [ph] businesses just based on product cycle innovation are not doing as well and when do you think those businesses can begin to stabilize and why? Then I had a quick follow-up?.

Yes. In the spine market look, we have seen a little bit of softness this last quarter. We had the spine market growing like 1% to 2% historically in the last two quarters Q3 and Q4 for us. We – Medtronic we were at 3% overall growth. We had the spine market, it’s hard for us we are triangulating. We don’t get market data for a couple of more weeks.

But based on what we can see we have new market relatively flat maybe 0.5% growth. So that definitely had an impact on us this quarter. But we are still gaining share and we think it’s on the strength of one our product releases and this whole methodology of launching them around speed to scale.

And then our surgical synergies deals which I think will build momentum as we get continue to expand our partnership with Mazor. But right now over 5.5% in the U.S. of our core spine volume is tied in with these capital deals and that’s a growing number.

So the two factors that are driving the business once is just product releases and we will see that continue throughout the year. Second half we have a couple of new product releases coming and launching in the speed and scale manner and then combining them with the capital equipment.

And that is obviously it when you look at as vis-à-vis the other multinationals we are performing quite a bit better. And on the pure plays I mean the gap is very – is narrow dramatically.

And as we move forward with introducing robotics in the portfolio with Mazor ICS and plus our continued product launches in core spine I feel good about where we are and I see positive momentum. But you are right, that’s been offset by pain stem in TBS.

And pain stem has been declining in that mid single-digits, even little higher over the last couple of quarters and the catalyst for change there is going to be Intellis which we plan to launch in the back half of the calendar year.

And Intellis will be the smallest implantable rechargeable system on the market 40% smaller than our current one with a state-of-the-art programmer.

I mentioned it’s rechargeable and it will be a fast recharge like 75% faster than our current and it’s upgradable and you are right, but you are also able to download novel stim patterns and algorithms as we are investing in. And you combine that with our evolved work flow that we launched a few quarters ago, which is definitely helping us.

I think that will stabilize that business. And then again, we are continuing to invest in novel stim patterns, which this Intellis platform we will be able to handle. And then DBS, that’s going to take a little bit longer.

I mean, we are funding that business in terms of our R&D, but it will be probably several quarters over a year before some of these new innovations come to market that we have talked about in terms of our new steerable leads, our new PC+S system and then a very novel cranial mounted rechargeable system.

So, DBS is it a little bit further out and then we see Pain Stim when Intellis launch and the dynamic that’s shifted as spine has gone up and Pain Stim has gone down, DBS was still performing. In this past quarter, it started to shrink a little bit as Boston got on the market in Europe with their MR compatible system..

Okay. Thanks, Geoff. And my two follow-ups, one for Bryan, I don’t know if I caught the specific answer in MITG. It did look on the margin there is a little core softness in MITG across some of the major segments.

I don’t know if there is anything you will be willing to call out there? And then for Omar, now that you have closed the divestiture, can you just kind of level set us in terms of where we should be thinking about priorities of future free cash and the broader balance sheet and most specifically as it relates to buyback after you complete the $5 billion dollar program? And then just M&A, how investors should be thinking about your priorities here mid-tier, larger acquisitions or more smaller growth innovative deals?.

Yes. From a margin perspective in our business, I don’t see anything with probably similar to the mix in the quarter, I don’t see anything that would continue there. And just real quick on general surgery in a question was asked previously, it was a little lighter in the quarter likely due to surgical volumes.

It reacts more to surgical volumes than our advanced energy business and advanced business overall. And so that’s why we saw little bit of weakness in general surgery versus what we have seen in the past. It is almost directly impacted by these surgical volumes and that was the reason for the softness..

And with respect to the questions for me, let me start with the acquisition strategy. Look, we remain focused on tuck-in acquisitions today and they worked for us. We have converted them into the ones that we have done. We are converting them quite smoothly into organic growth drivers for us over time.

We are not really focused today on transformative M&A. Remember we are still in the last year of integration of Covidien. We just did a divestiture that is separation agreements that we have got to follow through. So, we are focused on executing these big sort of bets in many ways that we made.

And we continue to have very disciplined approach to pursuing tuck-in acquisitions and we intend to continue with our approach. Over the long-term, we will continue to build value for shareholders and we look at opportunities that are accretive to margins and growth trajectories that support our strategic priorities.

I think Karen can comment a little bit on the capital allocation perhaps on the buyback as well..

Sure. As you have heard us talk about in the past time, we are focused on paying back to our shareholders in the form of those dividends and share purchases and that won’t change. We are also focused on balancing that payback with continued reinvestment in our own business, so that we can continue to grow that long-term value of Medtronic..

Okay. Thank you, David.

Darla, can we have the next question please?.

It’s from the line of Bob Hopkins with Bank of America..

Thanks and good morning..

Good morning..

I just wanted to ask two questions that really sort of clarify the guidance maybe.

And Karen to start out this is pretty simple math, but just to confirm the new EPS guidance for fiscal 2018 including Cardinal by my math based on your new disclosure it sums to about 475 to 480 is that correct?.

Yes. We don’t comment directly on exact EPS guidance. But we do expect – continue to expect 9% to 10% growth on the base of last year. So hopefully, that’s helpful..

Well, obviously, you give all the moving pieces in your disclosures and I just wanted to make sure that we had that right, but I guess we can follow-up offline on that, but our math tend to run 475 to 480 and I guess the other EPS clarifying question that I had was it I am just trying to reconcile the old guidance to the new guidance and understand maybe what has changed I know you are now giving your growth targets off of pro forma numbers, but I mean your old guidance called for 9% to 10% underlying EPS growth on legacy Medtronic and then $0.05 to $0.10 hit and then you said Cardinal will dilutive by $0.18, those are the three sort of big pieces to your old guidance and I am just curious could you help us understand what’s changed with this new guidance, obviously we can see that FX has gotten better, but as I sum through all the matter it seems like something must have gotten a little bit worse either the Cardinal dilution or maybe the base business due to other income or diabetes so I am just trying to understand what’s changed relative to the old guidance you never used to give it?.

Sure. I would say that the biggest thing that’s changed is in our diabetes business and the impact of the lower revenue growth until the end of the fiscal year given the demand and supply constraints and that guidance does ultimately have an impact through the P&L. And so that does also affect the bottom line.

Beyond that we do expect that to be offset by some better guidance in CVG than initially given.

Given the strength of that new pipeline and on an EPS perspective, we do expect that the dilutive impact of the transaction is still $0.18 on a net basis after taking into account the use of proceeds on a gross basis when you are looking at the numbers that we provide to reset your base on a gross basis that would translate into about $0.23 dilutive before taking into account these proceeds..

And do you have a number that quantifies the impact of the diabetes change in guidance for this particular quarter what the impact was on organic growth?.

I would say that again difficult to give you an exact dollar amount of the impact to the quarter of the demand and supply equation. But clearly it did impact us to perform under what we had initially guided for the diabetes business last quarter..

Okay, thank you very much..

Thank you, Bob.

Next question?.

It’s from the line of Kristen Stewart with Deutsche Bank..

Hi, guys.

How are you?.

Good Kristen..

I have missed you all.

I guess I have just a couple of more strategic questions and I just want to clarify just on diabetes it sounds like the demand is just more overwhelmingly positive, has this changed your mind from a strategic perspective – I am sorry for the background, just in terms of wanting to change your thoughts on going more from a consumer level because you have 30% more demand for like using 640G with the sensors why not think about going more just to our base business not going more the professional route?.

This for central….

So Kristen hi, this is Hooman, nice to hear your voice. The – let me just touch on that. First of all it is as we talked about purely a demand equation. And as you rightly pointed out, we have Enlite 1 sensor, our Enlite enhanced sensor, our Guardian Sensor 3.

All of those are experiencing strong demand which as Omar and Karen mentioned we are working to fill the capacity in order to meet that demand. It doesn’t change our strategy overall, number one. So strategically actually this increased demand means the strategy is working.

With respect to sensor augmented systems and then as far as personal versus professional CGM, I would say two things. One as Karen and Omar alluded to in the commentary we are still working with the FDA for the launch of our own personal CGM which should hopefully happen in this year.

The Guardian Connect sensor with sugar IQ, that’s number one and on top of that we continue to go down the path within our non-intensive type 2 business to drive professional CGM more aggressively through primary care physicians. So we are pursuing all three of these angles and that’s been the strategy and we will continue to try that strategy..

Okay, great, awesome.

And so with the FDA just getting new lines of that just was causing more of the delay and causing the backup in demand, not I think you are pretty strong in saying Omar it’s not yield?.

Correct..

It’s not deal, it’s capacity just to meet the demand..

It’s not the [indiscernible] of product and just the demand and getting more lines cleared by the FDA. Okay, perfect, that’s clear. Okay.

And then Omar, I am just curious on your thoughts of the recent FDA decision to kind of pull back on some of the bundled payments in terms of where care is going and the need to reduce care, but I am just curious on your thinking on whether this changes ultimately strategy and how you think about things going forward and then also just comments strategically on you there has been more consolidation in the industry, your thoughts competitively where you are stacking up and especially in light of the divestiture to kind of the evolution of Medtronic and where you are positioned now?.

Okay. Thanks Kristen. First of all this year measurement it would be with the payment changes. The changes really that is not mandatory anymore. I think there is general encouragement to move more towards value based payments. And I think it’s not only CMS but the commercial payers are also looking at it in that dimension.

At the end of the day the value based healthcare is around improving outcomes at a lower cost. And I think that the trajectory is not going to change. I think is good realization of that.

I think operationalizing this requires granular work and we are in the middle of that and we are driving that partnering with both providers and payers and CMS in doing so as we come up with the right models. So I would say that the change from the mandatory version is just that, it is not mandatory anymore.

There is no real change in philosophy about the value of bundle payments and the importance of outcomes measurements. I think with respect to the industry value based care is where they industry has got to move to. Consolidation gives you a capability to have a seat at the table.

It gives you more assets to use to deliver value based healthcare, because you probably need a variety of capabilities to do so. But at the end of the day, innovation in this industry that’s relevant for patients is never going to go away.

And let’s not confuse getting broader in some ways with lack of focus in specific physician partnerships and therefore driving innovation which will then result in the higher value that’s what MedTech does. And that is not going to go away..

Grea. Thank you..

Okay. Thank you, Kristen. Next question please..

Your next question is from the line of Larry Biegelsen with Wells Fargo..

Hi, good morning guys. Thanks for taking the question. Let me just follow-up on the question that was asked earlier about weak U.S. surgical volumes and in the spine market, overall calendar Q2 was pretty mix with the large cap MedTech companies and with growth slowing, so I wanted to see if you guys could talk about why you think U.S.

surgical volumes might have been weak maybe any inside on trends in July and August and why you think the spine market might be a little soft? And then I had a follow-up. Thank you..

I think there is two things on that, first of all always remember that the U.S. market is driven by innovation cycles. And as we go through our innovation cycles, the underlying market is really dominated by these growth spikes that as we get. And as we move into an accelerating phase of innovation you will see our U.S. almost go up.

With respect to the underlying market there is a slight change which is in the range of changes that have happened in the past and you are right that surgical volumes overall have been a little softer as have spinal volumes. A lot of this has to do it electric procedures, people backing away from those.

I think that’s the best that I think that we have seen that there has been an intentional sort of conservatism if you like maybe a caution about their elective procedures right down the middle of the year. But again, it’s within the range of movement of these markets over time. So, it’s not anything beyond that.

And I do think that innovation cycles are the ones that really moved these markets much more dramatically. And I think as we go through this period of accelerating innovation, you are going to see that..

Any commentary on the spine softness, is that also procedure related? And just for my follow-up, maybe, Mike, there is a couple of presentations coming up at ESC that could impact your AFib business, CASTLE AF as well as renal denervation, the SPYRAL OFF MED trial.

Could you talk about significance of those trials and any other color you might be able to add before the data? Thanks..

Larry, on the spine market, I just – I do attribute it to what Omar was talking about these broader themes around elective procedures. A little more specifics we can rule out a few themes.

I mean, we haven’t seen – we do have some visibility in the payers and we haven’t seen any increased pushback from payers, any increase like declines of procedures, because we do review insight into that. We haven’t seen that. And then just talking to physicians, we haven’t seen any other significant catalyst.

They still seem pretty positive about the market. And so at this point, again like I mentioned earlier, we will get more procedural insights in a couple of weeks, because the market data has delayed a little bit, the data that we get. But at this point, we are attributing it to the broader elective procedure dynamics that Omar mentioned..

And then Larry on the questions about the clinical trials to come up here at ESC for late-breaking clinical trials, I don’t have much to say on the CASTLE AF study until we actually see the results there.

Obviously, our franchises are doing very well in that particular area both therapeutically with the cryoablation and continuing benefits from the FIRE and ICE study as well as obviously continued growth in the insertable loop recorder market, where frankly most of the growth that we see there is being dominated by its use in cryptogenic stroke and syncope.

So, we don’t expect those to be particularly impacted, but we will wait and see what those data are. As it relates to the renal denervation, obviously we have been working now for better part 3 years to basically look at the application of that therapy. We have changed the device obviously to the spiral device.

We have changed where we are doing the application of energy to go more distal into the renal artery. We have changed the patient population that we are studying based on the evidence that we saw of who responded and who didn’t in the original HTN-3 study.

And we also have obviously now executed on randomized clinical trial, sham-controlled for the both on and off, on-med and off-med arms and what’s going to be presented at ESC next week is the off-med patient cohort there. So, we think that’s probably the purest look at the therapeutic value of renal denervation.

There will be simultaneous publication for that and we will discuss those results after they are actually presented at ESC..

Thanks for taking the questions, guys..

Thank you, Larry. Next question, please Darla..

It’s from the line of Glenn Novarro with RBC Capital Markets..

Hi, good morning guys. I just want to ask one more question on surgical volume, so we get it spine volumes in the U.S. were slower in 2Q and there was some softness in general surgical trends in 2Q, but can you give us your expectations for the second half of this calendar year.

And the reason I am asking is because one of things we have heard is that these higher – lower premium higher deductible plans are starting to push more and more cases into the fourth quarter similar to what we see in knees and hips.

So, is that a possible explanation as to why we saw some softness in 2Q and is that a reason for volumes to get stronger in the back end? So I am just wanting your thoughts on that? And then I just had a follow-up question for Mike Coyle..

Okay, Bryan, why don’t you take that?.

Yes. So, what I would tell you is that thinking in Q2 we get – it’s not a perfect science by the way. And so if you look at the variables that would drive the lower surgical volumes in a quarter it’s very difficult to say what variable actually had the biggest impact. So, I don’t want to draw any conclusions there.

What I know is that from our own field sales organization from some of our key competitors that plan to space in their general surgery type products if there was softness in the quarter. I don’t want to read too much into that though, because it’s one quarter.

We have quarters that are up – quarters that are down, so I am calling this a trend at all at this point. And I certainly wouldn’t want to draw any conclusions to any strength that would be happening in the fourth quarter as result of this.

One other thing I would mention in our Advanced Surgical business though we always look at surgical volumes, one of the key things we concentrate on is moving current procedures from open to MIS and that drives a lot of our growth. So, we are definite on surgical volumes, but not completely dependent on surgical volumes in that business..

Okay.

And then, Mike, just two cardio questions, one maybe a little bit more color on what you are seeing in your core piecing business today given Abbott is now launched an MRI safe pacer and then you are bullish on your spend outlook over the next couple of quarters with the Onyx launch, but maybe talk about what’s truly different about Onyx that could allow you to gain share in the stent market over the next, I don’t know, 6 to 12 months? Thanks..

Sure. On the pacing side, the market is very stable. We are seeing low single-digit to actually mid single-digit unit growth for initial implants. And obviously, we have seen some modest share loss to competitors as they have entered with MRI. But as that now we have brought out Micra both in the U.S.

and Europe and we will be coming to Japan this quarter. We are obviously seeing recapture of especially the single chamber unit share at much higher prices obviously with the micro product.

And as we head into the second half of this year, we will be releasing our next generation of pacing family, the Azure wireless pacer family both in Europe and in the United States. It’s actually just been released in Europe and will be coming to the United States in the second half.

So, we think we will actually get back into a share capture mode with that particular product. And then as it relates to the Onyx product, the feedback we have received from Europe and it’s early release here in the U.S.

and also in Japan is that it’s the most deliverable stent in the market that it has the widest range of sizes and widths of any product that it basically can go anywhere and has great visibility.

And we have seen it drive market share for us meaningfully in Europe to the point where we essentially recovered everything that had been given up as competitors are coming with their product. So, we are looking for a similar dynamic here in the U.S. and in Japan. And so we think we have obviously begun to see that.

We are seeking a price premium for the product, which makes it a little slower in its ramp in terms of having to get approvals and committees to go on contract, but we are very encouraged with the feedback that we are receiving and we expect it to be a growth driver for us for the rest of the year..

Okay, great. Thanks Mike..

Thank you, Glenn. Next question, please..

It’s from the line of Matt Taylor with Barclays..

Hi, thank you for taking the question. I guess, it’s the biggest change here. I just wanted to ask one follow-up on diabetes.

As you are moving towards getting this new line up and running and adding that capacity, I guess can you help us understand what the gating factors are in terms of predicting that timing or what the bottlenecks could be with setting up that new line and what could push that timeline backward or forward if there is some conservatism in that guidance?.

Yes. I think look the major variable here is just the FDA approval that we need for the capital equipment that’s needed for the line. The rest of it is pretty straightforward. We are replicating a line, a process that we know how to do. And there is some level of things out of our control is the FDA time cycle for approval.

It’s not anything that’s different from what we have got approved in the past and we expect this to go okay, but it is something that’s out of our control. And I think that’s the major factor in getting the lineup.

Is there anything else from that?.

No, that’s exactly right. We know the equipment. We know the process. So bringing the equipment in doing all of the qualifications that’s something we feel very comfortable with. Then there is obviously the variable of turning all of that over to the FDA and seeking their approval.

So as Omar pointed out, that’s the single biggest variable in this that has uncertainty around it, the other elements we feel very good about..

And just to make it clear, we have gotten approval for this kind of stuff from the FDA in the past without any issue. So, there is nothing that’s any different, but it is something that needs approval..

Okay, thanks. And just a follow-up on the presentation I noticed that CRT-D has actually declined low double-digits this quarter.

So, I was curious if you could give us some color on that? I was a little surprise by the magnitude of that decline and if anything could change there, going forward to improve that?.

Yes. The decline that you are seeing in the CRT-D is basically being driven by the U.S. and it is basically we are seeing low single-digit declines in initial implants for CRT-D. We are actually taking market share in the initial implants, but we are also now seeing sort of the low double low double-digit declines in replacements.

This is something we talked about a year ago in Q1 and Q2 as a competitor who had a major recall at the end of our Q2 and into Q3 and Q4. That obviously drove competitive replacements for us, which masked if you will that decline that’s really being driven by the extending of battery life in the CRT-D space.

And that’s what you are seeing sort of reflected in the numbers.

The other major driver for that which is temporary to the Q1 results is that we saw fairly significant destocking of hospital held inventory in the United States in Q1, where essentially the hospitals are looking not to hold this much inventory of product and if they want to take it, they want significant discounts to restock that, which we have opted not to do.

So, that is more of a temporary issue that what we think will not see this big of a magnitude of it going forward..

Great. Thanks a lot for the color. Thank you..

Next question please, Darla..

It’s from the line of Joanne Wuensch with BMO Capital Markets..

Thank you very much for taking my question. To me shift a little bit to the land of robotics, you have a new surgical robotics expected outside the United States this year and you mentioned Mazor in your comments.

Could you please give us an update on your thinking about those two aspects of your portfolio?.

I will let Bryan go first and then let Geoff talk about Mazor?.

I couldn’t hear you very well.

What was the question on the surgical robotic system?.

Just an update on how you are thinking about the launch applications and differentiations and anything else you could add to the color of as we look towards that?.

Well, obviously, we are pretty excited that we are in the fiscal year that we are going to get the first human use. So, that’s a positive.

We are in the – what I would define is the pilot phase build right now and we are obviously working very diligently for verification and validation and also any things that we need to put together for regulatory submissions. So, we are heading down the path, feel confident with what we have today.

Obviously, with this complex of a product, a lot can happen in the VNV process, but we are feeling good about where we stand today. In the strategy, it’s the same that I have mentioned before organization from a mission perspective is to move our patients from open surgery to MIS. This is another tool to ensure that we can do that.

And we feel confident that once we have launched this, we are going to be in a unique position to bring more value than any other company in the world. We will be able to fully service open surgical procedures, traditional MIS procedures and robotic surgery as well as provide operational efficiency services within the operating room.

So, we remain very confident in the product and we remain very confident in the overall strategy..

And then this is Geoff on Mazor, as I think most people know, it’s public, it’s out there is our relationship with them has a continuum if you will and we are in this phase of the relationship is a lead sharing then if we hit certain milestones and they hit certain milestones, we move to more of a distribution.

And the initial phase has gone very well. It’s tested the hypothesis that we believe robotics has a strong place in spine surgery and it works well with our broader solutions around intraoperative imaging and navigation. And so we are very pleased with where the relationship is going.

And I think we can talk more about this in the next quarter here in terms of moving towards distribution.

In addition to that, a go forward look on tighter product integration with our navigation and intraoperative imaging systems as well as our spine implant business how this impacts their product roadmap as well, but the relationship continues to go well. It’s growing.

Our customers see a lot of value and not just the robot, but the robot – Mazor X robot used in conjunction with our intraoperative imaging system the O-arm 2 as well as our navigation platform StealthStation..

Okay. Most of my questions have been answered. Thank you very much..

Thank you, Joanne. Will take one more question please..

And your final question will be from Isaac Ro with Goldman Sachs..

Thanks for letting me in [ph] guys. I appreciate it. Want to spend a minute talking about the nature of your relationship with hospitals.

There are couple of items here that have been brought upon that I thought are interesting, one was just the nature of surgical procedures and I am wondering if you are seeing any impact from the increase in prior authorization required by hospitals and payers before scheduling procedures, whether that’s having an impact on volumes in spine and elsewhere in your business?.

Look we don’t have any direct insight into that. We don’t hear of that as a specific reason. And like I said this range is within a fluctuation range that we have seen before. So we are gauging it in that light. And like we mentioned earlier electric procedures probably down a little bit, but again in the ranges we have seen before.

And again let me emphasize that product innovation in this market is what really swings these markets. And we do think that for the right procedures where there is real value that the patient can see and the physicians can see the procedures that happen and they will grow when new innovation comes along.

And we are in a period of accelerating that innovation, so we do expect our U.S. growth numbers to go up in the coming quarters, offset a little bit by the diabetes slowdown in the next quarter or so because that’s mostly – almost all U.S. But really surgical procedures themselves I think again are in the range of history, historical trends.

And we expect our product innovation to positively impact those markets..

Okay. It’s helpful.

Maybe just from another direction I think there was an earlier comment on the CRT-D business with regards to hospital inventory, are you seeing at a higher level any change in the way hospitals manage their inventory for your products, I mean it seems like again that customer group is a little bit stretch in terms of their financial health and so just understanding how they are managing their cash flow and how that impacts you?.

Well, I think the methodology for managing is more or less the same as it’s always been and you go through these cycles again in the range that we have seen before. And look I hear too from hospitals just in general that they are concerned about their business flow. But again it’s nothing that’s more than what we have seen before and in that range.

And for the right think they will do it. But their buying patterns are in line with what we have seen, nothing dramatically different..

Okay. Thank you very much..

Thank you, Isaac. Okay. So with that, let me thank you all for your questions and on behalf of the entire management team I would like to thank you again for your support and interest in Medtronic.

And we look forward to updating you on our progress on our second quarter earnings call which we now anticipate holding on November 28 which is a week later than normal closing time needed as a result of the divestiture of the Cardinal Health. Thank you all. And have a good day. Thanks..

Ladies and gentlemen, this concludes Medtronic’s first quarter earnings conference call. You may now disconnect..