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Medtronic plc (NYSE:MDT)
Q4 2018 Earnings Conference Call
May 24, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day. My name is Shelby and I'll be your conference operator today. At this time, I would like to welcome everyone to the Medtronic fourth 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. If you would like to ask a question during this time, simply press *, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the # key. Thank you.

I would now like to turn the call over to Mr. Ryan Weispfenning, Vice President, Investor Relations. Please go ahead, sir.

Ryan Weispfenning -- Vice President of Investor Relations 

Thank you, Shelby. Welcome to Medtronic's fourth 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 fourth quarter and Fiscal Year 2018, which ended on April 27th, 2018. After our prepared remarks, we would be happy to take your questions.

First, a few logistical comments -- earlier this morning, we issued a press release containing our financial statements and a revenue by division summary. We also issued an earnings presentation that provides additional details on our performance and outlook. During this earnings call, any of the statements may be considered forward-looking statements and actual results may differ materially from those projected in any forward-looking statements.

Additional information concerning factors that could cause actual results to differ is contained in our periodic reports and other filings we make with the FCC. We do not undertake to update any forward-looking statement. In addition, the reconciliations of any non-GAAP financial measures are available on our website, investorrelations.medtronic.com.

References to quarterly results increasing or decreasing are in comparison to the fourth quarter of Fiscal year 2017 and references to annual results increasing or decreasing are in comparison to Fiscal Year 2017. References to organic revenue growth exclude the impact of material acquisition, divestitures and currency.

References to pro forma exclude the impact of material divestitures. Unless we say otherwise, quarterly and annual rates and ranges are given on a comparable constant currency basis, which adjusts for material divestitures as well as the impact of foreign currency. All of these adjustment details can be found in the reconciliation tables included with our earnings press release.

Finally, other than as noted, our EPS growth and guidance does not include any charges or gains that would be reported as non-GAAP adjustments to earnings during the fiscal year.

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

Omar Ishrak -- Chairman and Chief Executive Officer

Good morning and thank you, Ryan, and thank you, everyone for joining us. I'm pleased to announce that this morning, we reported strong fourth quarter financial results. Revenues grew 6.5% organic, coming in 100 basis points above the high-end of our guidance range. This marks the second straight quarter of 6.5% organic topline growth, enabling us to more than overcome a very tough first half of the year.

Q4 non-GAAP operating profit grew 8% pro forma and 9% adjusted for currency, while non-GAAP diluted EPS grew 14% and 15% respectively. The operating margin expanded 80 basis points, pro forma, constant currency, and as we enter FY19, currency at current rates looks to be a tailwind to both margins and earnings for the first time in years.

For the full Fiscal Year 2018, revenue of $30 billion grew 4.6% organically with a further 40 basis points from acquisitions. Non-GAAP diluted EPS grew 9% pro forma and 10% constant currency. The second half of the year was particularly strong, overcoming several first half challenges, including an IT disruption, multiple hurricanes, fires in Santa Rosa, and supply constraints in diabetes.

Despite all of this, we recovered well and came in at the high-end of both the revenue and the EPS guidance we establish at the start of the year. We also continued to drive margin expansion, reduce debt leverage, and return $4.3 billion to shareholders.

We made significant progress against each of our growth strategies. In therapy innovation, we executed a number of meaningful product launches and advanced a pipeline of increasingly groundbreaking medical technology. We are creating new markets, disrupting existing markets and leading in several of the fastest growth markets in med tech.

In globalization, we continued to lead our industry in expanding access into markets around the world, including delivering another year of double-digit growth in emerging markets. In economic value, we continued to develop new partnerships in business models to accelerate adoption of our innovative therapies.

Our ability to overcome multiple challenges to deliver what we did in the second half of the year reflects the dedication of our 86,000 employees around the world, each of whom make a difference to benefit patients and fulfill the Medtronic mission. In FY18, together with our physician partners, we served over 71 million patients, or more than two patients every second.

In the fourth quarter, each of our operating groups delivered strong results, with mid-single digit revenue growth in CVG, MITG, and RTG, and over 20% growth in diabetes. Geographically, it was a strong diversified performance. With 5.3% growth in the US and 4.6% growth in non-US developed markets, including 4.4% growth in Western Europe and 5.5% growth in Japan. We also had a strong finish to the year wit 15.5% growth in emerging markets.

At the same time, we expanded our operating margin and delivered 290 basis points of operating leverage. This helped the EPS growth of 14% pro forma and 15% constant currency. As we look to FY19 and beyond, we have increasing confidence in our ability to deliver operating leverage and margin expansion as a result of our enterprise excellence program, which is now fully under way.

Looking out at group results in the quarter, our cardiac and vascular group grew 5.4%, delivering sustained growth by leveraging the breadth of its products and services, as well as its strong positions and important rapidly expanding markets. In cardiac rhythm and heart failure, we had a very good quarter in pacing, with high single-digit growth driven by the continued rollout of our Micra transcatheter pacing system as well as the recent launch of this next generation family of pacemakers. We also continued to see strong growth in infection control, and our mechanical circulatory support business.

Coronary and structural heart delivered impressive 12.8% growth, driven by the rollout of our resident Onyx drug-eluting stint in the US and Japan, as well as low-20% growth in the transcatheter aortic valves. With its innovative adaptive Bayesian trial design, which leverages prior enrollments in our previously reported off-med clinical study anchor counterpart. Patient enrollment is now well under way.

Positive results of our Symplicity Spyral, ConMed clinical trial were presented yesterday at Euro PCR meeting in Paris, validating the role this therapy can have in patients with treatment resistant hypertension as an adjunct to medical therapy.

Our minimally invasive therapies group grew 4.8%, led by 5.9% growth in surgical innovations with strength in advanced stapling and advanced energy as we capitalize on the conversion of surgical to procedures from open to minimally invasive. Our innovative products improving outcomes and driving growth, including our Signia-powered surgical stapled system, which uses our Tri-Staple 2.0 reloads as well as our ValleyLab FT10 energy platform and new iterations of our LigaSure.

Therapies were leading the development of the endovascular therapy market for the treatment of ischemic stroke, resulting in high-teens growth in neurovascular. We also had a great quarter in neurosurgery, with low double-digit growth, reflecting strong demand for our StealthState S8 navigation system, the Mazor X robotic guidance system for spine surgery, and our visual aids, MRI-guided laser ablation system.

In pain therapies, the turnaround officially under way, with back to back quarters of strong growth. Our spinal cord simulation business grew mid-teens this quarter, including high-teens in the US. we're seeing great acceptance of our new offerings in spinal cord stim, including our Intellis stimulator, our evolved workflow algorithm, and our snapshot reporting.

This is a dramatic turnaround for a business that declined in the mid-single digits in FY17 and low double digits in the first half of this year. In spine, we grew 1%, better that the global market, which we estimate is likely declining. We're seeing emerging strength in our differentiated spine products and procedures, including high single-digit growth in BMP, strong double-digit growth and [inaudible]. Strong customer adoption of our new Solera Voyager 5.5 6.0 fixation system and Arctic cage.

In addition, when coupling our spine revenue with the spine enabling technologies that are reported in our neurosurgery business, our combined revenue grew 2.7%. We believe this is a more relevant comparison of our spine results against our competition and an indication that our surgical strategy.

Outside the US, we continue to see strong demand for our 640 G system. We experienced another quarter of strong performance in Europe and have recently received regulated regulatory approval for the 640 G in Japan. All of this led to our IIM division, growing in the mid-20s internationally. In addition, our sensor attachment rates continue to increase as we shift our customer base from stand-alone pumps to sensor augmented systems. As this happens, our business is seeing an increasing revenue mix from CGM sensors, which creates a strong, consistent annuity stream for our diabetes group.

We're also excited about our entry into the $1 billion stand-alone CGM market our Guardian Connect system. As I our sensor capacity increased, we ramped up our commercial efforts for this product in Europe this quarter and expect to continue commercial expansion into the new fiscal year.

In the US, we recently received FDA approval for Guardian Connect and intend to start our broad launch in the first quarter. Guardian Connect is the only stand-alone sensor that transmits directly to a platform. It features unique predictive alerts and in the US will utilize Sugar.IQ, which is based on the cognitive computing capability of IBM Watson to detect important patterns and trends for people with diabetes.

Turning now to our globalization growth strategy -- emerging markets, which represent 15% of our revenue grew 15.5%. It is important to point out that it is not just one market driving group, but several, and reflects a board diversification. Latin America, the Middle East and Africa, Eastern Europe and China all grew double digits in the fourth quarter.

China, our largest emerging market grew 12.7% in the fourth quarter and finished the year with over $1.8 billion in revenue. This was a significant increase from the less than half a billion in revenue when I joined Medtronic seven years ago. Our differentiated strategies of public and private partnerships? I natives him to local manufacturing and R&D by making a difference, not only in China but in our emerging markets throughout the world. We're investing to build strong leading businesses in emerging markets, as we continue to collectively represent the single largest opportunity in med tech.

Our remaining growth strategy for economic value is an accelerator for therapy innovation and globalization strategies. We continue to make progress increasing new value-based business models that directly link him.

Our remaining growth strategy, economic value, is an accelerator for therapy innovation and globalizations transaction. We continue to make progress in creating new value-based business models that directly link our therapies to improving outcomes. With our direct related value-based healthcare arrangements, we now have over 1,100 hospitals under contract governing over 30% of our US CRHF and [inaudible] it was revenue.

Helping to drive sequential market share gains in ICDs and CRT -- this is one of the reasons why our performance in CRHF has been better than the street was expecting six to nine months back. The other reason was innovation, where we lead the development of several important disruptive technologies such as micro.

Finally, I want you to know that across Medtronic, execution is our top priority. You've seen that in our results in the past two quarters. In our resurgence following a string of challenges a first one is a year and then our oncoming commitment that began by achieving our Covidien cost synergies and is now being extended into our enterprise excellence initiative. We know there is much work to be done, but we are excited and optimistic, as our direction is clear, our pipeline is full and our team has never been stronger.

With that, let me ask Karen to now take you through a discuss of our fourth quarter financials. Karen?

Karen Parkhill -- Executive Vice President and Chief Financial Officer

Thank you, Omar. As mentioned, our fourth quarter revenue of $8.144 billion represented a 2.9% increase as reported and organic growth of 6.5%. Foreign currency had a positive $315 million impact on fourth quarter revenue. GAAP diluted earnings per share were $1.07. Non-GAAP earnings per share were $1.42. After adjusting for the divestiture, non-GAAP diluted EPS grew 14% pro forma and 15% constant currency.

The operating margin for the quarter was 30.2%, representing an 80-basis point improvement on a pro forma constant currency basis. Gross margin was down 50 basis points, reflecting our sales mix in the quarter. The impact of mix on our gross margin this quarter was more than offset by 150 basis point improvement on SG&A on a pro forma constant currency basis reflecting our companywide initiatives on expense leverage.

Net other expense, which is included in our operating margin, was $188 million. This was slightly higher than expected, primarily due to market to market on some of our investments. Foreign exchange in total had 160-basis point negative impact on our operating margin in the quarter, primarily due to the year over year change in currency gains and losses related to our hedging program. The good news is based on current rate, we expect the currency headwind that's plagued us for several quarters on the operating margin to turn into a tailwind in Fiscal 19, starting in the first quarter.

Our fourth quarter non-GAAP nominal tax rate was 14.9%, slightly better than expected given favorable IRS audit resolution. Fourth quarter average daily shares outstanding on a non-GAAP diluted basis were 1.366 billion shares. As expected, this was roughly flat sequentially. Combining our $1.8 billion of net share repurchase in Fiscal 18 with the $2.5 billion we paid in dividends over the same period, our total payout ratio was 65% on non-GAAP net income and 118% on free cashflow.

Free cashflow for Fiscal 18 was $4.7 billion above our prior guidance range and after adjusting for a $1.1 billion prepayment to the IRS related to our Puerto Rico tax litigation. While the litigation is still in process, given our access to cash post-tax reform, we elected to put as much of this potential $1.5 billion liability as possible behind us.

By prepaying, we were also able to stop the accrual of significant interest. In the quarter, we reduced debt by approximately $3 billion, allowing us now to focus on other capital allocation priorities going forward. Given US tax reform, we will be continuing the liquidation of some of our events overseas, note that this will negatively impact interest income, but it will enable increasing access over the next several quarters to our formally trapped cash on our balance sheet. We intend to put this cash to work by investing in our business and returning to our shareholders.

Now, looking at the picture ahead, for Fiscal Year 19, we expect organic revenue growth to be in the range of 4% to 4.5%. By business group, we expect CBG, MITG, and RTG to grow 4% plus or minus with CBG likely on the minus side given the anniversary of major product launches in coronary and structural heart and MITG and RTG to be more in line with the 4%.

We expect diabetes to grow in the low double-digits with a stronger first half off of low comparison. For the first quarter, we expect total company revenue to be consistent with our guidance for the year. In addition to CBG, we expect MITG to be on the minus side of the full year, given more difficult comparisons from Endo Stapling and capital sales, offset by more robust growth from diabetes with continued 670 G strength.

Turning to margins, we expect operating margin expansion in Fiscal Year 19 of approximately 50 basis points on a pro forma constant currency basis, driven by our enterprise excellence initiative. For modeling purposes, we would assume a slight improvement in the first quarter, with increasing improvement through the remainder of the Fiscal Year.

We expect our tax rate to be between 14% and 15%, roughly in line with our Fiscal 18 tax rate. With respect to earnings, we expect Fiscal Year 19 non-GAAP diluted earnings per share in the range of $5.10 to $5.15. This implies EPS growth of 10% at the midpoint of the range. For the quarter, we expect non-GAAP diluted EPS in the range of $1.10 to $1.12 off the Fiscal 18 base of $1.03. We recognize that the Street didn't have the full picture on first quarter comparisons, pro forma for the divestiture until we shared them last week in an 8-K. So, hopefully that filing helped.

Also, keep in mind, we had a lower tax rate in the first quarter last year from benefits not expected to repeat, creating a roughly $0.03 headwind in the first quarter. Finally, on free cashflow, we expect $4.7 billion to $5.1 billion in Fiscal Year 19. This excludes a potential final $400 million payment to Puerto Rico related to our pending litigation that I referenced earlier, the timing and outcome of which is uncertain.

Over the next couple of years, we expect to make significant progress in improving our free cashflow conversion, as litigation and tax payments are expected to diminish and we benefit from programs we have put in place to improve working capital.

While the impact from currency is fluid, if recent exchange rates hold, our full year revenue would be negatively affected by approximately $50 million to $150 million. Recall at the time of our third quarter earnings call it was a $500 million positive impact. However, despite this $600 million swing, FX is still a modest positive for Fiscal 19 margins, earnings, and free cashflow because of our hedging program.

If recent rates hold, we would expect a reported operating margin of 28.5% for the year and a $0.05 tailwind to full-year EPS. For the first quarter, if recent rates hold, revenue would be positively affected by approximately $90 million to $130 million, operating margin would have a slight benefit and EPS would have a $0.02 benefit.

Before I turn the call back to Omar, I would like to note that we plan to hold our biannual institutional investor and analyst day on Tuesday, June 5th in New York City. We intend to discuss our long-term strategies and share our long-range plan at that time. Now, I will return the call back to Omar.

Omar Ishrak -- Chairman and Chief Executive Officer

Thanks, Karen. To summarize, we have delivered two consecutive quarters of strong revenue growth to finish our fiscal year. We also expanded our operating margin and delivered meaningful EPS leverage. Looking ahead, we feel good about the growth opportunities in our markets and our competitive position in these markets. We expect continued revenue growth and margin expansion and we're also focused on generating strong free cash flow conversion and making the right investments to drive shareholder value. Finally, execution is our top priority.

Before we turn to Q&A, we had the benefit of Mike Weinstein joining us earlier this month. Given his recent transition, we thought it might be helpful for him to make some comments. Mike?

Mike Weinstein -- Senior Vice President of Strategy

Certainly. Thanks, Omar. I'll make a few comments. For starters, it was a great quarter. There's a lot of work to do. I certainly don't want the street to get out ahead of us, but this was a good quarter. Six to nine months ago when I was on the other side of this call, we were all on the sell side. We were worried about the company's ability to execute in the face of competition, competitors introducing MRI-compatible pacers and ICDs, deep brain simulators, and surgical cardiac monitors, etc.

Now, here we are six months later and Medtronic has delivered back to back quarters of 6.5% organic growth. Again, I don't want everybody to extrapolate from that and start modeling 6.5% going forward, but I do think it speaks to the breadth of the franchise and the number of growth drivers moving in the right direction, which honestly the street, myself included, underestimated or missed six months back.

RTG, as you noted, Omar, had its best quarter in years, growing 6% organic, despite all the challenges we're aware of in the spine market. Neurovascular grew to high teens, neurosurgery grew low double-digits, and the pain stim business has had a remarkable turnaround, growing mid-teens this quarter after a meaningful decline in the first half of this year. That's all heading in the right direction.

Diabetes obviously had a fantastic quarter, growing 20% plus, well north of what the Street was modeling. Guardian stand-alone hasn't launched in the US and that's going to start this quarter. I could go on -- in fact, all four operating groups, CVG, MITG, RTG, and Diabetes did better than the Street was modeling.

But the good news is not just the top line. Margins are starting. I emphasize starting to go in the right direction, gross margins beat by 20 basis points, SG&A beat by 80 basis points, the FX headwind to margins, which was severe this quarter, at 160 basis points, which we were all focused on three months ago should go away as we head into 2019 obviously assuming current rates, but there's a long ways to go.

The good news is we all know that. As Omar said, execution is the number one priority right now. We're not going to let one or two good quarters go to our head. I feel good we're heading in the right direction and investor meeting on the 5th will give us a chance to talk about it some more.

Omar Ishrak -- Chairman and Chief Executive Officer

Thank you, Mike. Let's open the phone lines now for Q&A. In addition to Karen and Mike, I've asked Mike Coyle, who's President of CVG, Bob White, 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 questions as possible. So, please help us by limiting yourself to one question and if necessary a related follow up. If you have additional questions, please contact Ryan and our investor relations team after the call. With that, Operator, first question, please.

Questions and Answers:

Operator

Your first question comes from Bob Hopkins of Bank of America.

Bob Hopkins -- Bank of America Merrill Lynch -- Managing Director

Thanks very much and congratulations on a great finish to the fiscal year. It's very clear strength and great to see. So, I have a quick question for Karen and then a follow-up for Omar. Karen, to start with on operating margins, it's obviously been a focus point for investors. You delivered 80 basis points of underlying margin in Q4 and 20 basis points for the Fiscal Year on your guiding to 50 for 2019.

So, I was wondering if you could talk about the 80 basis points of underlying improvement in Q4, which was a little shy of what you were hoping for at the 100 basis points you talked about. More importantly for 2019, can you talk about your goal of delivering 50 basis points of underlying margin improvement, which is above the 20 basis points you did this year? What are the drivers of that? How much of that is from the restructuring? What gives you confidence you can do 50 next year when you did 20 this year? Thank you.

Karen Parkhill -- Executive Vice President and Chief Financial Officer

Thank you for the question, Bob. We were pleased with the operating margin improvement in the fourth quarter of 80 basis points. Keep in mind that that was driven through committee and synergies that we are now benefiting from as well as the companywide focus on expense leverage and it was delivered mostly through improvement noted through 150-basis point improvement in our SG&A.

But going forward, we do expect to continue to drive operating margin improvement. We have a companywide program around enterprise excellence, which is intended specifically to drive margin improvement and also to help us offset the pricing headwinds and continue to reinvest in our company.

That enterprise excellence program is well-structured, well under way and we're confident in our ability going forward to continue to drive this margin expansion. We'll talk more about it at investor day as well.

Bob Hopkins -- Bank of America Merrill Lynch -- Managing Director

I did want to follow up with Omar on the emerging market growth. It really seems like a standout from the quarter. It drove over 2 points of growth in the quarter. So, maybe talk about the sustainability of that emerging market growth. Were there any one-time things impacting this quarter? What do you assume for Fiscal 19 in terms of emerging market growth? Thank you.

Omar Ishrak -- Chairman and Chief Executive Officer

Thanks, Bob. Like I mentioned earlier, the story in our emerging markets is our diversification and our presence in multiple geographies. China is still the largest. We have significant presence in the Middle East and Africa and Latin America. In the fourth quarter, all of these geographies grew in the mid-teens. So, that helped a lot in the fourth quarter performance.

Going forward, we certainly expect double-digit growth in the merging markets. That said, the low double-digits, that's what we've been performing consistently over time. There was certainly no one-time swing here in the fourth quarter. I think the diversification is playing out well for us with three big geographic collection of countries that are well-diversified among themselves. That's what gives us a confidence we can continue to do this and the biggest confidence that we have is we've been delivering this for the past five years. So, there's nothing other than better performance to expect going forward.

Bob Hopkins -- Bank of America Merrill Lynch -- Managing Director

Terrific. Thank you.

Operator

Your next question comes from David Lewis of Morgan Stanley.

David Lewis -- Morgan Stanley -- Managing Director

Good morning. A couple questions for Karen -- talking about growth, you mentioned the first quarter growth guidance you're assuming is comparable to your growth guidance to the remainder of the year, but the first quarter is also the easiest comp of the year and if you go back to Fiscal 18, the defining element of that year was the first half was dramatically weaker than the second half. I guess said more simply -- what drives the momentum and improvement across the remaining three quarters if the first quarter is going to be comparable with the remainder of the year.

Karen Parkhill -- Executive Vice President and Chief Financial Officer

I would remind everyone that our first quarter comes off the heels, typically, of a very strong end to our fiscal year. So, the first quarter is typically not our most robust growth quarter. The second quarter will be the quarter next year that comes off very low comparisons, much more so than the first quarter.

We're confident in the guidance that we've given for the first quarter, consistent with our annual guidance of 4% to 4.5%, but I would remind folks that both for CVG and MITG in the first quarter, we do expect both businesses to be on the minus side of that 4% with MITG having a difficult year over year comparisons from endo stapling and capital sales and CVG being the anniversary of some major product launches last year.

David Lewis -- Morgan Stanley -- Managing Director

Okay. Very helpful, Karen. The second question is just on cashflow. I know improving cashflow is a big focus for '19 and beyond. I imagine it will be a focus for the analyst day in a couple weeks. Can you talk about for Fiscal 19, operating cashflow assumptions, CapEx assumptions, free cashflow conversion and maybe a little bit about some of the executive compensation changes that may be happening around free cash? Thanks so much.

Karen Parkhill -- Executive Vice President and Chief Financial Officer

Thanks for the question, David. On free cashflow for FY19, we said that we expect it to be between 4.7% and 5.1%. We have improved our conversion ratio and honestly, we expect to improve that conversion ratio going forward, specifically over the next couple of years. In terms of things that impact cash, on cash from operation, we expect that to grow in line with earnings on CapEx. We expect CapEx to be roughly flat year over year.

We expect to spend over $1 billion in CapEx like we did this year. We will have certain other payments related to our restructuring program and some continued legal payments, but we do expect tax, specifically when you include the $1.1 billion related to the Puerto Rico litigation to decline meaningfully. We will still have that potential $400 million payment to Puerto Rico. It's unclear whether or not that payment will need to be made in Fiscal 19. It will need to be dependent on the litigation. But we will have that as well.

Operator

Your next question comes from Vijay Kumar of Evercore ISI.

Vijay Kumar -- Evercore ISI -- Managing Director

Hey, guys. Congratulations on a nice quarter here. So, maybe Karen was just talking about the guidance and the cash conversion rate. For the EPS guidance, what kind of assumptions are we making on capital deployment. When you talk about cash conversions improving, what should we normalize cash conversion for this business? Can Medtronic go to 90% or north of 90% over the medium term?

Karen Parkhill -- Executive Vice President and Chief Financial Officer

So, on EPS, we are assuming this is organic. We obviously don't assume that we make any acquisitions or divestitures. On tax, I did say that we expect 14% to 15% tax rate for the year and on our debt, we expect that to remain relatively stable now that we have completed the debt pay down that we have talked about. In terms of return to shareholders, we did announce recently that we expect to repurchase $1.2 billion in shares throughout the year. That was commensurate with us talking about some debt tendering that we were doing.

In terms of a normal cash conversion, keep in mind that our med tech industry is typically around the 80% conversion rate and we expect to be improving to that range over the next couple of years. We are very focused on it and we expect particularly some of the one-time charges that we've had over the past will be diminishing.

Vijay Kumar -- Evercore ISI -- Managing Director

That's extremely helpful. Maybe one for Omar -- Medtronic has always done a fantastic job on topline. I think the issue for us has always been maybe modeling some of the FX impact and moving parts. The prior analyst said a lot of the focus was on innovation, topline, what's happening with Medtronic. When we think about the upcoming analyst day, is there anything that's going to be different on this analyst day? Should we be expecting any update on the robot or anything else you want to highlight? Thank you.

Omar Ishrak -- Chairman and Chief Executive Officer

I can assure you that technology and innovation will still be at the top of the agenda. That's what we're most excited about. That's what fuels this company. Our pipeline is fuller than it's ever been. I'm really looking forward to sharing all of that with you on investor day. But really, we're laying out an enterprise excellence program. Our focus on operating margins, our focus on cashflow are elements that are serious and I expect they will come through at analyst day.

Again, there's going to be no drop off around our excitement around technology. If anything, it's increased. You'll see exciting examples from all of our groups. I do want to emphasize the operating margin focus and our cashflow conversion focus driven by our enterprise excellence program will be clear as well.

Vijay Kumar -- Evercore ISI -- Managing Director

Sorry, on the robot, should we be expecting any update on the robot?

Omar Ishrak -- Chairman and Chief Executive Officer

Robot is a major program for us. We're going to talk about it.

Operator

Your next question comes from Larry Biegelsen with Wells Fargo.

Larry Biegelsen -- Wells Fargo -- Analyst

Good morning. Thanks for taking my question. One on TAVR and one on new product launches in Fiscal 2019. So, maybe for Mike Coyle -- by our math, it looks like the worldwide TAVR market did slow a bit in calendar Q1. Is that accurate? What are you seeing in the market? PCR today, one of the presenters said that you would be presenting your low risk data at ACC in 2019. I just wanted to confirm that's accurate. Lastly, on TAVR, any expectations for the MEDCAC? Do you think it's more likely to expand, keep the same or decrease centers.

Mike Coyle -- President of CVG

Thanks for the question, Larry. In terms of the TAVR growth profile for the quarter, we would peg TAVR growth somewhere in the vicinity of the high-teens, which obviously is a slowdown from two years ago, it was mid-20s, but that's very strong growth given the size that market has grown to. For us, we've been growing faster than that in the low 20s. It's been a growth driver for us and we expect it to be an important growth driver for us.

In terms of the MEDCAC, our position is intermediate compared to what we hear coming from some competitors. We believe the current decisions covers all the indications for TAVR that are approved. We don't see constraint at the moment in terms of being able to meet demand. We do think what the societies are proposing, we can see upwards of 35% of the centers now falling out of it with the ability to provide TAVR. It's continuation. We think it might be the right time maybe in a couple of years.

Larry Biegelsen -- Wells Fargo -- Analyst

Thanks, Mike. Omar, I know you have your analyst date in a week or two. Just to give us guidance in product launches in 2019 -- what are the product launches you're most excited about for Fiscal 19. Thanks for taking the question, guys.

Omar Ishrak -- Chairman and Chief Executive Officer

I'll just name a few and we'll go through our overall pipeline in greater depth. The pain business -- this turnaround in pain is very significant. We're extremely excited about what we're seeing. We're seeing that with the Intellis workflow and our staff's reporting. I think these are unique elements in that industry. It's a massive turnaround form as recently as the first half year, something we're getting a lot of traction. Continued momentum in pain is something we will definitely see.

Diabetes is the other one. We're starting there to get the full benefit of the 670G in the US and we're extremely excited about what see. But equally, we've got penetration of the 670G into global markets. On the back of a 640G, which is already very successful. Then the Guardian Connect another opportunity I mentioned which also is a big area for both of us.

I think CVG, you heard Mike talk about it. One I'm extremely excited about is the further evolution of the micro product, which is a revolutionary product for us and one that we're extremely broad. We expect an exciting year full of new products which will continue to fuel our growth.

Larry Biegelsen -- Wells Fargo -- Analyst

Thanks for taking the questions, guys.

Operator

Your next question comes from Robby Marcus of J.P. Morgan.

Robert Marcus -- J.P. Morgan -- Analyst

Hi and congrats on the good quarter. Two of the businesses that stood out were diabetes and spinal cored stem. Omar, you touched on this briefly in the last question. You have two product launches there. Maybe you can give more color into what you're seeing and how you think that's impact markets.

Omar Ishrak -- Chairman and Chief Executive Officer

Sure. I'll let the two group leaders briefly comment on that. Hooman, you want to go with diabetes first?

Hooman Hakami -- President of Diabetes Group

Sure. Robby, I think the quarter was really strong. We had great balance across businesses, across geographies. I'd say there were really two main drivers. The first is strong global pump growth that we saw. Omar just touched on this a second ago. The first was continued strong uptick of the 640G in markets outside the United States, but in particular Europe.

Then we have seen continued strong performance out of the 670G. This is really encouraging because in many ways, we're just getting started here. So, you look at those dynamics -- all of those led o 6 points of share gain for across consumable and durable pumps this past quarter, which we're obviously really excited about.

The second big driver for us was the pull through of sensors. As we sell more integrated systems, we're seeing more sensor pull through. So, both the 640G, the 670G are driven by sophisticated algorithm where the pump and the sensor work together to keep a patient in control. As we sell more of these systems, the more sensors we've pulped through.

Looking forward, we expect both of these things to continue and for us starting to capitalize on it stand-alone

Omar Ishrak -- Chairman and Chief Executive Officer

Geoff, you want to...

Geoff Martha -- President of RTG

It's much, much smaller than the competition. It's much faster recharge, very little battery fade over time, MR compatible, etc. So, there's some real compelling differences there. Then in addition our evolved workflow which really drives the outcome has been, I believe, underappreciated. These two things taken together get us back in the game.

Regarding evolve, we're still building credibility as we produce more robust data over time. We just launched our vectors trial, which is our prospective clinical trial testing multiple aspects of evolve. Enrollment is under way and on schedule. We anticipate the first release of this data at NANS in January of 2019. In addition, we published some data from -- we call it the Vertaling data from Dr. Vertaling. We presented that recently at two scientific meetings and we got really strong results. We're seeing really strong data from evolve and that's going to continue to build over the course of the year and help us access a whole new group of physicians and patients. We're really excited about the pain stim business and the strong market growth and how we're positioned within it.

Robert Marcus -- J.P. Morgan -- Analyst

Thanks, a quick follow up for Karen -- with FX moving so much, maybe you can help us going in on things the income blind and with higher interest expense, run rate, what that might mean for next year. Thanks.

Karen Parkhill -- Executive Vice President and Chief Financial Officer

Sure. In terms of FX, with the recent movement over the last month in currency rate, we do now expect a bit of a headwind for the full year of FX on revenue and I mentioned between $50 million to $100 million. I also mentioned the good news is that we still expect a positive margin. You had a second question, Robby. Will you remind me of that one?

Robert Marcus -- J.P. Morgan -- Analyst

Just how the FX impacts P&L and what interest expense might look like with the higher run rate.

Karen Parkhill -- Executive Vice President and Chief Financial Officer

Right. On interest expense, obviously interest rate has been increasing, so we will have a modest impact on that on an interest income perspective. We are focusing on liquidating our overseas portfolio. As we do that, we will have interest income coming down a little bit.

Operator

Your next question comes from Isaac Ro of Goldman Sachs.

Isaac Ro -- Goldman Sachs -- Analyst

Question on the 2019 op margin expansion guidance you gave for that 50 basis points. If I think about your prior plan for that $3 billion in growth cost savings through 2022, can you help us understand what's embedded in the 2019 guidance as it relates to that program? It would be helpful to understand the pacing there and the net effect.

Karen Parkhill -- Executive Vice President and Chief Financial Officer

Sure. When we gave our enterprise excellence, when we announced our enterprise excellence program and talked about the over $3 billion in savings and leverage that would deliver through 2022, we also said that we expected over $500 million to $700 million impact or positive savings and leverage annually each year. That is now embedded into our forecast. So, that program is designed to offset pricing pressure, which we expect continued pricing pressure. It is also sure that we can continue to reinvest, particularly in R&D and it is intended to drive operating margin improvement and expansion. For next year, I mentioned we expect operating margin expansion of about 50 basis points pro former constant currency.

Isaac Ro -- Goldman Sachs -- Analyst

Okay. Got it. Maybe just a follow up question on a couple product specifics. Specifically on SCS, Omar, I think you called out the mid-teens growth there a little bit better in the US, trying to understand the sequential trend from here, do you expect that growth rate to expand on a year on year basis trying to figure out what's embedded there. Thank you.

Geoff Martha -- President of RTG

Sure. It's clearly off to a strong start. I caution you to not extrapolate continued further growth in terms of market share until some of this data comes out. The data that I mentioned a few minutes ago is going to take some time and that will, I think, drive incremental growth. We do think it will maintain. This is a sustainable growth driver, but we need to provide more data to accelerate that growth rate. It is not a one-time blip. We do think this is going to sustain.

Operator

Your next question comes from Raj Denhoy of Jefferies.

Anthony -- Jefferies -- Analyst

Thank you, Anthony in for Raj -- maybe two product questions and then an operating margin question. Just to clarify on 670G gains, is that from prior MDI patients or existing pumps? That's the first product question. The second would be on Spyral, you had data out at PCR. Maybe just a recap on why this program is different from the prior Symplicity program and what the update on market opportunity is there. And then on operating margin -- can you clarify that market to market gains and losses on securities, how that could impact operating margin next year and if the company is contemplating shifting that out of other income? Thanks.

Hooman Hakami -- President of Diabetes Group

So, Raj, with respect to the 670G, we are getting penetration of the 670G across patient populations, certainly our own install base, competitive conversions, and MDIs, so we are seeing all three. I think as you look forward, though, we do expect more penetration within MDI as the data comes in. Now we have, as you heard from the commentary, 70,000 trained patients are in line with the pivotal. As more of this data comes through and physicians see this data, I imagine we'll greater penetration within MDI.

Mike Coyle -- President of CVG

As it relates to Spyral, there were a whole bunch of things different about the data that was presented here, both the ESC last fall as well as the data shown yesterday at the PCR meeting. But one thing, the device is different. The data was studying the flex device. This is targeting a different part of the anatomy, going more in the renal artery, which is where we're seeing congregation of the nerves that we're trying to denervate. That has been an important contributor to the reliability of the denervation.

Number two, the patient population is different. In the original study, we had mostly loan systolic patients, older patients involved who had extensive hardening of the arteries, which were less responsive to the treatment. By moving to the patient population, it's actually a bit less sick, but has both systolic and diastolic tension. We've seen a much higher response rate that was shown in the HDN 3 data and has now been validated here.

In addition, we're using ambulatory blood pressure measurement as the basis for the analysis, which gets away from a lot of the white coat hypertension issues that we're shown, but probably the biggest difference here, what's become clear is that patients are not compliant to their medications. We showed the data yesterday that basically 40% to 50% of patients who say they're taking medication are not taking medication.

We're able to look at that through blood levels. It's very clear that that was a huge confounder to the original HDN 3 data in that it created a huge variability in the statistics. So, by carefully factoring that out in our analysis, we were able to now show the off-med study that was shown but the on-med study, we had not only statistically significant but clinically significant reductions in the blood pressure levels.

So, we are now rolling into the pivotal study using the Bayesian design, which means we're already 35% of the enrollment phase of the study for the pivotal trial. It's a very exciting program for us, something we spent a lot of years fixing and now we're glad we're moving ahead with the pivotal trial.

Karen Parkhill -- Executive Vice President and Chief Financial Officer

And on operating margin, yes, I did mentioned we had to market to market losses in the quarter. They were primarily related to the warrant that we own on Mazor. Yes, we are planning to shift market to market gains and losses going forward into non-GAAP reporting.

Anthony -- Jefferies -- Analyst

Thank you.

Operator

Your next question comes from Bruce Nudell of SunTrust.

Bruce Nudell -- SunTrust -- Analyst

Hi, good morning. Thanks for taking my question. Omar, question for you and then a couple questions on product -- so, firstly, looking at the midpoint of topline guidance next year, it's feeling like you're thinking developed markets for Medtronic will grow 2.5% to 3% and emerging markets 12% to 15%. Is that the right way to be thinking about it and is that really the slowdown in developed markets due to the product introduction timing?

Omar Ishrak -- Chairman and Chief Executive Officer

Emerging markets are in the double-digits. I think that's the way you should model it. I think we've got confidence in that. The remainder is the developed market. I think if you build a model out from that, that's the way to do it. I think if we build a model out from that, that's the best way to do that. We're pretty confident and then the swing will usually be driven by innovation cycles.

Bruce Nudell -- SunTrust -- Analyst

Thanks so much. Then Geoff, just on the spinal cord stimulation -- what's the internal confidence that the low-kilohertz sub perception is really equivalent to 10 kilohertz and that optionality is also very important to having durable long-term pain relief.

Geoff Martha -- President of RTG

That's been our position and our data is proving that out, that patients benefit over time from the optionality of high dose and low dose energy. That's really the heart of all the workflow. So, one -- make it simple. Having the flexibility to toggle between high dose and low dose, we think, over time produces the best outcomes. However, you need to provide physicians with the recipe for doing that so they can get consistent outcomes and mitigate complex patient follow up. That's our evolved workflow.

We're very confident in that, not just internally, but you're seeing external confidence building. I mentioned the Vertalin data we just talked about and our Vectors trial that we will be announcing the data on that in NANS in 2019.

Bruce Nudell -- SunTrust -- Analyst

My final question is Sapien 3 showed very good results extracted from the TBT registry in bicuspid patients. I'm pretty sure you guys have done the same sort of analysis and can you just say how CoreValve is looking in that registry across bicuspid patients that are of course, important, once a low-risk label is garnered?

Geoff Martha -- President of RTG

I think we'll wait until we're prepared to show the data, but we are absolutely doing that analysis as the basis for approval for bicuspid. Obviously, the rich data set of TBT is going to provide us the basis to see what the effect is. We are very optimistic about that analysis being supportive of seeing similar outcomes to what we see in the intermediate risk and higher risk groups.

Bruce Nudell -- SunTrust -- Analyst

Thanks so much.

Ryan Weispfenning -- Vice President of Investor Relations 

Shelby, we'll take one more question, please.

Operator

Your final question comes from Steven Lichtman of Oppenheimer.

Steven Lichtman -- Oppenheimer & Co. -- Managing Director

Thank you. Hi, guys. First question on core spine -- as you mentioned during prepared remarks, the recent soft patch known, I was wondering what your latest views on the market are, maybe most recent thoughts on the drivers or the growth challenge and do you think we can see a pickup and what would be the driver there?

Geoff Martha -- President of RTG

First of all, I'd say Medtronic's fine. I'm pleased with our performance against the softer market you mentioned. We grew our spine business as reported 1% and then when you combine that with our enabling technologies, things like spine navigation and robotics, we grew closer to 3%. So, we believe this is definitely outpacing the competition.

Now, regarding the softer market, what we're seeing is that historically, the procedure growth has outpaced the pricing pressure, for maybe a net 2% to 3% global market growth. But in the last couple quarters, that procedure growth has softened and it has not outpaced the price pressure. You're seeing more of a flat, slightly down market.

That's why I'm excited about our performance and that's been driven by the core spine and biologics piece is in high single-digit growth is in BMP and our lateral approach called OLIF, strong double-digit growth with our Prestige LP cervical discs. Then we've got a number of new product launches that are starting to take hold, our Solera, our Voyager 5560 fixation system, our Artic-L 3D-printed titanium cage.

Then coming up here shortly, we've got an Infinity posterior cervical system coming to market. That's the whole speed to scale strategy of our core spine business. Then on top of that, our navigation, robotics, power tools, nerve monitoring, all that together further integrating that and helping physicians use these tools to improve both clinical and economic outcomes, we believe that combined with our spine business is going to be growing 3%+ going forward.

The final thing I'd say is our global exposure. In China, for example, which is a big business for us, our spine business is growing 8%. So, our OUS growth is stronger than our US growth in pulling up the business.

So, those three things -- continued speed to scale of our product launches within core spine, enabling technology, improving clinical and economic outcomes is really differentiating us and helping our core spine business and then finally the mix of OUS growth, particularly in emerging markets, those three things will help us grow faster than the market.

In terms of predicting the market, that's hard to do. We don't think it's going to get much weaker. We do think it's going to be a slight uptick, but it's very hard to predict that.

Steven Lichtman -- Oppenheimer & Co. -- Managing Director

Thanks for that. Karen, just a clarification on capital allocation in FY19. You were clear on the reduced interest income as you position the balance sheet post tax reform -- are you assuming any uses of that freed up cash, whether through reinvestment in the business or enhanced buybacks beyond the $1.2 billion that you've talked about?

Karen Parkhill -- Executive Vice President and Chief Financial Officer

At this stage, the liquidation of these assets properly will take some time. We're not necessarily anticipating any large change in capital allocation other than what we've already communicated.

Steven Lichtman -- Oppenheimer & Co. -- Managing Director

Thanks, guys.

Omar Ishrak -- Chairman and Chief Executive Officer

With that, thank you all for your questions. On behalf of the entire management team, I'd like to thank you for your support and interest in Medtronic. We look forward to discussing our long-range plan with you on investor day a week and a half from now on investor day and we also plan on holding our next earnings call, the Q1 earnings call on Tuesday, August 21st. Thank you all very much.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 65 minutes

Call participants:

Ryan Weispfenning -- Vice President of Investor Relations 

Omar Ishrak -- Chairman and Chief Executive Officer

Karen Parkhill -- Executive Vice President and Chief Financial Officer

Mike Weinstein -- Senior Vice President of Strategy

Mike Coyle -- President of CVG

Bob White -- President of MITG

Geoff Martha -- President of RTG

Hooman Hakami -- President of Diabetes Group

Bob Hopkins -- Bank of America Merrill Lynch -- Managing Director

David Lewis -- Morgan Stanley -- Managing Director

Vijay Kumar -- Evercore ISI -- Managing Director

Larry Biegelsen -- Wells Fargo -- Analyst

Robert Marcus -- J.P. Morgan -- Analyst

Isaac Ro -- Goldman Sachs -- Analyst

Anthony -- Jefferies -- Analyst

Bruce Nudell -- SunTrust -- Analyst

Steven Lichtman -- Oppenheimer & Co. -- Managing Director

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