美敦力 (MDT) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by.

Good afternoon and welcome to Medtronic's second quarter earnings conference call. (OPERATOR INSTRUCTIONS).

Today's conference is being recorded.

With that being said, we will get right to the second quarter agenda.

Here with our opening remarks is Medtronic's Vice President of Investor Relations, Ms. Martha Goldberg Aronson.

Please go ahead, ma'am.

Good afternoon, and welcome to Medtronic's second quarter fiscal 2007 conference call and webcast.

As you heard, my name is Martha Goldberg Aronson, and I am the new Vice President of Investor Relations.

I have not yet had the chance to meet many of you in person, but I look forward to doing so in the near future.

During the next hour we will review the operational and financial results of our second quarter, which ended October 27, 2006.

Following these introductory remarks, Medtronic Chairman and Chief Executive Officer, Art Collins, will provide a brief overview of Medtronic's second quarter results and current position.

Next, Bill Hawkins, Medtronic's President and Chief Operating Officer, will provide insights on individual businesses, markets and productlines.

Chief Financial Officer, Gary Ellis, will follow with a financial summary as well as guidance for the balance of this fiscal year and fiscal 2008.

After our prepared remarks we will conduct a question-and-answer session, concluding the conference call around 4.30 PM Central time.

A few logistical comments.

This call is being audio simulcast on the Internet via the Medtronic homepage, www.Medtronic.com.

The press release, along with Medtronic's earning statement, balance sheet, cash flow and revenue by business summaries are available to the public via our webpage.

This quarter we are providing additional information in the revenue by business summary, so I encourage you to take a look at it.

In addition, we will post a transcript of the prepared remarks on our website following the conclusion of this call, which will remain available on our website until our next earnings call.

Today's commentary should be considered and evaluated in light of the important disclosures and reconciliations contained within our press release as filed with the Securities and Exchange Commission.

Please telephone Medtronic Investor Relations or Corporate Communications if you are unable to access the press release or the transcript.

Today's webcast will also include statements regarding Medtronic's anticipated financial results, market growth, product acceptance and regulatory approvals, as well as other forward-looking statements based on management's current expectations.

It is important to note that our actual results may differ materially from those anticipated.

Information on factors that could cause actual results to differ materially from these forward-looking statements is contained in Medtronic's Form 10-K for the year ended April 28, 2006 filed with the Securities and Exchange Commission.

We encourage you to review those carefully.

All statements are made as of today's date, as we undertake no duty to update the information provided in this call.

Unless we say otherwise, the comparisons we make today will be on and as reported basis, not on a constant currency basis.

Also, any references to quarterly revenue figures increasing or decreasing are in comparison to the second quarter of fiscal year 2006.

With that, I am now pleased to turn the call over to Medtronic's Chairman and Chief Executive Officer, Art Collins.

Good afternoon everyone.

By now most of you should have seen the press release discussing our second quarter financial results.

Compared to the second quarter last fiscal year revenue of $3,075,000,000 increased 11%, including a $33 million or 1% positive impact of currency translation.

Net earnings for the second quarter of $681 million translated into diluted earnings per share of $0.59.

To make a meaningful comparison you need to adjust last year's second quarter earnings for special gains and charges and pro forma stock option expense.

On that basis, which we believe gives a more accurate picture of our year on year operating performance, diluted earnings per share increased 13%, which was $0.03 above the consensus estimate.

On a pure GAAP basis, earnings for the second quarter decreased 12% due largely to the $225 million favorable impact of a tax accrual reversal in last year's second quarter.

Let me begin by stating that I am very pleased with our second quarter results.

All of our major businesses grew revenue over the prior year, as well as sequentially over the first quarter.

In addition, we believe we gained share in all of our major productlines.

In a few minutes Bill Hawkins will provide greater detail on these results, and also update you on our key initiatives to continue to drive growth in our various markets.

This quarter's performance also reflects the strength of our broad and diversified portfolio, which serves many of the fastest-growing segments in medical technology.

While delivering strong financial results in both the United States and international markets, we continue to make significant investments in our future.

R&D spending increased 16% this quarter and SG&A increased by 15% as we continue to add field personnel to support growth and to prepare for a number of new product launches.

Investments in important clinical trials continue and are a critical component of expanding therapy adoption, with over 200 clinical studies underway or plan to begin very soon.

We will continue to invest to support future growth, and you'll hear more about specific initiatives in just a moment.

Before I turn the call over to Bill, I will share with you some of the outcomes of this year's strategic planning process that concluded during this past quarter.

As many of you know, each year we conduct a thorough assessment of every business as well as of the Company as a whole.

As part of this process we review the internal and external factors that may impact our future results and we prepare five-year pro forma forecasts.

When we compiled all the business unit projections this year, five-year compound revenue growth was projected to be slightly over 14%, and EPS was estimated to grow at a compound rate of slightly over 15%, which is generally consistent with what we have seen in previous years.

As is always the case, these projections do not include assumptions for the impact of any acquisitions, divestitures or special gains or charges.

However, as I recently told attendees at our senior management meeting, I do expect that over the next five years we will add several new growth platforms, either through internal development, acquisition, or a combination of both.

I also expect that we will more actively reallocate resources among existing businesses and selectively prune productlines that are either no longer strategic to Medtronic or that do not have growth or profitability profiles that support of our corporate objectives.

As we review the changing external environment and competitive landscape, as well as our business plans, several common themes were clearly evident.

I look forward to discussing this subject in greater detail with you at our investors meeting in New York the morning of January 19.

Before we move on, let me make one final comment.

As I told you after the first quarter, we were disappointed with the deceleration in the U.S.

ICD market and the resulting impact on our business results.

However, I am very encouraged by the performance this quarter, thanks to the efforts, determination and resilience of our organization under Bill's leadership.

I believe these results highlight why you should be confident in Medtronic and our ability to continue to deliver top tier performance over the near and longer-term.

With that, it is now my pleasure to turn the call over to Bill Hawkins, Medtronic's President and Chief Operating Officer.

But first I would also like to convey to you how proud I am of the results generated this quarter by our teams around the world.

In virtually every region and every business we saw strong performance and improved momentum.

We achieved double-digit growth in Spinal and Navigation, Vascular, Neurological, Diabetes and Emergency Response Systems, and all major businesses improved their competitive position.

In the second quarter revenue in the U.S. was $2,033,000,000, up 7%, representing 66% of the Corporation's total revenue.

Internationally revenue of $1,042,000,000 increased 20%, 16% on a constant currency basis.

I continue to be very pleased with the growth of our international franchises.

Let's start with Cardiac Rhythm Disease Management.

This quarter total CRDM revenue increased 6%.

ICD revenues saw an increase of 4%, driven by strong international growth of 36%.

Pacing revenue grew 3%, and Emergency Response Systems grew 37%.

Let me provide some additional comments on our ICD results and our initiatives to reaccelerate growth in this important segment.

Internationally, ICD results continue to be strong across the board with Europe growing approximately 20%, despite a significant physician strike in Germany.

In Japan, ICD revenue more than doubled over last year based on the strength of our CRT-D launch.

In the U.S. we expanded the launch of the Virtuoso and Concerto ICD and CRT-D, and both products have been very well received.

More on that in a moment.

In the first quarter I said that we expected to gain up to 5 points of ICD market share by the end of the fiscal year, and I'm pleased to report that we exceeded this goal during the second quarter.

On a sequential quarterly basis, we gained approximately 6 points of market share, both in the U.S. and internationally.

We believe our current U.S. market share to be about 57%, with our worldwide market share estimated to be 56%.

Next, a few comments about ICD inventory levels.

As you know, last quarter we saw a downward adjustment in customer inventory levels based on the slowdown of the U.S. market.

As previously communicated, we thought that after last quarter the impact of the downward inventory adjustments at customer locations was behind us, and in fact during the second quarter we saw inventory levels stabilize relative to current implant rates.

The second quarter results clearly are encouraging and indicate that the ICD market is moving in the right direction.

These results reinforce our ability to lead the market and grow share based on the strength of our products and a sales and service organization that is second to none.

Solid share gains in both the U.S. and international ICD markets reflect the very positive acceptance of the Virtuoso, Concerto ICD and CRT-D products, which feature our Connexus wireless telemetry.

Since demand for these products is running so strong, we have only been able to establish about one-third of our accounts in the United States.

And those accounts where the products are fully available we're gaining meaningful share.

We expect to have the products available in all accounts by the end of the current quarter.

Now let's take a look at several key initiatives we have underway to reintegrate growth in the large and under penetrated U.S.

ICD market.

First, we continue to make good progress with IMPROVE HF, an extensive clinical study designed to analyze the treatment patterns of large cardiology practices.

The study involves reviewing the records of 60,000 patients in 200 clinics.

And although the study is still in process, results to date continue to suggest that over 60% of patients who meet the guidelines and are indicated for an ICD or a CRT-D device have yet to receive one.

Many hospitals and clinics are working to integrate ICD guidelines into their protocols and procedures.

This is a significant opportunity and we're supporting these efforts through programs such as the Sudden Cardiac Awareness Partners Prevention Program, which we have initiated in hospitals and clinics to better identify and treat patients who meet the criteria for device therapy.

This program, combined with more intensive management of IMPROVE HF, will improve compliance with current Medical Society guidelines and get this important therapy to more of the patients who can benefit from it.

Another important initiative is our Sudden Cardiac Arrest National Awareness Campaign that we have discussed previously.

This campaign will be aimed at physicians, patients and hospital administrators to improve awareness of both the risk and prevalence of sudden cardiac arrest, together with the effectiveness of ICD therapy.

The national advertising portion of our awareness campaign is coming together nicely.

Last week we previewed aspects of the campaign with physicians at the American Heart Association conference in Chicago, and we received very positive feedback on the campaign's purpose, design and content.

National television and print advertising associated with this campaign is planned to begin in January.

We continue to make strategic additions to our field force, including therapy sales representatives, clinical specialists, and general sales representatives, which we believe will help drive awareness and increase share.

As I have said before, the experience and expertise of our field force also gives us a marked competitive advantage.

We're confident that superior customer service, coupled with clear productline advantages, will continue to be the driving force behind our share gains.

Another major competitive advantage is CareLink, which has become the standard of care for remote patient management of CRDM devices.

We now have almost 95,000 patients on the CareLink network at more than 1,000 clinics.

Additional programs are being introduced to increase the use of CareLink, and we recently initiated a clinical study called CONNECT, which is designed to demonstrate the clinical and economic benefits of the wireless features included in the Virtuoso and Concerto product platforms.

We believe that this study will also further accelerate adoption in competitive accounts.

Let me add a few concluding thoughts on our ICD and CRDM business.

We continue to believe that the U.S. and worldwide ICD markets are attractive and represent a solid and sustainable growth opportunity.

The need for sudden cardiac arrest protection in heart failure treatment is significant in the U.S., and even larger internationally where we continue to see very positive signs of sustainable double-digit market growth.

As previously stated, we expect to see the U.S.

ICD market rebound as we move through the remainder of this fiscal year, with the potential to return to double-digit growth in FY '08.

Moving forward we continue to believe that the worldwide ICD market can achieve 10% to 15% growth over the next five years.

Turning to pacing.

This quarter's results reflect share gains in a market that is growing modestly.

During the quarter we fully launched our newest pacing platform the Adapta, Versa and Sensia family, which incorporates capabilities unique in the market, including Managed Ventricular Pacing, or MVP, automaticity and the connection to CareLink.

Initial acceptance of the Adapta has been very positive, and we believe that on a sequential basis we increased market share in the U.S. by 2 points and by 1 point internationally.

Our current low-power market share in the U.S. is now estimated at 54%, with our worldwide market share approximately 51%.

Now let me turn to our Spinal business, one of our consistent performers and most attractive growth platforms.

Spinal and Navigation's second quarter revenue increased 16%, with spinal revenue increasing 16% as well.

Spinal instrumentation sales increased 10%, but growth was constrained by limited commercial availability of allograft tissue.

Spinal biologics sales grew 33%.

All major geographies grew in the double-digits, with international Spinal sales continuing to accelerate, largely driven by the growth of the LEGACY, MAST products, and continued strength of our dynamic stabilization portfolio, including the DIAM System and our family of artificial discs.

Navigation revenue increased 13%.

Our MAST family of products, which includes the industry's most comprehensive offering of minimal access procedural solutions, continues to drive growth in the fusion portion of the market with SEXTANT I and II leading the way at over 25% growth this quarter.

We expanded the CD HORIZON family with the launch of the LEGACY PEEK Rod System for posterior spinal fusion procedures, the ENGAGE PLATE System for lumbar fusion surgery, and the LEGACY VCM Instrument Set to treat scoliosis.

During the second quarter an FDA Advisory Panel unanimously voted to recommend approval of our PRESTIGE Cervical Disc System, and we anticipate final FDA approval before the end of our fiscal year.

We also received conditional FDA approval to begin an IDE for studying INFUSE Bone Graft in the cervical spine.

And we enrolled our first patient in the U.S. trial to study the DIAM Posterior Dynamic Stabilization system.

On November 9, a FDA Advisory Panel recommended approval of INFUSE Bone Graft for use in the oral maxillofacial market, which signals an important step in the expansion of indications for INFUSE.

We intend to leverage our biologic salesforce to expand into this new to $200 million to $300 million market.

At the recent NASS meeting it was clear that continuing growth in the spinal industry will be driven by three primary vehicles, biologics, MAST technology and dynamic stabilization technology, which maintains motion.

Medtronic continues to lead the industry in both share and technology development in all three of these product categories.

Mid to longer-term growth will be supported as we expand our therapies to treat older patients who lead active lifestyles.

This past quarter we also announced the launch of our Arcuate vertebral augmentation system at NASS.

And although it was launched at the end of the quarter, and thus had a minimal impact on results, customer enthusiasm is growing.

Finally, as you know, CMS will convene a panel of the Medicare Coverage Advisory Committee, or MAC or MCAC, on November 30.

Medtronic has requested and been granted time to present during the MCAC meeting, and we will present data that shows compelling benefits of spinal surgery.

We look forward to this opportunity, and we will continue to work collaboratively with all payers to ensure appropriate patient access to our products and therapy.

On the subject of panels, we have also been asked to present data on our Endeavor Drug-Eluting Coronary Stent at the upcoming FDA advisory panel on December 7 and 8.

We look forward to participating in this panel's discussion and to presenting the excellent long-term safety data we have accumulated on the Endeavor stent.

Speaking of Vascular, positive momentum in this business continues to build.

Total Vascular second quarter revenue increased 28%.

Coronary vascular revenue increased 29% on a worldwide basis.

And we saw double-digit growth in all major geographies.

Coronary stent sales of $132 million increased 47%, driven by the continued success of Endeavor.

Excluding Japan, and we believe the international market for drug-eluting stents fell by nearly $60 million sequentially.

And despite this backdrop, Endeavor revenue grew sequentially to $73 million, reflecting the market's continued acceptance of Endeavor's strong efficacy and unparalleled safety profile.

In Western Europe we estimate that we gained 3 points of share during the quarter.

And in those markets where Endeavor has been fully launched, we continue to see shares in excess of 20%.

In Japan we successfully launched the MicroDriver bare metal stent, which drove year-over-year revenue growth of greater than 20%.

We were encouraged at the recent TCT meeting by the excitement Endeavor continues to generate with our customers worldwide.

The Endeavor clinical experience in nearly 1,000 patients followed for greater than two years provides consistent evidence of safety and sustained efficacy under any prevailing clinical metric applied.

An independent physician panel review, using the new, broader ARC definition for evaluating stent thrombosis, showed that Endeavor had a stent thrombosis rate lower than its bare metal stent counterpart, and lower than any first generation drug-eluting stent currently on the market.

There has never been a more important time to critically evaluate safety in drug-eluting stents, and we were pleased to announce during the second quarter the PROTECT trial, a European randomized controlled clinical trial that will enroll approximately 8,000 patients to evaluate stent thrombosis.

We were also very excited to share clinical data from RESOLUTE, a complimentary product to Endeavor designed to help physicians treat patients with challenging clinical conditions.

The four month data showed impressive results, with late lumen loss of 0.12 mm and a TLR of 0.0%.

Endovascular and peripheral vascular revenue increased 23%.

The international success of our Valiant Thoracic Stent Graft continued this quarter with revenue were then doubling.

In the U.S. endovascular grew 20% driven by the success of our AneuRx AAAdvantage stent graft, which continues to gain market share.

We also achieved several key product development milestones in our peripheral vascular business, including the submission of the first PMA module for the carotid solution system and CE Mark approval for two new stent products, the Completeâ„¢ SE iliac stent, and the Racer RX renal stent.

Looking ahead, we see important catalysts for continued growth in vascular.

With recent regulatory and reimbursement approvals, we now expect that Endeavor will obtain full access to the French, Chinese, Korean and Australian markets.

And despite recent competitive noise to the contrary, we continued to achieve every milestones in our Endeavor program.

As you know, we announced last Thursday that we submitted the last module of the Endeavor PMA to the FDA, and we continue to anticipate FDA approval and U.S. commercial launch in mid calendar year 2007.

Medtronic's PMA submission includes safety and efficacy data on approximately 4,100 patients who have been treated with Endeavor in clinical trials that include follow-up for as long as three years.

The Endeavor PMA submission sets a new standard for clinical data submitted to the FDA, and we look forward to working with the FDA on an expeditious PMA review.

Turning to our Neurological business.

Second quarter revenue grew 15%.

Core neuro revenue increased 17%, reflecting solid double-digit growth in both our pain and movement disorder businesses, which grew 18% and 15%, respectively.

In the U.S. neuro stimulators for pain grew 19%, driven by the successful launch of RestoreADVANCED and PrimeADVANCED.

We estimate that our U.S. market share increased sequentially by 2 points to 53%.

Also up in the U.S., stimulator revenue for movement disorders grew in excess of 20%.

Gastroenterology and neurological revenue growth of 10% was driven by our InterStim and Prostiva productlines, which both grew over 20%.

We believe we now hold approximately 20% market share in the U.S. minimally invasive PBH market.

Our Diabetes business had another strong quarter.

Diabetes' second quarter revenue increased 19%, and for the first time exceeded $200 million in a quarter.

Performance in the second quarter again reflected strong growth in insulin pumps.

This growth was offset by single a digit growth in disposables, which we expect to continue to improve in the quarters ahead.

Our Paradigm Real Time continues to gain market acceptance and remains the only product on the market that integrates continuous glucose monitoring and insulin pump functionality.

Looking ahead, we will continue to pursue regulatory approval of a pediatric indication for Paradigm Real Time and the Guardian productlines.

We believe that many parents are eager to gain the therapeutic benefit and peace of mind that will come from continuous sensing and alert capabilities.

As we continue to focus on geographic expansion across the Corporation, Diabetes launched a non-sensor augmented pump that operates in 16 languages, targeting markets in Europe and the Middle East.

This productline will allow us to broaden the price points and languages in which we compete.

Diabetes also launched a second line of Chinese language insulin pumps to target this strategically important market.

We also continue our STAR trials, a three-phase series of studies, which are intended to provide the basis for expanded indications and improved reimbursement for sensor augmented pump therapy.

Both STAR I and II have been completed, and we are currently evaluating those data and comparing them for publication in mid calendar year 2007.

STAR III is slated to begin enrollment later this quarter.

You'll recall that STAR III will be the largest outcomes trial ever conducted comparing sensor augmented pomp therapy to multiple daily injections.

In other clinical news, we expect our GuardControl study evaluating continuous glucose monitoring versus self monitored glucose meters will be published in early December in the Diabetes Care Journal.

This study measured HbA1c reduction over a three-month period in both adults and pediatric cohorts.

Moving on to cardiac surgery, second quarter revenue grew 4%.

In tissue valves we estimate an increase of 1 point of share sequentially, bringing our U.S. market share to 30%.

We also received the CE Mark for the Melody and Ensemble, the first -- the world's first transcatheter pulmonary valve replacement system.

And although the patient population is relatively small, this technology eliminates the need to open the chest.

Traditionally many of these patients with a congenital heart defect undergo multiple open heart surgeries during their lifetime.

So reducing the number of surgeries truly improves the quality of life.

In our Ears, Nose and Throat Sector, or what we call ENT, second quarter revenue increased 7%.

Core ENT second quarter revenue grew 2%, reflecting the lack of the Tonometry productline, which was sold last year.

Neurologic technology second quarter revenue increased 12% due to strong growth from cranial and spinal surgical tools, as well as continued success of our Strata Valve, which is increasingly being used to treat normal pressure hydrocephalus.

As you can see, we have a great deal underway in the areas of new product development, clinical trials and market development.

We continue to believe in the viability of our markets and the tremendous opportunities they represent.

And we remain focused on making the investments necessary to drive market expansion while increasing market share.

In doing so we feel it is important to continue to bring fresh ideas to different business units, to share best practices across businesses, as well as prepare our leaders to take on even larger challenges going forward.

As a result, I will share with you several organizational changes that will continue to position us well for future success.

First after 12 years of service with Medtronic, Bob Guezuraga, President of Diabetes, recently retired to spend more time with his family.

Chris O'Connell, most recently the Vice President and General Manager of Medtronic's Emergency Response Systems business, succeeded Bob, and moved into his new role at the beginning of this month.

Chris joined Medtronic in 1994 and has held a number of positions, including responsibility for all the sales and marketing activities for the U.S.

CRDM business.

Chris' breadth of experience has prepared him well to lead the growth of our Diabetes business.

Brian Webster replaced Chris as Vice President and General Manager of Medtronic's Emergency Response Systems business.

Brian has been with the business and Medtronic for 14 years, serving most recently as Vice President of Global Marketing and Solutions for that business.

In addition, we have created the new role of Vice President of Commercial Operations for CRDM.

Pat Mackin, previously the Vice President of our Vascular business in Western Europe, has assumed this role where he will have responsibility for CRDM worldwide operations, R&D and marketing, together with all U.S. sales and service activity.

Pat will report to Steve Mahle, who will continue to provide overall strategic direction for the business.

As I turn the call over to Gary for his financial summary and comment on guidance, I want to reiterate how positive I feel about Medtronic's current position and our ability to continue to deliver industry-leading performance going forward.

In my remarks I will discuss the income statement, balance sheet, and cash-flow statement.

Finally, I will close the call by discussing our financial guidance for the remainder of fiscal 2007 and fiscal 2008.

As you heard, second quarter revenue of $3,075,000,000 increased 11% over last year's second quarter.

Now let's turn to the rest of the income statement.

This quarter's gross profit margin of 74.1% was below last quarter's margin of 74.7%, and was impacted by both geographic and product mix shifts.

Faster growth outside the U.S., as well as a slower U.S.

ICD growth, which led to reduced production volumes combined to negatively impact the gross margin by as much as 50 basis points as compared to Q1.

The expensing of stock options in Q2 FY '07 was also negatively impacted -- also impacted the gross margins by nearly 20 basis points relative to the second quarter of FY '06.

We would expect the gross margins to improve to near 75% in the second half of fiscal year 2007.

Turning to R&D expenses, second quarter R&D spending increased 16% to $320 million, representing 10.4% of revenue.

The expensing of stock options increased R&D as a percentage of revenue by nearly 30 basis points.

Second quarter SG&A expenditures were $1,036,000,000, or 33.7% of sales, and represented a 15% increase over the prior year.

The expensing of stock options increased SG&A as a percentage of revenue by nearly 80 basis points.

As we find new ways to leverage G&A we will continue to invest in the selling and marketing part of SG&A, particularly in CRDM, Spinal and Diabetes.

Let me reiterate that we're making a significant multi-million dollar investment in the Sudden Cardiac Arrest Awareness Campaign in the second half the year, and thus expect to see an increase in total SG&A spending.

Net other expense for the quarter was $50 million compared to $41 million in the prior year second quarter.

This change is primarily due to increased royalty expense in our Vascular and Spine businesses, tied to the strong revenue growth.

On a sequential basis net other expense declined approximately $15 million, which was the result of increasing foreign exchange gains and the positive impact of several small intellectual property settlements.

Going forward we expect -- we continue to expect the net other expense line to be in the $60 million to $65 million range.

Net interest income for the quarter was $37 million compared to $14 million in the prior year period.

Sequentially net interest income decreased $2 million and was impacted by the recent retirement of approximately $2 billion in convertible debt in September.

As of October 27, 2006 we had approximately $5.5 billion in cash and cash investments compared to debt of about $6.1 billion.

We continue to generate in excess of $600 million of free cash flow, defined as operating cash flow less CapEx, per quarter.

Let's now turn to our tax rate.

After lowering our effective tax rate in Q1, our rate remained the same in Q2 at 25.25%, which is the rate we expect to maintain throughout the rest of this fiscal year.

Consistent with our ongoing objectives, we will continue to make investments and put in place strategies that may further reduce our tax rate.

These efforts are designed to provide additional funds to invest in growth initiatives and to help improve return to our shareholders.

Second quarter weighted average shares outstanding on a diluted basis were 1,159,000,000 shares.

In the second quarter we increased the repurchase of our shares, acquiring approximately $300 million of our common stock, which represents 6.6 million shares at an average price of $45.21 per share.

This brings our year-to-date total to nearly 8.7 million shares repurchased.

The repurchase of our shares is highly accretive and remains a very compelling use of our cash.

As of October 27, 2006 we had capacity to repurchase nearly 28 million additional shares under our Board authorized stock repurchase plan.

We will continue to be opportunistic with our stock repurchase activities.

As before, we have attached an unaudited balance sheet and cash-flow statement to this quarter's press release, and I direct your attention to these statements for additional financial details.

That is all of our financial overview.

Now let me turn to financial guidance.

We remain committed to our long-standing financial objectives that are focused on high-quality sustainable growth.

However, we have repeated on numerous occasions Medtronic's financial objectives and strategic planned projections should not be considered as financial guidance.

I will provide guidance from time to time, and when I do I will clearly label it as guidance.

As you have heard during this call, we believe that we're in the right markets with the right strategies to deliver long-term sustainable results better than any other company in the medical device industry.

Our diversified business portfolio is focused on large under penetrated markets.

This diversified business model also provides us the opportunity to minimize the impact of temporary slowdowns that naturally occur in any market.

It is clear that Medtronic's overall growth profile has been impacted by what we believe is a temporary slowdown in the U.S.

ICD market.

However, as you have seen and heard, we believe the ICD market potential remains large and underserved, and we're taking important steps to reaccelerate market growth.

It is also clear that our other businesses are doing well and that we anticipate continued growth.

We have taken all these factors into consideration as we reviewed our guidance following the Q2 results.

Last quarter we provided an estimated annual revenue range of $12.2 billion to the $12.6 billion, and an earnings per share range, including the expensing of stock options, of $2.30 to $2.38 per FY '07.

We believe that the previous revenue guidance, which represents growth of 8% to 12% is still reasonable.

We have assumed that the U.S.

ICD market does recover, albeit slowly, as we implement our various action plans.

We believe the U.S.

ICD market will continue to accelerate this fiscal year and has the potential to return to double-digit growth during FY '08.

We also intend to hold the market share gains achieved this past quarter, and we have plans to further improve our competitor position.

We're maintaining our FY '07 earnings per share estimate of $2.30 to $2.38, which after adjusting for stock option expense, represents 10% to 14% growth over the FY '06 pro forma earnings per share.

This estimate reflects approximately $75 million to $100 of additional investment that we intend to make over the next 12 months to reaccelerate U.S.

ICD market growth.

A significant portion of this investment will occur in the back half of the fiscal year.

Turning to FY '08, we anticipate the approval of artificial discs and drug-eluting stents in the U.S. and the higher growth in the U.S.

ICD market to accelerate our growth.

For now, we believe revenue in the range of $13.7 billion to $14.5 billion remains a reasonable estimate.

This represents a growth rate range of 11% to 14% on the topline.

We have assumed that the worldwide ICD market has returned to 10% to 15% growth in FY '08.

Consistent with these assumptions, our FY '08 earnings per share guidance is $2.65 to $2.75, which represents a growth rate of 13% to 17% over FY '07 current consensus.

As in the past, all the guidance that I just provided excludes the impact of any extraordinary charges or gains that might occur.

In summary, we have considered various scenarios in arriving at this guidance, and at this time we believe it is reasonable, given the dynamics we currently see in each of our markets.

I would like to remind all of you that we will be hosting our half-day investors conference in New York City on January 19.

This will be an abbreviated morning conference, as our day long investors conference has been shifted from the fall to late spring.

As a result, we will hold our extended investors conference in Minneapolis on June 20.

That is all for our prepared remarks.

We will now entertain any questions.

We will would like to end the call around -- between 4.30 and 4.45.

Please limit your questions to one or two per firm.

If another analyst at your firm has an opportunity to ask a question, or if your question is asked and answered, please remove yourself from the queue.

Brent, please initiate the question and answer period.

(OPERATOR INSTRUCTIONS).

Larry Keusch, Goldman Sachs.

Art, could you or Bill talk a little bit about -- you obviously said some very positive things about the [deep end] market and beginning to feel a bit better there.

Could you talk about -- do you think inventory levels have now really bottomed out?

And also could you touch on just how are you thinking about actual implant rates versus your sales volumes in the quarter?

This is Art.

Let me first talk about the inventory levels.

As we said during the call last quarter, it was clear that the inventory levels had been adjusted down for a number of reasons, which we outlined.

We also said that we thought that the inventory adjustment, given any significant change either downward or upward, in the overall market was behind us.

Essentially that is what we saw this last quarter because inventory levels were basically unchanged from the previous quarter.

And my guess if we continue to see growth of the market, which we expect to see as we move through this back year, inventory levels -- and this is purchased inventory that is kept at the hospital -- will either remain stable or increase slightly.

That is behind us.

I will let Bill comment on the implant rates.

In fact, the implant rates we are seeing moving in the right direction, which we also believe had an impact on the inventory, because again, last quarter some deceleration, but this quarter we are seeing things kind of stabilizing and beginning to move in the right direction.

I think that is renewed confidence with hospital purchasing people and that had an impact -- a positive impact on inventory.

Just one quick follow-up here.

If inventories are remaining stable, implant rates are beginning to reflect that.

Are we seeing any signs at this point that the referring physicians are doing things differently, or are we just sort of normalizing what has been sort of a volume trend that has been out there?

In other words, is the referral channel changing yet?

This is Bill.

We've are aggressively working with our different organizations on trying to impact the referral channels and getting EPs back in talking to the referral docs.

I think all that work we have been doing the last 12 months is beginning to have an impact.

It will I think have even more impact as we initiate the National Awareness Campaign and we continue the Partners Prevention Program -- a lot of the initiatives that we have been talking about.

These aren't events, these are sort of programs that take time, and we are seeing the impact I believe of those initiatives.

Glenn Reicin, Morgan Stanley.

I just want to push you a little bit more on the inventory level.

If I go back to maybe like a five-year history of your ICD sales, we do typically see a big sequential increase in market share.

But I have never seen a $90 million sequential increase.

And judging from what is happening in the market, it certainly doesn't appear as though we have had a quick turnaround.

It is incrementally better, but not $180 million better sequentially on sort of like a market adjusted basis.

Can you maybe just give us a little bit of clarification, when you mean inventory levels are the same, you mean in absolute dollars, days?

Just give us a little bit more insight on that.

Let me answer the question this way.

I think you're underestimating the impact of the new technology and the success that we're having with Concerto and Virtuoso.

As I mentioned, we've only launched that in roughly one-third of the accounts, but where we have gone in, we have had have meaningful market share changes.

The success this quarter, the differential this quarter versus last quarter was in part market share.

We gained 6 points, and that translated into real dollars.

Let me add -- this is Gary, just quickly on the inventory.

We are not going to give the absolute number, but the point is if you looked basically at that inventory days, which is another way we look at it, if basically as we indicated it is back to where we have been historically at.

It dropped down from the Q1, as we talked, from Q4 to Q1, and now we're at the same levels that we saw in Q1 basically.

You mean --?

Q1.

Q1.

It goes back now.

We're at the same level we have seen in previous quarters.

Q1 was an anomaly.

Adjusting for that how much inventory did customers take relative to the first quarter in absolute dollars?

In absolute dollars it is relatively minor.

It is a slight increase, but basically the days inventory Q2 versus Q1 are basically the same.

Q1 we saw it drop from what had been there, and we are basically the same.

Without pushing it too hard on guidance, do you then expect the next couple quarters you're going to see sequential improvements in ICD volumes, or do you expect them to stay roughly where they are at?

We expect to see the market and our revenues accelerate as we move through the end of the year.

In absolute dollars from current run rates?

That is correct.

That's correct.

Mike Weinstein, JP Morgan.

A couple of things.

One, I just want to maybe have you spend a minute on the strength internationally.

One item you mentioned, which we hadn't focused on before, was the CRT-D launches in Japan.

Could you just add some more commentary on that and how meaningful that was?

Just the point that we had actually -- we launched back in August the CRT-D, and we have been investing -- we sent Marshall Stanton over to Japan a year ago.

We have been putting other resources over there, and combined with the technology we have, and we are starting to see the fruits of those labors.

We are excited about the potential going forward.

You said the Japanese business, if I heard you correctly, more than doubled year-over-year.

Yes.

The InSync III Marquis was launched during the quarter.

And there was anticipation of that launch and it hit the ground running.

And just switching gears, if I can, real quick.

The acceleration we saw in MiniMed -- give us a sense on where you think that business is.

Your disposable piece is still lagging, but obviously your pump piece was very strong this quarter.

Where do we think that stands?

And obviously it is tough to read given the management transition.

I don't think the management transition is -- we're not going to skip a beat on that.

What we did indicate over the last several quarters, we have seen strong pump sales, but the overall revenue has been negatively impacted because our disposables were actually a few quarters down -- ago down, and they were, as we said in this quarter, only up single digits.

And as we told you last quarter, we expected as we move through the remainder of this fiscal year we will get back to a more normal run rate of disposables that should be up in that mid teen area.

But the leading edge of predicting revenues is really what happens with pump sales, and they continue to be very strong inside and outside the United States.

We have been adding people to the field.

We have been increasing the distribution.

There is still only 20% of the 1 million Type I diabetics today have pumps so --.

In the U.S.

In the U.S.

There is a big opportunity left in the U.S. for the Diabetes business.

Bob Hopkins, Lehman Brothers.

Congrats on a great quarter.

First question, just very quickly, was this a balanced quarter from an ICD performance perspective throughout the three months of the quarter, or was it more heavily weighted to the beginning or the end or the middle?

I think it was a fairly balanced quarter.

There is always, if you look at the flow of revenues through the quarter, you always see the last month being larger than the first two months.

But I think it was a fairly balanced growth as we moved through the quarter.

Nothing particularly unusual at the end of the quarter.

The only thing I would add to that, August tends to be a little slower obviously in the international market.

And So we would have saw a little bit lower August numbers, but over all I agree with Art, it is pretty balanced.

Switching gears for Bill.

You mentioned and commented on the upcoming spine panel on November 30.

Could you perhaps set some expectations for us for what we might see coming out of that?

In other words is there the potential for any actually hard decisions in your opinion coming out of this about reimbursement in any particular areas of spine, or is this just going to be a review of date and perhaps a call for more data longer term?

I am just trying to -- I don't want people to be surprised, and would love your opinion of what will come of that panel.

Right.

Again, let me just remind everyone this panel is not about the viability of fusion.

It is really a discussion about the guidelines.

We will be presenting there.

There's a lot of evidence that supports spine fusion or lumbar fusion today.

As I mentioned in my commentary, we have sponsored 10 plus clinical trials.

There is 4,600 plus patients that had been enrolled in trials.

There's a lot of evidence that we will be presenting.

And as you know, NASS and AAS and the American Orthopedic Society have all supported guidelines for these procedures.

We don't think this is -- we don't expect that there will be any definitive decisions.

We think that there will be a discussion on whether they ought to be putting in guidelines, but we don't think that will actually occur at this current.

Art, if I may, just one last follow-up on your comments about the potential for new growth platforms going forward, whether internally developed or externally acquired.

From time to time you have been willing to give us your latest thoughts on some markets, and I was wondering if, especially in light of all the turmoil from a CEO level at the various orthopedic companies that are out there, I was wondering if you would be willing to just talk broadly about your opinion of both the dental and the hip and knee markets as you see those.

We have our conference that is going to be in early January, and we will give you our thoughts with respect to not only the prospects on the current growth platforms we have, but also thoughts where it is appropriate on the future.

I'm going to beg off on that and pick that up in January in New York.

Matthew Dodds, Citigroup.

Congratulations, Art.

A quick question on the stent market -- drug-eluting stand market.

Bill, you said that Europe Intercontinental was down $60 million quarter over quarter.

Is that for the third quarter or your quarter, because what I am trying to figure out is what do you think is going on this quarter?

Is that market still contracting?

And if it is, is that mostly Europe because my sense is Intercontinental is still growing?

That is the first question.

Let me first clarify.

The number that I talked about, $60 million, is total OUS, is not just specific to Europe.

The overall market was down.

Penetration is down to about 50% outside the U.S.

Is your sense, since you have the October numbers as well, is your sense that is still contracting or did it level off?

It is pretty -- our judgment is it is stabilizing.

It has leveled off.

Then one follow-up for Gary.

On the comments on the gross margin, it sounds like a lot of it had to do with ICD variance.

I just want to be sure if you look at the two pieces, there's one, the OUS grew a lot faster than the U.S.

The other is obviously on the manufacturing levels.

You certainly reined it in this quarter after last quarter.

Were those even split, or was one much more important than the other in terms of that difference in the Company's sequential gross margin?

They were pretty evenly split between those two factors.

You are absolutely right, there is the two issues.

There is obviously the international U.S. mix that occurs, and then there is just a lower volume that impacted our manufacturing variances, and they are pretty evenly split.

But then again forward, my assumption is that the OUS will still grow a lot faster.

So is that why it doesn't maybe come back all the way next quarter, or is there something else that might push it out?

I think it will start to come back a little bit because obviously we are starting to see the U.S. market turnaround.

And obviously based on our growth rate that is trying to have an impact.

We are growing it.

It is not down negatively as you saw in Q1.

We do expect to start to see some impact in that mix differential.

But you're right, we would still continue to see stronger growth outside the U.S. than in the U.S., but the difference would be coming a little less.

We also think that on the manufacturing variance side, as we have tried to move inventory down and we are starting to see more production, even on like Concerto and Virtuoso that I mentioned earlier, that we might see some of that volume start to come back, and not have quite the same impact.

But you're right, I said that I would expect to see the margins get back closer to 75% by the end of the year.

I wouldn't expect that all to occur here in Q3, and I would expect the trend to come back Q3 and Q4.

Rick Weiss, Bear Stearns.

Turning to -- I think Bill's comments on Concerto and Virtuoso, am I misremembering, or did you all seem to indicate that in the last conference call that by the end of October you would have full availability of Concerto, Virtuoso?

And if that's correct, what is taking so long, and why are you confident you can get it out there now?

What we said is we thought that as we would exit into the third quarter, we would very much improve our output, which we are actually doing.

The amount that is being produced is significantly increasing week after week.

What has happened is that the demand has also continued to grow.

And we would expect that as we move through this quarter clearly as we get in the last month of the quarter we should be able to open up all of the accounts in the United States.

But the demand really has been even above what we had expected.

Maybe you could -- can you quantify any kind of way, when you say we're gaining meaningful share in the accounts where it is available, can you help us quantify that, and think about how we could extrapolate it?

I would be a little careful, but it is meaningful.

I would say --.

Well, all I can say is we're up 5 or 6 points a share this quarter when we have introduced this product.

We're not going to get specific about what it has done in each product -- or in each count, but the reality is, it is having an effect.

Just one more comment.

I made the remark that in accounts that have adopted CareLink we see our share higher, and we see our business growing faster.

The same thing with Concerto and Virtuoso.

We are about -- we are in about one-third of the accounts right now.

We should assume -- to put words in your mouth -- that Concerto and Virtuoso are going to continue to be crucial or key drivers of the CRM business in the U.S. for the rest of the year, or for the next several quarters, or however you would like to say it?

I think that is a very fair assumption.

And I think also that these two products will also complement and be complemented by CareLink.

I think it will be a competitive advantage clearly as we move through the end of this year into next year.

I want to sneak in one last thing on that.

With CareLink and Virtuoso, why just hold share, Art?

Why not --?

And no, listen to what we said.

We said that we expected to hold the share gains that we had seen in this quarter, and we have plans to improve our competitive position.

I think it would be a mistake to think that our field sales organization is satisfied even after this quarter of where they are.

They have the tools to go continue to gain share.

Point taken.

We are officially at the bottom of the hour.

Would you like to continue with questions?

Yes, let's continue for awhile.

Tao Levy, Deutsche Bank.

Just a couple of quick ones.

On the remote monitoring side of the business, is that -- any changes to the reimbursement structure or the way clinicians or Medtronic is getting paid there, so that it might be leading to greater adoption today than we had seen call it two years ago?

No, there isn't.

When we first came out, we were charging a certain fee and the basis of that was what has enabled us to ultimately get reimbursement.

And so there is an established code now for remote patient management.

We did recently lower the usage fee, which we think has helped marginally, but I think it is more of the demand for the product.

Also, for while back when all the recalls were really in the media, we were hearing from a lot of clinicians that they really wanted to split the market share among the three players to limit any potential future risk.

Obviously with record market share levels here, I was just wondering when you go back and you talk with these centers, are they just increasingly feeling a lot better about -- not that they have ever felt worse -- but feeling really been about Medtronic's safety record, whether now they can be monitored all the time with the CareLink, anything on that note going on?

I think there are a combination of factors.

First it is clear that as we move through last year there is increased focus on product performance, which includes the quality performance of the device.

I think the ability to have a device that not only can deliver therapy, but monitor its own performance and communicate that remotely using advanced telemetry is a plus.

I think there is an increased focus on both quality and performance, which we think long-term plays to our strength.

Just a quick verification clarification from Gary.

Your revenue guidance, does that include foreign currency or not?

Yes, it does.

At the current levels that is where we would be at.

Again, obviously if the foreign currency changes dramatically, we would have to reevaluate that.

But basically the currency rates have been pretty consistent since we gave that guidance.

Yes, that does include the current levels of currency.

As does the EPS guidance.

As does the EPS.

Correct.

Thanks a lot and congrats.

Bruce Nudell, Sanford Bernstein.

I have a question or two for Bill and then one for Art.

Bill, could you give us a little flavor on qualitatively -- and I missed the percent you gave of when you go into an organization and do the improved HF PARADIGM, what happens to implants at that, and what is the percent that are not receiving implants that are indicated today?

Secondly, to Bill, once again, what was your impression of ABCD, could something like that help, or is it good enough to help?

And then for Art, 14% bottoms up analysis, how does that square with 8%, 9% ortho?

I know I'm kind of cheating on Bob's question there.

But you know what I mean, they do seem somewhat incongruous if you guys really are comfortable that you could get at least close to 15% on a planning basis.

Bill, why don't you take the first two and then I will answer the last one.

Let me just, Bruce, regarding the question on the improved HF.

First of all, we don't really have any definitive data yet.

We have done a number of -- we have enrolled a number of patients, and we go in and we look at patient records to see how they in fact where triaged or managed.

What we have observed is that over 60% of the patients meet the guidelines.

We know that not all those patients were actually getting ICDs, but I can't tell you once the physicians review that information how many actually ultimately end up getting it, because it is early on in the study.

On the ABCD, as we have said before, we thought this was kind of a win-win situation in terms of the results.

The fact that we saw the ABCD have a somewhat positive outcome, we believe that is a benefit because it will just create more awareness around the whole issue of around sudden cardiac arrest, and now potentially more patients will get another type of screening.

And if it is a positive test, they will hopefully be triaged into getting some type of device therapy.

We think the fact the whole -- we support the whole area of risk stratification, and we think that this will be an overall positive for ICDs.

Let me address your last question.

To begin with, and we will have a lot more to say on this when we meet in New York, when we added up all the revenue forecast from the various business units, while we did not see overall any significant opportunity for growth through raising prices.

In fact, we saw price increase slightly negative from where it is now.

And we did see market share gains in most all of the businesses.

The major driver was really continuing to penetrate these large underpenetrated markets.

Because as you know, with the exception of the angioplasty and coronary stent market, which is a very penetrated market, and some of the cardiac surgery markets, and you could say perhaps in the United States for traditional pacing, most every single business that we have elsewhere, the number of patients indicated for the therapy is a much, much larger number than the ones who receive it.

Now with respect to your comments on orthopedics, as you know, we have studied that market for a long time.

We feel we're in the most attractive part of the orthopedic market, in the spinal business.

We have also said publicly we think that the major opportunity for growth from just unit growth probably is in the first part of the next decade.

And we have a lot of different alternatives that we have considered, but specifically as to any comments on the orthopedic market, we will hold off and talk a little bit about that and other subjects in New York.

I guess one thing that would really help us at your meeting I think would be if you guys could elucidate the OUS ICD market, which is kind of a black hole to us U.S. analysts, and really give us some more clarity on where you think the sustainability and the details of the OUS markets.

That would be extremely helpful to I think the sell side.

Thank you so much.

I think we will do that, not only for ICDs then I think increasingly it is important that we communicate across the broader range of Medtronic productlines what the opportunity is outside the United States, and what we're doing to continue to take advantage of that opportunity.

Great quarter.

We've got time for I think one more.

Tom Gunderson, Piper Jaffray.

I have two quick questions.

One is on diabetes, you seemed to have rebounded well despite the disposable issue that continues.

But you mentioned in the press release strong demand for Paradigm RT.

I don't mean to over read this, but I've heard anecdotes that there may have been some backorder issues during the quarter.

If that is true, should we expect something similar to the Concerto Virtuoso situation where we can pick up additional revenues in this and next quarter, just as you get the product out there more fully?

No, we did not have any manufacturing constraints with the Paradigm Real Time.

You shouldn't expect anything other than just demand going forward.

And we had strong demand in Q2 and we expect strong demand going forward in Q3.

Then the second question is just to focus a little more on what you were saying on international, and the teaser you gave us with Japan and ISTDs.

Year-over-year internationally there was a $56 million delta positive, a very nice -- with that.

But can you give us some sort of color, granularity, number as to what Japan contributed to that $56 million?

And was there -- not knowing the market as well -- is there any sort of inventory fill that came along with the new product intro there?

This is Gary.

We really don't have -- I don't have the number, and we won't be disclosing it anyhow as far as what the Japan aspect is.

But I can tell you that in Japan it would not be an inventory issue -- build up.

Basically it would be as they implant them.

That is not the issue.

It is clearly usage that is occurring.

We don't have the number for you.

Thank you, Tom, and thank you everyone.

I will just repeat what I said on balance that we like the way the quarter proceeded.

We believe we're in a very strong competitive position right now.

And we are investing to continue to lead some of the most attractive markets in the medical technology industry.

We will look forward to continuing the discussion at future investor updates.

And one last time, we're holding our analyst meeting in New York City at the Mandarin Oriental Hotel on Friday morning, January 19, 2007 from 8 to 12.

We will start with breakfast a little bit earlier.

Perhaps we will have some people around afterward for an informal lunch.

Please mark your calendars on that day.

And with that I wish everyone a very happy Thanksgiving.

And the same to you, Mr. Collins.

Thank you very much.

Ladies and gentlemen, that does conclude the earnings call for the second quarter.

Thank you very much for your participation, as well as for using AT&T's Executive Teleconference.

You may now disconnect.