美敦力 (MDT) 2008 Q4 法說會逐字稿

Good morning. I will 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. (OPERATOR INSTRUCTIONS) Thank you. Mr. Warren, you may begin your conference.

Thanks. Good morning and welcome to Medtronic's fourth quarter conference call and webcast. During the next hour, Bill Hawkins, Medtronic's President and Chief Executive Officer; and Gary Ellis, Chief Financial Officer, will provide comments on the results of our fourth quarter and fiscal year 2008 which ended April 25, 2008. After our prepared remarks, we will be happy to take your questions. Also joining us for the question-and-answer session will be Scott Ward, President of our Cardiovascular business.

A few logistical comments. This call is being webcast by our website, www.medtronic.com. Our press release, earnings statement, balance sheet, cash flow, revenue by business summaries, non-GAAP to GAAP reconciliations as well as a transcript of the prepared remarks will be posted on our website. The transcript 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 includes statements regarding Medtronic's anticipated financial results, market growth, acquisitions, divestitures, product acceptance and regulatory approvals as well as other forward-looking statements based on management's current expectations. It's 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 27, 2007, filed with the Securities and Exchange Commission. We encourage you to review this carefully. All statements are made as of today's date and we undertake no duty to update the information provided in this call.

Unless we say otherwise, the comparisons we make today will be on an as-reported basis, not on a constant currency basis and references to quarterly results increasing or decreasing are in comparison to the fourth quarter of fiscal year 2007. With that I'm now pleased to turn the call over to Medtronic's President and Chief Executive Officer, Bill Hawkins.

Good morning and thank you, Jeff. This morning we released our fiscal 2008 full year and fourth quarter financial results. Fourth quarter revenue of $3.860 billion increased 18% and revenue for the fiscal year increased 10% to $13.515 billion. Fourth quarter earnings and diluted earnings per share on a non-GAAP basis were $884 million and $0.78 respectively. Fiscal year earnings and diluted earnings per share on a non-GAAP basis were $2.973 billion and $2.60 respectively.

Our annual and quarterly performance reflected the benefits of Medtronic's diversified businesses, focusing on multiple chronic diseases across a range of increasingly important global markets. Our quarterly results also demonstrate that our leadership team is taking a more disciplined approach to not only achieving sales growth, but also delivering growth and operating income. Highlights of our quarterly performance included double-digit revenue growth in six of our seven businesses, spinal at 35%, cardiovascular at 22%, neuromodulation, 17%, diabetes, 20%, and our surgical technologies group formerly known as ENT at 18%. Over $800 million in ICD revenue, $174 million in DES revenue, split $81 million in the U.S., and $93 million in O-U.S. markets. Revenue growth outside the U.S. of 22% and on a non-GAAP basis, operating income grew 27%, reflecting improved margins from the reduction in operating overhead from 43.4% of sales in the prior year, to 42.6%.

Now I'll touch on each of these items in more detail as I discuss the segment results, beginning with our CRDM business. Fourth quarter CRDM revenue of 1.4 billion grew 6%, driven by balanced growth across both the high power and low power product lines. Fourth quarter global ICD revenue grew 5%, to $806 million, reflecting the successful recovery in the marketplace following the Fidelis field action. We estimate the world ICD market grew over 7% during the quarter and we were encouraged to see our worldwide market share rebound to over 50%. Availability of the Quattro Lead in Japan for the entire quarter helped us return to our historical share position in that market. Revenue in some geographies continued to be impacted by the lack of a single coil Quattro Lead which we anticipate launching in the first quarter of fiscal year 2009.

Turning to pacing systems, worldwide revenue in the fourth quarter grew 7% to $540 million, driven by positive implant trends and the sequential gains in worldwide market share. We estimate our O-U.S. market share now exceeds 50%, it's highest level in recent history. During the quarter we continue to extend our lead in remote patient management and recently passed the milestones of having over 250,000 patients enrolled in the CareLink system around the world. Other highlights for the quarter included the continuing enrollment of the EnRhythm MRI clinical trial which we have now enrolled over 350 patients. We anticipate launch of the MRI SureScan technology in markets outside the U.S. later this fiscal year and a U.S. launch early in fiscal year 2010. We continue to believe this unique capability will ultimately change the basis of competition.

Looking ahead, our CRDM business should benefit from our robust pipeline of new products, extending what is the strongest device portfolio on the market. At the Heart Rhythm Society meeting last week we announced the FDA approval and pending launch of the first of over 20 models in the Vision 3D portfolio of devices. This platform offers unparalleled clinical benefits that are built into our industry-leading pacing and ICD exclusives, such as Conexus wireless, Pain Free, MVP, Optival and the industry's first ICDs with complete automaticity. Vision 3-D gives us the flexibility to meet a wider range of customer needs across a broader mix of price points.

We also continue to advance our leadership in lead technology. In the first quarter we intend to launch the Attain StarFix left ventricular lead with deployable lobes which will set a new standard for steribility and fixation. Finally, while the CRDM market appears to have stabilized we continue to aggressively realign resources to protect and improve our overall operating margins. One of the focal points of this effort is the continuing realignment of our global workforce which in the case of our CRDM business started more than a year ago. Changes in the CRDM global workforce alone are expected to produce annual savings of more than $150 million.

Turning to our spinal business, revenue of $869 million grew 35% in the quarter, driven by the addition of $150 million in Kyphon revenue. Strong performance in Biologics continued again this quarter, with growth of 16%. Taken together, Kyphon and Biologics helped to partially offset continued competitive pressures on our core spinal products in the United States. We remain committed to our strategy of raising the bar of competition through continuous innovation and supporting the safety, efficacy and cost effectiveness of our products with robust clinical data. We also remain committed to enforcing our portfolio of intellectual property. During the quarter, we had a positive Markman hearing against one of our competitors. This case is the first significant assertion of key intellectual property including the Michelson patents against a growing number of competitors who we believe infringe our IP.

In regards to Kyphon, combined revenue in the third and fourth quarter of $298 million was at the low end of our previously stated projection. And while the fourth quarter results were disappointing, I remain confident about the strategic fit and the ultimate contribution coming from this business. We believe an unusual set of circumstances helped explain the softness of the Kyphon business this quarter. The four-month period between January and April represented kind of a bridge period between Kyphon's historical fiscal year end in December and Medtronic's fiscal year end in April. We did not optimally structure and align sales force compensation during this period which is reflected in the fourth quarter results. I have to say, I was out in Sunny Vale a couple of weeks ago and I came away confident that we are well-positioned for reaccelerating growth in this area. The pipeline is full and we are making good progress in our reimbursement efforts.

Going forward, our focus will be on continuing to execute on our integration plan including further refining our sales training and incentive programs, leveraging the combined sales management teams, building and developing our O-U.S. operations, continuing to optimize and integrate our back office functions and further utilizing the core spine sales organization to drive (inaudible). We recently established new leadership in both Memphis and Kyphon who are focused on leading our combined spinal franchise to the next level. We remain confident about the long-term potential of the aging spine market and the fundamental health of this business.

Fourth quarter revenue and our overall Cardiovascular business grew 22% driven by the successful launch of the Endeavor drug-eluting stent in the U.S. market. Coronary growth of 41% was fueled by $174 million in total DES revenue. International DES revenue of $93 million reflected ongoing market share gains from Endeavor and Endeavor RESOLUTE. U.S. DES revenue of $81 million reflected the launch and acceptance of Endeavor.

Our sustained success in Europe and O-U.S. reinforces our confidence that Endeavor has become and will be a significant product with traction going forward. Endeavor is the first new drug-eluting stent approved for use in the U.S. market in over four years and customer reaction has been very positive. Since the launch, I have personally visited many accounts that clearly recognize Endeavor's safety, deliverability and overall strong clinical benefits. Endeavor's compelling safety and efficacy profile was further validated last week when four year data from the Endeavor two pivotal trial and one year data from the 8,000 patient E-5 registry were presented at the Euro PCR conference. Endeavor's safety profile is now undeniable, even after four years and its efficacy has been validated once again, even in real world patients. Physicians acceptance is reflected in the market share that Endeavor gained in its first three months on the U.S. market.

We estimate Endeavor captured an average of 19% of the U.S. market during the fourth quarter and exited the quarter above 20% market share. Despite some reports and competitor comments to the contrary, we have maintained a disciplined pricing strategy. Endeavor's average price, selling price is consistent with the current U.S. market average. Customer feedback has been very positive and physicians continue to report that Endeavor is clearly the most deliverable DES on the market. Our MX or the multi exchange system accounted for more than 50% of total Endeavor units sold in the U.S. during the quarter. We feel the Endeavor launch helped to strengthen the ongoing recovery in the DES market and we estimate the U.S. DES penetration rate at approximately -- recently increased to approximately 65%.

Outside the U.S., the strength of our broad coronary stent portfolio including Endeavor and Endeavor RESOLUTE allowed us to continue to gain share. Excluding the Japanese DES market, during the quarter we achieved total coronary stent unit market leadership in markets outside the U.S. with total stent revenue of $153 million and 28% market share. As we announced last week we have initiated enrollment of the RESOLUTE three trial, a 2,300 patient randomized pivotal trial comparing RESOLUTE (inaudible) with a primary end point of target lesion failure at 12 months. The results of this trial will serve as the basis for our U.S. regulatory approval.

Our Endovascular business grew 6% in the quarter including 17% growth in O-U.S. markets driven by the strong performance of our thoracic product line. We continue to advance the strongest Endovascular product pipeline in the industry. During the quarter, we obtained FDA approval for the Talent AAA stent graft which we will launch next month. We anticipate FDA approval of the Talent Thoracic product later this spring. Availability of the two talent systems in the U.S. market will accelerate Endovascular revenue in fiscal 2009 and beyond. And finally, we completed enrollment of the CE Mark trial of our Endurant next generation abdominal stent graft and we anticipate regulatory approval and launch of this product in O-U.S. markets by the end of the calendar year 2008.

Now I'll turn to our neuromodulation business. In this past quarter, overall revenue grew 17% to $381 million. Adjusting for the impact of the divestitures of our diagnostic related product lines earlier in the fiscal year, neuromodulation revenue grew 22% in the quarter. Our pain management product lines, the largest component of the neuromodulation franchise, continued to see healthy market growth. Revenue grew over 20% in the quarter and we regained market share primarily driven by the launch of the RestoreULTRA in March, coupled with continued momentum for the launch of our 565 surgical lead. With RestoreULTRA, we are the only Company that gives patients the freedom and flexibility to control their stimulation to optimize their therapy through the exclusive target My Stem feature.

Our movement disorders product lines grew 23% in the quarter, driven by the adoption of our Activa therapy for Parkinson's disease. We continue to pursue activities to help drive patient referrals including strengthening neurologist's understanding of the growing body of compelling clinical evidence. During the quarter, positive initial clinical data for deep brain stimulation for both obsessive-compulsive disorder and depression were presented at a major medical meeting. We have received FDA approval for the initiation of a randomized controlled trial evaluating DBS for depression and anticipate enrollment commencing during the second half of the calendar year. Finally, our gastro (inaudible) product lines another strong quarter, driven by revenue from our InterStim product line which had its eighth consecutive quarter of greater than 25% growth.

Our Diabetes business grew 20% in the quarter, fueled by strong performance across the entire business. Growth that was driven by continued strong adoption of insulin pump therapy as well as our rapidly expanding continuous glucose monitoring business that more than doubled compared to the prior year and is currently annualizing at over $80 million. Sales of consumables were also particularly strong around the globe. Pump growth was highlighted by sales to new patients and strong performance in many international markets, where the Paradigm REAL-Time system has been more recently introduced. Off set by a modest slowdown in our U.S. replacement business, as we complete the initial wave of upgrades to our latest technology among our installed base of pump patients.

Looking at Diabetes, revenue for the full fiscal year, we recognized a number of major milestones. Global revenue for the year grew to over $1 billion, cumulative sales of Glucose Sensors passed the one million unit point and we celebrated our 25th year of market leadership in insulin pumps. While we do not break out operating income by business, we have invested to grow our Diabetes business and we have also worked extremely hard to improve margins. These efforts have paid off and over the last five years, Diabetes sales have grown at a 17% compounded annual growth rate and during this time, operating margins improved from the low single digits to over 20%. These collective achievements reflect the consistent market leadership and the financial strength of our Diabetes franchise. Going forward, we will continue to leverage the two co-marketing meter agreements we entered into with Johnson & Johnson LifeScan and Bayer. Joint sales calls, co-marketing events and other patient-focused initiatives are beginning to generate positive momentum.

Turning to our ear, nose and throat business, revenue grew 18% in the fourth quarter, driven by the successful launch of Fusion, an advanced Image Guidance Surgery System to facilitate sinus surgeries. Strong global performance in nerve monitoring and growth in Power Systems outside the U.S. continued to contribute to revenue growth for the year. We recently announced the integration of our surgical navigation franchise into ENT and in order to more accurately reflect the expanding scope and the focus of this franchise we have renamed this business surgical technologies.

Turning to Physio-Control, during the quarter we announced we have reached an agreement on a consent decree with the FDA addressing issues raised by the FDA during inspections of Physio-Control's quality systems. The consent decree outlines actions we must take in order to resume unrestricted distribution. Although we are clearly disappointed at the delay, we are encouraged to now have a plan in place that formalizes a path to resuming full operations and we are confident we have the resources in place to execute the plan. Needless to say, we will work with the FDA to expedite the process. Our intent to spin off this business remain unchanged.

Looking at our fourth quarter performance below the revenue line, I am pleased with the increasingly broad efforts under way to identify and capture meaningful cost synergies that will allow us to improve our margins while funding new products. Across the enterprise, there is a renewed focus on optimizing our cost structure and delivering leveraged earnings growth. I will now turn the call over to Gary and then I will conclude with a few closing remarks.

Thanks, Bill. As Bill mentioned earlier, fourth quarter revenue of $3.860 billion grew 18%. Breaking this out geographically, revenue in the U.S. was $2.332 billion, up 15%.

Outside the U.S., revenue of $1.528 billion includes (technical difficulty), including $160 million positive impact of foreign currency. After adjusting for restructuring and purchased in process research and development charges, fourth quarter earnings and diluted earnings per share on a non-GAAP basis were $884 million, and $0.78 respectively, reflecting EPS growth of 18%. GAAP earnings and diluted earnings per share were $812 million and $0.72 respectively. On a non-GAAP basis, our operating income grew 27%, reflecting the operating leverage we had been projecting. As adjusted for special restructuring, certain litigation and IPRD charges, fiscal year 2008 earnings and diluted earnings per share on a non-GAAP basis were $2.973 billion and $2.60 respectively.

GAAP earnings for the fiscal year were $2.231 billion or $1.95 per diluted share. The Kyphon acquisition was dilutive to our fiscal year 2008 earnings per share in the fourth quarter and total fiscal year by approximately $0.03 and $0.08 respectively which was in line with our previous estimates. This dilution was the result of required purchase accounting adjustments and we continue to believe that Kyphon will be earnings neutral in fiscal year 2009.

I will now provide additional details on the charges that impacted our quarterly results, each of which is listed in a separate income statement line item. First, we recorded restructuring charges of $31 million related to a global realignment initiative that we began in the fourth quarter. This initiative, which is part of our ongoing efforts to eliminate unnecessary cost, focuses on shifting resources to those areas where we have the greatest opportunities for growth and streamlining operations. This initiative, which will include charges in both the fourth quarter and first quarter of fiscal year 2009 impacts most businesses and will result in the involuntary elimination of approximately 1100 positions. We recorded $4 million of the $31 million within cost of goods sold relating to inventory write-offs and asset impairments associated these restructuring activities. Second, we recorded IPR&D charges of $47 million comprised primarily of a $42 million charge related to the acquisition of MDI Medical, a privately held development stage company developing a urinary urge incontinence therapy. Collectively, these charges including the respective tax impacts had a $0.06 negative impact on our fourth quarter diluted earnings per share.

Turning to the rest of the income statement, the gross profit margin was 75.6%, compared to 73.6% in the fourth quarter of last year. Gross margin was positively impacted by favorable foreign currency, overall efficiencies in manufacturing of product due to the increased volume and ongoing initiatives to reduce product cost. Fourth quarter R&D spending of $349 million increased 7%, compared to the $327 million in the fourth quarter of 2007. For the full fiscal year, R&D spending of $1.275 billion represented 9.4% of revenue. We remain committed to investing in new technologies to drive future growth. Fourth quarter SG&A expenditures of $1.296 billion represented 33.6% of sales, compared to 33.4% of sales in the prior year fourth quarter.

Kyphon had a 100 basis point negative impact on the current quarter, and SG&A and without -- SG&A without Kyphon would have been 32.6%. SG&A was also a little higher than we expected due to increased incentive payments driven by the strong revenue and earnings per share results. We have several initiatives under way to further leverage this cost structure by approximately 100 basis points in fiscal 2009 when compared to 2008. We will provide more details on these initiatives and their impact at our institutional investor and analyst meeting on June 2.

Net other expense for the quarter was $188 million, compared to $52 million in the prior year fourth quarter. This large increase is primarily due to $88 million in currency losses from our hedging programs. As you know, we hedge our operating results so that during periods when the dollar is weakening, the benefit of higher translated revenues is offset by currency contract losses. In addition to currency losses, the change in net other expense in the quarter was also impacted by amortization from intangible assets related to the Kyphon acquisition, an increase in Endeavor royalty expense and the inclusion in the prior year of accelerated deferred income from our product supply agreement. These factors were partially offset by income recognized in the Diabetes business in conjunction with a meter, co-marketing agreements with J&J and Bayer.

Net interest expense for the quarter was $5 million, compared to $41 million income in the prior year period, which reflects the impact of cash utilized to finance the Kyphon acquisition as well as lower interest rates. As of our fiscal year end we had approximately $3.7 billion in cash and cash investments and debt of $7 billion. We continue to generate approximately $750 million of free cash flow per quarter, defined as operating cash flow minus capital expenditures.

Let's now turn to our tax rate. Our fiscal 2008 effective tax rate exclusive of non-GAAP reconciling items, was 21% for the year. This represents a 22% tax rate on our profit before tax, reduced by a $37 million tax benefit related to the finalization of certain fiscal 2007 tax returns, and the reversal of our reserves for uncertain tax position. At the beginning of fiscal 2008, we lowered our effective tax rate to 23.25%, and maintained that rate through the first three quarters. However, the tax benefit from our O-U.S. operations was more favorable than we anticipated and resulted in our adjusting the tax rate to 22%.

In the fourth quarter, the collective impact of restructuring and IPRD charges along with catch-up benefit from lowering the effective tax rate to 22% had a tax impact of $40 million resulting in an effective tax rate of 19%. Fourth quarter weighted average shares outstanding on a diluted basis were 1.130 billion shares. During the fiscal year, we repurchased $1.544 billion of our common stock which represents over 30 million shares. As of April 25, 2008, we had approximately -- we had remaining capacity to repurchase over 30 million shares under our Board-authorized stock repurchase plan. As before, we have attached an income statement, balance sheet and cash flow statement to this quarter's press release and I direct your attention to these statements for additional financial details.

Let me conclude by providing our 2009 fiscal year guidance. As you recall, at the beginning of fiscal 2008, we decided to provide guidance one year at a time and more directional in nature. By way of background, current Wall Street fiscal 2009 revenue consensus is $15.1 billion, and earnings per share consensus is $2.96. We anticipate our fiscal 2009 revenue to fall in the range of 15 billion to $15.5 billion at today's foreign exchange rates. We anticipate our fiscal 2009 earnings per share to fall in the range of $2.94 to $3.02. Based upon the current market conditions, we are more comfortable with the lowering of these revenue and earnings per share ranges. This guidance reflects the following major assumptions.

The inclusion of Physio-Control for the full year. Although as Bill stated we still intend to spin off Physio-Control, we are providing guidance with Physio-Control included as the timing of this eventual spinoff remains uncertain. Gross margins of approximately 76%. R&D spending would continue at approximately 10% of revenue. SG&A expenses of approximately 33.8% of revenue. This estimate reflects the 100 basis point improvement I discussed previously. Net other expense of approximately $150 million per quarter at today's foreign exchange rates. This estimate reflects a reduction in our currency losses from the fact we have more favorable hedging rates, Endeavor royalty expenses and the amortization of Kyphon intangible assets. A reduction in net interest income given our reduced cash balance and lower interest rates. And an effective tax rate in the range of 22 to 23%. This estimate reflects our expectation that some of the one-time benefits of fiscal year 2008 will not continue, nor can we be assured of the renewal of the R&D tax credit.

Finally, opportunistic but disciplined stock repurchasing activities reflecting our ongoing commitment to continue to return capital to shareholders while ensuring sufficiently strong balance sheet to execute on our strategies. As in the past, all my comments on guidance do not include any unusual charges or gains that might occur during the fiscal year. I'll now turn things back over to Bill who will conclude our prepared remarks. Bill?

Thanks, Gary. Before we open it up to Q&A, I'd like to make just a few closing remarks. Our solid performance during the fourth quarter was a positive end to a fiscal year that was characterized by a myriad of challenges. The 10% growth we achieved in the face of these obstacles reflects the strength of our diversified business model and the perseverance of our global organization.

Looking ahead for fiscal 2009, while much work remains and the environmental uncertainties have never been greater, I feel we are well-positioned to execute on a number of near-term opportunities which include the ongoing Endeavor launch, the stabilizing global ICD market, the increasing momentum in diabetes and neuromodulation, the emerging potential of our surgical technologies business and ongoing emphasis on our O-U.S. market. As many of you know, we recently made some organizational changes designed to better align our Senior Leadership Team and global workforce with our strategic priorities and I believe these changes position us well for solid execution. We continue to identify and execute on a broad set of restructuring and cost reduction initiatives that will allow us to fund new products, serve more patients, and generate leveraged earnings growth. Our financial strength will allow us to generate increasingly significant capital and we will focus on continuing to strike the right balance between reinvesting for growth and returning capital to our shareholders. I'd now like to open things up for Q&A so Operator, first question, please.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Your first question comes from Matthew Dodds with Citigroup.

Good morning. And a couple questions. First, for Bill. When you look at the ICD numbers, you came almost all the way back internationally in share, if you look at where you were in your fiscal fourth quarter '07. In the U.S., you're still a couple hundred points below. What I'm wondering specifically is is Quattro more important in the U.S. for single coil than internationally or is there something else there that's made the recovery a little bit slower? And then the second question is I guess for Bill and Gary, when you look at the full year guidance, when you've had a really good fourth quarter, sometimes in the past, the Q1 comes in a little below expectations and Gary, I know you're not giving Q1 guidance, but is there any reason to think there's going to be an acceleration through the year in fiscal '09?

Well, let me -- Matt, Bill. Let me just respond to the first question on the market share in the U.S. and O-U.S. No, I wouldn't suggest that there's any reason to believe that the Quattro is any more important in the U.S. than it is O-U.S. I mean, we are -- we feel very good about our position. We're continuing to assert our new products and as you've seen, I think we've recovered nicely from Fidelis and we're optimistic going forward. So this is -- it's a marathon. It's not a Sprint. And we keep on running.

Yes, Matt, this is Gary. Let me make a couple comments on the guidance. You're right, I'm not going to give you Q1 guidance. I've given you kind of an annual number. But what I would expect, in answer to your question, could we see things accelerating as we go through the year, in some ways what I would say is, I think you can see, the guidance I gave, the revenue itself, the revenue growth will probably be higher in the first part of the year just because of the fact that you have Kyphon obviously for the first six months that we didn't have in last year's numbers, until you get to the comparison in the back half of the year. So the growth rates in revenue will actually be probably higher in the first half of the year than they would be just in the back half, just for that fact alone. Otherwise, I'd say the rest of the growth rates and also on Endeavor, the reality would be Endeavor you'd see more growth rates in the first obviously three quarters than you would see in the fourth quarter where you have the comparison with Endeavor this year.

So growth I would say in revenue, your growth rates would probably be higher probably earlier in the year and maybe even coming down a little bit as we got closer with the tougher comparisons in the back half. On the other hand I would agree that operating leverage will continue to improve as we go through the year because some of the initiatives we've taken under way as far as reducing cost, et cetera, those initiatives will start to play out, will continue to play out as we go through the year itself. We've seen some of that benefit in the current year but that will obviously come over time and so the operating leverage component of our guidance I would say you'll start to see that playing out more as you go through the year itself versus just being in the first quarter. And just to end, I just want to highlight, we had a very strong fourth quarter but there is no indication to us that that momentum that we had had in the fourth quarter is going to hurt the momentum as we enter in the current year. We had a strong fourth quarter but that momentum from what we can tell at this point in time continues to be strong so we feel good about entering into the current year.

That's perfect. Thank you, Gary, thank you, Bill.

Your next question comes from Mike Weinstein of JPMorgan.

Good morning. Can you hear me okay if.

Yes, we can.

Good morning, Mike.

Okay. Perfect. Gary, let me start with you with the fiscal '09 guidance. The two items I would just love to hear a little bit more on are down the income statement you said gross margins is 76%, which would be the higher end of what we would have been expecting and so I'd like to talk a little bit about mix assumptions within that. And then second, and more importantly really is the SG&A line. You're forecasting 100 basis points of SG&A leverage in '09 versus '08 and I was hoping could you talk about the components of that and obviously talk in the context of the recent headcount reduction. Thanks.

Okay. Yes, thanks, Mike. I mean, with respect, first of all, on the gross margin itself, as we said in this quarter we were at 75.6% gross margin. And that's obviously including the Kyphon business in there which has higher margins. We also are starting to see with Endeavor and the volumes coming from Endeavor, that has a positive mix benefit for us as we see more of that in the U.S. So mix, from a mix perspective, that is a slight positive for us as we go into the current year. The foreign exchange, that margin is obviously assuming the foreign exchange rates stay kind of where they're at currently and you can change there, it could have a slight impact, but the point is on our product mix is going in the direction of increasing slightly the margins.

The other thing is, some of these product cost initiatives that we've talked about over the last 18 months to two years and we've talked about that, are starting to have a real benefit on our product cost and reduction in product cost. So from our perspective right now, we would expect to be right around 76%. Again, give or take, 20 or 30 basis points on either side of that at this level. On the SG&A, we'll go into more detail on all of the initiatives that we have under way with respect to SG&A at our June 2, analyst meeting as I mentioned in my comments. You are correct, part of that will come from the 1100 positions we eliminated during the current -- recently announced. But those will obviously be coming forward in -- not so much in the first quarter but as I mentioned earlier as we kind of go through the back half of the year, you'll start to see some of those benefits. The other part is we're seeing the leverage that you would expect from all the costs we've put in place related to Endeavor, to RestoreULTRA, some of these new products we introduced. We have made the investments. As that revenue continues to come in that will continue to provide the leverage as we go into next fiscal year. So all in all that's all I want to say right now about the SG&A. Again, at our June 2, meeting we'll get more specific about some of these initiatives we have under way and what we're actually trying to accomplish in reducing or SG&A costs.

Gary, on this quarter, the one you just reported, you came in certainly above expectations on the operating line. But you gave back some on the other expense line because of your FX hedging losses. Your hedging loss has actually more than doubled sequentially from the January quarter to the April quarter. But you are forecasting that it seems to come down as we look at your FY '09 guidance. Can you maybe just talk about why they were so high this quarter?

Well, clearly in our fourth quarter, the dollar as you know weakened dramatically during that quarter from January. The dollar itself, during this period, got up to actually close to 160 during that period of time on the euro, for example. So a dramatic change on the dollar weakening during that period of time which obviously was also a slight benefit for us in the revenue because we received more benefit on the revenue as a result of that also. But because we were basically hedged, none of that benefit or very little of that benefit drops to our bottom line. It's offset in that currency line as you mentioned. So our currency losses were greater in this quarter than what we had been experiencing and what we'd been running previously, just because of what happened with the dollar and the magnitude of our revenue also in the quarter had some impact on that.

Going forward, we expect that to come down a little bit because the reality is for next year, I am hedged -- we are hedged at Medtronic here at more favorable rates than we were for the '08 time frame. So the currency losses, even at today's FX rates will be less than what we experienced during Q4 because we have more favorable rates for next year.

Last question for Bill. There's been a fair amount of concern out there about the Kyphon integration and how that's going and then with the management changes you made to start the new fiscal year, probably played into people's psyche going into this quarter. Can you just talk with your own view on how you feel like that's going and whether you feel like you've got all the pieces in place for Kyphon to get back on its prior growth trajectory? Thanks.

Couple comments. First of all, the integration overall I think it's gone well, particularly in the sales force, which is critical. We have integrated the sales force under one common sort of sales management. We took the Kyphon regional Vice Presidents and the core spine regional Vice Presidents and put them at the same level and have them now reporting to two area Vice Presidents and all in all, that's gone very well. I mean, we've been able to really hold onto all the people that we've wanted to in the core business. We've had a little bit of some challenges outside the U.S. We did lose some people that we would have liked to have kept outside the U.S. But we've got the right person running that organization, a guy named Steve Foster, and I think that is settling down and I feel good about our position going forward. As you would expect in these kinds of integrations, things -- some things go well and some things are a bit more of a challenge. I think net-net, things have stabilized. I feel good about the team. I feel good about kind of where the business is. As I said, I was out there literally a couple weeks ago and came away very enthusiastic about the outlook for this year. I feel like, in fact, I was -- to be candid, even more encouraged about what I saw in the pipeline, some things that they've made a lot of progress on in the recent -- last six months. So I think we're -- I feel like we're in good shape.

Great. Thank you.

Thanks, Mike. Next question.

Your next question comes from Lawrence Keusch of Goldman Sachs.

Hi. Good morning. Just coming to the O-U.S. defib market growth, I'm wondering if you guys can give us a feel for perhaps what FX was for CRDM or defib specifically and then Bill maybe touch a little bit, since there's been a lot of concerns about what's been going on in the overseas markets with defibs, that would be question one. Your guidance for '09 implies 11 to 15% top line growth. Obviously Kyphon has a positive benefit there, Endeavor has a positive benefit. Sort of how you're thinking about the growth in your core markets, particularly, given the competition in the core spine business.

So let me respond to the first question on the defibs outside the U.S. So if you look at the market for defibs outside the U.S., it was about 20% growth. And if you look at it, take FX out, it was probably in the high single digits, kind of a level. So I mean, good, solid performance outside the U.S. Even with the back drop of the recovery that we have ongoing with Fidelis and while we made a lot of progress this quarter, we still don't have single coil outside the U.S. and we will have it -- as I said, we'll have that in the first quarter of FY '09, I think will help us in many of the markets or a lot of the markets, some were pretty much exclusive to single coil. We've still got some upside in respect to getting the single coil back.

Net-net I feel still very good about the O-U.S. market for defibs, particularly when you take a step back and you look at the overall penetration rates and you compare those across different geographies, there's a lot of disparities which says to me there's lots of opportunity. So we don't see anything fundamentally changing in our belief that this can be a double-digit growth rate market opportunity.

Larry, let me kind of respond to the guidance aspect. You're right, the revenue guidance that we provided, the $15 billion to $15.5 billion in revenue is about an 11 to 15% growth versus the current year revenue. But as you indicated, if you take out the Kyphon just six month benefit you get from the acquisition of Kyphon and you take out that impact, you're probably down more in the -- closer into the 9 to 11% range on revenue growth that Bill and I have been talking about really since back in the spring of the year here, that that's what we think we can achieve as an organization, both not only for the next year but on an ongoing basis. From our perspective on that 9 to 11%, the biggest assumption you have there is that basically the CRDM continues in that single digit growth overall between pacing and defib and that single digit growth and that all of our other businesses are clearly up in the double-digit, low to mid-teens, depending on the business themselves.

Again, we're pretty excited about what obviously Endeavor is doing with -- on the vascular side. We'll have that obviously not only in the U.S. but going in Japan next year, and so the reality is that's real positive. Diabetes as you heard today is doing very well. Neuro is doing extremely well. Spine, Kyphon, clearly will be a benefit. And the spine business itself came back a little bit for us this quarter. So overall, we're feeling good as we go into next year. We still think the revenue guidance we've given is reasonable based in line with what we've communicated previously and we'll do the best we can to exceed that. But at this point in time, we think that's a reasonable guidance.

Gary, just on the corresponding side, obviously there's been some changes in leadership there. You guys have acknowledged this over time that there's been increased competition in that business. How much are you assuming that that business changes from where you are today to get to those -- that guidance number?

Basically, the business would be basically growing about the same rate it did here in '08 for us to get those kind of numbers.

Terrific, okay.

Again, obviously, we'll be doing everything we can to improve on that. But from our perspective, that will just have to continue for to us achieve those kind of numbers.

Thanks, guys.

Your next question comes from Larry Biegelsen with Wachovia.

Hi. Thanks for taking my question. Two questions. First, was there any one-time stocking in the quarter for Endeavor or for ICDs, any kind of restocking for ICDs or something one-time in nature? And then I have another question.

I mean, no, there wasn't. In fact, if you look at ICDs, we're at one of the lowest levels that we've been in a long, long time in terms of inventory in the field. So there was no special quarter-end deals that got us to where we got to. I think the numbers reflect very much the market demand. On Endeavor, there wasn't as well. In Endeavor, in fact, we don't do any consignment.

It is consignment.

It is consignment. So we don't -- so there's not an impact either on Endeavor, nor on ICDs.

And could you talk a little bit about how you're addressing the Fidelis fractures. We heard some anxiety at HRS from physicians. At this point, Medtronic, HRS and the FDA aren't recommending to prophylactically replace Fidelis leads because of the risk of prophylactic intervention is greater than the risk of serious injury from lead fracture but you recently posted data to your website showing that the fracture rate is increasing over time and you noted that you expect the lead survival curves to continue to trend downward. Have you or your advisory board, FDA or HRS identified a fracture rate at which the prophylactic intervention appears to be less than the risk of serious injuries resulting from lead fracture? And if so, what is the rate and do you think we'll eventually reach this point? Thank you.

So we recently sent a letter to physicians updating them on the performance of the Fidelis and the -- in that letter, I mean, there was no change to the recommendations. The failure rate was well within the bounds that we had characterized in our initial care characterization of the issue. So it is trending where we had had expected it would be trend which is well within the bounds that says we are doing the right things. So at this juncture the recommendation is no change to what we initially said back in October when we alerted patients of the potential issue.

Thank you.

Next question.

Your next question comes from Rick Wise of Bear Stearns.

Good morning, everybody.

Good morning, Rick.

Back to ICDs. Bill, you just said if I heard you correctly that you thought the market was up I think in the quarter maybe 7%. But if I've got the right number, that's against weak comps. Can you give us any more perspective or granularity on referral patterns and when you look out at fiscal '09 against maybe more apples-to-apples comps as we go through the year, is 7% or upper single digits the right number for looking at the global ICD market growth or U.S.? Any perspective would be welcome.

Yes, Rick, our assumptions are that this market will grow in the mid- to upper single digits in FY '09. That's the assumption and that's what we saw as we got through some of the turbulence after the Fidelis deal, we're beginning to see the market stabilize a bit and our market data tracking would suggest that that's a very good number, in that mid-to single digit kind of a number. So I mean, in all the kind of the field checks that we do, we see that -- again, the market is either still a big unmet need out there. We think we understand some of the dynamics that have to do with some of the referral patterns and we've got a lot of initiatives under way here in the U.S. and outside the U.S., quite frankly, to try to free up some of the pent-up demand that's out there and so, all that kind of factors into our view that this is a market that can grow in that single digits, mid single digits.

Turning back to Endeavor, again, what's baked into your '09 numbers in terms of share? Obviously, Endeavor had a very strong quarter, fourth quarter. It sounds like there's more to go. Are there accounts you're still not selling into so you think you'll have more momentum as you go through fiscal '09 and again, help us understand if the competing stents hit the market the next three to six months, which sounds likely, can you hold share? How much share are you assuming you're losing, again, any perspective would be great.

Hi, Rick, this is Scott.

Hi, Scott.

I think actually, you're correct. We had a very strong first quarter or launch for Endeavor. We do anticipate that we'll continue to see strong momentum in the United States and outside of the United States. In fact, as we exited fourth quarter, our share exceeded 20%. We do anticipate obviously additional competitive stents to come into the market. However, if you look outside the United States, Endeavor has done extremely well versus the competition. We continue to gain share. In fact, in fourth quarter, as Bill mentioned, we achieved what we consider to be a market leading position now in our addressable markets in coronary stents. So we feel really good outside the United States about our full market pipeline. We've got the market leading bare metal stent, we've got Endeavor and Endeavor RESOLUTE and that positions us extremely well.

I think coming out of PCR we were very pleased with the results that we presented there with the results from Endeavor 2 and our E5. Where we showed that Endeavor just continues to get stronger and stronger. The safety and efficacy profile continues to be very strong out to four years. That I think is going to continue to give us strength in the United States. We have penetrated a large number of the accounts that we intended to get to in the U.S. We've got about another month of new account growth and then we will be pretty stable in the U.S. We're really pleased with MX, the MX now is over 50% of our mix and we're demonstrating that we can be very successful using the MX system. I think we can sustain this share as we go forward and I think we'll continue to do well outside the United States.

I am going to sneak in one other quick one on Endeavor since I've got you, Scott. Maybe talk, if you could, a little bit about your strategy on RX when the patent expires in October and how much benefit you expect in fiscal '09 and maybe just factually the mix O-U.S. of Endeavor and RESOLUTE. Thanks so much.

The O-U.S. mix on Endeavor and RESOLUTE, it differs by country. We have -- it's about a quarter to a third of our mix depending on where you're at in O-U.S. markets. In terms of rapid exchange, the rapid exchange patents, principally the [YOCH] patents expire at the end of October. When those patents expire, we intend to launch on rapid exchange in the United States as soon as we have freedom to operate. And we do anticipate that that will help us sustain and accelerate our share growth as we head into the second half of the year. In the event we do get access to rapid exchange.

But just to clarify, the third that Scott talked about is RESOLUTE versus Endeavor and on the rapid exchange, that is not in our guidance.

Thanks, Gary.

Your next question comes from Bob Hopkins with Lehman Brothers.

Thank you and good morning.

Good morning, Bob.

First question is on Endeavor, just to pick up where we left off there. What was the specific average selling price for Endeavor in the quarter in the U.S.?

Bob, we don't disclose the specific average selling price but I can tell you that it was consistent with the overall market average selling price in the U.S.

So despite the fact that your competitors are saying you're at about a 10% discount, you dispute that, you think you're coming in about flat on average with the competition right now?

That's absolutely correct. You know that the average selling price in the U.S. is probably between $2000 and $2,100 across all the competitors. So that's about where we're at.

Then should we expect that to come down as (inaudible) launches throughout the course of the year?

That's a good question. I think it's really a complicated question, Bob. I think we've got to see what [Xience and Promis] does in terms of their pricing and how they come into the marketplace. I think it's a little bit hard for us to comment from our perspective. We are in the market. We're pleased that Endeavor is doing very well. I think it's at about the average selling price that's out there and we'll see what Boston Scientific and Abbott decide to do with their own pricing as they come into the market.

Okay. Thank you. And then, quickly, one for Gary. You guys put up very strong operating margins this quarter and there's reason to believe there's more to come. Just curious as you look out over the next couple of years, do you think you can get beyond where you used to be in sort of the mid-30s range as a target looking forward?

Bob, that's a tough one. From our perspective right now, I would say no. I think that getting back to kind of where we were historically at, mid-30s, would be a great result and a marketplace that as we go forward we expect it will continue to be pricing pressures, et cetera. Obviously, we don't have a number that we're going to just move to and then stop. So the reality is we'll do the best we can. I think to be reasonable at this point in time, if we can get back to kind of the historical level we were at prior to making some of these investments and riving some of the declines we saw in operating margins over the last few years, if we can get back to that historical level, that would be, we would deem that a very successful expectation. Again, we'll drive as much as we can. But you also have to continue to invest in this business and there's just going to continue to be pressures on pricing. So from our perspective that would be a great result to get back to where we were at historically.

Finally, just a quick one for Bill. Just wonder if you could talk a little bit more about the significant management changes that were implemented in the previous couple of weeks and I guess from a 30,000-foot level, what do those changes allow you to do now that you couldn't do before?

Well, first, I couldn't be more excited about the team that I have. I mean, this is -- in the changes, I took the opportunity to kind of streamline the organization to realign the team around some of the key strategic priorities with the focus that I'm putting on operating performance with James Dallas and some of the opportunity to do a better job looking across the enterprise and making better choices on how we allocate R&D with Katie Simon and her role and then having the business unit heads reporting directly to me and then having international consolidated under John Luke, I mean, it all works. So I feel really good about it. We'll talk more about this at the June analyst meeting and we'll give you a bit more in-depth profile of some of the people and what they're doing. Net-net it's a good thing and I'm very, very excited about the team. I think the team is excited about the opportunities that we have in front of us.

Will the analyst meeting be primarily you and Gary speaking for the morning or will it be all the business heads as well?

We're going to have a format that was not dissimilar to what we did a year ago, where we have Gary and I and James Dallas will actually be kind of the -- give some prepared remarks or give some short presentations and then we're going to provide plenty of time for Q&A with the business unit heads. Rather than trying to anticipate what you want us to say, we're going to give you the chance to really interact with all the big unit heads.

Thanks very much.

We'll take a couple more questions here.

Your next question comes from too Tao Levy with Deutsche Bank.

Internationally, the ICD market, (inaudible) I think you even mentioned this quarter grew single digits. Now, granted you're up against a relatively tough comp last year but what gets that market going? I don't think there's much new data really coming out. We've talked about low penetration rates in the past. Is it a bit of an overhang from Fidelis that maybe hurt the business this quarter?

Yes, as I mentioned before, I think there's a little bit of that going on and the fact that we still don't have a single coil lead, the Quattro, which we'll have in the first quarter of FY '09 and some of the -- and the impact that that's had in a couple of markets. Japan has come back a little bit for us but Japan continues to be a big -- we think a big market. There's a lot of head room for growth. We're continuing to invest and to see the fruits of those labors and some of the emerging markets, which are small but growing, like China and Russia and India. And then the Western European markets, there's more and more focus on really implementing the guidelines, what the EFC and nice, so add it all up, I think we feel good that we can get this market into that double-digit growth rate.

Okay. And at the HRS we talked to some clinicians and they're pretty excited about the MRI compatible pacemaker. When do we actually finally see some data on that and are there any challenges on the manufacturing side of that product?

We're completing the clinical trial on that and it should -- we're expecting to have that in Europe later this year. Okay. This fiscal year. And then I think it's FY '10 that we'll have it in the U.S. And you're right, we're very excited about this. We think this could be a game-changing technology. We think the ability to have a product that has labeled for MRI compatibility will be very important for customers around the world. So this is--.

Is there a date when there's going to be data released or a conference or--?

I don't know if we'll present if there's any data. No, I don't think there's going to be any data necessarily. But--.

It either works or it doesn't, right?

Yes.

Then just lastly on the spine business, any changes with the [X-Stop] product or growth of that product, the last few months, one of the recent conferences feedback from surgeons was that that product may not be living up to the early clinical expectations that had been seen before.

Well, I don't know what you're referring to in that regard. One of the challenges we have had is in expanding reimbursement and that's been a -- we've got a terrific person heading up our reimbursement efforts at Kyphon and we are every day getting more and more covered lives to -- for X-Stop. So the product has -- was shown in a randomized controlled trial, performed well and better than conservative care. So we've got -- and we've got a whole sort of portfolio in development, with the X-Stop, with the Deon, with the Spherion which is the next generation. So we believe very strongly in this category and we're investing to support that.

Thanks a lot.

We'll take one more question.

Your final question comes from Michael Jungling of Merrill Lynch.

Hi, good morning, it's Paul Choi pinch hitting for Michael here. If I could ask two strategic questions. First, with respect to spending, your operating base, Gary, is there additional room for down sizing of the sales force or reduction on the G&A side this year, above and beyond what you've sort of indicated, that could potentially maximize free cash flow and sort of reorient your business model? And secondly, with respect to some of the personnel changes you've had in senior management, given some of the departures, would it be correct to infer that you're no longer focused on large scale acquisitions and you'll reduce your M&A activity for the near term? Thanks.

Well, this is Gary. Let me address the first one and Bill, you can take the second one. With respect to the restructuring and continuing to evaluate whether it's our sales force or G&A functions, et cetera, Medtronic will continue and always has, will continue to take a look at our infrastructure and where we have resources allocated, whether it's by business, whether it's by function. And so when we continue to see areas where we're focused on as far as in reductions, no matter what function it happens to be, yes, I think you will see some of that as we continue to leverage the organization. What we've done here currently doesn't mean that that's all we're going to do. As an organization you'll continue, any business continues to evaluate where its resources are at and what we need going forward.

So I think you'll continue and you should expect as a Company we will continue to look at that and evaluate whether there's a different resource allocation that's necessary in each one of our functions or businesses. If that's appropriate, we'll take the steps we've taken here recently as we move ahead. I also want to highlight the fact that at the same time we're making those reductions, we're investing in those areas where there is tremendous growth opportunities that are occurring in the organization, whether it's on the sales side, marketing, engineering, et cetera. So we will continue to make those shifts. Bill?

Quickly in response to your question about the personnel changes and would that reflect a strategic shift in our kind of acquisition strategy, I wouldn't read anything into that, per se, other than what we -- but I would go back and remind you what I've been saying and that is that right now we feel very good about our portfolio. We feel very good about the opportunities that are in front of us. I think you've seen from the recent quarter that we have a lot of opportunities in our existing businesses and that's where our focus is right now. We're going to -- we'll continue to do the sort of odd tuck-in acquisition like we did with the NDI and restore that will complement existing businesses. So I mean, that's where we expect to get growth over the next couple years and that's where our focus is going to be.

So let me just conclude and as we look sort of forward, ahead to the next, new fiscal year, I just want everyone to know that I'm confident we can deliver top tier performance. I look forward to seeing many of you in New York at our institutional investor and analyst meeting coming up on June 2. Where we'll have an opportunity to further update you on our plans and strategies for delivering sustainable top and bottom line growth. On behalf of the entire team, we look forward to seeing you in New York. Thank you very much.

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