美敦力 (MDT) 2009 Q1 法說會逐字稿

Good morning. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Medtronic first-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

I will now turn the call over to Mr. Jeff Warren, Vice President, Investor Relations. Please go ahead, sir.

Thanks, Dennis. Good morning and welcome to Medtronic's first-quarter conference call and webcast. During the next hour, Bill Hawkins, Medtronic President and Chief Executive Officer, and Gary Ellis, Chief Financial Officer, will provide comments on the results of our first quarter, which ended July 25, 2008. After our prepared remarks, we will be happy to take your questions.

A few logistical comments. This call is being webcast via our website, www.medtronic.com. Our press release, earnings statements, 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 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 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 25, 2008, 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 first quarter of fiscal year 2008.

With that, I am now pleased to turn the call over to Medtronic President and Chief Executive Officer, Bill Hawkins.

Good morning and thank you, Jeff. Q1 was another strong quarter, further demonstrating our commitment to deliver market-leading performance. A revenue of $3,706,000,000 increased 19%. First-quarter earnings and diluted earnings per share on a non-GAAP basis were $813 million and $0.72 respectively.

Significant accomplishments for the quarter included the following. A double-digit revenue growth in six of our seven businesses, including Spinal at 33%, CardioVascular at 30%, Neuromodulation at 20%, Surgical Technologies at 17% and Diabetes at 12%. We had over $760 million in ICD revenue, $175 million in DES revenue, revenue both outside the US of 24% and, on a non-GAAP basis, operating income growth of 29%, which reflected improved margins from our initiatives to drive operating leverage.

In evaluating our results this quarter, there are several important factors to keep in mind. First, the diversity of our businesses was once again key to driving market-leading performance. Second, given the number of different markets we operate in, at any given time, there will be variability around their underlying performance, with some markets showing relative strength and others showing relative weakness. However, on the whole, the broad medtech market continues to show solid growth, particularly when compared to other segments of the economy that are not as insulated from current macroeconomic pressures.

Finally, our results this quarter clearly demonstrate execution on the four initiatives we outlined at our investor meeting in June. Collectively, these initiatives form the One Medtronic approach. First, driving sustainable long-term growth of 9% to 11% through innovation. Second, applying a strong focus on improving operating margins by 300 to 400 basis points. Third, delivering earnings per share growth of 11% to 14% and ensuring disciplined capital allocation by returning a minimum of 40% to 50% of our free cash flow to shareholders each year. And fourth, aligning the organization for relentless and consistent execution.

We will expand on our performance this quarter against each of these broad initiatives during the remainder of the call, beginning with revenue growth. There were two primary drivers for overall revenue growth during the quarter. The first driver was our overall product performance. Key to our growth were the stabilization of our ITV productline;, solid performance in Brady; slower, though not unexpected, growth in CoreSpine; growth in Biologics; the addition of Kyphon; good performance in our CardioVascular business, fueled by the US Endeavor launch; continued strength in our endovascular product launches; strong performance with our Neuromodulation products, driven by both pain stim and InterStim; strength across our Diabetes products, led by CGM; and another quarter of consistent performance in our Surgical Technologies business.

In addition to overall product performance, the second key revenue driver during the quarter was strong growth across our O-US markets. Revenue for markets outside the US grew 24%, 10% on a constant currency basis, driven by exceptional performance from many emerging markets, including central and eastern Europe, Middle East and Africa, and Latin America, which all had revenue growth of more than 20%.

Growth of those markets was led by our Diabetes, Spinal and Surgical Technologies businesses. Strength across all our emerging markets is expected to continue with the growing wealth of the Middle East, Eastern Europe and Asia markets, including China.

Overall, our diversified product portfolio enabled us to deliver another strong quarter. Highlights were as follows. First, global ICD revenue grew 5% to $764 million, reflecting the continued stabilization of the worldwide ICD market. With our fiscal year-end in April, our first quarter typically results in a sequential decline. With this in mind, we were pleased with our results, given that the new Vision 3D portfolio of products had yet to launch.

During the quarter, we received FDA approval of the Attain StarFix left ventricular lead with deployable lobes, the first-ever active fixation left-heart lead. Attain StarFix establishes a new standard for steerability and fixation and has demonstrated a 0% chronic dislodgement rate.

Looking ahead to this fall, we believe the availability of the Vision 3D productline, coupled with the launch of the Attain StarFix, will help us maintain our market share, which remains in the 50% range over a 12-month rolling average. Consistent with what we communicated at our June analyst meeting, we estimate the worldwide ICD market is continuing to grow in the mid- to high-single digits on a constant currency basis.

Turning to pacing systems, worldwide revenue in the first quarter grew 7% to $526 million. This growth was in line with our overall market growth. In the US, revenue was down slightly year over year, although our share position remains above 50%.

Finally, during the quarter, we continued to enroll patients in our EnRhythm MRI clinical trial, with over 460 patients enrolled today. We anticipate launch of the MRI SureScan pacing technology in select markets outside the US later this calendar year and the US launch in fiscal year 2010. We believe this unique capability will be beneficial for patients and will provide us a significant competitive advantage.

Turning to our Spinal business, revenue of $859 million grew 33%, including $161 million in revenue from Kyphon. Excluding Kyphon, spinal growth in the quarter was 8%. Our performance this quarter reflects the rebuilding underway with Steve La Neve. Steve took over as President of Spinal and Biologics at the beginning of last quarter and is working hard to solidify his management team.

Included in our Spinal results is an $8 million revenue credit associated with the buyout of inventory from one of our main distributors in China. This is related to our plans for commencing our joint venture with Weigao, which is on track to begin operating on September 1.

As we have described previously, although the market for CoreSpine products in the US continues to grow in the low double digits, our market share position remains under pressure, primarily from the proliferation of smaller, privately-held companies.

Strong performance in Biologics continued again this quarter, with growth of 16%. During the quarter, we announced approval to market two smaller kit sizes of INFUSE bone graft for use in certain spinal fusion and oral maxillofacial procedures, which helped contribute to the largest revenue quarter ever for INFUSE. We estimate the OMF market potential for INFUSE to be in the $200 million to $250 million range.

Since its market introduction, INFUSE has been successfully used to treat thousands of patients. Expanding our portfolio of INFUSE products will help broaden availability to a larger group of patients.

With regards to Kyphon, revenue of $161 million was up $11 million sequentially, driven by a 10% sequential increase in balloon kyphoplasty revenue. The overall Kyphon revenue run rate is tracking a little lower than our earlier expectations, driven primarily by softness in the X-Stop interspinous process decompression device. We have several initiatives in place designed to re-accelerate X-Stop revenue. At the same time, we remain confident in Kyphon's important strategic fit and its ability to make increasing contributions to the long-term growth of our Spine business.

The key to our future success in the Spinal business will be our commitment to driving long-term innovation. This commitment is reflected in the breadth of innovative products in the long-term Spinal product development and clinical pipeline, including our BRYAN Cervical Disc, our new Atlantis translational plate, the CD Horizon Legacy family, which includes our very successful PEEK Rod and hydroxyapatite coated screws, the Aperius device, which is the next-generation interspinous device being introduced in Europe, the OSTEOGRIP family of screws, the upcoming launch of balloon kyphoplasty in Japan, and finally, a series of expanded indications for our INFUSE bone graft. These innovative products will strengthen our existing portfolio and position us to continue our market leadership.

So to conclude on Spine, I will be the first to say I'm disappointed with our performance the last couple of quarters. We have some work to do and I expect it will take us a few quarters to get things back to where we want them to be. I can assure you, however, we are wasting no time in making the appropriate changes. Steve La Neve recently announced a number of moves with his senior leadership team.

On a positive note, demand is strong, reimbursement is appropriate, our pipeline is full and our O-US market continues to have a lot of runway. Net-net we remain committed to this business and excited about its future potential.

Our CardioVascular business generated very strong growth of 30%, delivering revenue of $631 million. Coronary and peripheral product growth of 41% was fueled by $175 million in DES revenue, including $80 million in the US. Endeavor market share in the US was stable at approximately 19%, despite two new competitive entrants. We continue to maintain a disciplined pricing strategy for Endeavor and our average selling price remains consistent with the current US market average.

We believe the Endeavor launch has helped to strengthen the ongoing recovery in the DES market. We estimate the DES penetration rate in the US has improved to approximately 67%, its highest level in a year. DES revenue in markets outside the US of $95 million reflected stable market shares in a relatively flat global DES market.

Our clinical evidence continues to build for Endeavor and Endeavor Resolute, further validating its uniqueness and exceptional performance in real-world patients. Endeavor is the most studied of the new drug-eluting stents with a wealth of long-term data that far exceeds the competition.

Our Endovascular business grew 26% in the quarter, including 35% revenue growth in O-US markets, driven by the strong performance of our thoracic product line. We continue to advance the strongest endovascular product pipeline in the industry. In the US, growth of 17% was driven by the recent approvals of the Talent abdominal and thoracic stent grafts, which broaden our industry-leading portfolio of aortic repair technology. Outside the US during the quarter, we began the launch of our next-generation Endurant stent graft. Together, these products should help accelerate endovascular revenue during the remainder of fiscal 2009 and beyond.

Structural Heart Disease revenue of $78 million grew 15%, driven by strong growth in tissue valves in our O-US markets, adoption of our Melody trans-catheter valve and favorable comparisons.

Revenue in our revascularization business grew 15%, driven by a series of new product introductions and strength across our O-US markets.

We had another strong quarter with our Neuromodulation products, as revenue of $348 million grew 20%. Adjusting for the impact of the divestitures of our diagnostics-related product lines last fiscal year, Neuromodulation revenue grew 23% in the quarter. The Neuromodulation market continues to show robust growth, with the worldwide market for pain management growing in excess of 20%.

Revenue from our pain stim products grew over 30% as we took share with the successful launch of RestoreULTRA and our market-exclusive patient-controlled pain programmer called TARGETmyStim. I was recently with several of our neuro reps, and they commented that the RestoreULTRA was one of the strongest product launches in recent history. Together with the 5-6-5 surgical lead launched late last year, the RestoreULTRA system has quickly become the most widely-used spinal cord stimulator in the market and has enjoyed rapid adoption, particularly for initial implant.

Our movement disorders product lines grew 20% in the quarter, driven by growth of our Activa DBS therapy for Parkinson's Disease. Revenue from Gastro Uro products also grew over 23%, driven by another strong quarter from our InterStim product line. This was our ninth consecutive quarter of greater than 25% growth in InterStim. This productline is now annualizing at over $200 million.

As we stated at our investor meeting in June, the Neuromodulation space is one that we believe has significant potential for future growth. To this end, we have increased our investment in R&D and are currently in clinical trials on a number of new therapies using our platform technologies. During the quarter, we observed a series of milestones in the broad clinical programs we have underway designed to expand our DBS franchise into new indications and further extend our industry leadership.

Diabetes revenue of $269 million grew 12%. Growth was driven by our rapidly expanding continuous glucose monitoring business. Sales of consumables were also particularly strong around the globe, reflecting the strength of our installed base, coupled with the positive impact from multiple programs we currently have underway designed to improve our consumers' overall experience.

It should also be noted that this quarter reflects the impact of some difficult comparables, given that the diabetes business saw 23% growth in the prior-year period. Insulin pump growth was highlighted by strong performance in many O-US market, where the Paradigm REAL-Time system has been more recently introduced, offset by a slowdown in the US as we complete the initial wave of upgrades to our latest insulin pump technology among our installed base of pump patients.

Our Surgical Technologies product lines are fast approaching a $1 billion segment, and once again had a very good quarter, as revenue grew 17% to $202 million. ENT product growth of 16% reflected the continued successful launch of Fusion, an advanced image-guided surgery system to facilitate sinus surgeries. In addition, we saw strong performance in nerve monitoring and power systems.

Neurologic Technology products growth of 15% was fueled by strong acceptance of the Strata programmable valve for hydrocephalus. And finally, navigation growth of 29% was propelled by strong sales of the O-ARM navigation system, coupled with strength in our service contracts.

During the quarter, we also completed the Restore Medical acquisition and we are actively integrating Restore's obstructive sleep apnea product line into our Surgical Technologies business. This acquisition will deliver new growth by providing us with a proven, office-based procedure in a very fast-growing segment of the obstructive sleep apnea market.

And finally, a couple of comments on Physio-Control. We made good progress during the quarter toward resuming full shipments. Revenue in the quarter was $94 million, reflecting ongoing sales to critical care customers, governments and O-US markets. We are working with the FDA to return to full shipments. Our intent to (inaudible) this business remains unchanged.

So looking ahead to the remainder of the fiscal year, we continue to see the potential for strong growth in Neuro, CardioVascular and Diabetes and for solid double-digit growth in Surgical Technologies. We see our CRDM business stabilizing in the 5% to 7% growth range, supported by a solid share position.

In considering the challenges I discussed previously for our Spinal business, for the remainder of the fiscal year we expect growth in the range of what we saw this quarter, as strength in Biologics and O-US markets continue to offset pressure on the core business in the US market.

Beyond the revenue performance during the quarter, we made solid progress on executing against the other One Medtronic initiatives. We are starting to see the benefit of our operating leverage initiatives as a result of the restructuring we did in CRDM and the sales leverage we are seeing in both Diabetes and CardioVascular. We also made good progress this quarter in further strengthening our teams, focused on reducing costs. James Dallas's Medtronic operations organization is now in place and we are moving ahead on many fronts. Gary is going to comment in more detail in his remarks on the progress we have made and the efforts underway across the organization to drive meaningful operating leverage so that we can grow earnings per share in the 11% to 14% range.

During the quarter, we also took decisive action relative to the new capital allocation strategy that we outlined on June 2. With the increase of our dividend by 50%, we have reinforced throughout the enterprise the importance of financial discipline.

With that, 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, first-quarter revenue of $3,706,000,000 grew 19%. Breaking this out geographically, revenue in the US was $2,249,000,000, up 16%; and outside the US, revenue of $1,457,000,000 increased 24%, including a $157 million positive impact of foreign currency.

After adjusting for restructuring, first-quarter earnings and diluted earnings per share on a non-GAAP basis were $813 million and $0.72, respectively, reflecting EPS growth of 16%. GAAP earnings and diluted earnings per share were $747 million and $0.66, respectively.

On a non-GAAP basis, our operating income grew 29% to 32.6% of revenue, reflecting solid operating leverage.

In the quarter we recorded restructuring charges of $96 million related to a global realignment initiative that we announced last fiscal year. This initiative, which is part of our ongoing efforts to streamline the organization, focuses on shifting resources to those areas where we have the greatest opportunities for growth while eliminating unnecessary costs. This realignment, which also resulted in charges in the fourth quarter of last fiscal year, impacts most businesses and geographies.

As previously announced, this initiative resulted in the elimination of approximately 1100 positions. This charge, including the respective tax impact, had a $0.06 negative impact on our first-quarter diluted earnings per share.

Turning to the rest of the income statement, the gross profit margin was 76.9% compared to 74.7% in the first quarter of last year. Gross margin was positively impacted by a favorable foreign currency, overall efficiencies in manufacturing of product due to increased volume, ongoing initiatives to reduce product cost and a 50 basis point benefit from the impact of Kyphon. We expect our gross margin to be slightly above 76% for FY '09 as we continue to see the benefits of the broad portfolio of initiatives we have underway to reduce our cost of goods sold by $1 billion by fiscal year 2012.

As we described at our investor meeting in June, we are seeing good traction from our design for manufacturing, Lean Sigma, and manufacturing consolidation initiatives.

First-quarter R&D spending of $324 million increased 8% compared to $300 million in the first quarter of 2008 and represented 8.7% of revenue. This includes a reclassification of approximately $11 million of certain legal and patent expenses from R&D to SG&A. Before this reclassification, R&D would have been approximately 9% of revenue, up 12%.

R&D was below our expectations due to timing issues associated with a shifting of R&D resources among the businesses. We remain committed to investing in new technologies to drive future growth, and going forward, we anticipate R&D spending will approximate 9.5% of revenue, after adjusting for this ongoing reclassification.

First-quarter SG&A expenditures of $1,318,000,000 represented 35.6% of sales compared to 35% of sales in the prior-year first quarter. Kyphon had an 80 basis point negative impact on the current quarter. In addition, the R&D reclassification I previously mentioned increased SG&A expense in the quarter by approximately 30 basis points. SG&A without Kyphon and the reclassification would have been 34.5%.

As we outlined at our June investor meeting, we have several initiatives underway to leverage our cost structure, and in the first quarter we started to see benefit of these efforts. For example, SG&A expenses in Diabetes and CardioVascular grew less than half as fast as revenue during the quarter.

Consistent with our previous forecast, net other expense for the quarter was $151 million compared to $57 million in the prior-year first quarter. This large increase is primarily due to $65 million in currency losses from our hedging programs.

Net interest expense for the quarter was $9 million compared to $44 million in 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 July 25, 2008, we had approximately $4,314,000,000 in cash and cash investments and debt of $7,134,000,000. We continue to generate on average $750 million or more of free cash flow per quarter, defined as operating cash flow minus capital expenditures.

Let's now turn to our tax rate. Our effective tax rate, exclusive of non-GAAP reconciling items, was 22.5% compared to an effective tax rate of 21% for the prior full fiscal year. Including the $30 million tax benefit related to the impact of the restructuring charges, our reported tax rate was 21.6%. As previously stated, we expect our fiscal year 2009 effective tax rate, excluding unusual charges, to be in the range of 22% to 23%. It is important to note that this estimate does not reflect the potential renewal of the R&D tax credit.

First-quarter weighted average shares outstanding on a diluted basis were 1,129,000,000 shares. During the first quarter, we repurchased $175 million of our common stock, which represents over 3.4 million shares. As of July 25, 2008, 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 commenting on full 2009 fiscal year guidance. As you know, we limit our guidance to one year at a time and keep our guidance more directional in nature. Based upon our first-quarter results, our fiscal year 2009 guidance remains unchanged from last quarter. To reiterate, we continue to anticipate our fiscal 2009 revenue to fall in the range of $15 billion to $15.5 billion at today's foreign currency exchange rates.

We also continue to anticipate our fiscal 2009 earnings per share to fall in the range of $2.94 to $3.02. Considering the solid progress we continue to make on our initiatives to deliver meaningful operating leverage, we are comfortable with current Wall Street consensus, which is at the midpoint of that earnings per share range. 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 begin our Q&A session, just let me make a few final comments. Again, we are pleased with the solid results we delivered in the first quarter. We are making good progress, executing against our recently announced One Medtronic initiatives, and we expect progress will continue in the upcoming quarter and throughout the balance of this fiscal year and we are confident in our ability to continue to deliver market-leading performance.

I would now like to open up things for Q&A. In the interest of getting to as many questions as possible, we would like to respectfully request that each caller limit themselves to one question with one follow-up. So operator, first question, please.

Tao Levy, Deutsche Bank.

Good morning. So maybe if we could first touch on the US ICD market. You know, what is the latest that are seeing? Are we behind -- any issues with the Fidelis, and do you expect going forward the US portion to improve in growth?

And then my second question is on the pacemaker, on the MRI safe product. I think some data is going to be coming out later on this month. Any expectations on what that data is going to show?

Okay. Tao, Bill Hawkins. First, let me just make a couple of comments about the ICD market. As I said in my remarks, you know, we see the market growing in that mid to high single digits, as we had discussed at the June analyst meeting, with the US being in kind of the low single digits and O-US being in the low double digits.

So -- and in terms of our position, we are pleased with the progress that we're making. As I said, we didn't have the Vision 3D and we did launch all of the -- the Attain StarFix, which we think is making some good traction, and we will be launching the Vision 3D platform this quarter.

So we feel very confident about our position in the ICD market. We think the market is stable and kind of growing in the range that we indicated before.

On the pacemaker side, we will be presenting some data at the ESC on the SureScan MRI technology. And again, as I said, we are excited about this. We think that this will really differentiate our pacemakers in the marketplace when we launch it outside the US by the end of the calendar year, and as I said, in 2010 here in the US.

Great. And the single (inaudible) Quattro lead, did that get approved or is that still --?

No, it's -- we are still going through qualifications on that, and we will launch that when -- you know, when we -- we are ready to launch it when it meets our internal standards.

Okay, thanks.

Matthew Dodds, Citigroup.

Great. A couple of questions. First for Gary. On the gross margin, you said Kyphon was 50 basis points year over year of an increase. But if you look at the last couple quarters, you have steadily marched up there as well. Can you just maybe tell us a little more detail -- how much of that is foreign exchange versus everything else?

And then for Bill, for the Resolute, when do you think we can see the start of a US trial?

Let me address the gross margin first, Matt. As I indicated in my comments, there was a lot of factors driving the gross margin improvement that we have seen, not only versus the prior year, obviously, but even, as you indicated, over the last few quarters.

You are right -- the benefit of Kyphon has been in there the last few quarters. Obviously, it wasn't in there in the prior year and that is why we mentioned it versus the prior year. But it has been in the last few quarters.

Currency, as I indicated in my comments, was about 120 basis points of the improvement versus, again, the prior year. Some part of that would be an improvement over the last couple quarters, because there we have seen the dollar continuing up there -- up and through our first quarter, obviously, the dollar had continued to weaken. Here in August, it obviously has turned around and has started to strengthen. So some of that benefit will be gone as we go forward.

And that is why we are still saying our gross margins, we think, will be maintained in that -- just above 76% for the rest of the fiscal year, because we do think some of the (technical difficulty) is going away.

But I don't want to minimize the issue and the benefits that we are getting from our operating leverage initiatives. As you know, we started this initiative to reduce our cost of sales and our product costs by $1 billion about 18 months ago, and we are clearly starting to see some significant benefits on those programs, and that is starting to come through in basically across all of our businesses, which are seeing improvements in their gross margins.

So there is a lot of factors driving the gross margin. We were happy with the results, obviously, for the quarter. I think the currency will be a little bit of a negative versus this quarter, based on where the current FX rates are, as we go forward. But we still think our gross margin will be above 76% for the rest of the year.

And Bill, before you chime in -- Gary, just one last thing. Because of the way inventory works, you still think this is the high water mark for the FX benefit, was Q1?

Well, based on what has happened with FX rates, the answer is yes. I mean, what you have to -- again, obviously the dollar here in August has strengthened 5%, 6%, 7%. And so as a result of that, some of that benefit of that 120 basis points will not be there based on where the current FX rates -- current rates are.

If you had rates bounce back to what we saw in Q1, again, you would still see that kind of a level benefit on the gross margin. But I am just saying based on where current rates are, no, it will be a slightly lower benefit for the rest of the year if that stayed.

All right. Thanks, Gary. And then, Bill, on Resolute?

Yes, so let me just (inaudible) you on Resolute. So really, there is two trials -- there's the Resolute 3 and then there is the Resolute US trial. The Resolute US will begin this quarter, actually. And the Resolute 3, which is an all-comers trial, which randomizes 2000-plus patients, one-to-one Resolute versus Xience, is well underway in about 15 to 20 centers outside the US. So we are moving along on both fronts.

Thanks, Bill.

Rick Wise, Leerink Swann.

Good morning, everybody. Maybe continuing on with Endeavor, Endeavor share was stable for the quarter, I think you said, Bill, at 19% or so. But can you talk a little bit more about July, or maybe as you exited July, and maybe early sense of August? Obviously, you have had some significant competitive launches in the United States. And maybe help us think through how we should be envisioning Endeavor in this trialing period that is likely to go on for Xience and PROMUS.

As I said, Rick, look, first of all, if you look outside the US, where we have competed with all the stents for now a year plus, we have seen our position to be very stable. I mean, we feel that that market share has been in that 20% range outside the US in the addressable market; we are not in Japan yet, which is a big market.

So again, if I look there and say is that a surrogate for what you could expect in the US, and yes, granted, we don't have the rapid exchange in the US like we do outside the US. But nonetheless, I mean, there is a large over-the-wire segment. And MX has been very well received. So, look, I am not going to suggest that we wouldn't kind of give up maybe a point or two, but I don't think it is going to be much more.

Okay. And about the marketshares, so you think -- just to make sure I understand -- you think it is a point or two in coming quarters in the US?

Yes, I mean, look, we feel very good about the stickiness of our business and the uniqueness of the Endeavor, as I pointed out, in terms of the thing -- the reason that people are using it is the different from the reason that people are using the other competitive stents.

Two other quick ones. Kyphon, you expressed your optimism about getting on track, and clearly, sequentially looking better. Maybe help us understand, Bill, what is required to get Kyphon to where you want it, like what actions need to be taken and when is that likely to happen?

And last, a brief one on the US diabetes. Seems to be stalled out in the $170 million per quarter kind of range for the last four quarters, plus or minus a tad. Again, color on why, when, how it starts to move beyond that level. Thanks so much.

All right. Okay, well, real quickly, on Kyphon, look, the balloon kyphoplasty, the BKP business, we feel very good about. We are working to kind of re-accelerate the growth in the interspinous process devices, the St. Francis products that we had, which just -- we have some work to do -- on market development.

It's interesting. In fact, Lee Trevino is one of the beneficiaries of this technology and is a terrific spokesperson. And so we are probably going to be using Lee and doing some other things to really talk about the value of this. But that is where we had some softness this last quarter, was on the St. Francis component.

But the BKP is looking good, and as I have said, where you have to get into Japan, and when Japan opens up, I mean, I think we have got a lot of headroom for growth on that side of the business.

On the Diabetes business, I think we pointed at the June analyst meeting that we had some tough comparables. And the replacement pump part of our business has -- there are cycles when it benefits us and there are cycles when it goes against us. And we are a little bit in one of those cycles where it is going against us. But as we introduce new products over the next year or two, I think you're going to see continued solid, strong growth.

The CGM, the continuous glucose monitor, is doing terrific. Our consumables are strong; our O-US business is strong. We've just had -- this is a -- in the US, with the cycle we are in with replacements and when we are -- we are up against some competition now who have new pumps. But as we introduce our new products, I am very confident that you are going to see very strong, solid growth in that Diabetes business.

Thanks, Bill.

Mike Weinstein, JPMorgan.

Good morning, guys. Gary, let me just start with the quarter and then the guidance. You came in above the street consensus by $0.03 this quarter. You don't give quarterly guidance, so that doesn't necessarily draw to your fiscal '09 guidance. But by the same, token you did not raise for the fiscal year. So would just like to get a sense, was this quarter in line with your expectations and that is why you didn't raise guidance, or are you being cautious on the balance of the year for any particular reason?

I would say I am not being cautious for any particular reason on the rest of the year. As we talked about through our comments, we started off the year very strong and we feel good about it. We did have -- the quarter from our perspective was closer to our expectations than where we would have expected the quarter to be at. So as a result, we thought we would probably exceed where the Street was at in the first quarter. So we had a little bit higher expectations. But we ended up even exceeding ours a little bit by where we ended up.

I think what we have done is -- back on the guidance, as you recall, the range of the guidance is the same -- when we gave at the end of our fiscal year '08, we gave the same guidance. And we said at that point in time until we saw some of the quarters kind of moving through, we were more comfortable with the lower end of the range.

So at this point in time, basically, the consensus is at the midpoint of the range. And we are saying that -- and based on what happened in this quarter, the fact that we did kind of exceed expectations, we have moved up and said, all right, we are comfortable with that mid part of the range. And we will continue to get more confidence, obviously, as we go through the quarter -- or the rest of the year, as those quarters continue to be hit and exceeded as we move through the rest of the year.

So right now, it is a little cautious, but there is nothing from the standpoint of what is going on with the business that gives us caution. It is just we want to make sure that we continue to show strong results before we continue to take guidance up.

Okay, that's helpful. Let me turn to the Spine business. Obviously, the Spine business is struggling, both the base business and Kyphon. So if we could spend a little bit of time on A, X-Stop, which my question there is basically is X-Stop down year over year? And then B, on the pipeline, there are a number of products in the pipeline that I'd love for you just to comment on. Maybe I'll just rattle them off. The Bryan, and then for cGLP, AMPLIFY for INFUSE, and then maybe [Dion] would be another one just to give us an update on.

Mike, as I mentioned, the soft spot on the Kyphon part of the business was X-Stop, okay? You know, the data is really strong there. I mean, the randomized controlled trial that we had demonstrates the value of this technology. A little bit of a history here in terms of when St. Francis kind of was first out there, and I think there was a question about patient selection.

And so we have kind of taken a little bit of a step back and making sure that we are addressing the right patients with the technology. We are continuing to -- we are -- and invest in new products. We will be launching the PEEK version of X-Stop later this fiscal year, which I think is going to be a real opportunity for us to kind of come out and to sort of relaunch this product.

There are some competitors out there that don't have X-Stop devices, but are -- I think they are doing some things to sort of position their products a little bit like X-Stop. But again, we have got a great pipeline with Aperius, which is already approved outside the US. We have got [Dion], which is in its randomized -- which is in a trial here. But it is going to be a couple of years before we will be here in the US.

So I think in the US, it is all about PEEK version and it is really about us kind of relaunching this product. As I mentioned, Lee Trevino is kind of -- has become an avid spokesperson for this technology. So there are some things we are going to try to do to try to really kind of relaunch the X-Stop.

On the rest of the Spine, yes, you are right. We have got a lot in the pipeline, when you look at some of the next-generation or the modifications of the disc portfolio that we have with the Prestige and then the Prestige LP, which we think will be in the FY '10 timeframe. But then we have the Bryan, which we have an approvable letter. We think that this -- the end of this quarter, we will get approval. But we probably will modify the launch until we get the tool set approved, which is really key to that product; it is not just the product itself, but it is how you deliver that product. And so that is going to -- will slow our launch down a bit until we get that approved.

But then other products in the Spine portfolio, we have got these translational plates, which we are real excited about. The OSTEOGRIP, which is kind of -- is a differentiated screw. The SEXTANT continues -- the SEXTANT II continues to do very well. The whole PEEK rod family continues to do very well. So we have a lot in the pipeline that, again, is part of our strategy to kind of really move the technology upstream, differentiate ourselves and really sell on technology.

So I mean, we are all over the Spine business right now, I can tell you. And I am confident that this business is going to be a strong business for Medtronic. And by the way, as I mentioned, the Biologics continues to do very well with the two new small kit sizes. You know, we have got a dedicated sales force going after the OMF marketplace, and we are beginning to see some traction there.

So, look, I am optimistic and very confident in the Spine business. And by the way, Steve La Neve is -- he is doing a terrific job.

Okay. Thanks, Bill.

Larry Keusch, Goldman Sachs.

Hi, good morning. I think, Bill, you mentioned this in your prepared comments that -- or it may have been Gary -- I apologize -- but there was redirection in R&D as you are allocating through different businesses. Could you just kind of just walk us what is going on there? I know this is in relationship to your overall plan. But sort of who is getting the money now, where is it coming from and how long do you think that timing disruption will be in place?

Well, I don't know what you mean by timing disruption. But this is, as we pointed out in the June analyst meeting, we are -- a part of our job is to take a step back and look at kind of the portfolio of therapies that we are in and to try to make judgment calls of where we think the most headroom for growth is and where we have the biggest opportunities.

And right now, as I pointed out in June, we think that the Neuromodulation space, there is some really neat sort of mid-term to long-term opportunities. And so we have redirected some of our resources to fund things like the treatment-resistant suppression trial. We have got the epilepsy trial underway. We have just gotten HDE approval for OCD, obsessive-compulsive disorder. We have got a lot of work to kind of develop next-generation pain stim devices. The InterStim product line, as I pointed out to you, has grown nine quarters of over 25%. So we are continuing to invest in the InterStim product portfolio.

So there is a lot that we believe that -- of headroom for growth in that side of the business. The Diabetes, despite the fact that this quarter was a little bit lighter than maybe what you were expecting; but we anticipated that we would be a little light because of some replacement headwinds that we had from comparables last year. But we see a lot of upside in the Diabetes business and we are investing appropriately.

We have increased our investment for a range of new pumps that we think will differentiate us in the marketplace and actually give us the ability to move more from the Type I to the Type II diabetic, and also the opportunity to perhaps move into the hospital market. So there is -- the Diabetes business is one that we are investing in.

CardioVascular, I mean, is -- we have been investing and we are still investing, because of just the size of that market. The trans-catheter valves, we have got a lot in the pipeline that we think is going to -- that will serve us well over time. And we have got our pulmonic trans-catheter valve, the Melody valve out there.

So Larry, I mean, it is consistent with what we said in June. We are looking to make sure that we are not just sort of running this as a portfolio, but taking a big picture view and making sure we are allocating resources to drive short-term and long-term growth for Medtronic.

And the timing aspect, just to add on to what Bill said, Larry -- because it is consistent with the message we have been communicating of just investing in Neuro and Diabetes -- the timing issue gets back to the fact that as you try to accelerate investments in certain businesses, back to Neuro or Diabetes or going forward, it just takes time to ramp up to get basically people hired, to get clinical trials started, versus -- using cardiovascular as an example -- the clinical trials they have been running have kind of fallen off because of, obviously, we were completing some of that. So that expense falls off faster than being able to ramp up in some of the other businesses.

And that is about a quarter or two. I mean, I would expect here as we get into the second quarter, you are going to continue to see us, as we talked about, getting closer again into that 9.5% of revenue as we move ahead because the investments will start to accelerate.

Okay. That's really helpful. And then Bill, just coming back to Endeavor, you have obviously had a chance now to get a sense of how the US market is developing with Xience and PROMUS out there. Just if you could talk a little bit where, as you look forward, where you think Endeavor will get its usage. What sort of lesions is it going to be used in, sort of what intelligence are you kind of going in that direction now?

And I guess the one thing I think about relative to your performance in Europe is it is my understanding that Resolute is the majority of the mix now, where it is approved in Europe. So I just wanted to get a sense of how you think of the US without having that product right now and maintaining that sort of stable-ish share that you are talking about.

Well, let me comment on that. First of all, actually, Endeavor is, by a long shot, the preferred product, believe it or not, in Europe. I mean, Resolute is an important part of that portfolio, but we have -- it is predominantly Endeavor. And I think -- and the reason for that, which is why we feel confident about our position in the US, is the safety message.

I mean, the fact of the matter is -- I mean, the long-term safety data that we have on Endeavor is unparalleled by our competitors. And I think that is the reason that people are using Endeavor more than any other reason. Now couple that with its deliverability and its ability to sort of access distal tortuous lesions is another key thing that differentiates this product.

So I mean I feel that -- look, we have established a very important niche for those patients who you have concerns about their compliance with -- and in platelet therapy, which is not an insignificant group of patients, we are --that is a subset of patients where physicians are realizing the value of Endeavor.

Secondly, it is the deliverability of the product. And so, I mean, you combine those two, that is a sizable part of the market. So I am still pretty bullish about the stickiness of this product.

Now, as I said, look, we have got PROMUS and we have got Xience out there right now, that are -- they are battling it out, trying to get into the labs. AND so, I mean, I wouldn't be surprised if you see, as I said, you know, one or two or some modest, small single-digit kind of share exchange over the next quarter.

Okay, great. Thanks, guys. I appreciate it.

Larry Biegelsen, Wachovia.

Good morning and thanks for taking my question. Gary, one part of the guidance I didn't hear you give an update on was SG&A for the full year. Do you still expect it to come in at 33.8%? And then I have a follow-up. Thanks.

I didn't give any guidance for the SG&A, but you are right -- we had provided 33.8% previously. With this reclass issue that I just mentioned, obviously, between R&D and SG&A, that would move it up about 30 to 40 basis points. So you would be -- closer to the full year, we would still expect to be kind of 34.1%, 34.2% because of that reclass issue. But otherwise, we still have the same expectations around the fact that we are going to be leveraging SG&A.

And I want to make sure I am clear also, when we give that guidance, we have set plus or minus kind of a half a point. Because obviously, I can't predict exactly where that number is going to be because you're predicting revenue and expense line. But it is going to move up a little bit, Larry, because of this reclass issue. But overall, we still expect to see the same leverage as we move ahead and we still have expectations that that SG&A number will start to -- will continue to come down as we go through the year.

Then on Endeavor, Rapid Exchange in November -- how confident are you that you'll be able to launch, that you won't be blocked? And just if I could ask -- I didn't hear an update on MAVERICK. Thanks.

On the Rapid Exchange. So. as you know, Abbott has filed for an extension with the patent office. We filed a motion challenging their ability to extend, and there is a hearing scheduled for the middle of September. And we believe we have a very strong case in front of the judge there. But that is where it is, so I can't make any predictions further than that, other than to say we are -- we think we have a very, very strong case.

And MAVERICK, Bill? I didn't hear you give an update on the timing of that, when you talked about Spine. Sorry. Thanks.

Yes, on MAVERICK. Well, it is outside the US already. We are looking at -- we got an approvable letter in the third quarter of FY '08; so we have got an approvable letter. We expect to get FDA approval in the fourth quarter of this fiscal year.

And then, on the MAVERICK, again, some of what I mentioned to you on the Bryan, the key is the deliverability. And the first-generation MAVERICK, while it is a good product, I mean, we think the real product is going to be the A-Mav. And so we will more than likely be really moving -- when we get the FDA approval, then we will submit a PMAs for A-Mav, and that will be the product that we will really put the most focus on.

Thank you.

Michael Jungling, Merrill Lynch.

Great. Thank you, everyone. I have two questions. Firstly, could you please give us the constant currency growth rates for low-power, high-power, your CoreSpine (inaudible) and Diabetes?

And then secondly, a question on operating cash flow. It decreased in the first quarter. Can you explain why the Accounts Payable and the accrued liabilities, why they increased, which appears to be the core reason for the decreased operating cash flow? Thank you.

With respect to the constant currency by all the businesses, Mike I will ask you to do that -- talk to Investor Relations off-line and get those numbers. I don't want to get into all the detail on that in the call here. So why don't we just get that off-line?

As far as the cash flow goes, the operating cash flow, our operating cash flow in the first quarter is always a little bit lower because you have all the incentives being paid out from the prior year, etc. So it is always a little bit lower as a result of that.

In the current year here, it is lower than the prior year, primarily because of two payments -- unusual payments that were made. One obviously related to the Marquis settlement that we talked about previously and we talked about end of the fourth quarter. That payment was made. That was about $115 million, $120 million. And also the payment was made related to the prior -- the Kyphon qui tam that they had obviously accrued prior to our acquiring Kyphon -- of $75 million. Both those payments were made, almost $200 million in, in effect, unusual payments in the first quarter.

Otherwise, from a true operating perspective, our cash flow continues to be very, very strong and tracking right along with what we would expect. As I have mentioned, our free cash flow continues to be in excess of $750 million per quarter and we would expect that to continue as we go through the year.

Great. A quick question for Bill. Given that some of your businesses continue to slow, what is your appetite for making some divestments?

I'm sorry, Michael, what was the question?

The question was what is your appetite for making some divestments, given that some of your core businesses seemed to slow down on a constant currency basis?

Again, let's be careful here. As we talked about in June, I like the portfolio that we have that -- the diversification that we have with a number of different therapies. And as I mentioned in my remarks, all of our businesses kind of go through certain cycles. But if you take a step back and look at the fundamental markets for all of our business -- I mean, CRDM included. I mean, the reality is there is still large unmet clinical needs out there for many of these businesses.

So I mean, I feel very good about the overall markets we are in. Now having said that, we are always looking at our products and determining whether or not they fit better with Medtronic or could perform better outside. And we made that determination with Physio-Control and our intent is still to spin off that business. We made that decision with a number of our diagnostics-related businesses and we spun off Gastro, Uro and Neuro diagnostic businesses.

So we are always looking at the overall sort of portfolio of products and making judgment calls. But right now, I mean, I feel good about the other mix and that's helped us to deliver strong, diversified results.

Bill, the conclusion would be that we should see no material divestments over the next four months?

Michael, again, as Bill said, Physio-Control we are planning on -- and indicating an initiative to divest. And I don't think we are going to announce here until we -- any other divestitures during that period of time. So I mean, again, both acquisitions and divestitures, we don't comment on other than what we have already told you about, which -- and that includes -- right now, all we have communicated is Physio-Control.

Okay, thank you.

Dennis, I think we have time for one more question.

Tim Lee, Piper Jaffray.

Just getting in under the wire. Hey, just -- first a quick follow-up on the drug-eluting stents. I mean, how important is getting the Rapid Exchange catheter? And how should we think that impacts your market share position, if Abbott is successful in extending it? Or the flipside is, how should we think about your market share if they don't get extended?

Well, Tim, all of our guidance is predicated on what we are selling today. We haven't put into our models that we need RX to be able to maintain our share. So we feel good about the learning curve that people have been through with MX. In fact, many people commented that MX -- there are certain attributes about MX in terms of wire exchange that you don't get with a Rapid Exchange.

So none of our assumptions about the guidance going forward, when we talked about the 12 to 14 -- the 10% to 14% growth include us getting RX. Now if we get RX, yes, there could be some upside for us. But it is not built into our models.

Fair enough. And then just one last one for Gary here. How should we think about the FX impact here in terms of the top-line impact, particularly given the surge of the US dollar here of late? Could we start to see a headwind as we get to the latter part of fiscal '09?

Well, again, at today's rates, it is still a positive and would be a positive really through all this fiscal year. I mean if you look back at where the dollar, what has happened, the dollar strengthened dramatically kind of really in the April -- end of March/April timeframe, and it has been that way for the last four months. And now, it is back to kind of where it was kind of in the April --March/April timeframe, where -- the current strength that you have seen recently, it's kind of back down to where it basically was previously.

So that being said, right now for the rest of the year, you would still see a positive on FX on the top line. And obviously, we are hedged, so it doesn't affect us too much on the bottom line. But on the top line, you would clearly still continue to see a positive as you go through the year.

At current FX rates, however, it would be probably in the neighborhood of $50 million, $55 million less than what it was in Q1. So I mean it will have an impact on us if these rates stay the same for the rest of the year. It would be not quite the positive we saw here in Q1, but it would continue to be a positive.

Okay. Thank you very much.

Okay, let me just wrap things up. As you heard in the call, we are pleased with the quarter. This quarter, on the back of a strong finish to our last fiscal year, I think -- I hope demonstrates our commitment to the execution and the confidence that we have in the diversification of our businesses and the outlook that we have for the next quarter and for the remainder of the fiscal year.

So I am pleased with how things are going and, again, I look forward to updating you as we go forward. So on behalf of the entire management team, thanks for your interest and continued support. Thanks.

Ladies and gentlemen, this does conclude the Medtronic first-quarter earnings conference call. You may now disconnect.