美敦力 (MDT) 2009 Q4 法說會逐字稿

Good morning.

My name is Rachel and I will be your conference operator today.

At this time, I would like to welcome everyone to the Medtronic fourth-quarter fiscal year-end 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 would now like to turn the call over to Mr.

Jeff Warren, Vice President of Investor Relations.

Sir, you may begin.

Thanks, Rachel.

Good morning and welcome to Medtronic's fourth-quarter conference call and webcast.

During the next hour, Bill Hawkins, Medtronic Chairman and Chief Executive Officer, and Gary Ellis, Chief Financial Officer, will provide comments on the results of our fourth quarter and fiscal year 2009 which ended April 24, 2009.

After our prepared remarks, we will be happy to take your questions.

A few logistical comments.

Earlier this morning we issued a press release containing our financial statements and our revenue by business summary.

You should also note that some of the statements made during this call may be considered forward-looking statements and that actual results might differ materially from those projected in the forward-looking statements.

In addition, the 10-K for the fiscal year 2008 identifies certain factors that could cause the Company's actual results to differ materially from those projected in any forward-looking statements made during this call.

The Company does not undertake to update any forward-looking statements as a result of new information or future events or developments.

In the 10-K is available through the Company or via the Medtronic website.

During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance.

These measures are addressed in a non-GAAP to GAAP reconciliation that were included in today's press release and are also available on the investor relations portion of the Medtronic website.

And unless we say otherwise, reference to quarterly results increasing or decreasing are in comparison to the fourth quarter of fiscal year 2008.

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

Good morning and thank you, Jeff.

Q4 was a solid quarter with revenue of $3.8 billion growing 5% after adjusting for a $211 million unfavorable impact of foreign currency.

Total year revenue of $14.6 billion grew 9% after adjusting for a $100 million unfavorable impact of foreign currency.

Fourth-quarter earnings and diluted earnings per share on a non-GAAP basis were $916 million and $0.82 respectively.

Total year earnings and diluted earnings per share on a non-GAAP basis were $3.3 billion and $2.92, growing 10% and 12% respectively.

Despite a challenging economic environment, our fourth quarter and annual results reflect the underlying resilience and strength of Medtronic's diversified portfolio of businesses that focus on many of the most prevalent chronic diseases across a range of increasingly important global markets.

While we continue to closely monitor any potential impact from the ongoing economic turbulence, I remain confident in our ability to deliver sustainable market-leading performance.

Looking ahead, we intend to extend our market leadership by increasing our focus on innovation.

Over the next year, we expect to introduce many new products.

We will also continue our efforts on relentless execution.

We intend to extend our market leadership by strategically investing in faster growing markets like endovascular, diabetes, atrial fibrillation, transcatheter valves, neuromodulation, and spine, and we expect to extend our leadership by leveraging our global footprint.

Today we are well positioned in the most attractive chronic disease markets with leading technology.

We exited fiscal 2009 stronger than we began.

In our CRDM business, growth in the global IT market appears to have stabilized in the mid-single digits on a constant currency basis and appears to be showing positive signs in the US.

And although we have clearly felt the impact from Fidelis over the last 18 months, we are now back on the offensive, having stabilized our share position and strengthened our overall product line.

Last week I attended the Heart Rhythm Society meeting in Boston and was encouraged by Medtronic's arsenal of market exclusives, recent product launches, and very importantly the buzz around our newly formed AF Solutions business.

Our sales force and customers were visibly energized.

Among the new product highlights were our new left heart leads and lead delivery systems.

Our recently announced Attain Ability is the smallest and only for French left heart lead on the market.

Additionally, Medtronic market exclusives like OptiVol, MVP or minimal ventricular pacing, and pain-free shock reduction are truly differentiating technologies that draw physician preference and benefit patients.

We also continue to be the leader with first-to-market products.

We are the first and only company to bring an MRI-safe pacemaker to market and the first and only company to embed lead integrity software into our defibrillation systems.

In atrial fibrillation, we are poised to be the undisputed leader in one of the fastest growing and most promising areas of med tech.

Our AF Solution business formed around our recent acquisitions of Ablation Frontiers and CryoCath possesses two of the most compelling technology platforms in this space.

The integration of these two businesses is going well as we develop a new sales channel in Europe and we remain on track to file the PMA for Arctic Front this summer and the PMA for the AFI catheters later this fiscal year.

Physicians are clearly excited about having access to these breakthrough technologies which aim to enable them to treat patients faster, safer, easier, and with more predictable procedure times.

In Spinal and Biologics, the results this quarter were in line with our expectations.

We were encouraged to see continued stability in our core spine business, reflecting positive momentum from several new or enhanced products including translational and lumbar plates, Peek rods, and other minimally invasive products.

It is important to note that our extensive line of Peek products is now annualizing at nearly $300 million and our recently approved Peek Prevail spacer should only add to this momentum.

These products are examples of our efforts to revitalize our entire core Spinal product pipeline over the next two years.

And although we have much work to do, we still have the most comprehensive line of innovative products in the market including unique minimally invasive solutions, dynamic stabilization products, navigation and imaging technologies, and exclusive biologic solutions.

No one can compete with the breadth of our portfolio.

In our CardioVascular business, solid growth was driven by continued momentum in our coronary franchise along with exceptional growth in our endovascular business.

In coronary, worldwide stent revenue grew 15% sequentially with momentum coming from increased adoption of Resolute outside the US, the availability of Rx in the US, and positive Endeavor clinical data at the ACC in March.

And later today at PCR, new ENDEAVOR II five-year data will confirm the durability of Endeavor's long-term clinical efficacy and challenges the current conventional wisdom on long-term efficacy.

With Endeavor's recent approval in Japan, it is now approved in all global markets and we expect momentum to continue as we launch Endeavor into the $500 million plus Japanese drug eluting stent market.

In endovascular, we are making great strides with exceptional company leading growth.

This business is well on its way to being a $500 million business.

In the transcatheter valve market with our recently announced acquisitions of Ventor and CoreValve, we have two of the best platforms to drive toward market leadership.

This is clearly an exciting opportunity and it is already a market that is taking off in Europe.

And based on the excitement that I heard from physicians while at ACC, it should be an even more compelling opportunity here in the United States.

These tuck-in acquisitions are consistent with our strategy to pursue opportunities that have natural synergies with our existing growth platforms and leverage our global footprint.

In Neuromodulation, both our Activa deep brain stimulation products for Parkinson's Disease along with our Gastro Uro businesses grew in the mid to high teens on a constant currency basis with InterStim growing 20% or better for the 13th consecutive quarter.

This quarter's results also reflect some near-term pressures that we have seen in our pain stimulation business.

We believe these pressures are both temporary and addressable in nature.

We are also increasing our competitive focus to address some initial trialing excitement surrounding the launch of a competitive product.

Looking ahead, Rick Kuntz and his team are highly focused on advancing our technological and competitive leadership in pain stimulation with new offerings to gain share and broaden the market as well as pioneering many other compelling opportunities neuroscience, including the use of deep brain stimulation for the treatment of epilepsy and psychiatric disorders.

Today we have both best-in-class products and the field sales and support staff necessary to drive our continued leadership in this attractive market.

And we will continue to expand the field staff commensurate with market growth in the broad field of neuromodulation.

In Diabetes, strong double-digit performance on a constant currency basis this quarter was driven by the continued success of continuous glucose monitoring and solid insulin pump sales.

We continue to have success as the only company with a proprietary continuous glucose monitoring sensor augmented pump on the market.

At this point we have a three-year lead on the competition.

We are also the only company with the iPro, a unique professional CGM tool.

And with our Diabetes CareLink therapy management software, we offer the most integrated diabetes data management system on the market.

We continue to execute on our significant new product pipeline including making strong progress and blazing the trail to a closed loop system.

So stay tuned for an update on this program at our upcoming investor meeting on June 2.

As another sign of our increasing business development efforts, later today we will announce details of a strategic marketing collaboration with Eli Lilly which combines our delivery and glucose sensing leadership with the insulin expertise of Lilly, a recognized leader in diabetes treatment, research, and education.

In Surgical Technologies, this business delivered another solid -- another quarter of solid growth reflecting steady performance particularly given the elective nature of certain ENT procedures and the capital equipment component of the navigation business.

Turning to our international operations, solid constant currency growth in the quarter underscores our commitment and focus on geographic expansion.

After adjusting for the unfavorable impact of foreign exchange, revenues and markets outside the US grew 9%.

China, Central and Eastern Europe, Middle East and Africa and Latin America all had constant currency growth rates in the high teens or better.

International product line standouts included Core Spinal, CardioVascular, Diabetes, Gastro Uro and Surgical Technologies, which all saw double-digit constant currency growth.

It is also important to note that we continue to invest in our international infrastructure.

Reflecting on fiscal 2009, we delivered on our financial commitments despite the unforeseeable shifts in the economic climate.

We strengthened our core businesses and made solid progress advancing our pipelines by increasing our focus and discipline on driving innovation and improving R&D productivity across the Company.

Fiscal 2009 was a successful year that included delivering double-digit constant currency growth in five out of seven businesses; delivering international constant currency growth of 10%, with greater than 20% growth in China, Central and Eastern Europe, Latin America, and the Middle East and Africa; launching over 20 major new products; reducing manufacturing costs by nearly $200 million which when combined with last year has us over 40% towards our goal of $1 billion savings by FY '12; increasing productivity with EBIT per employee growing nearly 10%; generating nearly $3.4 billion in free cash flow with nearly 50% of it being returned to shareholders, the dividends and share repurchases; delivering non-GAAP operating income growth of 12% versus sales growth of 8%; making strategic investments; establishing leadership positions into compelling growth areas of atrial fibrillation and transcatheter valves.

Bottom line, despite currency and other factors significantly impacting our revenue, we delivered on our original FY '09 EPS guidance excluding the impact from the acquisitions.

As I look across the company, I am pleased with the progress being made in aligning the organization toward ONE Medtronic.

These changes are having a positive impact on driving innovation, achieving operational excellence and ultimately unlocking many of the strategic synergies that are innately part of the Company, including areas such as clinical expertise and core technology research and development.

Finally before I turn the call over to Gary, I want to say a few words about the outlook for FY '10 and how we see the debate on healthcare reform impacting our business going forward.

I firmly believe that our industry will be part of the solution to the challenges our country and other economies are facing with rising healthcare costs.

Medtronic has and will take a leadership position in enabling more efficient and effective healthcare.

We have led the way with outcomes-based medicine and are leading the way with enabling technologies like CareLink and diagnostics to reduce unnecessary visits to the clinic or hospital.

Our therapies are designed to help restore people to health and to enable them to return to a more productive level in society.

We are active in the ongoing healthcare reform discussions in Washington and we are encouraging others in our industry to participate as well.

Regarding US tax reform, we believe the current discussions that are considering removing tax deferral on foreign income would alter the global competitive landscape and would be harmful to US companies.

We oppose this.

On the subject of preemption, we continue to believe that the FDA is the appropriate governing body for determining device safety and effectiveness and we are opposed to any legislation that would undermine the FDA's authority.

Finally on a positive note, as I travel the world I see first hand the need and the opportunity for all that we do.

With the aging of the population, the changing demographics, and the growing burden of chronic disease, Medtronic is well positioned to prosper for years to come.

I will now turn the call over to Gary, who will take you through the detailed financial results.

After his comments, I will conclude with some closing remarks.

Thanks, Bill.

As mentioned earlier, fourth-quarter revenue of $3.829 billion grew 5% after adjusting for a $211 million unfavorable impact of foreign currency.

Breaking this out geographically, revenue in the US was $2.376 billion, up 2%.

Outside the US, revenue of $1.453 billion increased 9% on a constant currency basis.

As expected, the significant strengthening of the dollar in Q4 versus the first half of FY '09 and the prior year had a tremendous impact on revenue.

Foreign currency translation reduced Q4 revenue by over $200 million versus the prior year.

However, as I will discuss in a moment, unlike many companies we were able to offset much of the bottom-line impact through our hedging programs.

After adjusting for restructuring, certain litigation, IPR&D, and special charges and discrete tax adjustments, fourth-quarter earnings and diluted earnings per share on a non-GAAP basis were $916 million and $0.82 respectively.

GAAP earnings and diluted earnings per share were $250 million and $0.22 respectively.

After adjusting for the same types of charges I just mentioned, fiscal year 2009 earnings and diluted earnings per share on a non-GAAP basis were $3.283 billion and $2.92, an increase of 10% and 12% respectively.

GAAP earnings for the fiscal year were $2.291 billion or $2.04 per diluted share.

FY '09 non-GAAP operating income also grew 12% on 8% revenue growth, which reflects our ongoing focus on delivering operating leverage.

As noted, the fourth quarter of fiscal year 2009 was impacted by a number of items.

First, we recorded $132 million in income tax benefit related to the reversal of various tax reserves related to tax position settled with the IRS, numerous state taxing authorities and assessments received from various foreign tax authorities.

These reserves were provided for in prior years and are no longer necessary.

Second, consistent with our ongoing commitment to be improving the health of people in communities throughout the world, we recorded a $100 million special charge related to a charitable contribution made to the Medtronic Foundation.

Third, we recorded $27 million in restructuring charges related to a new initiative to realign and delayer the organization started in the fourth quarter, partially offset by the reversal of certain reserves remaining from prior period.

These new initiatives resulted in charges in the fourth quarter of fiscal 2009 and further charges are expected to be incurred in the first quarter of fiscal 2010.

These initiatives will ultimately result in the elimination of approximately 1500 to 1800 positions through early retirement benefits and voluntary and involuntary severance packages.

Fourth, we recorded $270 million in certain litigation charges for the settlement of royalty disputes with Johnson & Johnson which related to Medtronic's licensed use of certain patents relating to coronary angioplasty stent design and (inaudible) material.

Fifth, we recorded $530 million in IPR&D primarily related to the acquisitions of Ablation Frontiers, Ventor, and CoreValve.

With the exception of the tax benefit, all these items are disclosed individually on the face of the income statement and all are reconciled in the tables accompanying the earnings release.

Switching to the businesses, CRDM revenue of $1.300 billion increased 1% after adjusting for $83 million unfavorable impact of foreign currency.

Worldwide ICD revenue was $780 million including a $42 million unfavorable impact of foreign currency.

As Bill mentioned, the US ICD market grew about 5% and the global ICD market grew 8% after taking into account the impact of currency.

Our analysis also suggests the initial implant market in the US actually grew modestly and although we continue to face a replacement headwind, our overall share in the US and worldwide remained stable over the past three quarters.

Pacing systems revenue of $494 million included a $36 million negative impact of foreign currency.

Spinal revenue of $881 million grew 4% on a constant currency basis.

Core Spinal revenue of $512 million grew 5% on constant currency reflecting increasing stability in this business and traction from a series of recent product introductions.

The biologics revenue of $[215] million declined 1% on a constant currency basis.

Although this business continues to feel the pressure from several external factors, we were encouraged by the continued stability of this business in the US.

We were also pleased by the double-digit growth outside the US on a constant currency basis.

Kyphon revenue of $154 million grew 6% on a constant currency basis.

We continue to focus on making the changes necessary to get revenue growth back to double digits and to realize the underlying potential of this business.

We were encouraged to balloon kyphoplasty sales in the US continue to improve.

For the first time, we did over 20,000 BKP cases in the US in the fourth quarter.

Cardiovascular revenue of $644 million grew 8% on a constant currency basis.

Coronary stent revenue of $213 million declined 8% on constant currency, reflecting the tough year-over-year comparisons for Endeavor in the US.

However, on a sequential basis, our share in the US did improve modestly as we continued to transition customers to our Rx delivery system.

In markets outside the US excluding Japan, Endeavor and Endeavor Resolute market share remained stable at around 20%.

Endovascular revenue of $117 million grew 67% on a constant currency basis.

US growth of over 70% was fueled by the continued success of our Talent abdominal and thoracic stent grafts in the US.

Equally impressive constant currency growth outside the US of over 60% was driven by ongoing success of our next generation Endurant abdominal stent graft.

We continue to advance evidence-based medicine in this growing market by launching three post-market clinical trials in the quarter.

Neuromodulation revenue of $389 million increased 7% on a constant currency basis driven by continued strength in Activa and Gastro Uro.

Revenue in our pain business grew 2% on a constant currency basis.

Movement disorders grew 9% on a constant currency basis, fueled by growth in our Activa DBS therapy for Parkinson's Disease and essential tremor, which grew 18%.

The Activa product line continues to benefit from momentum created late last quarter when JAMA published results from the largest randomized controlled study of DBS for Parkinson's disease.

Gastro Uro revenue of $81 million grew 16% on a constant currency basis, driven by another strong quarter from InterStim, which grew over 20% on a constant currency basis.

Diabetes revenue of $296 million grew 14% on a constant currency basis driven by the continued strength in our CTM franchise, which is annualizing it at $100 million in revenue.

We were also encouraged to see that despite a challenging economic environment and increased competition, insulin pump sales still achieved double-digit growth on a constant currency basis.

These results reflect the strength, breadth, and depth of our global diabetes organization.

Surgical Technologies revenue of $235 million grew 8% on a constant currency basis.

Growth was highlighted by the strong sales of the StealthStation S7 with Synergy Cranial and EM Fusion, coupled with strength in our service contracts.

I think it is important to note that given the elective nature of the underlying procedures and large capital equipment component of the business, Surgical Technologies performed well in this environment.

Finally, Physio-Control revenue of $84 million declined 7% on a constant currency basis.

Results reflect the impact of the economy and delayed customer purchases in advance of the LIFEPAK 15 which we received approval for in late March and are now in the process of launching.

Turning to the rest of the income statement, the gross profit margin was 75.7% compared to 75.5% in the fourth quarter of last year and in line with expectations.

Foreign exchange had a 60 basis point negative impact on gross margins, offset by our ongoing initiatives to improve manufacturing efficiencies and reduce product costs.

We continue to see benefits of the broad portfolio of initiatives we have underway to reduce our cost of goods sold by $1 billion by fiscal year 2012.

Fourth-quarter R&D spending of $368 million represents approximately 9.6% of revenue.

Consistent with the prior three quarters, fourth-quarter results include a reclassification of approximately $12 million of certain legal and patent expenses from R&D to SG&A.

Before this reclassification, R&D would have been approximately 9.9% of revenue, with a growth rate of 9% versus the prior year.

We remain committed to investing in new technologies to drive future growth.

Fourth-quarter SG&A expenditures of $1.313 billion represented 34.3% of sales compared to 33.6% of sales in the fourth quarter last year.

During Q4, we intentionally increased our investment by over $20 million in selling and distribution efforts especially in Spine to reinvigorate sales growth and focus on maintaining and gaining share.

Across the Company, we continued to invest in our sales force and added over 400 sales reps globally in FY '09.

After annualizing for the impact of Kyphon in FY '08, the previously announced R&D reclassification, and the negative impact of FX, we saw a 50 basis point improvement in SG&A in FY '09.

We will continue to invest in customer facing reps in FY '10 with over 500 planned additions globally.

Despite the investment and distribution plan for FY '10, we are driving for an additional 80 to 100 basis point improvement in SG&A as a percent of sales during the year.

Net other expense for the quarter was $53 million compared to $188 million in the prior year.

The year-over-year decrease primarily is a result of the gains from our hedging programs which were $50 million during the quarter, compared to $90 million in losses in the comparable period last year.

As you know, we hedge our operating results so that during time periods when the dollar is strengthening significantly, lower translated revenues will for the most part be offset by currency hedging gains.

Net interest expense for the quarter was $13 million compared to expense of $5 million in the prior year period.

This change from the prior year reflects lower interest rates on investments and higher interest expense from our $1.25 billion debt issuance in the quarter.

As of April 24, 2009, we had approximately $3.9 billion in cash and cash investments.

Looking ahead, we expect our cash to continue to increase, however, lower interest rates would negatively impact our return on this cash.

Let's now turn to our tax rate.

The fourth-quarter provision for income tax reflects an income amount of $24 million.

This amount includes the $132 million benefit for the reversal of various tax reserves as well as the tax impact of restructuring certain litigation, IPR&D, and special charges.

Excluding these one-time items, our effective tax rate in the fourth quarter was 20.5%.

This rate includes a $17 million tax benefit related to the finalization of certain fiscal 2008 states tax returns and state tax law changes.

Exclusive of one-time adjustments, our fourth-quarter and fiscal year tax rate was 22%.

Fourth-quarter weighted average shares outstanding on a dilutive basis were 1.119 billion shares.

During the fiscal year, we repurchased $759 million of our common stock.

As of April 24, 2009, we had remaining capacity to repurchase approximately 18 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 2010 fiscal year guidance.

As you know, we limit our guidance to one year at a time and try to keep it more directional in nature.

In fiscal 2009, we saw significant fluctuations in currency exchange rates.

Given the ongoing turmoil in the global economy and the resulting impact on monetary policies around the world, it will continue to be very difficult to predict exchange rates.

Therefore, we are providing revenue growth guidance on a constant currency basis.

As we look at our markets over the foreseeable future, we believe that constant currency revenue growth of 5% to 8% remains reasonable and is consistent with our expectations for fiscal 2010.

While we are not trying to predict the impact of currency movements, to give you a sense of the FX impact if exchange rates were to remain similar to last week for the remainder of the year, then our revenue growth rate would be negatively impacted by approximately 1% to 2% or roughly $220 million to $240 million.

It is also worth pointing out that we would expect most of the negative FX impact to occur in the first half of the year, turning positive in the back half of the year.

Turning to guidance on the bottom line, this is where the benefits of our ongoing hedging strategy are clearly more visible in the current environment.

As you know, our hedging strategy is designed to help us more effectively manage our international operations as well as to minimize the impact from fluctuating exchange rates on earnings.

This means that over the past couple of years while other companies were enjoying the bottom-line impact of a currency tailwind, we were not.

Conversely as the dollar has strengthened, our hedging strategy will effectively minimize much of the bottom-line impact that many of our -- that other companies are feeling from the currency headwinds of today's environment.

Having said that, based on expected constant currency revenue growth of 5% to 8%, we believe it is reasonable to model earnings per share in the range of $3.10 to $3.20 which reflects earnings per share growth of 8% to 12% after adjusting for the approximately $0.06 to $0.07 of dilution from our AF and transcatheter valve acquisitions.

This guidance also reflects the following major assumptions.

Gross margins would remain in the range of 75.5% to 76%; R&D spending in the range of new 9.5% to 10%.

As I mentioned earlier, improvement in the SG&A expenses ratio of 80 to 100 basis points, net other expense of $350 million $400 million for the year, and effective tax rate in the range of 21.5% to 22.5%.

Also we have mentioned before we have an extra selling week in fiscal 2010 which will occur in the first quarter which means Q1 will have a total of 14 weeks.

As you know, this anomaly is due to the way our fiscal years are structured, with a catch-up week occurring once every six years.

As in the past, my comments on guidance do not include any unusual charges or gains that might occur during the fiscal year nor do they include the impact of the new accounting method for recognizing non-cash interest expense on convertible debt.

Another important housekeeping item before I turn things back over to Bill, who will conclude our prepared remarks.

We will be hosting our annual institutional investor and analyst meeting again this year on Tuesday, June 7.

This year's meeting will be held at our world headquarters facility in Minneapolis.

In addition to hearing from our business unit leaders in the morning session, this year's meeting will feature our Medtronic University format which offers our unique opportunity for attendees to choose from 12 different classroom-like sessions ranging from a deeper dives into transcatheter valves and AF to sessions on healthcare policy, international operations, as well as areas such as innovation and ventures.

Looking over all the sessions, we will be offering some compelling choices for those of you who will be able to join us here in Minneapolis.

Bill?

Thank you, Gary.

Before we begin our Q&A session, let me close by reiterating what I said to begin with, that Q4 was a solid quarter.

As I look across the Company, I am pleased with the progress being made in aligning the organization towards One Medtronic.

These changes are having a positive impact on driving innovation, achieving operational excellence, and ultimately unlocking many of the strategic synergies that are innately part of the Company.

We continue to balance our focus on driving innovations to fuel growth and on both shaping and executing across the enterprise to generate efficiency and leverage to fund future opportunities.

I would now like to open things up for Q&A.

In the interest of getting as to 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.

(Operator Instructions) Larry Biegelsen, Wachovia.

Thank you and good morning.

My first question is I'm trying to understand your fiscal 2010 revenue growth guidance of 5% to 8%.

The extra selling week gives you about 2% in CoreValve, roughly 50 bps.

How are you accounting for that in the 5% to 8% organic or constant currency revenue growth in 2010?

Thanks.

Larry, this is Gary.

The 5% to 8% growth we are talking about -- constant currency growth we gave in the guidance would include those.

From the standpoint of the extra week, you would have to carefully -- you can't just do a mathematical calculation on that because obviously we do have an extra week, but there are -- some of our businesses it is just more bulk purchases.

It's not procedure-related, so it's not a straight percentage calculation.

But that it was obviously be a benefit for us.

We agree with that.

And you are right, the acquisitions give us some additional revenue as we go forward.

All that was contemplated in that 5% to 8% guidance we gave.

And secondly, just on the CoreValve US IDE, could you give us an update on that please?

We expect to submit the IDE mid calendar year '10, so next year.

Is there a chance that you will need a US feasibility study, Bill?

And then I will drop.

I don't know, Larry.

We can get back to you on that, but our current thinking and the discussions we have with the FDA would suggest that we are on track for a mid-calendar year '10 initiation of the IDE.

Thank you.

Rick Wise, Leerink Swann.

Good morning, everybody.

A couple things.

Maybe starting with gross margins, if I remember correctly, you all were talking about gross margins and guidance that might have been better than 76%.

Obviously you got very close at 75.7%.

Was this a greater challenge from currency you thought?

Were savings less than you thought?

And maybe related to that, was the pricing environment or mix more challenging than you expected?

Rick, this is Gary.

The biggest impact was currency.

As you indicated, we had indicated last quarter that again, we've been in the 75.5% to 76% range, but we thought it would be closer to 76%.

As you said, 75.7% is off slightly.

But currency, the revenue impact on concurrency for example ended up being about $25 million to $30 million more than we expected and which has an impact obviously on the margin.

Okay, Bill, the follow-up question maybe on Spine, you said you quote you still have much work to do.

Maybe you could share your thoughts in a little more expansive way on what that work is and maybe highlight in your mind what the most important new products are that could be accelerated or revitalized or help you regain share.

Just over the next one, two years as you discussed.

Thanks.

Well, a year ago I put Steve La Neve down in the Spine business and he over the last year has been working to kind of build his team.

We just appointed someone to head up operations in R&D, a terrific guy that comes from another business across Medtronic.

So we are getting the team solidified.

We are very clear on the priorities, one of which is to really focus on the pipeline.

It is to make sure we get the right cross-selling initiatives going on between the Kyphon organization and between the Core Spine organization.

A lot of work on making sure we got the right priorities around clinical studies to drive the biologics side of the business as well as some of the core spine parts of the business.

So there were a number of things that we are doing that are going to strengthen the business for the long run.

In terms of the pipeline, there are a lot of things in the pipeline, the biggest of which as we've talked about in the past is the G5 and you will hear more about that at the analyst day.

It's really a whole new posterior screw system that we think will have a competitive advantage in the marketplace.

We continue to be optimistic about some of our -- the Peek materials, as I shared with you.

We are annualizing now almost $300 million.

We are launching the new Peek Prevail.

We have the new direct lateral system that will be very competitive in the marketplace.

So there are a lot of products that we think will drive growth going forward.

Thank you very much.

Bob Hopkins, Bank of America-Merrill Lynch.

Thanks for taking the question.

First, Bill, I was wondering if you could talk about the fiscal 2010 guidance a little bit more.

Can you give us a rough sense as it relates to your -- the core ICD market and the core spine market?

What kind of market growth rate assumptions you are using for your 2010 assumptions?

So for the ICD market, as we indicated, we are encouraged by what we are seeing in the US in terms of a bit of a stabilization and in modest -- low single-digit growth here in the US coupled with the high single-digit kind of growth outside the US.

And so that is where we get the mid single-digit kind of growth for the overall ICD market.

So that's a positive.

On the Spine business, there too, Spine is -- continues -- the overall market continues to grow in the high single-digit range, which a low double digit, so that's a good market.

The other thing I meant to mention on the ICD at the HRS meeting this last week, which I attended, there was some very important data that was released on the MADIT, the MADIT-II which I think will be very helpful to the overall ICD market and we are all obviously waiting for the MADIT-II CRT data.

So there are some good things that are happening which we think will stabilize the ICD market and we continue to see good opportunities in the Spine market.

Okay, so you forecast basically similar rates of growth as to what we are seeing right now for both growth markets.

Yes.

Okay, then second question for me is just a question on the quarter.

Obviously, a good in-line quarter overall.

The two areas that looked a little weak to me relative to the expectations were your pacemaker number and your neurostim number, and you highlighted that a little bit in the prepared remarks.

But I was wondering if you could just put a little more or give a little more color on both those two businesses and what happened in the quarter and what your expectations are going forward.

Well, starting with the brady market, worldwide the brady market grew in the low single digits, around 1.5% on a constant currency basis.

The US brady market was somewhat flat, maybe down a little bit, and overall our position held in there.

I mean we've maintained now a 50% plus market share for many, many, many years.

So we feel very good about kind of our position.

We're excited obviously about the MRI SureScan technology that we launched outside the US, and we will be bringing the Advisa MRI system in, I think in the second quarter of FY '10 outside the US, and clearly excited about what we are going to do here in the US with that.

So we feel good about our position with our product platform in a market that has been somewhat in that low single digits for some time now.

On the pain inside, as I indicated, it's kind of a tale of two cities.

You look at certain parts of our neuroscience business with the strength that we are seeing in the movement disorders as well as the InterStim, offset a little bit by what happened this quarter with -- in the pain stim business, principally in the US as we saw a competitor bring forth a new product that got people's attention to at least trial it.

But you're going to hear from Rick at the analyst meeting in June.

He's going to take you for our pipeline, which gives me a lot of confidence in our ability to really drive a market-leading performance in that business.

Thanks very much, Bill.

Matthew Dodds, Citigroup.

Good morning.

Bill, let me just follow up on Bob's question on the pacers.

Not just this quarter but the last four quarters, your US pacer growth has been below the market, so you have been losing share.

Can you just say kind of on a more broad-based view, what specifically is going on there?

Is it competitive?

One of the two competitors that's been causing that since it's more of a trend than one quarter?

And then Gary for you, on the accounting for the convertible, are you saying it's going to be removed from the numbers so we should not put it in our forecasts and also back it out of the '09 results?

Well, again, on the US on the pacing side, yes, you look back over the last two or three quarters and we have had underperformed the market modestly, but you've got to look at this kind of over the long run.

And as I mentioned, when I think about the opportunity that we have with the SureScan MRI technology, I feel very good that we are going to be able to bounce back although it's not a big bounce because we didn't fall that far back.

So again, we have got to just be careful kind of quarter-to-quarter stuff here, but I think overall, we are well positioned with the breadth of our product line in the pacing side.

Matt, just to respond to your question on the convertible accounting, as you indicated, our guidance that we provided did not include the impact of the convertible accounting, which as we have disclosed both in our Qs before would be when we have to adopt it would be about $0.10 impact on the earnings per share.

And as you indicated, you have to restate the prior years also to reflect that.

Our guidance, we decided to give guidance without that in there.

That is what we have seen basically being done by many companies currently at this point that they are excluding that in their overall guidance.

As we go forward and adopt the statement and the standard, we will have to determine how we actually adjust things going forward.

But right now to keep things kind of apples-to-apples, we give guidance with [Hal-Tec] accounting in there and as we go forward, we will have to adjust to determine whether we actually continue to provide guidance without it or we ultimately end up including it.

But what we have seen from other companies who are in the same situation of having to adopt this accounting standard, most of them are providing guidance currently without the statement, assuming the adoption of the statement.

So there is no form coming out any time soon that would show the '09 with -- by quarterly breakdown of what that would be?

We will have to obviously when we do the first-quarter results, we will have to provide that because we will be restating the prior years but prior to the first-quarter results, I don't think you'll see anything.

No.

All right.

Thanks, Gary.

Thanks, Bill.

Mike Weinstein, JPMorgan.

Thanks for taking my questions.

Gary, just to follow up there, so at this point, you haven't decided whether you are going to include the convert accounting in your reported results or not, or your adjusted results?

It will be -- we will obviously have to adopt the convertible accounting and we will adopt that in our first quarter of FY '10 and we will have to restate the prior year.

That's what the accounting rules will require.

What we have not -- we have done, Mike, just say in our guidance right now we are not including that impact in there.

What we will do after as we go through the year, I don't know yet.

Our current assumption is that we will continue to provide guidance without that assumption in there because that is what we have seen other companies doing.

But we will have to determine as we go forward.

But as far as adopting it yes, we will be adopting it.

There will be the impact on the GAAP results as a result of adopting that accounting, reducing the earnings per share by about [10]% as I mentioned earlier.

Okay, I'm sure you realize that there is a variation on the Street that some analysts, ourselves included have adopted it and others haven't at this point.

Exactly.

Mike, that's exactly right and that's one of the reasons we tried to determine what were people assuming?

What were they not assuming?

And as you indicated, there's differences and so what we tried to do is make it very clear.

What we are giving is guidance without it in there and then firms can decide how they want to go about looking at that.

Okay.

And two follow-up questions.

Bill, could you comment on the Kappa Sigma Dear Doctor letter from yesterday?

Then Gary, are you surprised or at all disappointed that you didn't get to your 33% SG&A target to end off the year?

You did set a pretty aggressive goal for FY '10, 80 to 100 basis points.

And maybe just talk about your conviction for FY '10 versus what you got in 2008 and 2009, thanks.

So on the Kappa Sigma, we did put in -- sent a letter to doctors yesterday in regards to really an older line of pacemakers that go back to 1997.

There was 1.7 million of these implanted.

We determined that there was a very small subset of those, I think 37,000 roughly.

Most of which by the way were outside the US, but a subset here in the US as well that when you get out past a number of years, you know there was a very, very small risk of a wire lifting off of a bond and it could have rendered the pacer -- the battery to deplete.

So we did send a note to doctors.

It is -- and the only -- the thing that we did comment was that for pacer-dependent patients, that is the only case where you would recommend perhaps exchanging out the device and if you look at that population, it was like 10% of the 36,000 or 37,000 were affected.

And again, if you look at the ones that were affected in the US, I mean you really get down to a population of less than 1000 patients.

So we called about 50 doctors on Sunday and the people were very comfortable with how we were handling this and we have been encouraged that this has been well-received by the market at least to how we handled it.

Mike, to your question on SG&A, I had given -- I had higher expectations that we would get to a lower percentage on SG&A as a percentage of revenue in the fourth quarter.

As we went through the fourth quarter, it was clear we needed to make some investments to, as I mentioned in my comments, to drive the selling and distribution.

And so we made a conscious decision to increase the investments over what I had originally expected as we started off the quarter.

And so we didn't quite achieve what I was hoping for overall in the quarter itself.

Now I was very pleased with what we accomplished in the year as I mentioned earlier we did achieve a 12% operating income in growth on the 8% revenue growth.

So we clearly did achieve the operating leverage we were looking for during the year.

And I am very convinced that going forward on the 80 to 100 basis point improvement in FY '10 on SG&A, we know where that's coming from as also just in the announcement today we're talking about the restructuring that we're doing here within the organization, the delayering, so we are taking costs out.

All the initiatives that we have started over the last year we are seeing several significant benefits.

So I am very convinced that we can continue to make the investments necessary to drive the business going forward at the same time achieving that 80 to 100 basis point improvement on SG&A going forward.

So overall, we had to make some decisions here in the fourth quarter that resulted in us not getting to what I had expected earlier, but overall I'm very, very happy with our overall leverage in this year both for this current year and as we go forward.

Great, thanks for taking the questions.

Kristen Stewart, Credit Suisse.

Thanks for taking my questions.

Gary, can you just go back and give us a little bit more details on the restructuring?

I know earlier you had said that you were going to be taking out I think it was upwards of 1800 individuals.

To what degree would you expect to see the savings in terms of dollar amounts in 2009, 2010?

In my comments I indicated 1500 to 1800 [p's] positions, several of which obviously are both early retirement and voluntary.

There are involuntary clearly including that number also.

So we do expect that number of positions to be eliminated.

We are adding obviously as we also talked about.

And so going forward, we are going to be a -- as I made in my comments -- we're adding over 500 sales people next year and also making investments in the R&D area.

So the amount you take out is -- it helps us make sure that we can make the investments necessary to continue driving the business.

I don't have the exact dollar amount of what the savings we would expect related to taking out those existing positions, but I think it was important to highlight even if I did have what that number is, that amount comes out so we can make investments in the rest of the organization.

It provides us the opportunity to continue to make investments necessary to drive the business but achieve the leverage I mentioned earlier.

So I don't know what the exact dollar amount is on an annual basis.

Obviously with those -- that number of positions, it's large but it provides us the opportunity to do both aspects of what we're doing as a company.

Okay, and then would you expect to see any additional restructuring charges as we look out to fiscal 2010 to specifically more on like the manufacturing side?

I don't know if there's any opportunities for plant consolidations and things like that.

Well again, what I indicated in my comments is related to the 1500 to 1800 positions we're talking about at this point in time, that will also include a charge in Q1 because based on the way the accounting rules go, you can't book everything in Q4.

I don't know what the magnitude of that number is but assume maybe it's something similar around what we had this quarter.

We'll have to wait and see as we work through that but there will be a charge in Q1 related to wrapping up this 1500 to 1800 employees.

Going forward, no, there's no additional expectations from our perspective as far as what we are expecting to do.

On the other hand, I will say we will continue to evaluate the Company and evaluate where our organization is at.

If there is opportunities to leverage manufacturing, leverage our R&D efforts, leverage our sales structure, leverage our own G&A infrastructure, there's clearly going to be areas that we're going to continue to focus on.

And a company of our size with 40,000 employees you will always have areas for opportunity like that.

So I don't want to say that there is not going to be anything going forward, but this is the effort that we were to have at this point.

We think this is adequate to get us going through FY '10 but we will continue to look at opportunities as we move through FY '10 and into FY '11.

And then just a question for Bill.

Just with respect to acquisitions, you've clearly done a couple here over the last couple quarters.

How should we think about what lies ahead?

Would you expect there would be fewer deals in 2010?

Just continued tuck-in in nature or would you consider doing things a little bit bigger to further broaden the footprint?

First, we are busy integrating the AF as well as the transcatheter valves, which are going very well by the way.

So we are -- at this juncture, we don't have any big things planned.

I mean we will always be opportunistic if there are small tuck-ins that we can leverage our kind of global footprint or we get synergies in our current platforms.

But right now I mean it's -- got our heads down, focus on execution and it's driving a sustainable growth.

Thanks very much.

Ben Andrew, William Blair.

Good morning.

I just wanted to follow-up on the Spine industry or space rather and try to understand how you are changing the structure of the sales force there if you are to try to drive e reacceleration of Kyphon?

And then what sort of assumptions you've got baked in for the non-implant business within Spine for 2010.

So on the Spine business, we have really multiple sales sort of arms, one, Core Spine business; and two, we have a focus group on a Biologics; and three, we have the original Kyphon organization.

They all come under one integrated sales management structure and we are continuing to make improvements on how we leverage the breadth of our total footprint to be able to maximize sales for the overall Spine business.

So it's moving in the right direction.

I feel good about what is going on there.

On the comment about growth in the other non-spine Core Spine business, you heard that this quarter we had -- we made good progress on Kyphon.

In fact, we saw about 11% sequential growth in terms of procedures in the Kyphon BKP business.

Part of that was a result of the favorable free study, so we are excited about that and we are on track to get into Japan I think the early part of FY '11.

So that is still a market opportunity for us.

On the Biologics side, we are investing heavily here and with -- beyond just the BMP INFUSE, we are continuing to round out the portfolio of DBM products and other products which will complement our overall Biologics component.

Bill, does your guidance for fiscal '10 then assume that the overall Spine business is growing, what -- mid single-digits, high single-digits, low double?

Overall for this Spine, it is in the mid single-digits.

Our assumption is basically assume that we kind of continue what we've been over the last several quarters here.

Okay, so maybe a turn in fiscal '11 then or --?

Yes.

I think as we -- this is Gary -- as we would end up FY '10 a lot of the new products that they have coming out are really towards the end of FY '10.

So as we get into FY '11 is when we would really expect some of the things that the initiatives we have underway in the Spine business along with the new products really start to have an impact on the revenue growth in Spine from what they have currently.

Thank you.

Okay.

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

Just as a reminder, many of us will be back together on June 2, where we will have a chance to go into a lot more detail, but so one more question, please.

David Lewis, Morgan Stanley.

Good morning.

Bill, just thinking about the growth trends in constant currency over the last several years sort of fall into the 5% to 8% range from something that was closer to double digits.

And Gary's commentary on R&D spending for next year still sort of in this 9% to 10% range, do we have the appropriate level for R&D spending now that we consider sort of a new adjusted topline growth rate for Medtronic?

We do.

Innovation has is, has been, is and will be the lifeblood of this industry.

Our growth is predicated on investing to sustain our existing businesses.

Medtronic today is close to a $15 billion business.

We have a portfolio of leading technologies.

It's important for us to maintain that business at the same time to make sure that we are allocating resources to invest in new areas.

And you will hear some -- about some of those on June 2, whether it is in the hepatitis C area and some of the things we're doing post-op pain and a number of other areas.

So absolutely the investment we are making in R&D will enable us to drive sustainable profitable growth.

Okay, then Gary, just two quick ones here wrapping up.

Number one, can you quantify the impact of the last three acquisitions on the 2010 number?

Can we think about $100 million to $150 million of absolute revenue?

Is that close?

Yes, I think that's probably reasonable to assume overall.

I think if you looked at both the AF acquisitions and with CoreValve, I think that's probably a reasonable number to be in -- range to be in.

Obviously almost all that revenue is outside the US as you would know.

But yes, that's probably a reasonable range.

Okay, just last question, you talked a lot about SG&A leverage and your commitments obviously to fiscal '10.

Specifically you talk about the gross margins in '10 and specifically what is benefiting that GM and specifically what you think is attracting from that GM heading into this year.

Well, clearly the things are going to be improving the gross margin, as we said the gross margin for next year we would assume to be kind of in the 75.5% to 76% range at today's FX rate, as I mentioned earlier.

FX is clearly still having a negative impact.

As we go forward, so that's one of the items that is there.

As we go forward, we would expect to continue to see the savings from our reductions in product costs, as I mentioned.

And so that would be a benefit that would actually start to have some benefit that would drive up the gross margin as we go forward.

And then the key variable, the big unknown, is ASP impact and as we've talked about, the assumption that we have here on the 75.5% to 76% basically assumes that the product cost improvements that we achieve during the current year which should be in excess of $200 million would basically additional $200 million, that those are basically eaten up by ASP declines across all the businesses.

If that doesn't happen, as we've talked about before, you could see the gross margins inching up a little bit from what I even gave out as guidance.

But the ASP impact we will have to determine as we go through the year and the assumption on that by the way would say that ASP declines accelerate from what they have been historically.

We will just have to wait and see how that all plays out.

Okay, I think it's time to wrap it up.

On behalf of the entire management team, I want to thank you for your interest and continue support, and I hope to see many of you on June 2.

Thank you very much.