美敦力 (MDT) 2010 Q4 法說會逐字稿

Good morning.

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

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

Jeff Warren.

Please go ahead, sir.

Thanks, Celeste.

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 2010 which ended April 30, 2010.

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 a 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 statement.

Additional information concerning factors that could cause actual results to differ is contained in our periodic reports filed with the SEC and we do not undertake to update any forward-looking statement.

In addition, the reconciliations of any non-GAAP financial measures are available on the investors portion of the Medtronic website.

Finally, unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the fourth quarter of fiscal year 2009.

References to annual figures increasing or decreasing are in comparison to fiscal year 2009 and all growth rates are given on a constant currency basis.

And 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 another solid quarter and caps off a very strong year.

This morning, we reported fourth-quarter revenue of $4.2 billion, which represents growth of 10% as reported, or 6% on a constant currency basis.

Total fiscal year revenue of $15.8 billion grew 8% both as reported and on a constant currency basis.

Q4 non-GAAP earnings of $986 million and a diluted earnings per share of $0.89 increased 8% and 9% respectively.

Total year non-GAAP earnings and earnings per share of $3.6 billion and $3.22 grew 9% and 10% respectively.

Our Q4 results reflect another solid quarter of delivering balanced growth across our businesses and geographies.

We continue to execute on our One Medtronic strategy and it is clearly having an impact.

Looking back at the year, we came in at the high end of our revenue expectations and exceeded the high end of our original EPS guidance range.

We delivered on and exceeded our FY '10 operating commitments driven by the initiatives we started several years ago.

In FY '10, we maintained our gross margins in a challenging environment by taking out over $250 million in product costs.

We also delivered meaningful SG&A leverage based in part on our early efforts to delayer, restructure and right-size the organization.

Overall, we have delivered over 100 basis points of operating margin improvement in FY '10 on top of delivering over 100 basis points of improvement in FY '09.

Our results continue to reflect the strength and the stability of our globally diversified portfolio.

Our broad and unique portfolio of businesses positions us well to provide innovative solutions for the most prevalent chronic diseases serving patients by building markets around the globe.

Our balanced performance was evident again in Q4.

Our international operations continued to deliver exceptional results with 11% growth in Q4 and 13% growth for the year.

The strong international growth for the quarter was broad-based with Western Europe, greater China, other Asia, Middle East and Africa, and Latin America, as well as five of our seven segments delivering double-digit results.

These strong Q4 international results were driven by multiple product lines.

Our AF Solutions and structural heart business performed well in Europe.

Our CRDM implantables business had an exceptional quarter in China and other Asia.

In Europe, our two drug-eluting stents, Endeavor and Resolute, continued to take share.

Our endovascular business had another quarter of solid double-digit international growth driven by the continued adoption of Endurant AAA and Valiant Thoracic.

I was encouraged to see balloon kyphoplasty grow in Western Europe where our turnaround efforts are beginning to have an impact.

In our Neuromodulation segment, pain stim, DBS and URO/GASTRO experienced double-digit growth in Europe and Central Asia.

Diabetes saw strong pump growth in the quarter in Western Europe and other Asia driven by the expanded launch of Veo.

Market-leading performance continues to be our goal with growth as the primary driver.

Our growth strategy is focused in three areas -- protecting and driving share, developing new and existing markets and expanding geographically.

More recently, we have invested in adjacencies to create new opportunities for growth.

We have successfully used our balance sheet to acquire tuck-ins that offer opportunities to leverage our vast global footprint.

Our strategy around tuck-ins has been very successful.

We are executing on the integration plans of these recent acquisitions and their results continue to exceed our expectations.

Our AF Solutions business is tracking to our expectations.

We were pleased with the results of the STOP AF trial presented at ACC and at HRS.

We completed the Arctic Front submission in March and we hope to receive FDA approval later this calendar year.

We are also making progress towards US approval of our Ablation Frontiers catheters, which we anticipate in the second half of FY '11.

We intend to be the first company with on-label indications for all stages of AF.

In transcatheter valves, our integration has gone exceptionally well.

In Q4, we achieved the number one position in the aortic transcatheter valve market, taking meaningful share even with a competitor's launch.

Regarding our core valve US IDE, our discussions with the FDA are going very well and we expect to begin the trial this summer.

Late in Q4, we completed the acquisition of Invatec.

We expect Invatec to contribute to the growth of our cardiovascular segment in FY '11, adding important new products to adjacent areas of our coronary and peripheral vascular businesses.

We also recently announced our intent to acquire ATS Medical.

This move has been very well-received by our customers around the world.

This strategic tuck-in reinforces our commitment to provide our customers a comprehensive portfolio of market-leading products.

This will be particularly important in many emerging markets where there continues to be a strong demand for mechanical valves.

Turning to our product pipeline, Medtronic has never had as robust a pipeline as we have today.

Our investments in R&D are delivering innovative technologies across all major markets.

As I have said many times before, innovation is the lifeblood of our Company.

We believe our innovative new products are critical to growing markets, improving pricing and protecting and driving share.

In CRDM, we launched the Advisa MRI SureScan pacemaker in Europe at the end of Q4.

We hope to launch Revo MRI SureScan pacemaker in the US in the first half of FY '11.

We expect the pricing premium on these two innovated pacemakers to mitigate pricing pressure and drive share.

In high power, we launched our Protecta family with SmartShock technology in Europe and anticipate launching these devices in the US in the first half of FY '11.

As shown at HRS, Protecta with its exclusive SmartShock algorithms reduces the delivery of inappropriate shocks, the leading clinical feature request from physicians.

As you know, the launch of Revo MRI and Protecta in the US is dependent on the resolution of our Mounds View FDA warning letter.

We are taking this warning letter very seriously and we were pleased to see that the FDA noted our responses appeared to be adequate last November.

We are awaiting the FDA's follow-up inspection and remain hopeful that we can bring the important patient safety advancements of Revo MRI and Protecta to the US market in the coming months.

Turning to CardioVascular, we are on track to bring our resolute drug-eluting stent to the US in FY '12.

Later this morning, the results of the RESOLUTE All-Comers trial, which compares RESOLUTE to Xience, will be announced in Paris at Euro PCR.

We recently launched the Integrity bare metal stent in international markets.

So far, it has received an extremely favorable market reception.

Integrity is a truly unique platform.

Its continuous sinusoidal wire design provides significant improvement in flexibility, stent profile and overall deliverability.

Later in FY '11, we also expect to launch a DES version of Integrity in international markets.

In Q4, we received approval of the Complete SE stent, which treats peripheral arterial disease in the iliac arteries.

In endovascular, we expect to launch our Talent AAA and our thoracic stent grafts in Japan in the second half of FY '11.

In spine, we are completely refreshing our posterior fixation systems with a combination of SOLERA, VERTEX and TSRH 3Dx.

SOLERA, our next-generation posterior fixation system, has received outstanding feedback during its initial trialing period.

The broader rollout of SOLERA will occur in the back half of FY '11.

In addition, our DLIF system with the Clydesdale implant is gaining momentum, growing over 30% in Q4.

In Kyphon, we expect to launch various components of our next-generation kyphoplasty system throughout FY '11, including the Xpander 2 balloon in the back half of the fiscal year.

In biologics, we were pleased to see that AMPLIFY has been scheduled for an FDA panel on July 27.

Turning to Neuromodulation, we launched Restore Sensor in Europe late in Q4.

This innovative spinal cord stimulator includes our proprietary adaptive stim feature, which automatically adapts stimulation by responding to changes in body position and activity.

We recently announced the start of our US clinical trial and expect to bring this device to the US market in FY '12.

During the quarter, our DBS therapy for epilepsy received an FDA panel recommendation for approval.

We expect -- we anticipate FDA approval later this calendar year.

In diabetes we recently launched two new second-generation sensor integrated pump platforms.

In international markets Veo with its unique low glucose suspend feature represents an innovative leap in closing the loop.

In the US our launch of Revel with its new predictable alerts is off to a good start.

These two innovative pumps extend our market leadership with the industry's only sensor integrated diabetes management system.

In June the results of STAR 3 will be presented at the ADA meeting in Orlando.

Looking ahead, our diabetes pipeline is poised to deliver meaningful innovation across all product lines.

In [searchable] technologies, our growth was driven by the recent launches of NIM 3.0, our Midas Rex MR7 and Synergy Cranial 2.1.

We launched the PEEK plasma blade in Q4 and expect to launch the O-Arm 3.1 in FY '11.

We are continuing to leverage and develop our navigation platforms to improve the delivery of our therapies across all our businesses.

This rich pipeline positions Medtronic well to deliver consistent market-leading performance.

We will build on our strong momentum as we move through FY '11 and into FY '12.

Turning to our organization, we have assembled a strong executive team to execute on our strategies for growth, innovation and leveraging the size and scale of One Medtronic.

Rick Kuntz and James Dallas remain focused on optimizing our leading functional capabilities and improving leverage across our global operations.

Mike Coyle, Chris O'Connell and Jean-Luc Butel are focused on driving our businesses around the globe.

Earlier today, Mike and Chris announced further management changes within their groups to optimize organizational alignment.

We are delivering market-leading performance by developing innovative technology, providing best-in-class sales and service, raising the bar on quality and ensuring transparency in our physician collaboration.

Collaboration with physicians remains vital to innovation in our industry.

And this bedside to bench to bedside model must be based on solid principles.

Medtronic has taken a leadership role in this area by putting in place a comprehensive set of enterprisewide policies and processes to govern the way we engage with physicians, including voluntary disclosure of Physician Service Compensation, which will go live at the end of this month.

Ultimately, we believe our commitment to transparency is in the best interest of all stakeholders.

It will ensure the integrity of physician industry collaboration to provide innovative, long-term healthcare solutions.

We hope that all medical device companies will follow our lead.

Before turning the call over to Gary, I would like to comment on our financial strength.

We have one of the industry's strongest balance sheets and are generating significant free cash flow.

In FY '10, we generated $4.5 billion in free cash flow after adjusting for the impact of certain litigation payments, returning over 40% to our shareholders.

Over the past four years, our dividend has more than doubled.

We repurchased over $1 billion of our stock in FY '10 and we have already repurchased over $500 million of our stock so far in the first quarter of FY '11.

We remain committed to returning a minimum of 40% to 50% of our free cash flow to shareholders while at the same time investing in our business to drive sustainable growth over the long term.

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

Thanks, Bill.

Fourth-quarter revenue of $4.196 billion grew 6% after adjusting for a $131 million favorable impact of foreign currency.

Breaking this out geographically, revenue in the US was $2.442 billion, up 3% while sales outside the US were $1.754 billion, increasing 11%.

Q4 international revenue growth by region was as follows.

Greater China grew 25%; growth in other Asian was 20%; Latin America grew 20%.

Growth in Middle East and Africa was 15%; Europe and Central Asia grew 10%; the Japan growth was 5%; and Canada grew 3%.

After adjusting for restructuring, IPR&D and certain acquisition-related costs and the non-cash charge to interest expense due to the change in accounting rules for governing convertible debt, fourth-quarter earnings and diluted earnings per share on a non-GAAP basis were $986 million and $0.89 respectively.

Our Q4 earnings also include a negative $14.8 million impact from US healthcare reform legislation related to the elimination of a federal tax reduction for government subsidies of retiree prescription drug benefits.

Excluding this impact of healthcare reform, Q4 non-GAAP earnings per share would have been $0.90, up 10%.

GAAP earnings and diluted earnings per share were $954 million and $0.86 respectively.

Moving on to a more detailed analysis of our results, CRDM revenue of $1.409 billion increased 5%.

Worldwide ICD revenue of $881 million grew 10%.

The US ICD market grew in the low single digits and the worldwide ICD market grew in the mid single digits.

We capitalized on the opportunities to serve customers and patients due to a product disruption of a competitor.

We believe we took approximately two-thirds of the competitors' US share during their absence, recognizing a benefit of approximately $60 million to $70 million in Q4.

We continue to work hard to serve these new Medtronic customers.

We estimate that our US high-power market-leading share increased by nearly 500 basis points.

Our international high-power share remains stable.

High-power pricing remains stable with low single digit declines in the US and low to mid-single-digit declines in Europe and Japan.

Pacing revenue of $495 million declined 4%.

Our global decline was due to a combination of year-over-year share declines and price erosion, which we are addressing with the launches of our MRI SureScan technology.

We were encouraged to see our Western Europe pacing share and pricing improve sequentially as we started our Advisa MRI SureScan launch mid-quarter.

Pacing pricing in Japan declined in the high single digits due to Japanese R-zone and FRP adjustments in the market, which went into effect on April 1.

CardioVascular revenue of $757 million grew 12% driven by balanced growth across all businesses and international growth of 21%.

Coronary revenue of $382 million increased 9%.

We estimate that our worldwide unit share for all coronary stents remain stable at approximately 20%.

In Japan, our drug-eluting stent revenue fell sequentially to $22 million due to competitive launches.

Also, late in the quarter, we closed the acquisition of Invatec.

Structural heart revenue of $239 million grew 17% driven by 38% growth in international markets on the strength of our CoreValve transcatheter valve.

Since the acquisition, we have increased manufacturing production to service the growing customer demand.

In Q4, we announced our intent to acquire ATS Medical to broaden our CardioVascular product offerings with ATS's mechanical and tissue valves.

We expect to close the ATS transaction this summer.

Endovascular revenue of $136 million grew 12% driven by the ongoing success of our Endurant abdominal stent graft in international markets and our Talent abdominal and thoracic stent grafts in the US.

Spinal revenue of $880 million declined 2%.

Core spinal revenue of $664 million declined 2%.

Core metal constructs grew in the low single digits while Kyphon results were stable sequentially and down year-over-year.

We continue to see good adoption of our recent product introductions, including TSRH 3Dx and VERTEX.

We were also pleased to see sales of balloon kyphoplasty return to modest growth in Western Europe.

Biologics revenue of $216 million was flat.

Our non-BMP productline saw solid growth due to MASTERGRAFT Strip and PROGENIX Plus.

INFUSE sales continue to be impacted by negative mix due to growth in smaller kits.

Spine market growth, both globally and in the US, remain stable in the upper single digits.

The US market continues to be driven by healthy procedure growth with an increasing contribution from mix.

Despite a lot of noise to the contrary, US market pricing remains stable at flat to negative 1%.

The international spine market remains healthy and continues to grow in the low double digits.

We continue to work on turning our spine business around.

We expect stabilization and progress towards market growth as we move through FY '11.

Neuromodulation revenue of $411 million increased 4% driven by continued strength in Deep Brain Stimulation and URO/GASTRO.

Double-digit growth in our DBS business was driven by the continued worldwide adoption of Activa RC and PC.

Experience with Activa RC and PC continues to be positive based on it size reduction and advanced programming system.

The URO/GASTRO business continues its double-digit growth driven by another strong quarter from InterStim therapy.

Our pain stim business declined in the quarter due to competitive pressure and execution issues in the US market.

We are taking a number of steps to address our performance.

While the market has slowed somewhat, the US SCS market remains solid.

We were encouraged by implant trends we saw in the fourth quarter and expect our performance to turn around in FY '11.

Our pain pump business experienced a year-over-year decline due in part to tougher comparisons from restocking in the year-ago period following our product disruption.

Diabetes revenue of $332 million grew 8% driven by strong growth in consumables and CGM growth in excess of 30%.

We continue to see strong pump growth in Western Europe and other Asia with a continued launch of Paradigm Veo and its unique low glucose suspend feature.

We launched our Paradigm Revel pump in the US mid-quarter and are experiencing good market acceptance.

Surgical Technologies revenue of $273 million grew 13% driven by strong growth in monitoring, image guidance systems and (inaudible).

Navigation experienced exceptional growth in the US market as we captured many orders that had been previously been pushed out in prior quarters due to the difficult capital markets.

It appears that the US capital markets have improved across all of our surgical technology businesses.

Finally, Physio-Control revenue of $134 million increased 52% as we resumed unrestricted global shipments.

We attribute the strong growth to pent-up demand that came through in Q4.

The LIFEPAK 15 continued to gain momentum in the prehospital segment during the quarter.

Turning to the rest of the income statement, the gross profit margin was 75.9%, an improvement of 20 basis points.

We continue to protect our gross margin and offset modest pricing pressure due to the product portfolio of initiatives we have underway to reduce our cost of goods sold by $1 billion by FY '12.

In FY '10, we took out $250 million in product costs, $20 million ahead of our goal and through the first three years of our five-year initiative, we have removed $625 million in product costs.

Fourth-quarter R&D spending of $378 million represents 9% of revenue compared to $368 million in the fourth quarter of 2009.

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

Fourth-quarter SG&A expenditures of $1.396 billion represented 33% of sales compared to 34.3% of sales in the fourth quarter last year.

SG&A expense benefited from our ongoing SG&A initiative to leverage our facilities and IT expense s.

Additionally, our realignment and restructuring efforts from both fiscal year 2008 and 2009 provided some tailwind in reducing expenditures.

This was partially offset by an increase in legal expenses this quarter compared to the last years, driven by an increasing amount of government scrutiny on the industry.

We expect legal expenses to continue to run high next fiscal year.

Going forward, we would expect SG&A spending to be in the range of 34% plus or minus 25 basis points.

This reflects our continued focus on initiatives to drive leverage, partially offset by the impact of acquisitions and the delivered investments we are making in FY '11 to support new product launches and drive growth.

Net other expense for the quarter was $95 million compared to $53 million in the prior year.

The year-over-year increase primarily is a result of reduced gains from our hedging programs, which were $11 million during the quarter compared to $50 million in the comparable period last year.

As you know, we hedge our operating results to reduce volatility in our earnings.

Included in the Q4 results was a gain on the sale of our ophthalmic business, which was offset by write-downs on several investments in our minority investment portfolio.

Looking ahead, based on current FX rates, we anticipate net other expense will be in the range of $60 million to $80 million in Q1, including hedging gains of $50 million to $60 million.

Net interest expense for the quarter was $70 million, excluding the $42 million non-cash charge to interest expense due to the change in accounting rules governing convertible debt, net interest expense on a non-GAAP basis, which is $28 million.

As of April 30, 2010, we had approximately $8.4 million from cash and cash investments and have $2.6 billion of debt repayment occurring in FY '11.

Looking ahead, we expect our cash to continue to increase.

However, low interest rates will negatively impact our return on this cash.

Let's now turn to our tax rate.

Our effective tax rate as reported was 22.7%.

Our effective tax rate included a $14.8 million charge to tax expense due to the write-off of our deferred tax asset.

Again, this reduced Q4 earnings per share by a penny.

Fourth-quarter weighted average shares outstanding on a diluted basis were 1.106 billion shares.

During the fourth quarter, we repurchase $395 million of our common stock.

As of April 30, 2010, we had remaining capacity to repurchase approximately 51 million shares under our Board authorized stock repurchase plan.

In Q4, we continued to see improvement in our balance sheet.

DSOs improved in Q4 by 4.4 days, which equates to nearly $200 million in additional cash flow.

Fourth quarter free cash flow was $1.1 billion.

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.

As Bill said earlier, FY '10 was a very strong year, particularly when considering the overall global economic downturn.

We grew our top line by 8% and our non-GAAP diluted earnings per share by 10%.

We maintained our industry-leading gross margins and improved operating margins by 110 basis points.

We generated record free cash flow.

We continued to return cash to shareholders through our dividend and share repurchase program while balancing our investment to drive future growth.

I feel very good about the financial strength of our balance sheet and the sustainability of our long-term growth.

Let me conclude by providing our 2011 fiscal year revenue outlook and earnings per share guidance.

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 2011.

We would like to remind people of the revenue benefit we experienced because of the extra week in Q1 of FY '10, which we estimate to be approximately $200 million.

While we can't predict the impact of currency movements, to give you a sense of the FX impact if exchange rates were to remain similar to yesterday for the remainder of the year, then our FY '11 revenue would be negatively impacted by approximately $400 million to $500 million, including a negative $40 million to $60 million impact in Q1.

It is also worth pointing out that we would expect the largest negative FX impacts to occur in Q2 and Q3.

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.

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 as the US dollar strengthens, our hedging strategy is effectively minimizing much of the bottom-line impact that other companies are feeling from today's currency environment.

We currently have hedging contracts on approximately 80% of our expected FY '11 international exposure.

While this still leaves some potential bottom-line exposure, we expect minimal impact, especially compared with other companies in our industry who do not have hedging programs in place.

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 $3.45 to $3.55, which includes approximately $0.05 of dilution from the acquisition of Invatec and the pending ATS Medical acquisition.

Excluding the impact of the acquisition dilution, as well as an estimated $0.05 benefit of the extra week in FY '10, FY '11 earnings per share growth is expected to be in the range of 10% to 13%.

While we are confident in our spinal segment turnaround strategies, until we begin to see the positive impact of the turnaround reflected in our financial results, we would feel more comfortable modeling earnings per share at the lower end of our guidance range.

This earnings guidance reflects the following major assumptions -- gross margins in the range of 75.5% to 76%; R&D spending of approximately 9.5%; net other expense in the range of $210 million to $250 million, which includes hedging gains in the range of $260 million to $280 million based on current exchange rates.

Net interest expense would be in the range of $90 million to $100 million, which includes the carrying costs of pre-funding existing debt in FY '10 at favorable rates.

An effective tax rate of 21.5%, which is not assumed that the US R&D tax credit, which expired on December 31, will be reinstated in FY '11 and diluted weighted average shares outstanding in the range of 1.009 billion to 1.100 billion shares.

Note that all the operating expense assumptions are at a constant currency.

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 non-cash charge to interest expense due to the change in accounting rules governing convertible debt.

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

In the interest of getting to as many questions as possible, we respectfully request that each caller limit themselves to one question with one follow-up.

Operator, first question please.

Matthew Dodds, Citigroup.

Good morning.

So first, I just wanted to hit the US pacing number because I know you have the MRI compatible coming.

But Bill, what is going on with the market?

You said you thought you lost share.

It looks like with your number the market was down.

I mean how strong is that pricing pressure getting versus volume growth?

Well, I don't think the pricing is changing any more than what we have seen in the last year or so.

I think there are a couple of things going on in the pacing market.

First, and not withstanding the pricing issue that we just talked about, we do see some modest sort of mix shift from pacing to CRTD.

I can't quantify that for you, Matt, but that is what we -- we believe that there is a dimension of that happening.

Clearly, with the impending launch of Advisa MRI SureScan and the Revo, we are optimistic that we are going to be able to see growth through share gains going forward.

And we will see improvement in pricing because of just the technology uplift that we are going to have.

So that is kind of how we are going to address the overall market.

And then just one quick one for Gary.

When you look at the extra selling week, the $200 million, should we assume the acquisitions of Invatec and ATSI roughly offset that $200 million so the real growth is 5% to 8%?

Yes, I think that is a good way to look at it.

Obviously we have the impact of the extra week.

The acquisitions, depending obviously when ATS closes, which will be -- that has not closed yet, so that will -- we expect sometime this summer.

But with Invatec and ATS, yes, that would be approximately offsetting that extra week impact.

And so if you take those two things into consideration, the other businesses and the 5% to 8% range, yes.

Great, thanks Gary, thanks, Bill.

Mike Weinstein, JPMorgan.

Thank you, good morning.

A couple questions.

First, on the spine business, you made the comment that prices were flat to down low single digits and suggested that there is a disconnect between what you guys are seeing and what some of your competitors are seeing.

Maybe you could just elaborate on that.

Well, I mean the only thing I can say, Mike, is when we look at our average pricing -- again, it is in that very low single digit and again, I think it is offset by the introduction of new products, the SOLERA, the TSRH 3Dx, the VERTEX.

So as we bring in new products, we have been able to get a modest, if you will, increase and that has been offsetting the pressure that you may have on older products.

So for us, we have managed pricing across all of our businesses through the introduction of new technologies.

And when we bring in a new product, we really work hard to get a modest premium.

Bill, can we talk about Europe?

That is probably topic number one on most investors' minds right now.

Can you talk broadly about I guess two areas -- one, the risk that the issues that a lot of the countries in Europe are facing right now leads to a downturn in healthcare budgets of your fiscal year '11 and that having an impact on your business.

And then two, the risk that we see any measure similar to what we have seen announced on pharmaceutical pricing impact the device industry going forward.

Obviously, we have seen announcements out of a number of countries over the last couple of months that are specifically targeting pharmaceutical pricing.

Do you have any expectations of similar announcements or proposals relative to devices?

Thanks.

Well, to answer the second question first, we have not -- I have not heard of anything of that sort in any of the countries as it relates to pacing or defibrillation or any of our major productlines.

I have not heard of any kind of national sort of pricing being set for those products.

If you look at again Western Europe for us, I mean we had a good year.

In fact, this last quarter, we grew 13% and it's again in large part driven by the launch of many new products in the CRDM space with Protecta and with the SureScan MRI technologies, with CryoCath, with the valve technology, transcatheter valve, the neuro business with the Restore Sensor Veo and diabetes.

So we have managed through it pretty well because of just the introduction of so many new products.

Now, having said that, clearly there is some major economic challenges, particularly in southern Europe and Greece and Portugal and Spain.

I mean we are monitoring it very closely.

But we remain cautiously optimistic given just the breadth of our product portfolio.

Okay, let me just ask maybe one final question and I will let others jump in here.

And this is for Gary.

Gary, can you just elaborate on your hedging?

You obviously saw some benefit this quarter on the other income line from your hedging despite having a top-line benefit.

And it looks like you are guiding to, for the first quarter, $50 million to $60 million of hedging gains on the other income line, which would seem to fully offset or more than offset, excuse me, the top-line impact from currency.

So just talk about your hedging.

It seems like you probably were hedged at some pretty attractive rates over the course of the last couple quarters.

Thanks.

Yes, Mike.

We, as we have indicated before, in our hedging program, we tend to hedge about a year to a year and a half out.

It will vary by currency and obviously depends on how the orders are hitting.

But we tend to try to go into a year as we did this FY '11 about 80% hedged, 75% to 80% hedged and that will vary by currency and what we expect to kind of see based on the forecast on some of their currency rates.

Some years, it can be higher than that, some years a little bit lower depending on what we see happening.

So you are right.

As we went through FY '10 and as we go through FY '11, we were able to lock in at some relatively favorable rates even versus where some of the historical levels had been at.

That was positive for us as we went through FY '10 making sure we could hit our commitments on the bottom line.

We obviously believe it is going to help minimize the exposure that potential is out there right now as we go into FY '11.

Back to your question on Europe, the bigger issue that we are probably experiencing overall is just the impact that some of the crisis in Europe is having on the foreign exchange rates with the dollar strengthening as much as it has against the euro.

And as I mentioned, that has had -- if that continued, that would have a large impact on everyone in the industry basically with a significant reduction in the overall revenue.

We have minimized that with our hedging strategy and so as a result, we end up having for some very large gains as I mentioned as we go through next year in our hedging program.

So we think it helps us ensure that we can protect that bottom line.

Great.

Thank you, Gary.

(Operator Instructions).

Bob Hopkins, Bank of America.

Hi, good morning, thanks.

Can you here me okay?

Yes, we can, Bob.

Great.

So first question is just getting a little bit better understanding on some of the top-line guidance that you are providing.

First, a follow-up on Europe.

In your guidance, are you suggesting that Europe will also be growing in that 5% to 8% range?

And then also on the top line, in terms of US marketshare and ICDs, you made some comments about where you are right now.

By our math, you are at roughly 51%, 52% share.

Are you forecasting a couple points of share gain in that top-line guidance as well?

On the Europe question, we are forecasting again solid growth in that 5% to 8% if not a little bit more going forward given just the breadth of our product portfolio, which I already talked about.

So we think the new products will enable us to drive meaningful growth outside the US, but -- and an important part of that is Western Europe.

I would add actually Western Europe could be a little bit higher because Invatec, which obviously has -- a lot of their operations are outside -- actually in Western Europe.

So the Western Europe numbers could be actually -- I don't have them in front of me as far as what our numbers are for next year, but Bob, they could be a little bit higher than the 5% to 8% just because, as Bill mentioned earlier, that is where all the new products are hitting first.

And then with the Invatec acquisition, it will probably have a little bit more of an impact in Europe.

So they will probably be at the higher end of that 5% to 8% range.

On the ICD side, we are very encouraged by what we did last quarter and the amount of business we picked up in response to a competitor's issue.

And going forward, we are going to work hard to maintain as much of that as we can.

We are realistic and obviously a lot of that has gone back to the competitor or some of that has gone back to the competitor, but we have held onto, we believe, a disproportionate amount of that through the first few weeks.

And so this is one that is always hard to predict, but we are feeling pretty optimistic about the outlook for this year.

And then, Gary, just to follow-up on the bottom-line guidance, could you just -- and you gave some specifics here, but I was wondering if you could just highlight, of the operating leverage and leverage generally that falls through to the bottom line, that 10% to 13% excluding the deal dilution, could you just talk about how much core operating leverage you are anticipating in 2011 versus leverage from buybacks?

Yes, as we indicated in the comments, the operating leverage we obviously have received over the last two years has been 100 to 110 basis points on operating margin.

So it is been very, very significant and that's obviously coming through both the gross margin and the SG&A reductions we have talked about.

As we look ahead, as we indicated in our comments, we think the gross margin will stay relatively consistent where we are at at this point in time; although it depends on what happens with the FX rate.

FX could pull it down a little bit and that is why we gave the 75.5% to 76% range.

SG&A itself, basically we are indicating that the 34% plus or minus kind of a 25 basis points, which would be just 30 to 40 -- 20 to 40 basis points improvement over kind of where we are at in the current year.

But what I have to highlight, as I mentioned in my comments, we are continuing to focus on driving operating leverage throughout the organization and we will see benefits from that.

But we have two headwinds we are going to have as we go into FY '11.

One is the Invatec acquisition actually adds about 40 to 50 basis points to the SG&A line itself, so that will hurt the operating margins a little bit.

So that is a headwind we are fighting against.

And then the second thing is, with all these product launches that we have expected for FY '11 across all of our businesses, we are going to be upping the investment obviously in marketing and driving those product launches to make sure they are successful.

So as a result, this is a little bit of a year of investment in the marketing and sales side to drive some of those product launches themselves.

So cut through all of that, Bob, we are expecting to see some continued improvement on the operating margins for next year, but they will be muted from what we had this year just because of some of those investments in the Invatec acquisition.

And the other area we are going to invest in is R&D.

This year, I think it was around 9.2%, next year we are in the 9.5%, so there is going to be modest increased investment in R&D given just what we have in our pipeline.

We feel very good about the long term and we are going to do what we can to make sure that we can invest to drive growth internally through our product pipeline.

And what would the tax rate be assuming the R&D credit does get implemented?

The R&D credit itself is worth about 50 basis points.

So I mean if we got that reinstated, it could be closer down to the 21% range.

Great.

Thank you very much.

Kristen Stewart, Credit Suisse.

Hi, thanks for taking my question.

On the Kyphon business, I was just wondering if you could comment or give us an update on the Japan launch, as well as just kind of the US business, if you think the current run rate is what we should expect going forward maybe in light of some of the recent competitive entries?

So in Japan, we still maintain this is a big opportunity, but it is going to take time to develop.

This is a -- as we commented before, in Japan, they really don't do much vertebroplasty, so there is a big market development opportunity that needs to take place and we are investing to be able to realize that.

But I don't think you should put a lot of numbers, big numbers into your model for this year because we estimated it is going to take some time to develop.

But we, again, remain very optimistic for what could be a big opportunity in Japan.

Here in the US, with the introduction of two new competitors, we feel like we have a very highly differentiated productline where we will be very competitive in maintaining and growing our position in the marketplace.

I am not going to get into it, but there are a number of differences in our products versus the CareFusion or the Stryker products and our people are well-prepared to market and sell those differences.

So we will -- and then the other thing is we are making some changes in how we manage the Kyphon business.

We are going to put more focus on the BKP.

We are going to leverage the broader spine salesforce to drive the X-STOP, you know, which has been a challenge for us.

So there are a couple of things that we are going to do differently going in FY '11 from an organization point of view.

And the things that we are going to be doing in the US are something we did actually in Europe six months ago, and we have seen good results come out of the European moves.

So we are cautiously optimistic that that is something that is going to be helpful to us here in the US.

Thanks.

And then Gary, just in terms of thinking about the FX impact on the operating margins -- I know you just touched upon it -- but just in terms of the gross margin impact embedded within your 75.5% to 76%, what should we think about in terms of the impact on a go-forward basis assuming rates stay where they were yesterday?

And can you maybe give us a ballpark on where the FX benefit was to gross margins in fiscal 2010?

Yes, if you assume the rates stayed where they were at yesterday, basically you would be closer to the lower end of that gross margin range that I mentioned, the 75.5% to 76%.

It obviously will vary depending on what the products are and exactly even what area where the FX impact is at, as far as how much benefit.

But you can tend to look that we probably are getting about 50 to 60 basis points of benefit right now, based on what the previous FX rates were where we are currently at.

So you would be at the lower end of that range if you assume the FX stays the same -- where the rates stayed the same for the rest of the year.

David Lewis, Morgan Stanley.

Good morning.

Gary, just a quick question on ATS and Invatec.

I guess the dilution of $0.05 seems a little heavier than we would have expected just on financing costs.

So I would have expected a significant amount of distribution leverage with both those assets.

Is there something we are missing there?

Well, no, I think we have always said for the Invatec, for example, I think we were very clear when we did that that we thought that was kind of in that $0.03 range.

With ATS, it is kind of in the $0.02 range.

There's things you have to deal with, obviously, from the acquisition side, both on the intangible assets and the amortization related to that.

You have writeup on the inventory that we have to do from an acquisition accounting perspective that comes through.

So that is why you get to about $0.05 overall.

As we have indicated on both of them, even with ATS as we end the fiscal year, we would expect them earnings-neutral, but initially the first couple quarters, there clearly there will be an acquisition impact related to the acquisitions themselves and there is integration costs.

I mean the reality is, yes, over the long term, there will be complete very significant synergies, especially with ATS, but there is obviously also integration costs and costs we are going to have to incur to make those integration -- that synergy work.

So it is not going to all occur right away on day one and with ATS, we are assuming we only probably have it for six to nine months for the year.

So that is why you are getting most of the cost in the current year with the benefit obviously in FY '12.

Gary, is it safe to assume that for fiscal '11 those acquisitions would be accretive on a cash basis?

Yes.

Okay, helpful.

And then Bill, just a question on capital deployment.

You mentioned some minority write-downs obviously this quarter.

We haven't seen you make necessarily more minority investments, but we have seen a couple of large, $40 million to $70 million, investments in sort of minority or venture investments.

We are also seeing you sort of take up the R&D spend and we are seeing kind of multiple small tuck-in acquisitions.

Just trying to get a sense of is this signaling sort of a change in how you view kind of go-forward investment sort of more diversified on where you are going to spend to grow and sort of less focused on larger transactions?

I don't think it represents a significant change, David.

This is what we have been saying for some time now in terms of our model for growth is going to be a combination of organic, which is where the primary drivers of growth are going to come from in both the business unit level, as well as some of the things that we are doing internally with our ventures group.

And we do have a minority investment portfolio that we continue to use.

When we see interesting early-stage technologies, we will periodically invest in those technologies.

And then the tuck-ins, we have been pretty consistent now for the last few years in how we have managed our growth through the combination of organic, plus tuck-ins, plus venture and then some of the minority investments.

So this is a model that is working for us and this is what I think you can expect to see going forward.

And Bill, just a quick follow-up and I will jump back in queue.

Obviously it is incremental, but 9.5% is sort of the highest level of R&D in several years.

Are you kind of prepared to say if 9.5% can be a cap for Medtronic or could we see that number inch higher to the 10% range?

Well, I would love to be able to inch it higher and at the same time, deliver on the bottom line and it's obviously the engine for growth for Medtronic.

We have got a lot in the pipeline this year and so that is why we are incrementally investing from 9.2% to 9.5% because of our confidence in what we think can help deliver top-line growth and bottom-line growth.

Okay.

Thank you very much.

Ben Andrew, William Blair.

Good morning.

Just wanted to talk a little bit more about the spine market.

Bill, you were more bullish on kind of the overall trends here and in Europe than we have been hearing recently.

Can you talk a little bit about what is going on with volume and pricing differently and has it changed or is this a product cycle issue that led to the comments?

On the overall spine business or Kyphon in particular?

On the construct side specifically.

Well, constructs for us in total were -- we were in that mid single digits for the year.

If you look at our overall spine performance for FY '10, it was roughly 2% with biologics being roughly flat.

Kyphon was down and our core constructs, actually on a year-to-year comparison, were in that mid single digit range.

So we are not back at market growth with the core constructs, but we are moving in that direction and it has been driven by the launch of a number of new products.

As I said, SOLERA is doing well.

The TSRH 3Dx is doing very well, the SOVEREIGN technology is doing very well.

Some of the cervical products we have launched, the VERTEX and VERTEX SELECT and then DLIF.

We feel like we have got a very competitive portfolio with the Clydesdale implant and our NIM technology.

So we are -- it is all about having a balanced portfolio of products and we are using that to drive growth.

And Bill, when you look at the DLIF specifically, do you feel like that is helping to expand the market into lateral or are you converting some of your historical customers to DLIF from other product?

I think it is probably more cannibalization; although I think it is hard to put a real number on it, but my sense is that it is not really expanding the market so much.

It is a combination of really I think more cannibalization.

Okay.

So the recent comments we have been hearing out of the competitors that pricing is intensifying, you are not echoing those comments at this point on the core traditional constructs, is that right?

That's right.

Okay, thank you.

Rick Wise, Leerink Swann.

Good morning Rick.

Rick?

Hello?

Can you hear me?

Yes, now we can.

Hi, guys.

This is Danielle in for Rick.

How are you?

Just a quick question on -- well, two quick questions.

Physio, can you provide an update on any strategic alternatives there?

Are we still thinking of a spinoff, probably not this year, but maybe fiscal '12 or beyond?

And then on the diabetes side, we are seeing a tougher FDA, the new regulations around the infusion pump.

How do you expect that to impact your diabetes pump sales?

And also at the upcoming ADA meeting, do you see anything groundbreaking coming out on the CGM side and/or new products coming from you guys?

Thanks.

Well, first, on the Physio, our long-term plans have not changed.

As we announced a couple of years ago, at some point, we will spin this business off.

Right now, we are giving -- we are just back on the market.

We are investing to resume our market-leading position and we had a very good quarter and we have a good outlook for FY '11.

So we -- our plans all along were to get back to the market, work through the issues that we had and we have done that.

And now we are really driving the business and we will evaluate what is the right time to take the next strategic move.

On the diabetes business, diabetes has been driven by the strong portfolio of new products that we have, the Veo outside the US, which is, as I mentioned, the first step in closing the loop with low glucose suspend technology.

And here in the US with the Revel and some of the things we are doing to improve our overall sensor technology.

We have worked very closely with the FDA on some of their concerns around infusion pumps.

And we believe that the investments we have made in the quality and the durability will ensure that we stay very vibrant on the marketplace.

In terms of ADA, what is coming on ADA, again, we have a lot to talk about with all the products, which I just mentioned and the big -- obviously we are all waiting for the results of STAR 3.

I think that will be an important trial to really highlight the importance of continuous glucose monitoring with pump therapy.

Okay, thanks, guys.

Tao Levy, Deutsche Bank.

Good morning.

Bill, you made a comment earlier on about hitting your bottom-line commitments.

And I was just wanted to make sure, longer term, you still think of Medtronic as a company that can grow earnings at that 10% or greater?

Yes.

That is -- our goal is to deliver I mean 5% to 8% top line and two to three percentage points faster on the bottom and the goal is in that low double digit earnings per share growth.

We will do that as a combination of operational strength and financial strength.

And the only reason I bring it up is because I understand you tuck-in acquisitions.

They are good for the long term of the Company, but they always do add a little bit of dilution and at the same time, you are talking about raising your internal R&D investment.

I figure there might be a little bit of give and take where you may be making some of these external acquisitions, but at the same time, your internal R&D slips down a little bit.

Well, I mean look at this last year.

We did the CoreValve and the CryoCaths and we delivered 8% top-line growth and we delivered 10% earnings per share growth.

And so we have been -- that is our -- that is the aspiration, that is the financial guidance that we have given and we are going to work hard to deliver on that.

And the last question, on the MRI pacemaker market opportunity, one of the criticisms that you guys get often is in Europe, your first generation didn't do that well, but now you are talking about Advisa starting to do better in Europe.

Can you just comment a little bit more what you are seeing with this new MRI pacemaker uptake within certain markets?

Thank you.

Well, the Revel, which was launched first, or the old EnRhythm, was a product that we really never launched in Europe, so it was kind of a niche product.

The Advisa platform was a much more substantial platform and that is what we have just now brought forth with the MRI safe technology.

That is different from what we had in the US.

In the US, actually the Revo platform, which is based off EnRhythm, was a product that was more than just a niche here in the US.

So that is why we are confident that Revo will be a good start here in the US and Advisa is the right product platform for us in Europe.

And again, as we indicated in the comments, I mean it has obviously been very early with the Advisa launch, but the initial information data we are seeing has been positive.

But it is still too early to really give any kind of firm data on it, but right now, it has been really quick adoption of what we have seen initially.

Thanks a lot.

We will take a couple more questions.

Adam Feinstein, Barclays Capital.

Hi, thanks.

This is Matt for Adam.

Can you hear me?

Yes.

Hi, I just wanted to ask a question first about Neuromodulation.

There was a little bit of a slowdown and you mentioned some issues in SCS.

I wondered if you could elaborate on that a little bit.

Well, first, if you look at Neuromodulation, it is really a compilation of the urinary incontinence and fecal incontinence products, the InterStim, Deep Brain Stimulation and then you have the spinal cord stimulation.

So starting with the good news, the good news is that InterStim continues to do well.

I think we've got 16 quarters now where we have had over 20% growth.

In DBS, we are making a major investment in expanding indications, things like epilepsy, the obsessive/compulsive disorder and things of that sort, so DBS is doing well.

Yes, we have had some challenges with spinal cord stimulation.

We are addressing those.

The Restore Sensor outside the US, when we that here in the US, that technology is going to be very well-received, but we are not waiting for that.

I mean there is a blocking and tackling issue here and we made some changes and I am confident that you are going to see our results improve.

Okay, great.

And then questions about market growth.

You mentioned some growth numbers for this quarter and I wanted to ask about what you think your outlook is for the spine market and for the CRM market.

Are you still seeing those as high single digit and mid single digit growers or has that changed?

On the spine market, we still see the market being healthy and upper single digits growth, which is down from what we saw a few years ago, but it is still, on a relative basis, a good solid market.

On the CRDM business looking at ICDs, ICDs we see in that mid single digits with growth outside the US being more mid-to high single digits and the US in that low to mid single digits.

So on a worldwide basis, we see good solid mid single digits.

And on the pacing market, again, we are looking at flat to low single digits.

And then obviously with CRDM, we will have the AF businesses, which obviously that market is growing quite substantially and that is probably the fastest growing market in the CRDM franchise.

Okay, great.

And then any risk of product launch delays due to your discussions with the FDA?

Well, that is a hard question to answer.

I mean clearly the environment is changing and the bar has been raised and we take quality extraordinarily seriously.

We are investing a tremendous amount to make sure that we continue to bring forth market-leading, but quality advantaged technology.

But if you just look at what happened across the industry, I think you would have to make the assumption that there is more risk now with the FDA.

So will that translate into longer times to complete warning letters?

It very well could and that is why we called that out in our commentary.

All right.

Thank you very much guys.

All right.

Last question.

Derrick Sung, Sanford Bernstein.

Hi, thanks for taking my question.

I wanted to go back to the US ICD market where you said you saw a $60 million to $70 million benefit this quarter from the Boston stop shipment.

So if we back that number out of your sales this quarter, then that implies kind of a flat, maybe even slightly down growth rate, organic growth rate for your US ICD sales ex the Boston impact.

And I was wondering can you -- does that imply that you were growing below market and losing share organically or do you feel that the market actually slowed down and is more at that level versus the low single digit numbers that you provided earlier?

I think it is the latter.

I think what we did see was a bit of a tempering of the market and we don't believe we lost share.

We believe we actually maintained, if not gained a little bit of share and clearly the Boston situation helped us.

I think we gained about two-thirds of what was available there.

But clearly the market in the US -- we see it bounce around a little bit.

This was one quarter where we saw it more in that very low single digits.

I think the other thing to highlight is the Boston situation obviously impacts the market too.

And I think it is almost impossible in this quarter that we just went through to really determine what was going on in the market itself because how that was affecting the market, were they holding off on replacements for example on the Boston side.

As we went through this whole process and we were meeting the demand, what did that do to even our ability to be out there, and even for the physicians for example to be out there actually getting new patients on board.

So I mean it is just a different situation and it is hard to evaluate the market.

We do not believe we lost share.

The other thing is it is hard to tell right now, but the question is we do think the inventory levels might be a little bit lower also out in some of the hospitals as a result of this as they work down the inventory as they were going through the Boston situation.

So we feel good about the quarter and as we indicated, we have picked up about two-thirds of what we believe Boston lost during that period of time, but I wouldn't read a lot into what is going on in the market for this quarter itself.

Okay.

And how much of that $60 million to $70 million was the one-time from the actual period of the stop shipment versus post-stop shipment sort of permanent share gain on your end?

That number is basically -- our assumption for that, 24, 25 days that they were out.

That's the assumption for that period of time.

After that, again, it is hard to say exactly what the impact is.

But that is the estimate for that period of time.

Okay.

And then just lastly, going back to your comments on spine, so if your feeling is that pricing has held up somewhat more than say other comments from competitors in the spine market, then are you attributing the slowdown in the growth of the market that we have seen over the last few quarters to volume?

And if so, what is causing that?

No, I think it is partly price because if you look back a year or two years ago, we were actually seeing price increases in the spine market and we are now seeing is modest price decreases.

So I think you have seen in part a change in the price in the marketplace.

But in terms of -- we are seeing it more in that low single digit decline versus what we understand some other competitors have put forth.

And our comment was also based on the fact we have seen the slowdown in the market for the last two or three quarters.

So it wasn't like this occurred just recently.

So that is why we made the statement.

The pricing has, as Bill mentioned, used to see price increases, but over the last probably three quarters or whatever, we have seen pricing relatively flat to down to 1% that we talked about.

So that is what clearly brought the market from being more like a 10%, 10%, 11% growing down to more the high single digits recently over the last year.

Okay, thank you very much.

Okay, well, let me conclude.

First of all, thank you.

I would like to just close by noting that FY '1 was a very strong year and continued our track record of delivering consistent results to meet our financial commitments.

The strength of our globally diversified portfolio was evident again with broad-based growth across our businesses and geographies.

Our recent acquisitions remain on track and we are delivering one of the best product pipelines in our Company's history.

Our innovative technologies position us well to continue delivering market-leading performance as we enter FY '11.

In FY '11, we intend to continue to execute on our margin expansion programs, investing for growth and generating a sustainable return for our shareholders.

And finally, I would like to remind you that we will host our annual investor and analyst meeting on June 7 in New York.

So on behalf of the entire management team, thanks again for your interest in Medtronic and your continued support.

Have a good day.

Ladies and gentlemen, this concludes today's Medtronic fourth-quarter year-end earnings release conference call.

You may now disconnect.