美敦力 (MDT) 2011 Q3 法說會逐字稿

Good morning, I will be your conference operator today.

At this time I would like to welcome everyone to the Medtronic Q3 earnings release 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) Mr.

Jeff Warren, you may begin your conference.

Thanks, Darla.

Good morning and welcome to Medtronic's third-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 fiscal year 2011 third quarter which ended January 28, 2011.

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

First, 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 any forward-looking statement.

Additional information concerning factors that could cause actual results to differ is contained in our periodic reports filed with the SEC; therefore, 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 our website at Medtronic.com.

Finally, unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the third quarter of fiscal year 2010, and all revenue growth rates are given on a constant currency basis.

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.

This morning we reported third-quarter revenue of $4 billion, which represents growth of 3% both on an as reported and a constant currency basis.

Q3 non-GAAP earnings of $922 million and diluted earnings per share of $0.86 increased 8% and 12%, respectively.

Our Q3 growth reflects the difference our new, innovative products are making.

Q3 also reflects another quarter of relative stability as Medtronic continues to grow in line with our markets.

We remain confident that as the global macroeconomic environment improves, so too will our markets as the underlying demand for innovative medical solutions to treat chronic diseases is only going to grow.

As I look across the Company I would like to highlight three areas where we continue to focus.

First, we have built and are executing on a very robust pipeline of differentiated, value-added technology to drive share in our core markets and growth in new markets.

Second, Medtronic is increasingly well-positioned and executing on our plans to capture the tremendous growth opportunities in emerging markets.

And finally, we are leveraging our size and scale to deliver superior financial performance.

The healthcare world is changing and Medtronic is well positioned to take advantage of these trends.

So starting with our pipeline, our focus on innovation remains our principal strategy for growth.

We are committed to executing on our pipeline to drive share in our core markets and growth in new markets.

Spinal is a good example of this, where we are starting to realize the benefits of the investments we made to reinvigorate this important business.

We are ramping up the launch of Solera, our new flagship posterior fixation system.

During this first phase of Solera's launch we are excited about the positive surgeon feedback we continue to receive on the advantages of this more durable, versatile, and smaller profile system.

Solera, when integrated with our neuromonitoring, navigation, and imaging platforms, is changing the way spine surgery is performed.

Navigated spine procedures allow for extremely precise placement of spinal implants while performing minimally invasive surgery which should lead to improved accuracy and enhanced patient safety.

This differentiated technology is something only Medtronic is doing and it is starting to change the basis of competition in the spine market.

The Solera launch builds on the recent introduction of two other posterior fixation platforms, VERTEX SELECT and the TSRH 3Dx, but these systems are only a portion of our new spinal products.

Over the coming months we will be launching several new products, including our new Atlantis Vision Elite interior cervical plate, the T2 ALTITUDE Expandable Corpectomy System, the HA-coated TSRH 3DX osteogrip screws, and the new DLIF instrument sets.

When you combine all of our innovative technologies with the outstanding service and support of our field force, we are reasserting our market leadership.

Although we are still early in this product launch cycle, we are starting to see improved growth in market share performance.

We are back in a growth mode with a differentiated growth trajectory versus the other large players in the space.

Breakthrough innovation is by no means limited to our spinal business.

In cardiovascular, we are seeing our new, highly deliverable, integrity stent platform take share in both the drug-eluting and bare metal stent markets.

In fact, in our addressable markets where both Integrity bare metal stents and RESOLUTE Integrity DES are available, we have achieved the number one position in total stent share.

In drug-eluting stents our recently launched RESOLUTE Integrity has been very well received, resulting in 2 percentage points of share gains in international markets this quarter.

In bare metal stents, the success of Integrity has pushed us to the number one global position.

Our bare metal stent share is up nearly 9 percentage points in the US this quarter on the strength of Integrity.

In Endovascular, Endurant, our market-leading abdominal stent graft in Europe, is now launching in the US ahead of schedule.

Endurant is off to a fantastic start and we are focusing on extending our US market leadership.

Turning to CRDM, we are very excited by the recent FDA approval of our Revo MRI SureScan.

This is one of the most important advances in pacing since we introduced a rate-adaptive pacemaker over 25 years ago.

Revo is the first MRI-compatible pacemaker to enter the US market and we have a considerable head start on the competition.

This exciting new technology is clearly capturing the interest of both physicians and patients.

We believe this product will help to drive share and alleviate pricing pressure.

We continue to work diligently with the FDA to resolve outstanding warning letters so that we are able to launch key new products including Protecta, our next-generation ICD and CRT-D, and InterStim bowel, an import new indication for our InterStim franchise.

Turning to our new markets, we had a number of successes this quarter including our acquisition of Ardian, which positions us well in hypertension, one of the largest and most exciting opportunities in med tech.

In our AF Solutions business we received FDA approval for Arctic Front, the only cryoballoon ablation treatment that is approved in the US for paroxysmal AF.

This innovative technology eliminates the need for time-consuming point-by-point ablation and complex mapping and navigation.

The launch is off to a great start and we are excited that all US electrophysiologists will have access to this unique technology.

In transcatheter valves, we continue to experience great success with CoreValve in international markets.

This quarter we started the CoreValve US pivotal study.

We were also pleased by the FDA's approved modification of the extreme risk cohort to a single arm with a performance goal and no randomization.

This is a very positive for patients and should allow us to enroll this trial more quickly and effectively.

In addition, subclavian access has been added to both arms of the trial, an import new option for patients who cannot be treated transfemorally.

Earlier this month we welcomed the results of the largest CoreValve registry to date published in circulation.

The results affirm the high rates of procedural success, low rates of adverse events, low mortality, and substantial improvements of cardiac function that we continue to experience with CoreValve.

Another important area for Medtronic is our increasing focus on emerging markets where we are extraordinarily well-positioned to capture the tremendous growth opportunities.

In Q3 I was pleased by our continued strong performance in emerging markets where we grew over 20%.

Revenue from emerging markets is now annualizing at $1.4 billion and represents nearly 9% of Medtronic's total sales.

Over the next five years we expect that revenue mix to exceed 20%.

Next month we will hold the grand opening of our new China headquarters and physician training center in Shanghai, as well as our new Asia manufacturing facility in Singapore.

These are just two examples of the long-term investments we are making in emerging markets to drive sustainable growth.

Last month we were pleased to join 11 other companies as the initial participants in the US China public-private partnership on healthcare which is intended to foster long-term cooperation with China in the areas of research, training, regulation, and patient access.

Medtronic was elected to the PPPH board and is taking a leadership role in formulating strategies and policies that complement China's vision for providing modern, quality healthcare.

Before I turn the call over to Gary, I would like to comment on Medtronic's ability to deliver superior financial performance by leveraging the benefits of our size and scale.

Our industry-leading margins allow us to generate significant cash flow.

We take a balanced and a disciplined approach to investing our capital for sustainable growth while also returning capital to shareholders.

In Q3 we generated $1.1 billion of free cash flow.

Year-to-date we have returned over 70% of our free cash flow to shareholders in the form of dividends and share repurchases.

Medtronic remains committed to returning a minimum of 40% to 50% of our free cash flow to shareholders.

At the same time, we continue to strategically invest in areas with significant growth potential.

We constantly strive to efficiently allocate and leverage our resources while ensuring Medtronic's cost structure is right-sized to current market conditions.

Accordingly, we announced this morning that we will be restructuring our business through a combination of cost-saving measures, tighter expense management, and workforce reductions.

While these actions are in part due to current market conditions, they are more an outcome of our ongoing efforts to drive leverage across the enterprise.

It is never easy to make these decisions, but we believe that this is the right thing to do for Medtronic to continue to position the Company for long-term, sustainable growth.

In the new and changing healthcare environment Medtronic's size and scale will be an important key to winning.

Our market-leading technologies and the breadth of our portfolio puts us in a position of strength when facing our competition and serving our customers around the globe.

Our functional expertise and world-class capabilities provide us with a significant competitive advantage in med tech.

We remain committed to executing our long-term growth strategies and delivering sustainable, market-leading performance.

So Gary will now take you through a more detailed look at our quarterly results.

Thanks, Bill.

Third-quarter revenue of $3.961 billion increased to 2.9%, as reported, or 3.4% on a constant currency basis after adjusting for our $22 million unfavorable effect of foreign currency.

Breaking this out geographically, revenue in the US of $2.259 billion grew 1%, while international sales of $1.702 billion increased 7%.

Q3 international revenue results by region were as follows.

Greater China grew 29%, growth in Latin America was 28%, Middle and Eastern Africa grew 13%, growth in other Asia was 8%, Europe and Central Asia grew 6%, Canada grew 1%, and Japan declined 7%.

GAAP earnings and diluted earnings per share were $924 million and $0.86, an increase of 11% and 15%, respectively.

After adjusting for several unusual items which had a net after-tax impact of only $2 million, third-quarter earnings and diluted earnings per share on a non-GAAP basis were $922 million and $0.86, an increase of 8% and 12%, respectively.

This quarter's pretax adjustments included a $13 million net charge for legal matters, a $39 million net benefit from IPRD and certain acquisition-related costs, which included an $85 million gain resulting from our minority investment in Ardian, a $14 million charge recorded in SG&A for costs related to the retirement and transition of our CEO, and a $44 million non-cash charge for convertible debt interest expense.

In our Cardiac & Vascular Group, revenue of $2.099 billion grew 2%.

Results were driven by strong growth in structural heart, endovascular, and AF Solutions, offset by modest declines in CRDM implantables.

CRDM revenue of $1.221 billion declined 1%, roughly in line with the world-wide CRDM market.

Looking ahead, we would expect similar market performance in Q4.

Although we expect our results to be in line with the market, it is important to note that our Q4 CRDM growth rate will be negatively affected by tough comparisons due to the benefit from a competitor's stop shipment last year, which had an approximate 500 basis point positive impact.

Worldwide ICD revenue of $735 million declined 2%, our US ICD business declined 4%, and the US ICD market declined in the low single digits.

US ICD pricing pressure trends remain stable this quarter with mid-single-digit declines.

We expect pricing pressure to improve when we launch Protecta.

We continue to make progress on our effort to expand our CRT-D indications in the US.

In Q3 we filed results of the RAFT trial with the FDA which showed CRT-D therapy reduced mortality in mildly symptomatic heart failure patients.

Our international ICD business grew 1% and the international ICD market grew in the mid-single digits.

In Europe, we estimate we lost 180 basis points of shares sequentially as we faced year-end pushes from our competitors, as well as increased pressure in the value segment of the market.

Protecta continues to perform very well in the premium segment and we are pleased to see the positive impact it is having on share and price.

In addition, we are launching a number of new products in Europe this month to further bolster our market-leading portfolio.

In the premium segment, we are launching DF4 versions of our Protecta and Vision 3D devices.

We are releasing our new [Cardia] and [Ageda] CRT-Ds and ICDs, which will improve our competitive position in the European value segment.

The majority of our international underperformance came in Japan where we lost several percentage points of share sequentially due to a competitive product launch, as well as an unusually strong year-end push by our competition.

In Q4 we expect to launch Protecta XT in Japan, which should improve our competitive competitiveness.

Pacing revenue of $450 million declined 2%, while the market declined in the low- to mid-single digits.

Our US pacing business declined 6%, driven mainly by pricing pressure.

We are pleased to have received FDA approval for the Revo MRI SureScan pacemaker earlier this month.

The launch is off to a good start and we believe this innovative device will improve pricing and drive share.

Our international pacing business grew 2%, returning to growth for the first time in six quarters.

The international pacing market declined in the low single digits.

In Europe the success of our MRI pacemakers continues to alleviate pricing pressure, which is now only declining in the low single digits.

Our AF Solutions business grew in excess of 30%, driven by the continued adoption of our Artic Front cryoballoon in international markets.

As Bill mentioned, we are excited about the US launch of Artic Front and the early positive feedback we are receiving from the electrophysiologists.

Cardiovascular revenue of $774 million grew 8%, including 10% growth in international markets.

Coronary and peripheral revenue of $401 million grew 4%, which includes $33 million of revenue from Invatec.

Worldwide drug-eluting stent revenue in the quarter was $184 million, including $47 million in the US and $22 million in Japan.

While the stent market continues to experience year-over-year declines, we are taking share with our highly deliverable Integrity platform.

Looking ahead, we are pleased to see that the RESOLUTE US one-year data will be presented in a late-breaking clinical at ACC in April.

Structural heart revenue of $241 million increased 13%.

Structural heart growth continues to be driven in part by the strong adoption of CoreValve in international markets.

We continue to split the market with our competitor and we are the clear leader in the transfemoral segment.

In surgical heart valves, our ATS Medical integration activities are going very well with ATS adding 700 basis points to our structural heart growth in the quarter.

Turning to Endovascular, revenue of $132 million grew 12%.

In the US, revenue growth of 6% was driven by the launch of the Endurant abdominal stent graft late in the quarter, which increased our AAA share by 400 basis points sequentially.

In Europe we also gained 400 basis points of share sequentially in both the abdominal and thoracic markets on the continued strength of the Endurant abdominal and Valiant Captiva Thoracic Stent Grafts.

Physio-control revenue of $104 million grew 5%, driven by double-digit growth of both the LIFEPAK 15 for the pre-hospital market and the LIFEPAK 20e for the hospital market.

In Q3 we launched the LIFENET System 5.0, the next generation of our web-based data network for emergency medical services and hospital care teams.

Similar to our competition, physio-controls' growth was affected by softness in the pre-hospital market as municipalities continue to face budget constraints.

We expect this weak demand to continue in Q4.

In addition, we will face a tougher comparison in Q4 due to the strong growth we experienced last year from pent-up demand after we resumed unrestricted global shipments.

Now that the business has been operating at full strength for the past year and performing well, we believe it is the right time to reinitiate our efforts to divest physio-control.

As we are just restarting this process, we do not have any specifics on timing but we will keep you posted on our progress.

Now turning to our Restorative Therapies Group, revenue of $1.862 billion grew 5%.

Growth was driven by another quarter of solid performances in diabetes and surgical technologies, as well as renewed growth in spinal.

Spinal revenue of $861 million grew 2%.

We continue to see stability in the global spine market with market growth remaining in the range of 3% to 4% for the third quarter in a row.

We also continue to be encouraged with the improving growth trajectory of our spinal business.

In core spinal, defined in our reportable results as core mental constructs, IPDs, and Kyphon, revenue of $626 million declined 1%.

However, it is important to note that excluding Kyphon and IPDs core mental constructs were up 2%.

In January we ramped up the launch of Solera nearly quadrupling the number of sets in the field, and we are pleased to see the impact Solera is having on our share and pricing.

Our TSRH 3Dx system is also posting very solid growth.

We continue to take share in the direct lateral market, although competitive pricing is affecting market growth of this segment.

We expect our DLIF solution to the navigation enabled this summer.

Kyphon revenue declined 5% and was flat sequentially, and we were pleased to see sequential improvement in our procedural volumes.

We remain focused on generating evidence to support the clinical and economic benefits of BKP.

Earlier this month results from three BKP clinical studies were published, two in the Journal of Bone and Mineral Research and one in the Lancet Oncology.

All three studies continue to build the body of clinical evidence demonstrating the unique benefits of Medtronic's BKP technology.

Turning to Biologics, revenue of $235 million grew 10%.

Results were driven by our Osteotech acquisition which added approximately 9 percentage points of growth stabilizing INFUSE sales that grew 1% as well as a strong performance in other biologics.

The Osteotech integration is exceeding our plans and the transition from Osteotech's distributors to our salesforce is nearly complete with limited disruption.

We estimate that our share of the US DBM market has nearly doubled to over 30%.

Neuromodulation revenue of $401 million increased 3%.

Results were driven by mid-teens growth in InterStim and high single-digit growth in DBS, partially offset by small declines in drug pumps and [pain stim] where we experienced softness in demand.

In pain stim our Restore sensor, with its proprietary AdaptiveStim technology, continues to gain traction in Europe.

Restore sensor was approved in Canada and Australia in Q3 and we continue to make progress on bringing this breakthrough technology to the US market.

In gastro-uro, InterStim had high teens US growth and we look forward to the prospect of indication expansion to sustain its trajectory.

Diabetes revenue of $341 million grew 11%, driven by double-digit growth in global insulin pumps.

Veo, with its low-glucose suspend feature, and Revel continue to lead in the respective markets.

Our market-leading continuous glucose monitoring business continues to post robust growth as we remain the only company with sensor-augmented pumps.

Surgical technologies revenue of $259 million grew 8%, or 10% after adjusting for the divestiture of our ophthalmic business in FY 2010.

The solid growth was driven by strong performances across the portfolio of ENT, power systems, and navigation product lines, as well as balanced growth across capital equipment, disposables, and service.

Despite economic headwinds, hospital capital expenditures remained strong for our differentiated technology in both the US and European markets.

Turning to the rest of the income statement, the gross profit margin was 75.1% compared to 75.4% last quarter.

While ASPs and product LBMs were consistent with our expectations, the gross profit margin came in 50 to 60 basis points below our expectations, primarily due to obsolescence and post-acquisition inventory adjustments.

In Q4 we would expect the gross margin to be back to approximately 75.5%.

Third-quarter R&D spending of $371 million was 9.4% of revenue.

We remain committed to prudently investing in our core platforms and new technologies to drive sustainable, long-term growth.

In Q4 we expect R&D spending to be in the range of 9% to 9.5% of revenue.

Third-quarter SG&A expense was $1.394 billion.

Excluding the $14 million expense related to the retirement and transition of our CEO, SG&A expense on a non-GAAP basis was 34.8% of sales compared to 35.1% of sales last quarter.

SG&A expense was negatively affected by the recent acquisitions and additional bad debt reserves in certain markets.

Exclusive of one-time adjustments, we expect Q4 SG&A to be approximately 33% of revenue which reflects our focus on initiatives to continue to leverage SG&A despite the impact of slower markets, product delays, and recent acquisitions.

Net other expense for the quarter was $153 million compared to $148 million in the prior year.

Other expense includes $86 million of non-cash amortization expense as well as $15 million in FX hedging losses.

In addition, included for the first time this quarter is a $9 million expense from the recently implemented excise tax in Puerto Rico.

This represents one month's impact and it is important to note that this additional expense is almost entirely offset by a corresponding tax benefit that I will discuss in a moment.

Looking ahead, based on current FX rates, we anticipate Q4 net other expense will be in the range of $160 million to $180 million, which includes an anticipated $10 million to $20 million in hedging losses as well as an estimated $25 million to $30 million expense from the Puerto Rico excise tax.

Net interest expense for the quarter was $70 million.

Excluding the $44 million non-cash charge for convertible debt interest expense, non-GAAP net interest expense was $26 million.

At the end of Q3 we had approximately $9 billion in cash and cash investments.

Looking ahead, we expect our cash position to continue to increase over the long run, although it should be noted that we will have $2.2 billion of convertible debt repayment occurring in April.

We expect low interest rates will negatively affect our return on our cash.

In Q4 we anticipate non-GAAP net interest expense will be in the range of $25 million to $35 million.

In Q3 we generated $1.1 billion in free cash flow defined as operating cash flow minus capital expenditures.

Going forward, we expect to continue to generate free cash flow in excess of $1 billion per quarter.

Turning to tax, our effective tax rate as reported was 8.8%.

Our adjusted non-GAAP nominal tax rate was 11.8%, but would have been closer to 21% before adjusting for several discrete items including a $68 million net benefit associated with the resolution of our IRS audits for fiscal years 1997 through 1999, the finalization of certain foreign audits, and changes to uncertain tax position reserves; a $28 million catch-up benefit associated with the retroactive renewal and extension of the US R&D tax credit; and the previously mentioned $8 million one-month benefit for the recently enacted Puerto Rico excise tax, which offsets the charge recorded in other expense.

Exclusive of one-time adjustments, we continue to expect our Q4 tax rate to be in the range of 20.5% to 21.5%.

However, this is before taking into account the benefit related to the Puerto Rico excise tax which is expected to be in the range of $25 million to $30 million in Q4.

Third-quarter weighted average shares outstanding on a diluted basis were 1.078 billion shares.

During the third quarter, we repurchased to $380 million of our common stock.

At the end of Q3 we had remaining capacity to repurchase approximately 21 million shares under our Board-authorized stock repurchase plan.

For fiscal 2011 we anticipate diluted weighted average shares outstanding of 1.083 billion shares.

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

Let me conclude by commenting on our outlook and guidance.

This morning we reiterated our revenue outlook and tightened our FY 2011 earnings per share guidance.

We believe that current Q4 revenue consensus of $4.3 billion appears reasonable and would reflect adjusted constant currency revenue growth of 3% after taking into account a $70 million benefit from a competitor's stopped shipment last year, as well as an expected $60 million to $70 million positive FX impact in Q4 based on current exchange rates.

Turning to our earnings per share, at this point in the year we are comfortable tightening our earnings per share guidance range.

Our previously stated guidance of $3.38 to $3.44 did not include the impact from our Ardian acquisition.

After tightening the range to $3.40 to $3.42 and then including the expected $0.02 impact from the Ardian dilution in Q4, we expect FY 2011 earnings per share in the range of $3.38 to $3.40.

Current FY 2011 earnings per share consensus of $3.40 appears reasonable.

However, when we look at the current Q4 earnings per share consensus it appears that most estimates have not taken into account the $0.02 of Ardian dilution.

We are currently in the planning process for FY 2012 and we intend to give FY 2012 guidance on our Q4 earnings call in May.

During this planning process we are focused on looking at resource allocation and continuing to drive leverage in our overall cost structure.

While these plans are not yet final and we are not ready to discuss specific details, first, based on our current expectations, we intend to reduce our global work force during Q4 by 1,500 to 2,000 positions or 4% to 5%.

This would result in us recognizing a related restructuring charge in Q4.

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 effect of non-cash convertible debt interest expense.

I will now turn things back over to Bill, who will conclude our prepared remarks.

Bill?

Thanks, Gary.

Before turning to Q&A, I want to note that as you all know I recently announced my intention to retire at the end of the fiscal year.

Our Board of Directors is in the process of looking for my successor and their search is progressing well.

Although we do not have any new information at this point, we will update you when we have more news to share.

At this point I expect this to be my last Medtronic earnings call.

I would like to say that it has truly been an honor and a privilege to lead the finest medical technology company in the world.

And while I am excited about the prospects of new endeavors, I feel extremely proud of what we have accomplished over the past several years.

When you take into account our robust pipeline, our outstanding leadership team, and our ability to capture new opportunities in emerging markets and emerging technologies, I could not be more excited for the future of this great company.

With that, Gary, I would like now to open things up for Q&A.

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

Operator, first question.

(Operator Instructions) Matthew Dodds, Citigroup.

Bill, when you look at the businesses this quarter it looks like you are down in two businesses that are still kind of problem areas when you look at market share, ICDs and neurostimulation.

So in your view, especially in the US, is it really a matter of getting Protecta out in ICDs, Restore, and the InterStim indication that will drive you back to holding, maybe gaining share, or is there more structurally you need to do?

Then if you could layer in there also in Japan in ICDs you have lost a lot of share there the last couple of years.

When do you see that stabilizing?

Matt, this is Gary.

Overall, as you said, what we have seen clearly in both CRDM and neuro -- and let me address each one individually.

CRDM, as you indicated, we have maintained share in certain markets.

We lost a little share this quarter in some of the international markets more so than anything else.

We are excited about the new products.

I think within CRDM, as far as market share goes, we are seeing the impact of Protecta and the MRI SureScan product are having an impact, both in international markets and we are excited about getting those in the US.

So we think that will help not only maintain our share and potentially gain share, but also stabilize pricing as we have talked about.

So I think on the CRDM -- and then we have talked about obviously in the international markets, especially in Europe, where we lost share was in the value segments.

We are launching a couple new products in that category to stabilize that share and gain share back in the European marketplace.

Japan, as you said, we have lost share the last couple years in various categories.

Part of that was obviously related to the Fidelis; there was more of an impact in Fidelis in that marketplace probably more than any other.

But I think recently here what we have seen is the new products, the Protecta that I mentioned we are going to be launching in Japan, will clearly have an impact in our ability to again maintain share in Japan and regain some share direction.

So in CRDM we have been stabilized, these new products are important, and we are seeing the benefits of those where they are launched.

Neuro is the same way; we need to get some of the new products approved.

And Restore sensor is important, not only in the US, but also the other indication for fecal incontinence in the InterStim product line that will clearly drive that business.

Because InterStim and DBS in the neuromodulation business continue to do very, very well where it has been Pain Stim where we have been struggling a little bit.

That is also been part of a market issue.

The market has been somewhat soft also in Pain Stim, but we would expect Restore sensor -- we are seeing that help us maintain share in the European markets.

And when we can launch that in the US I think that will actually help us drive share also here in the US.

All right.

Gary, just one little quick question.

On the restructuring, do you have a range of how big a charge we are talking about next quarter?

We really don't at this point, Matt.

It's too early to tell.

We are still assessing where the employees are even at as far as geographically and what the impact of that is all going to be.

So we really don't have any estimate at this point of what the charge would be.

Okay.

Thanks, Gary.

Kristen Stewart, Deutsche Bank.

Thanks for taking the question.

Just kind of following up on the restructuring.

How should we think about the savings going forward from this plan as it rolls out into 2011, or 2012 rather?

Well, this is Gary again.

Again, we don't have the details on exactly what that amount is going to be.

As we talked about, the effort we are trying to do here is just kind of an ongoing part of our overall process to leverage the organization and make sure that we are driving efficiency throughout the Company.

We also are obviously acknowledging the fact that our markets are somewhat softer and we have had to readdress the infrastructure to reduce it to what our market growths are at this point in time.

What that savings is at this level, we don't have any estimate for that.

We will by the time we put together our -- in our Q4 earnings call we will have a better estimate, but again right now all we know is it's between 1,500 and 2,000 employees.

Okay.

And then just on the gross margin I know that you had said that if not for some of the obsolescent charges we would have been, I guess, more in line with where your expectations were.

What specifically were the charges that were taken, what business unit were they in?

Well, the obsolescence charges -- the good news about -- as we are launching some new products, the endovascular Endurant product we mentioned, some of the other products, the Solera, we have some set costs.

But the impact of launching new products means that you have some old products that are becoming obsolete.

And so the reality is we had some charges in our cardiovascular business related to some of those new products and also a little bit in the spine area.

In addition, we had some of the acquisition costs.

As we have pulled in the acquisitions there is a step-up in purchase accounting you have to do and then there is also just some inventory adjustments as we brought some of these new acquisitions in that were impacting the quarter.

Obviously, those would have been [OSAL] and spine and CV where some of the acquisitions are at.

So it's primarily in those two businesses where we saw the one-time charges.

And the total of those two are 50 to 60 basis points you said?

That is correct.

Okay, thank you.

Mike Weinstein, JPMorgan.

Thanks.

A couple of clarifications, Gary, if I can.

The fourth quarter are you guys implying $0.91 to $0.93?

The reality is with the Ardian dilution what we are saying is, again, the $3.38 to $3.40.

So if you just do the math you are absolutely right that you will end up with -- basically, I think more around the $0.93 is where you are going to end up because I think the consensus right now is $0.95.

And you take the Ardian dilution in place you could kind of get to that $0.93.

Okay.

And then let me ask just a couple of other items.

The restructuring, can you give us -- and it sounds like it's very early, but can you give us any insights into where you will be making the cuts, either in what business will be cuts come and within what segments -- R&D, sales, manufacturing?

And then second, just turning back to this quarter.

Pretax income declined almost 6% this quarter, which was worse than I think probably the Company was modeling.

I think it was worse than the Street was modeling.

So I guess I just would appreciate some visibility on the tax side in terms of when you saw some of these tax windfalls coming through, because I know in early January you guys had commented that you were comfortable with the consensus then.

Right.

Well, as far as the restructuring and where it's at, again we are not going to get specific about which businesses or which geographies or even which kind of a function will be addressing, but -- because it's going to be across the Company.

We are going to evaluate our employee complement across the organization and determine where we need to make some adjustments overall.

You can obviously assume from the standpoint of as we look at this there are some markets and some businesses that are growing very dramatically.

So whether it's emerging markets or some of even the emerging therapies or obviously in some of the acquisitions, that is not where we are going to be primarily focused.

It's going to be more on those businesses and geographies, developed markets for example, where it has been a little slower, where the markets have slowed down.

But that is all we are going to say at this point in time.

Again, it's primarily going to be focused on infrastructure costs.

Not to say that there won't be some impact on the sales or R&D side, but the fact of the matter is it's primarily infrastructure related to all of those is what we are trying to focus on as we go forward.

With respect to the pretax earnings and the complication really of all the things happening on the tax line here this quarter, overall, yes, we were not -- we would have expected our pretax earnings to be a little bit higher as we went through the quarter.

And the primary surprise was really on that gross margin as I mentioned earlier.

We would have expected, as I mentioned in my comments, the gross margin be closer to 75.5% to 75.6%, so that was a little bit of a surprise that we had not expected.

So that impacted us.

The other thing that is compounding the issue on the pretax and kind of complicating the whole issue is this Puerto Rico excise tax issue I mentioned earlier, which is actually reducing our pretax profits but then there is a credit on the tax line itself.

That is the accounting that basically the accounting firms have come up with for all of us are operating in Puerto Rico are going to have to do.

And so that complicates a little bit even your pretax, what is the growth rate, or in this case, as you have said, a slight decline from where we have been at previously.

So from our perspective, that is something we're going to -- that Puerto Rico tax thing is just something we are going to have to deal with going forward.

And it's going to be a re-class between pretax and after-tax numbers.

So overall, that is kind of explaining what is going on.

Now back to the restructuring, that is the intent of the restructuring.

We obviously are seeing that our pretax earnings are not where we need them to be.

We need to continue in these little bit slower markets.

We are going to have to take some cost out, and that is what we are attempting to do here.

So we are getting ahead of the game and trying to address that as we move into FY '12.

Thanks, Gary.

Bruce Nudell, UBS.

Good morning.

Thanks for taking the question.

Bill, I have a couple questions, one on AMPLIFY.

What is the likelihood that that will be approved?

And if it is not approved, what is the risk to the franchise given commercial payer reaction or Medicare reaction?

Secondly, on the US ICD market, I think it is down between 1% and 2% this quarter.

Do you anticipate a kind of re-equilibration at sites that were kind of noncompliant as judged by the JAM article, and what do you see the trajectory over the next several quarters for that key market?

Thank you.

First, on AMPLIFY, again, point of clarification.

This is not INFUSE.

This is kind of a new indication and it is a new kind of formulation.

We are continuing to work with the FDA to figure out kind of where they are on this.

We were encouraged by the panel vote which was in support of the approval.

So as we learn more, we will let you know.

But it's really -- it is incremental to kind of our current business.

So if there was a reason for the FDA to delay this anymore, it is not going to have a significant impact.

It won't have any really impact on our current business.

It is really all upside for us.

So just to clarify that, Bill, you don't feel that not having -- like posterior lumbar fusion is probably the biggest off-label use of INFUSE.

And you don't think not getting AMPLIFY approved could result in a retrenchment?

No, we have been very clear with our people in terms of the appropriate indications for INFUSE, and so I don't see anything that would change as a result of AMPLIFY not getting approved.

So again they are really -- they are different, there is a different formulation.

It's really a different product than INFUSE.

And the ICD question?

So on the ICD, yes, the market was this quarter down about a percent.

And the US, we think that there has been some sort of short-term impact because of the JAMA and the DOJ.

I think that that is a -- it's a short-term impact.

I think that hospitals are having to adjust a little bit to making sure that they are in conformance with the appropriate guidelines, but I would take a step back.

I continue to be encouraged that this is a large patient population.

It is a big market opportunity and I think we are in just a little bit of an air pocket here that is a result of the reaction to the JAMA and to the DOJ article.

But we did see this quarter a bit of -- a little bit of a continuation of what we have seen in the last couple of quarters where the market is -- it is in that sort of flat to down here in the US and it's modestly up outside the US.

Thanks so much.

Bob Hopkins, Bank of America.

Good morning.

Gary, first, to start off there is a lot of moving parts here in terms of tax rate to be thinking about and hedging gains and losses going forward and the restructuring.

I was wondering, as it relates to 2012, the current consensus is [364].

Are you comfortable at this point suggesting that that is reasonably in the ballpark?

Again, Bob, I am not going to give any guidance on FY 2012 as far as what our guidance would be at this point in time.

We haven't given any guidance previously for FY 2012 and so I am not at this point either.

We will do that in our Q4 earnings call.

There were a lot of moving parts here in the quarter, especially on the tax rate and the other incumbent expense.

It has been complicated by this Puerto Rico excise tax issue.

I think some of the things that you saw in the quarter with the retroactive, obviously, R&D credit, etc., will be just based on the rate going forward.

So it's not going to be a catch up, they will just have it in the rate adjustment.

So I think there is nothing that occurred here in the quarter that necessarily changes my outlook for FY 2012 and that is about the only thing I can tell you at this point in time.

But we are not going to give any guidance at this level as far as what is appropriate for FY 2012.

Okay.

But then just to talk maybe a little bit more granularly about the tax rate going forward and how we should be thinking about that in light of all the moving parts, and the hedging gains and losses going forward, how we should be thinking about that.

Overall, from the standpoint on foreign exchange overall right now we see that relatively flat year on year.

We have hedged for next year a big portion of where we are at.

We don't see a big headwind; we don't see a big benefit.

Basically we are hedged at rates that are relatively close to where we are at here in the current year.

We are not completely hedged, but where the rates are right now I would feel pretty comfortable that there is not a big change there.

On the tax rate itself, as we indicated, our overall effective tax rate, ignoring this Puerto Rico tax issue right now, would have been more around kind of in that 21% range.

And we think that is probably still going to be appropriate going forward.

But, again, this Puerto Rico excise tax thing will have an impact on probably reducing that effective tax rate, as you look at it, by about 3 percentage points as you go up and move ahead, because you are going to have $25 million to $30 million a quarter coming through the tax that is offsetting the other income and expense line items.

So we have to go through the calculations and figure it out, but my guess is as we get into next year you are going to have tax rates, effective tax rate, that is closer to the high teens.

And we will give more details as we get into the year.

I want to just maybe add one comment, maybe just an inference of your previous question, Bob, in terms of just sort of -- we are not going to give guidance on the outlook for next year, but I would just remind you that we do feel very good about kind of our new product portfolio.

As we get through the warning letters, the CRDM with the Protecta and now with the MRI here in the US, we think that that is going to be a catalyst.

A lot of the new products that we are just now launching, the Endurant, the AF, are off to a very good start so we are excited about CoreValve.

There is just a lot in the pipeline, in the neuro side as well with, as we get through the warning letter, InterStim bowel.

So I mean, we are making the tough decisions and the restructuring to position ourselves to deliver profitable growth, and we feel that we have got a good pipeline that is going to enable us to accelerate growth for next year.

Great, Bill.

Thanks and good luck with your new ventures.

Thanks, Bob.

David Lewis, Morgan Stanley.

Good morning.

Gary, just a quick follow-up on the restructuring.

I know you are not giving details, but as we think about this conceptually should we be thinking about this restructuring as largely dropping through to the bottom line and being accretive to earnings?

Or are there significant chunks of reinvestment that we may be missing?

Well, again from our perspective, obviously a lot of this will go to the bottom line.

We do this as we focus on -- we don't think about these costs necessarily dropping to the bottom line.

We take a look at our entire cost structure and say what investments do we need to make, what kind of profitability improvement do we need to have, and where do we need to see the leverage occurring.

Then we backed into where do we think we have opportunities to reduce our overall infrastructure costs.

So, overall, what you could assume by doing these things that, yes, you will see more leverage in the P&L as we move forward, and so that will clearly impact and have a benefit dropping to the bottom line.

But these are -- continue to be activities that we take to make sure we are achieving our objectives on delivering the profits to our shareholders, but also to ensure that we can make the investments to drive the growth in some of the markets that we have been talking about, both the emerging therapies and some of the emerging markets geographically.

So it's a combination.

Okay.

Bill, just one quick follow-up here on emerging markets.

It looked like the emerging market business accelerated a little bit this quarter sequentially, so I wondered if that was stocking new products or entrants into new markets.

And maybe you could share with us, given emerging markets is becoming a much more substantial component of overall corporate growth, what we can think about in terms of a sustainable growth rate for those emerging markets maybe just in the next few years?

Thank you.

Well, we said big picture we think that we can see emerging markets becoming 20% of our mix in the next five years.

It has been growing 20%-plus for the last number of quarters, if not number of years.

Yes, it was another good quarter.

China contributed approximately $30 million in incremental revenue year on year and it represents almost 3% of our total Medtronic revenue now.

China is -- again we have said this for the last year or so, we have been making over the last several years big investments to take advantage of what we think -- we think that China will be a very strong market for years to come.

India is a bit behind but we are seeing very good growth rate in India.

Latin America is doing very well, so it's really pretty balanced across many of the overall emerging markets.

So if you look at today, again as I said in my commentary, roughly 9% to 10% of our revenues come out of the emerging markets, and we expect that to almost double the next five years.

And Bill, the emerging market segments that remains at the level of corporate profitability or higher?

Yes.

This is growing --

Yes, but at overall profit margins, and again as we have said before in the emerging -- international profit margins are basically the same as they are in the US and the emerging markets the same way.

In total they are basically consistent with where we are at across the Company.

Obviously it will vary by market but in general the emerging markets have a profit margin that is very consistent with the corporate level.

Great.

Thank you very much.

David Roman, Goldman Sachs.

Good morning, everybody.

Thank you for taking the questions.

Bill, I was hoping you could maybe extrapolate a little bit more on the new product launches.

You launched Solera in January and your spine business, although stable, we didn't see much of an improvement.

Can you maybe help us understand the timing and pacing of when we should start to see a significant impact on the P&L from some of the products you are launching?

Maybe using -- if you look at pacing for an example, I think this is the first quarter in several quarters where you have seen growth out of Europe and you launched Revo, I think, over a year ago.

Is that the right thing to say?

Is it 12 months until we start to see traction?

Maybe you could just sort of take us through the launch timelines.

Yes, there is a bit of a flywheel effect here, particularly on the spine side when you are -- in making big investments in the capital, in the instrument sets to get out there to drive the procedures.

We commented in the last quarter or so that we have been investing in the instrument sets and we are now getting those into the field which are going to drive the procedures.

Where we have the sets and where we are in the account we are seeing very good growth.

And so we are very optimistic that Solera is going to be a terrific product platform for us, but it's not just Solera.

The TSRH 3Dx, the VERTEX SELECT, as well as even some of the DLIF products, I mean DLIF had another very strong quarter, so we are very encouraged by the momentum that is building, particularly on the spine side.

On the pacing side, again I want to make sure that people understand there is a big difference between the US and the OUS in terms of what we think is the opportunity for Revo.

I mean Revo is doing well in the European markets, but remember Revo is dual chamber only and in Europe dual chamber is roughly 50% or a little bit less of the total market.

In the US dual chamber is 80%.

The same thing for active fixation leads, which in Europe it's roughly 50%.

In the US, active fixation, which is what we have MRI safe, is 80%.

I was in the field last week on Friday with a few of our reps and I can just tell you there is a tremendous excitement and enthusiasm about MRI safe.

I think it's a different opportunity here in the US than what we have seen in markets outside the US.

We are pretty bullish that this is going to be a product platform that, as I made the comment, sort of like what we saw with the Activitrax years ago, this is going to enable us to gain real meaningful share.

Just to add to Bill's comment, the only thing I would add to what he has to say is the other thing you have to remember is we do see new technologies adopt quicker generally across the board in the US.

The reason that is to some extent is outside the US, especially in the European markets, you have these tenders and everything else that you have to get things to be a part of.

And that just takes a little bit longer process to get the products into the marketplace and them to really have an impact.

But, clearly, in the US we tend to see new products start off quicker and back to Bill's point we really do believe that especially with the MRI SureScan that that clearly will be well received in this marketplace.

And do you at this point -- I know it's early in the launch to give us some sense as to directionally the relative pricing you are able to achieve on some of these new products.

And is the price premium on new products sufficient to fully offset the impact of negative like-for-like pricing?

Well, on the pacing side we do think that there is real value in this product.

Again, we are only out there for a week and we are seeing that customers are rewarding us with a premium for this product.

So any way, we think that that will offset, yes, the dynamics of market growth and that we will see that our growth will be positive with Revo.

And how about on the spine side?

Yes, and the same thing.

On the spine side we are probably less of a premium on the Solera on a relative basis, but it's really -- in this case we are using Solera to actively go after market share.

Okay, thank you very much.

Joanne Wuensch, BMO Capital Markets.

Thank you very much for taking the question.

Is there any update on the FDA warning letter?

You are starting to get some or at least one product approved, but anything that you can share with us on that front?

Yes, well, we were encouraged that the FDA approved the MRI safe.

I was actually in the FDA again last week and, again, I am cautiously optimistic that this is -- we are going to see the warning letters get lifted and will be able to get these products in the market, as I said a while ago, sooner rather than later.

But we have done -- we have completed all the follow-ups with the FDA and we have been meeting with the FDA on a regular basis.

And so I am -- again, I remain optimistic that this is going to happen sooner rather than later.

And is there anything that you can broadly discuss on price?

It sounds like in certain areas you are still see negative 3%, negative 4% type of price pressure and other areas you are starting to gain that back somewhat with differentiated products.

But could you give us a big picture view?

Yes, it's all about new products.

Again, as I made the comment on the Revo MRI, we think that that is going to enable us to bring the price back up.

The same thing on Solera, less so but it's -- again when we bring out new product that is our opportunity to really sort of move the price back up.

And so as we replenish, as we continue to bring forth new products that we have been investing in that is going to help us to offset some of the price pressures.

My final question has to do with spine.

For a while now you have been talking about trying to get back to the market growth rate, albeit the market growth rate keeps going down or maybe stable -- I would like your view on that.

Could you please comment on how long you think it will take for you to get back to a market growth rate?

Thanks.

Well, this is Gary.

Again, from an overall -- as I have mentioned, we think the market growth rate overall has been stable the last three quarters, kind of in that 3% to 4% range.

If you take a look at our core metal constructs, we grew 2% this quarter.

And as Bill mentioned with Solera and everything else, we think as we go through Q4 here and we enter into FY 2012 we will be back to market growth.

Thank you.

Good luck, Bill.

Thank you.

Derrick Sung, Sanford Bernstein.

Thanks for taking the question.

On physio-control could you give us a sense, Gary, as to how the operating margins for that division compare relative to overall company average margins?

And I guess the question that I am getting to here is is it reasonable to assume that this will be a pretty accretive transaction if the operating margins are well below company average?

Overall, physio-control's gross margins and operating margins are probably some of the lower ones in the Company overall, and clearly below the Company's average.

So that will be accretive from the standpoint of our overall margins.

Again, the primary reason we have talked about this strategically of divesting this business that we talked about even two, three years ago is that we just think actually physio-control strategically is not benefiting Medtronic as much as we would like to see with that business.

But more importantly, we think that they alone or being spun off or divested can do much better themselves.

It's just hard for them to -- because of those margin issues I just mentioned it's hard for them to ever compete against the investments we have to make.

And so overall, we think this is better for them.

It's better for the Company in general.

We have talked about this, this has been a strategic decision that we have made a long time ago, but we wanted to get through the -- making sure the business was back and running effectively and it is.

It's a nice business but I think it will be better that we divest it from the Company.

Okay, thank you.

Next year you are going to be anniversarying some of the reimbursement cuts in Japan.

I was wondering if you could kind of talk about which businesses might benefit most from that.

And overall, from a company perspective, what is the level of impact that you would see on overall company pricing next year?

Well, as you said, yes, we are, as of the beginning of April, anniversarying against those Japan price cuts which were probably the most felt in CRDM and also in cardiovascular.

In general, the entire cardiac and vascular business is probably where it had the biggest impacts, but CRDM on then on the cardiovascular side.

So that will clearly benefit those two businesses because Japan, as we have seen all year, has been either flat to down primarily because of those ASP pressures.

And that will clearly help them as they go into next year.

We won't have those tough comparisons that they will be dealing with.

Overall on pricing pressures, as Bill mentioned, we have seen the pricing pressures being somewhat stable the last several quarters.

However, from our perspective, with these new products and the innovation we think that will actually help minimize some of the pricing pressures that we have seen.

So going forward we would expect to see not quite as dramatic pricing pressures as we probably saw this last year from Medtronic in general.

Okay.

Thank you very much.

Rick Wise, Leerink.

Good morning, everybody.

Good morning, Bill, Gary, and all of the best, Bill, for whatever is coming up next.

I wanted to touch on two things.

One, just on the Revo pacer, you indicated that you think it's going to drive share.

My impression is your share is already in the low 50%s.

Maybe help us think just what kind of dreams do you have for what impact on share.

And if you could talk a little bit about when your next-gen Revo is going to be launched in the US, have you filed it?

Just a little perspective there.

Again, I mentioned the real addressable market for us is about 80% of the market because that is the dual chamber and the active fixation.

I am not going to give you a projection.

The only thing I would say, Rick, is what I say to our people.

I mean, why would you not want an MRI safe pacemaker if it's available?

I mean given the fact that we know roughly 70% of the people who get pacemakers are going to need an MRI safe.

So I just think -- and this is a different environment here, the whole issue of liability and everything else, I mean in terms of just -- the forces are in place to really drive the adoption of this kind of therapy.

So I am fairly bullish that this is going to be a real big opportunity for us.

Okay.

Turning to spine, you mentioned that pricing in the lateral fusion category is getting more competitive.

Can you quantify that a little more specifically and maybe give us some perspective on what your DLIF -- you said you have gained share and it grew fast.

I sort of feel like in the first quarter I remember you grew 40%, last quarter 25%; a little perspective about this quarter?

It's in that same range.

It's up 25% to 30% so the DLIF system in doing well, and we are bringing out new instrument sets which are going to, we think, even make it more competitive.

On the pricing, it's really we haven't seen major changes in the overall spine market.

If you go back a few years ago we saw price increases and now we are in that flat to modestly down, but again it's all predicated on bringing out new technologies.

And with all of what we have in the pipeline we are comfortable that we are going to be able to manage through this very well with Solera, with the TSRH 3Dx, with the VERTEX SELECT, with the T2 ALTITUDE, the whole product portfolio.

Okay.

And one last one, Gary, if I could on gross margin.

Obviously I understand why, but gross margins this quarter were the weakest we have seen in some time, and you gave us the guidance for the fourth quarter.

But as recently as last quarter you were you were talking about 75.5% to 76%.

What drives you to that upper end of the range as we look over, not just the fourth quarter, but just directionally only looking ahead?

Is it all these new products and the better ASPs?

Is that, quote, all it is or can you help us understand what might move it higher over time?

Well, again, we would have said that the normal rate here for Q3, ongoing rate would have been around 75.5% to 76% and that is the reason that we still feel comfortable.

We are not saying we are going to increase our gross margins from where they are at.

We just don't have the one-time items we had in this quarter.

But overall, Rick, I would tell you that, yes, we think -- as we mentioned during the call here, we do think the new products will have an impact on stabilizing the gross margin and potentially giving us a little bit of an uptick, because at the same time we are coming out with these products we continue to focus on taking product costs out.

So if we can maintain pricing pressures and minimize those and take product costs out, obviously that gets us the benefit.

There is no question that we have things that are pushing back a little bit the other way.

Some of the acquisitions, the mix is such that their gross margins aren't quite as high as some of the other product lines.

So it's a combination; there is a lot of moving parts in the gross margin overall.

But what we are trying to get at is really on an ongoing basis we think our gross margins still are running between 75.5% and 76%.

And we think we can continue to maintain those as we go through the fourth quarter and we would hope as we get into the future years.

Thanks so much, Gary.

Okay, with that, just again thank you for your interest in Medtronic and especially for your support during my leadership tenure.

And wishing each and every one of you all the very best.

Thanks a lot.

This concludes Medtronic's Q3 earnings release conference call.

You may now disconnect.