美敦力 (MDT) 2013 Q1 法說會逐字稿

Good morning.

My name is Christy and I'll be your conference operator today.

At this time I would like to welcome everyone to the Medtronic first-quarter 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) It is now my pleasure to hand the program over to Mr. Jeff Warren.

Please go ahead.

Thank you, Christy.

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

During the next hour Omar Ishrak, Medtronic Chairman and Chief Executive Officer, and Gary Ellis, Medtronic Chief Financial Officer, will provide comments on the results of our fiscal year 2013 first quarter which ended July 27, 2012.

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 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 any forward-looking statement.

Additional information concerning factors that could cause the 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 first quarter of fiscal year 2012 and all year-over-year 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, Omar Ishrak.

Good morning and thank you, Jeff.

Thank you to everyone for joining us today.

This morning we reported first-quarter revenue of $4 billion, which represents growth of 5%.

Q1 non-GAAP earnings of $883 million and diluted earnings per share of $0.85 increased 4% and 8%, respectively.

It is worth pointing out that we delivered these results while covering one or two pennies of negative EPS impact from bad debt at the Greek distributor and higher than expected tax expense.

Gary will discuss these items later.

Our Q1 results represent another positive step towards our goal of delivering consistent and dependable growth.

Two of our larger end markets, US ICD and US Spine, which have been under pressure, continue to show signs of stabilization.

At the same time, our results reflect the positive operational impact of our strategies and market-leading technologies, both in developed and emerging markets.

There is still a lot of work to be done and we are just at the beginning of our efforts, but we are encouraged that our actions and improving execution are beginning to yield some results.

Let me start with US ICD.

We estimate the market declined approximately 4%, the best it has been in six quarters.

While the market did see the normal impact of our Q4 to Q1 seasonality, we were pleased to see relative sequential stability.

Our US ICD business was down 3% in Q1, slightly better than the market.

Pricing was down around 4% which was consistent with the previous quarter.

Our implant volumes were up 4%, but this growth was offset by hospitals reducing their level of bulk purchases which are now at the lowest level in nearly five years.

This reduction in bulk purchases is a trend we have seen over the last four quarters, and looking ahead we would expect the stabilization in the US market to continue.

Turning to US Spine, we estimate that US Core Spine market was flat and has now modestly improved over the past three quarters.

Stabilization was also evident in our own results as our US Core Spine business was flat this quarter.

Our business seems to be turning the corner as our new products and procedures gain critical mass.

Our continued focus on navigated spinal procedures and enabling technologies, such as POWEREASE, is attracting more surgeon interest and improving our Spine financial results.

Strong capital equipment sales in our Surgical Technologies business further demonstrate the importance of these technologies.

As a result, our US Core Spine share is stable year over year and we estimate we gained modest share sequentially in Q1.

Although we are pleased with the progress we are making, it is still very early and we have to build on this momentum and deliver consistent results over time.

The other part of our US Spine business, BMP, declined 20% in Q1.

As you know, questions were raised last year about INFUSE and to better understand the facts we requested Yale University to perform an unprecedented systematic analysis of all the available data.

While the timing is controlled by Yale, we are expecting the results to be published in the coming months.

The remainder of our business also performed well with some standout performances in areas where new products are making a difference.

In Coronary, our Resolute Integrity drug-eluting stent picked up an additional 7 points of share in the US this quarter, nearly tripling our share over the past two quarters.

In Endovascular, the launch of our Endurant abdominal aortic stent graft in Japan and the release of the Endurant II in the US and in Europe are driving strong growth in our aortic business.

Across the balance of our CVG portfolio we continue to see double-digit growth in transcatheter valves, in atrial fibrillation and in our peripheral interventional product lines.

In RTG, our recently launched RestoreSensor is gaining solid market acceptance and resulting in improved growth in pain stim.

Additionally, we continue to see double-digit growth across the RTG portfolio in DBS, gastro/uro, CGM, navigation, and ENT.

While our teams are executing well on recent product launches, we are also making progress on advancing our industry-leading product pipeline.

In transcatheter valves we expect to complete enrollment in our CoreValve US high-risk arm in the coming weeks.

In renal denervation we are continuing enrollment in our SYMPLICITY HTN-3 US pivotal trial and remain on track to complete enrollment during the first calendar quarter of next year.

We also continue to advance our drug-eluting balloon program as we enrolled patients in our IN.

PACT SFA II US pivotal study.

While these are all longer-term programs, we also have important programs that we expect to launch in the next 12 months.

In CRDM we have received CE Mark approval for the Viva and Brava families of next-generation high power CRTD products.

In Spine, we anticipate US approval later this fiscal year for our Bryan ACD Cervical Disc, which we believe will take share in the growing cervical arthroplasty market.

We also expect to launch new inter-body implants from our [AMT] acquisition at the NASS conference in October.

And, finally, in diabetes we are targeting US approval of our MiniMed 530G pump, as well as our Enlite Sensor late this fiscal year.

Our international revenue grew 6% in Q1, including 4% growth in Western Europe which has remained relatively stable over the past several quarters.

Our European growth varied by country with stronger growth in the North, including double-digit growth in France, the UK, and Ireland, but partially offset by softness in southern Europe.

However, we are seeing signs that the southern European governments are focusing on the ways to better support their healthcare systems.

For example, in Spain and Italy they both recently made some significant payments on the outstanding payables to us.

While we are encouraged by these positive signs, we are obviously continuing to watch Europe very closely.

Overall, our developed markets, including the US, showed improved growth this quarter and our emerging markets grew 14%.

Although this performance in emerging markets is respectable, I was disappointed in that it was below the 20% level that we have been targeting and expect to deliver consistently over the longer term.

As I mentioned in our investor meeting in June, we feel that emerging markets growth combined with market stabilization, as well as our strong portfolio and pipeline, provides the foundation to deliver consistent top- and bottom-line growth over the midterm.

But over the longer term we must position ourselves to succeed in the rapidly changing global healthcare market.

To do this we are building upon our strength and remain focused in two main long-term strategies -- creating economic value and accelerating globalization.

As I continue to reach out to our customers around the world I am further convinced that these are the right strategies.

These customer interactions also provide further clarity on the new kinds of partnerships needed to win in the changing healthcare environment.

The ability to deliver economic value is increasingly important, especially in the US and Europe, as the market clearly shifts from pay-per-procedure to pay-per-value.

Likewise, with globalization there is an increasing need to address inequity and access to healthcare for people around the world, particularly for our therapies.

In order to fully capitalize on these strategies, we are improving the operating rigor across the Company.

We remain focused on reducing product costs by $1.2 billion over the next five years.

This is important, not only to maintain our gross margins, but it also fuels innovation in tiered products which are essential to our strategies for succeeding in the emerging value segment.

We are also focusing on improving working capital and I have set a goal for the Company to meaningfully improve our inventory turns.

In that regard, we recently adjusted our incentive programs to drive better inventory management.

Improvements like this will strengthen our already robust levels of free cash flow generation.

And this leads me to my final point, our commitment to return 50% of our free cash flow to shareholders.

As an S&P dividend (inaudible), Medtronic has a long history of consistently increasing our dividend and in June in our Board of Directors once again increased our dividend to a payout ratio of 30%.

In fact, over the past five years our dividend has more than doubled.

We further supplement our shareholder return through share repurchases and have bought back 13% of our shares over the past five years.

We feel the commitment to return 50% of our free cash flow to shareholders is appropriate at this point given our current mix of US OUS free cash flow, and we believe that the remaining 50% of our free cash flow provides us with ample flexibility to make investments for sustainable growth.

With respect to M&A opportunities, I want to emphasize that we will be very disciplined.

We do not intend to pass along EPS dilution to our shareholders and all transactions will be scrutinized for their ability to meet our high financial hurdles with a particular focus on returns.

This commitment is tied directly to the change we made this year in our long-term incentive plan where return on invested capital now has much greater weight.

We believe the combination of our strong capital allocation policies, together with executing on or near and midterm growth drivers and long-term strategies, will enable us to create value for our shareholders.

Let me now ask Gary to take you through a more detailed look at our results before we take your questions.

Gary?

Thanks, Omar.

First-quarter revenue of $4.008 billion increased 2% as reported and 5% on a constant currency basis after adjusting for a $119 million unfavorable impact of foreign currency.

Q1 revenue results by region were as follows.

Growth in Central and Eastern Europe was 21%, Greater China grew 15%, growth in Middle East and Africa was 14%, South Asia grew 12%, growth in Latin America was 11%, Western Europe and Canada grew 4%, and the growth in US was also 4%, while Asia Pacific grew 2% including 1% growth in Japan.

The emerging markets grew a combined 14% in Q1 and represented 11% of our total sales mix.

Q1 GAAP earnings and diluted earnings per share were $864 million and $0.83, an increase of 5% and 8%, respectively.

After adjusting for acquisition-related items and the non-cash charge for convertible debt interest expense, first-quarter earnings and diluted earnings per share on a non-GAAP basis were $883 million and $0.85, an increase of 4% and 8%, respectively.

In our Cardiac and Vascular Group, revenue of $2.115 billion grew 4%.

Results were driven by solid growth in coronary, endovascular, AF Solutions, and structural heart partially offset by declines in pacing.

CRDM revenue of $1.193 billion declined 2%.

Worldwide ICD revenue of $675 million was flat and we estimate that the worldwide ICD market declined in the low single digits as we continue to see the US ICD market stabilize.

Our Protecta ICD with its shock reduction and lead integrity alert technologies, combined with the proven long-term performance of our Sprint Quattro leads continues to receive strong market acceptance.

In the US our lead to port ratios returned to the highest level since 2007 and we saw a marked improvement in ICD replacement market share.

In Western Europe our high power share reached its highest levels in three years.

Pacing revenue of $463 million declined 6%, in line with the market.

Our US pacing revenues declined 10%, also in line with the market.

These declines were driven primarily by pricing, which was down in the mid-single digits as we have now anniversaried the market release of the Revo MRI pacemaker family, and to a lesser extent fewer procedures and reduced hospital bulk purchases.

Our AF Solutions business grew nearly 20% globally with growth in excess of 30% in the US, driven by the strong performance of our Arctic Front cryoballoon as we continue to gain share in this important growth market.

In Q2 we planned to launch our Arctic Front Advance with its EvenCool technology in centers in the US and Europe.

Coronary revenue of $433 million grew 16% on the global strength of Resolute Integrity.

Worldwide DES revenue in the quarter was $253 million, including $102 million in the US.

Resolute Integrity's deliverability, unique diabetes indication, and long-term clinical performance is receiving strong customer acceptance globally.

The rapid capture of DES market share in the US clearly demonstrates the benefits of our broader CVG sales and customer support strategy.

It also reinforces our expanding leadership position within the interventional cardiology community which will continue to expand as we bring forward fundamental new technologies -- new therapies, such as transcatheter valves and renal denervation.

Next month we expect to launch Resolute Integrity into the $500 million Japanese DES market.

As with the US market, we intend at a minimum to double our share.

In renal denervation we continue to lay the groundwork in this important opportunity.

Commercially we are still in the pre-reimbursement phase in many countries and SYMPLICITY is fighting for discretionary spending in European hospitals that are faced with tightening budgets.

Achieving broader reimbursement is going to require more robust clinical, data which we are actively pursuing with both our HTN-3 US pivotal study and our global SYMPLICITY registry.

Turning to Structural Heart, revenue of $280 million increased 7% driven by strong growth in TAVI.

We continue to innovate in this space, leading in the introduction of new sizes and indications.

We launched our CoreValve Evolut 23 millimeter valve in Europe late in Q1.

With Evolut we are now able to serve the broadest range of TAVI patients on a common 18 French delivery system.

On the clinical front, we have a full portfolio of clinical trials designed to drive regulatory approval and therapy expansion.

We have begun enrollment of our global CoreValve SURTAVI trial focused on expanding the market to moderate risk patients.

In our CoreValve US pivotal trial we completed enrollment in our extreme risk arm back in January and are in the continued access phase.

On the high risk arm we expect to be fully enrolled in the coming weeks.

Turning to Endovascular, revenue of $209 million grew 17% with strong, balanced growth across our aortic and peripheral businesses.

In aortic growth was driven by the adoption of our next-generation Endurant II abdominal stent graft.

In peripheral we are opening new accounts with our Complete SE stent.

Growth is also being driven by the continued adoption of our Assurant Cobalt Iliac stent.

Our IN.

PACT drug-eluting balloons delivered strong double-digit growth in international markets and we are making progress with our IN.

PACT global registry and US pivotal study.

Now turning to our Restorative Therapies group.

Revenue of $1.893 billion grew 5%.

Results were driven by growth in surgical technologies, neuromodulation, diabetes, and Core Spine, partially offset by declines in BMP.

Spine revenue of $786 million declined 3% globally and 5% in the US, mainly driven by declines in BMP.

Global Core Spine results of $645 million grew 1% with flat growth in the US.

These results were in line with the growth of the Core Spine market, which was roughly flat both globally and in the US.

It is worth noting that excluding Kyphon, which was slightly down in the US and down low double digits internationally, our Core Spine business grew 1% in the US and 2% globally.

We are seeing improvement in our business as new products and procedures gain scale through increased product family capabilities, number of sets in the field, and surgeon training events.

In thoracolumbar we began our full market release of SOLERA 5.5/6.0 in Q1 and nearly doubled our number of SOLERA minimally invasive sets in the field.

SOLERA with its attractive combination of navigation and powered instruments is generating strong surgeon interest.

In cervical we increased the number of ATLANTIS VISION ELITE cervical plate sets by 20%, which is helping to improve growth.

In interbody, although the Q1 revenue from our [AMT] acquisition was modest due to the limited release, surgeon interest exceeded our expectations.

We intend to launch our [AMT] implants at NASS in October and believe that in addition to improving our interbody growth these innovative implants will generate pull-through revenue for the rest of our thoracolumbar portfolio.

Our other Biologics portfolio has strong double-digit growth with continued adoption of our Grafton and MagniFuse DVMs.

In BMP revenue of $140 million declined 19%, including the 20% decline in the US, although the results were stable sequentially.

It is important to note that BMP is one of our lower margin products using its impact to our bottom line.

As Omar mentioned, we expect the results of the Yale study on INFUSE to be published in the coming months.

Surgical Technologies revenue of $324 million grew 24%, which included $34 million of revenue from Advanced Energy.

Organic revenue growth was 11% driven by strong US sales of capital equipment, including our StealthStation S7, O-arm, and Fusion IGS systems.

This strong performance also reflects increased surgeon for our navigated spine procedural solutions.

In addition to capital sales, Surgical Technologies continues to benefit from balanced growth of disposables and service revenue across our power, monitoring, Advanced Energy, imaging, and navigation platforms.

Turning to Neuromodulation, revenue of $419 million increased 8%.

Our pain stim business had double-digit growth driven by sales of our RestoreSensor spinal cord stimulator with AdaptiveStim technology.

Our DBS business continued to show strong results led by solid new implant growth in the US.

Our uro/gastro business delivered another quarter of double-digit growth driven by adoption of our InterStim Therapy.

We also want to let you know that we recently received a warning letter in our Neuromodulation business.

We're working with the FDA to resolve the issues which primarily relate to our complaint handling and [catha] processes.

We did not expect it to have a material impact on our financial results.

Diabetes revenue of $364 million grew 6%, driven by double-digit growth in CGM.

International sales of insulin pumps were also up double digits as Veo, with its low glucose suspend feature, continues to lead the market.

In the US we are anticipating FDA approval of the MiniMed 530G insulin pump and Enlite Sensor to occur in late FY 2013 which we expect to re-accelerate growth in the US.

Turning to the rest of the income statement, the Q1 gross margin was 75.7%.

Excluding the impact of foreign currency, our gross margin was 75.9%.

We continued to offset pricing pressure through our five-year $1.2 billion cost of goods sales reduction program.

For FY 2013 we expect gross margin to remain in the range of 75.5% to 76% on an operational basis.

First-quarter R&D spending of $385 million was 9.6% of revenue.

Excluding the impact of foreign currency, the R&D spend was 9.4% of revenue, which was driven by higher clinical trial spending and transcatheter valves and renal denervation.

We remain committed to investing in new technologies and evidence creation to drive future growth and for FY 2013 we continue to expect R&D spending to be approximately 9% on an operational basis.

First-quarter SG&A expenditures of $1.405 billion represented 35.1% of sales.

In Q1 we recognized $8 million of bad debt due to a single distributor in Greece.

Excluding this and the impact of foreign currency, SG&A would have been 34.8% of sales.

We continue to focus on several initiatives to leverage our expenses while at the same time investing in new product launches and adding to our salesforce in faster growing businesses and geographies.

In FY 2013 we expect to drive 30 to 50 basis points of improvement.

Net other expense for the quarter was $39 million.

Net gains from our hedging programs were $20 million during the quarter.

As you know, we hedge much of our operating results to reduce the volatility in our earnings from foreign exchange.

Based on the current exchange rates we expect FY 2013 net other expense will be in the range of $180 million to $210 million.

This includes the expected impact of the US med-tech tax that will begin in January and higher royalty expense due to increased sales of Resolute Integrity.

For Q2 FY 2013 we expect net other expense to be in the range of $35 million to $45 million.

Non-interest expense for the quarter was $33 million.

Excluding the $23 million non-cash charge for convertible debt interest expense, non-GAAP net interest expense was $10 million.

At the end of Q1 we had approximately $10.8 billion in cash and cash investments and $10.8 billion of debt.

For FY 2013 we expect non-GAAP net interest expense in the range of $70 million to $80 million, which excludes the non-cash charge for convertible debt interest expense.

Let's now turn to our tax rate.

Our effective tax rate in the first quarter was 20.6%.

Excluding the impact of one-time items, our adjusted non-GAAP nominal tax rate in Q1 was 20.9%.

This quarter's tax rate was higher than expected and negatively affected by a finalization of certain tax returns and changes to uncertain tax position reserves, as well as the lack of the US R&D tax credit extension.

Together these items totaled $13 million, which had a 120 basis point impact on our tax rate and over $0.01 impact on our earnings per share.

For FY 2013 we expect an adjusted non-GAAP nominal tax rate in the range of 19.5% to 20.5%.

This does not include a new benefit for the US R&D tax credit which has not yet been extended by Congress.

Historically, the R&D tax credit has had an annual benefit in the range of $30 million to $35 million, or approximately $0.01 per quarter.

In Q1 we generated $1.2 billion in free cash flow defined as operating cash flow minus capital expenditures.

We remain committed to returning 50% of our free cash flow to shareholders and during Q1 we repurchased $470 million of our common stock or approximately 1% of our outstanding shares.

As of the end of Q1 we had remaining authorization to repurchase approximately 46 million shares.

First-quarter average shares outstanding on a diluted basis were 1.037 billion shares.

Let me conclude by commenting on our fiscal year 2013 revenue outlook and earnings per share guidance.

While we were encouraged with our top-line performance in the past couple of quarters, we continue to be focused on delivering consistent results.

At this point we want to remain conservative so we are not changing our FY 2013 constant currency growth outlook of 2% to 4% from continuing operations.

Although we cannot predict the impact of foreign 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 fiscal year then our FY 2013 revenue would be negatively affected by approximately $400 million to $430 million, including a negative $140 million to $160 million impact in Q2.

Turning to guidance on the bottom line.

We continue to expect FY 2013 non-GAAP diluted earnings per share in the range of $3.62 to $3.70, which implies annual earnings per share growth of 5% to 7%.

It is also worth noting that while we do not provide quarterly guidance, when looking at the quarterly gaining of EPS consensus we would not be surprised to see some models shift a couple of pennies from Q2 to 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 impact of the non-cash charge for convertible debt interest expense.

I will now turn the call back over to Omar who will conclude our prepared remarks.

Omar?

Thanks, Gary.

Before opening the lines for Q&A let me just conclude by reiterating that although we were encouraged by our Q1 results we recognize that we need to deliver this kind of performance consistently over the long term.

While we are keeping a close eye on certain markets, on an overall basis our end-markets continue to stabilize.

That trend, along with the breadth and scale of our business, our leading product portfolio, our recently launched products, and our economic value-oriented go-to-market strategies are beginning to make a difference.

We are also preparing ourselves for changes in the global healthcare environment by implementing our strategies of economic value and globalization.

We believe that all of this combined with our strong capital allocation policies positions us to create long-term value in healthcare.

With that we would now like to open the phone lines for Q&A.

In addition to Gary, I have asked Mike Coyle, President of our Cardiac and Vascular Group, and Chris O'Connell, President of our Restorative Therapies Group, to join us for the Q&A session.

We are rarely able to get to everyone's questions, so we respectfully request that you limit yourself to only one question and, if necessary, one follow-up so that we can get to as many questions as possible.

If you have additional questions, please contact our Investor Relations team after the call.

Operator first question, please.

(Operator Instructions) Matthew Dodds, Citigroup.

Omar, for you.

The US definitely has turned around for you the last couple quarters, but if you look at emerging markets two of the last three quarters now you have been below 20%.

I think your goal is actually to be above 20%, so what are you seeing?

My sense is this has got to be China, Latin America, just looking at some of the growth rates.

Is this execution or is it more market?

I would actually say that it is more execution rather than anything else.

As we put our growth strategy in place it is going to take a while.

There is going to be some level of variability quarter over quarter this period as we put our long-term strategies in place.

I don't think it is the market itself because the healthcare demand is actually strong.

China is still investing heavily in healthcare.

Despite the overall economy there is some pressure but the government is very insistent on investing in healthcare.

In places like Latin America and in India there is demand from the population, so we don't see that as the market itself.

We just need to make sure that our strategies all get into place and over time we will try to drive a little more consistency here.

But that is what we are facing right now.

Do you think 20% range for this fiscal year is still the goal?

That is certainly our goal, absolutely.

Okay, perfect.

I will end with that and we will keep it to going.

Thanks, Omar.

Mike Weinstein, JPMorgan.

Thank you.

So, Omar, you have gotten with this quarter your organic growth backup to it looks like about the 3.5% range, so a nice quarter.

A couple businesses that appeared to hold you back a little bit this quarter is, one, the pacemaker business and, two, diabetes was a little bit light in the US.

So I was hoping you could talk about -- and maybe Mike can jump in on the pacemaker market because it is not a Medtronic issue -- why not only has pricing gotten a little bit worse in pacemakers, but volumes appear to be contracting?

And love your opinion on that.

Then, two, maybe for Chris, maybe you can just comment on why the US diabetes business was flat this quarter?

Thanks.

Sure.

Let me make a few comments up front and then I will ask both Mike and Chris to make some comments as well.

First, the pacing market we see about three or four here in general.

Our results were a bit weaker than expected.

It was mostly price.

Remember we anniversaried our Revo MRI launch so that had some impact, but also we had destocking of the reduction in bulk purchases and pacing was a factor.

But in the end also the procedure volume was lower.

We haven't quite gotten to the point of exactly why and I am sure Mike will have some thoughts on that so I will let him comment on that in a minute.

In terms of diabetes, there results were primarily related to a replacement cycle issue.

We were building excitement for the new products and it might remain a challenge until we get our FDA approval in FY 2013, but it is primarily a replacement cycle issue in the US.

That is what we are seeing.

So, Mike, do you want to go first, a few words about the pacing market [as questioned]?

As Omar mentioned, it is the three items that he outlined.

On the procedure volume side I would say that really we saw the procedure volumes starting to drop in the first half of FY 2012, and they actually began to stabilize at sort of market implant rates here in the US in Q3 of last year.

So we are now heading into the third quarter where they have been relatively stable, in fact up slightly, so we think the prior year comparisons are showing significant declines.

But as we get later into the year we think that those will normalize.

As for what is behind it we have been trying to dig into that and really have not come up with good answers.

It looks like the general economy may have something to do with that.

But generally speaking, we don't have a good answer for it other than to say it appears to now have stabilized and we should start to see that by our Q3.

Chris, can you say a few words about the diabetes?

Yes, Mike, certainly the growth in the US was a little more modest than we expected and the market, as we have been commenting in recent quarters, has been a little bit softer in the recent years so with the consumer economy.

As Omar said, our replacement cycle is currently negative in the US.

However, I will say that our new pump starts, what we call new pumps on new patients, was positive in the quarter which makes us feel good.

In addition to that the international business was very strong.

The big event in the US is obviously going to be the launch of the 530G at the end of the fiscal year so we are all looking forward to that.

Thanks, Chris.

Great.

Thank you, Omar.

David Lewis, Morgan Stanley.

Good morning.

Gary, just a quick modeling question here.

Just the second-quarter commentary made versus consensus numbers of the $0.02 essentially moving from the second to the fourth.

I am just sort of thinking about the first quarter.

SG&A actually would have been stronger if you would take out the Greek adjustment.

And thinking about R&D being heavier in the first quarter, could you just kind of provide us a little commentary on why the second-quarter numbers would be a little lower than consensus or why that -- do you see those $0.02 moving from the second to the fourth?

All we are trying -- all of you are going to have to adjust your models based on what you think is appropriate.

All we know, we are highlighting is the fact that for the full year and what you saw here in the first quarter we have given guidance of earnings per share growth of 5% to 7%.

It was 8% in Q1 and, as you said, could have been a little bit better without the SG&A bad debt expense we had.

But the issue you have in Q2 last year, the comparison there was a couple cents in there related to a gain on our investment in PEAK and Salient.

And so if you just looked at the consensus currently it would indicate earnings per share growth of 10% after adjusting for that in Q2, which is obviously significantly above where we were here and where our guidance is at.

And that is with assuming the R&D tax credit is not extended yet.

So the idea that Q2 where you have the higher earnings per share growth versus what I think right now the consensus is showing is a very low earnings per share growth in Q4.

So we are just saying the models look like they could probably be shifting a little bit more from Q2 to Q4.

Okay.

Maybe just a quick follow-up here for maybe others in the group.

On the cardiovascular, specifically coronary, side obviously you saw another very strong quarter, the second sequential quarter.

Can you just give us a sense of where you think you are?

You talked about some of this at the analyst day.

In terms of the account penetration with Resolute, I think you mentioned at the analyst day that you were maybe 25% to 30% of accounts still had not been penetrated.

Maybe just give us an update on where that penetration stands and can we see another very strong performance or an accelerated performance in the next quarter?

Thank you.

Sure.

First off, let me make a comment and say that we continue to be pleased by the results.

Every time I go out in the field and talk to customers there is strong acceptance of this product.

I can see it personally when I go to the field with our own CRDM reps how engaged they are in using their relationship to open the doors for our overall CVG strategy to work.

But let me ask Mike to give some more specifics.

I think at the analyst meeting we talked about targeting a 25%-plus market share.

We would estimate out of the data that we saw here for Q1 we are probably sitting around a 27% market share.

I think we have gotten through the primary accounts where we had strong positions with the Integrity bare metal stent prior to the release of the Resolute Integrity.

Now we are really going to be relying on the broader CVG strategy, the leverage that we have with our commitment to next-generation technology and interventional cardiology, like renal denervation, like transcatheter valves, as well as the broad strategic account management programs that I outlined at the analyst meeting that are really helping drive economic value in these accounts.

So we think there is still upside to share available to us, although it certainly won't come in the chunks that we saw the last two quarters, but we do believe that there is still meaningful share upside for us on the coronary side.

Great, thank you very much.

Kristen Stewart, Deutsche Bank.

I was wondering if you could maybe quantify or give some color just around renal denervation sales as well as TAVE this quarter, just around whether or not you are still seeing renal denervation grow.

Some of your comments suggested that it seems to be getting a little bit tougher in the pre-reimbursement environment.

I think you have mentioned TAVI was up double digits.

But any commentary on what you are seeing just kind of in the overall market?

Thanks, Kristen.

I am going to ask Mike to take this one.

Sure.

So on the renal denervation side, renal denervation continues to be the fastest-growing product line that we have within CVG, so it is a very nice growth driver for us.

But this is very much a market development exercise.

There is significant issues for us to focus on in terms of market development, including working the referral base.

These are physicians who basically have patients who have not been generally referred for device interventions, so we have to very much focus on developing those referral channels.

And also reimbursement.

As you know, in Europe they are not looking for new things to pay for in healthcare budgets so we have to use the very compelling data that we are generating to get reimbursement.

We continue to see progress on both of those fronts.

In fact, in Europe this past quarter we have really begun to focus our renal denervation reps on market development and starting to use our coronary reps to help with the actual procedure support, which I think is going to really help us continue to develop those referral chains.

Then on the reimbursement side, the data continues to be extremely strong on the sustainability of the benefit for hypertension reduction via renal denervation.

And we continue to work to expand reimbursement levels throughout Europe.

On the transcatheter valve side, the market growth rates that we have talked about for Europe on the TAVI side were in that 15% to 18% kind of range and we continue to expect that as the growth rates that we will see in that area.

We continue to split the market with our primary competitor in that space and we continue to have very robust new product flow with the Evolut product introduction here just in the past quarter, so we expect to continue to see strong growth in that segment of our business.

Thanks.

Would you be willing to just kind of give out a renal denervation number or comment if it was higher sequentially?

No, I think at this stage I think we said we have to --

It is slightly higher sequentially, but we don't have the number to give out at this point.

Okay, thank you.

Rajeev Jashnani, UBS.

Good morning.

My question was on the ICD market in the US.

I think you talked about implants being up 4% year over year and I was wondering if you could just give a little bit more in terms of your expectations for volume and pricing.

Not just for Medtronic, but really what you're thinking the market is at right now.

Thank you.

The overall market is down in the US, but we do see these implant volumes growing.

But at the same time, as I pointed out earlier, the hospital destocking is a real factor.

I think hospitals are working to reduce their inventories and reduce their level of bulk purchases, like we said.

For us, actually in many ways we can use that to our advantage in the sense that the level of discount that we are to give out for that instead we can transfer that to multi-line deals, which are probably better for us.

But we do see an overall reduction in the market by both of those drivers, although implant volumes appear to be relatively stable.

But I am sure Mike can add a lot more color to this.

So for US market we are seeing modest, low single-digit improvement in the implant growth rates for the market as obviously we have now anniversaried the issues with the original DOJ investigation and now we're starting to see a return to growth.

Pricing continues to be obviously a drag on the market, but still low single digit sort of pricing pressures.

So as you can see we are encouraged going forward that we are going to continue to see implant growth rates.

Obviously we think we have upside, not only from that perspective but also in overall market share as we are now going to be heading into a new product release cycle with the Viva/Brava products we just announced, the CE mark in Europe for those two products.

We will have the [Avera] product line coming in in the fourth quarter.

And then those product lines will come to the US next year, including the Advisa MRI Pacemaker next year.

So we see some nice catalysts for continued market share capture with that product.

Would it be fair to characterize your expectations for both the US and ex-US markets as roughly flat on a revenue basis?

That would be a reasonable assumption.

Flat to slightly down.

Thank you.

Bob Hopkins, Bank of America.

So I wanted to ask two questions on Spine.

You had the best Core Spine ex-Kyphon growth that I think you have seen in quite some time, and so I was wondering if you could just flesh that out a little bit.

Do you really think that the market is improving or is it that you feel like you are gaining share, is it mix?

Just a little more color on what has driven the improvement in the Core Spine ex-Kyphon growth rates that you highlighted today.

I think it is both.

The market is stabilizing to some degree, but I do think that we have been working and getting our new product launches tighter.

And the procedures; we are training surgeons.

There is a lot of acceptance around new procedures and I don't want to minimize our synergy with capital equipment purchases.

You put all that together, I think our performance is definitely improving.

It is not unreasonable to expect us to gain a little bit of share in Core Spine as we go ahead.

I think that is something that is in our expectation, and we prove that.

It is very early.

It is only one quarter that we have had this kind of performance, but we are encouraged to see this thing turn around.

I think -- Chris, I am sure you have some comments on this so go ahead.

Sure.

Bob, that is exactly right.

The market is stable and I think what is going on is our relative and poor performance is definitely improving.

A lot of that is just the story we have been continuing to tell about the new products.

So you take the SOLERA for example.

We are out in force this summer with the 5560, which is the larger rod diameters, and we have seen that business literally double sequentially as we have gotten more sets out into the field.

Lot more navigated spine surgery going on.

Keep in mind we have an installed base now of O-arms in the US of 250 and over 1,000 StealthStations with those numbers even bigger when you look at the global picture.

So clearly some of the strategies we have been developing, both on the individual product line segments as well as with the procedural innovation, are really moving the needle.

Another example is the MAST [mid-lift] procedure we talked about at the analyst meeting.

We now have over 300 surgeons utilizing that procedure.

We have done over 1,000 procedures.

So we are pleased with our trajectory at this point and obviously see that to be a continuing story.

Then just as a follow-up on Spine, in the Yale study you mentioned it will read out in the next couple of months.

I am just curious, do you know the conclusions of the Yale study at this point and are you optimistic relative to the outcome, or are you blinded to that?

No, we are really blinded to that.

That is completely outside; it is a third-party thing and Yale is managing that.

We are waiting for the results just like everybody else.

Do you know specifically when we will see that?

I think in the next few months.

Certainly before the end of the year we are expecting to see that.

We are expecting some time here in the coming months, but (inaudible) the timing is still all tied to Yale.

But we are expecting in the next couple of months, that is the expectation from them.

Great.

Thanks, guys.

David Roman, Goldman Sachs.

It is actually Topher Orr in for David.

I just had a quick question as it relates to earnings leverage.

This quarter obviously you posted about 5% constant currency top-line growth with 8% EPS.

Given that you guys maintain guidance in the 2% to 4% range, if we were to move to lower, say, just argument's sake, more in the 3% range for constant currency growth, how should we think about EPS leverage?

I think our range of 5% to 7% still holds.

We are confident that we can deliver on that and sort of dig into any variables that come our way.

I think beyond that, Gary, maybe you have some thoughts.

As we indicated, obviously on a constant currency basis, as we indicated, we did 5% this quarter.

Now as reported, obviously, it is 2% and so the earnings per share is as reported numbers.

We have got to cover all the foreign currency negativity from the bottom line, so we did that and made the investments we needed here in the first quarter.

But as we indicated in my comments, the reality is we are expecting leverage for the full year in the 2% to 4% guidance.

If you pick 3% for the year, that is what you pick for our growth rate, we are still -- our earnings per share guidance is still in that 5% to 7% range, so there is still leverage.

We are expecting 30 to 50 basis points of leverage and SG&A.

We are expecting the R&D expense for the year will not be quite as high as we saw here in Q1 as we kind of go forward through the rest of the year.

And as we highlighted, depending on what you assume in the tax rate, there is obviously should be, assuming the R&D tax credit gets removed, there is even additional leverage there.

So there is a lot of different factors that we think will continue to provide additional leverage as we go through the year, even in light of some of the headlines we are going to have to face with the medical device tax, etc.

So our guidance assumes that we do achieve continued operating leverage in the current year and we have every expectation to deliver on that.

Thanks.

Then just one quick follow-up if I could.

Omar, I know in the past you have talked about May/June of 2013 timeframe for completion of your overall in-depth business analysis.

I was wondering, do you have any update on timing?

Are you guys ahead or behind on that schedule, or do you still anticipate sort of the same timing in terms of completing it?

No, we are well in the process of doing that.

This is like a continuous effort and we have been through a few rounds of that.

We have analyzed our businesses.

At this stage we are okay with the portfolio.

I think we have some sub segments which we are looking at, some smaller businesses, and we will optimize our portfolio accordingly.

But we have been through one round of analyzing our businesses and these things aren't that black and white.

There are some areas that we are looking at and some areas we have to shore up with perhaps acquisitions all around the guidelines as I have said before.

In some areas we don't have enough critical mass and we are seeing what the best way there is to achieve that.

So we will look at this thing on an ongoing basis.

The actions are also dependent on exactly what we find and then the actions result in other actions, so it really isn't black and white.

So I wouldn't wait for some kind of milestone event where suddenly we decide that we have got a dramatically different portfolio.

We will adjust this as we go along.

Great.

Thanks, guys.

Bruce Nudell, Credit Suisse.

Good morning.

One question for Mike and one question for Gary.

Mike, it seems like the TAVI program will hit the US endpoints is my guess anyway.

Do you feel that the kind of blemishes ascribed to the devise -- paravalvular leak, pacemaking, maybe left bundle branch block -- if you do hit the endpoints would be a sufficient stumbling block to create a high risk for approval or delay?

Go ahead, Mike.

I think Mike should take this one.

So, Bruce, I think I take issue with your underlying assumptions there.

I think as we look at the high-quality clinical evidence that is being generated here, especially obviously our US clinical study and then the advanced registry which really is an extremely well-controlled and supervised registry study, I mean we are seeing just excellent performance from the overall product.

I think it is dangerous to look at data that may be several years old when the device was used in different ways before the AccuTrak technology was available, when there were different implant techniques in terms of depth and placement of the valve.

The current data, and I think especially the current reports that you are seeing, show really excellent performance on overall paravalvular leak as well as pacemaker implants now in sustained use down in the low teens, even reports down around 10%, 11%.

So we feel very good about the trajectory of the program and we think the clinical evidence that is being generated is very high quality and very much supportive if this is a technology that really is a very strong performer.

If you look at overall the market share positions in Europe where this is at least -- I mean we are essentially neck and neck with our primary competitor in those areas, which I think is a testament to the performance of the technology.

So we feel very good about it.

Thanks so much.

Gary, just is a draconian outcome for BMP figuring into the guidance range for revenue this year, or is that really just a very remote kind of possibility that is not seriously impacting your guidance range?

Thanks.

Yes, I mean obviously, Bruce, what our guidance is assuming right now is that the INFUSE product line continues at the level that it has been the last several quarters.

We will all have to wait and see what happens with the Yale results and how that would potentially impact the guidance.

We don't know at this point in time.

If it is positive obviously that could be potential upside.

If it is continued concerns obviously that could be potential negativity.

So we have tried to bake some of that in there, but the reality is it is kind of assuming that we kind of continue along with the same kind of levels with INFUSE as what our guidance is based on right now.

We will have to see what the results of the Yale studies indicate.

Thanks so much.

I think that is probably the best way to put it, Bruce.

We are assuming kind of where it is right now and there is some range in our guidance, so it can -- then it also depends on other things that happen.

That is not the only factor.

But it does follow the -- we are going to [absorb] a little bit of negativity, but also there may be positive results as well.

So we really don't know and so we will have to do it the way it is stabilized as of today.

Thank you so much.

Josh Jennings, Cowen.

Good afternoon, gentlemen.

Thanks for taking the questions.

I guess first just wanted to hone in on the ICD business.

This business has stabilized quicker than we anticipated and you guys outperformed the market.

Can you just talk about the intra-quarter cadence of the performance of that business unit?

Did you see any improvement in the back half of the quarter in June and July?

Mike, probably -- (multiple speakers) thing of note, but, Mike, you are closer to it.

I wouldn't comment on this quarter's trends.

I think, generally speaking, we feel like we are seeing a nice return in terms of the stabilization of the market implant rates for ICDs and we are also, obviously, seeing some very nice share trends for us.

I think we referenced in our introductory remarks here seeing a nice improvement in [lead to CAN] ratios in the ICD side.

They are now back to pre-Fidelis levels, actually above pre-Fidelis levels in terms of those ratios.

And we are seeing a nice improvement in terms of overall market share on the replacement side, which actually even highlights the [CAN] ratio improvement because obviously on most implants we are not getting the lead.

So we really do feel as though the trends are really being driven by market share capture for us and stabilization of implant growth rates.

Obviously we have the headwind of the pricing pressure, which as I mentioned is kind of a low single-digit drag on the overall market.

So, generally speaking, we feel like those trends are likely to continue.

This is Gary.

Just to add one comment to what Omar and Mike said is that we have indicated that what we did see in the historical data was that June and July of last year was kind of, seemed to be kind of the valley as far as where the market went.

And that is where we started to stabilized was after that period of time.

So the comparisons clearly have gotten better as we have gotten to this point and now we are comparing to the low point of where we were at previously.

The other thing I would just mention is Omar referenced the reductions in hospital inventories, I mean those were meaningful in the quarter.

We expect that our overall inventory shares of our products would probably be down in the order of 15% in US hospitals, so to be showing absolute revenue share capture against that headwind we think is a significant testament to the fact that we are getting nice share captured trends.

But, again, we expect those trends to continue as well, the hospital inventory compression.

Can you just follow that up with your outlook on the OUS ICD marketplace from a pricing and volume standpoint?

Then, lastly, for Mike, you talked about some of those metrics on the CoreValve and some of the data that is being generated on the newer technology with the AccuTrak.

Any timelines in terms of when we can see some of that in print just so people can get more conviction around that improvement?

Thanks a lot.

So on international ICD trends, I think in Europe we actually are seeing very similar trend in terms of procedure growth and pricing pressure.

They are both very similar to what we saw in the US and so I wouldn't highlight those as being meaningfully different.

I would point out that our ICD shares in Europe are at the highest level in probably three years.

Then we will continue to release data on the advanced registry outcomes as that data becomes available, so you will continue to see that come out at the major meetings over time.

Then, of course, the US submissions are right on track with what we had discussed at the analyst meeting three months ago so there is no changes to timing expectations there.

Thanks, Mike.

So we are at the top of the hour; we have, I would say, time for a couple more questions.

Derrick Sung, Sanford Bernstein.

Thanks for taking my question.

Gary, I just wanted to start by following up on your revenue guidance.

I appreciate the conservatism that you have mentioned, but where do you see potential risks for a deceleration in sales growth versus what you are seeing this quarter?

You have already mentioned that INFUSE is probably not one of the areas that you could see a further -- you are anticipating further deceleration.

So where are the potential areas of risk here that might get us back to kind of, more or less, the midpoint your revenue guidance?

First of all, for INFUSE there may well be risk.

We just said that we modeled it flat, but in that sense we model a lot of things a certain way.

There is definitely potential risk in INFUSE and that is one of the factors in our range.

Other areas, like Europe, you just need to pick up the newspaper and look at what is going on in Europe.

Again, our view has been, and it has been confirmed, that the healthcare budgets are being protected.

Our teams are saying that and they are executing and we are seeing the numbers.

But you have got to be a little cautious about what is happening there and we are going to watch things very carefully.

I think outside of that I am a little concerned about emerging markets as well.

Like I mentioned earlier, I think it will get there to 20% I think our modeling actually -- the financial modeling doesn't quite have it at 20% so I'm not sure there will be downside there.

I think, Gary, you could add a little bit more color.

I think Omar has indicated clearly some of the risks that we still see in the quarter, or excuse me, in the year.

The reality is, Derrick, obviously we were encouraged over the last couple quarters.

We have seen some return to growth and obviously we have seen some real positive results coming from Resolute Integrity.

We will be anniversarying the PEAK and Salient acquisition here in this quarter so that has been a little bit of an upside that we won't have as we go forward.

That being said we are giving guidance of 2% to 4% and we are just -- our markets have been volatile over the last couple of years.

We are seeing stabilization, which is good, but we are going to be cautious until we see that those continue to be stable and continue to grow.

So as Omar indicated, let's see a few more quarters of that happening before we get too far ahead of ourselves in what our guidance is.

There are still risks out there in some of these markets.

Our teams are managing relatively well at this point through them, but at some point in time that does have an impact on us also, whether it is Europe or some of these other areas.

So that is why we have kept the guidance where we are at this point.

We are hopeful that we are being conservative, but right now let's not get ahead of ourselves.

I would like to also repeat the fact that consistency and delivery is very important for us.

As I said before, the guidance is irrespective of market conditions.

I can't be absolutely 100% on that, but we will do our very best to absorb hits to the market or any uncertainties that are outside of our control.

That is why the guidance is where it is.

As we see our overall growth rates from our businesses grow we will be more comfortable, but one quarter is not enough, not even close, for us to draw a conclusion like that.

We need several more quarters of dependable, consistent performance before we can claim any sort of success.

Okay, thank you.

If I could just sneak in a quick follow-up on your DES business, you are showing clearly some very impressive share gains off of resolute integrity but the overall global DES market continues to decline.

I just wanted to get your thoughts on how you think about that DES market beyond your share gains, and once you anniversary those share gains how do you think about your business moving forward?

I think we have got a pipeline going.

But again, Mike, you are the best to comment on it.

I would point out that we have not even entered the Japanese market yet with that product, which as we bring that out in the second largest DES market in the world we are going to see a year-plus worth of continued growth driven from that.

Then obviously as we continue to work that pipeline, but then begin to expand our new product entries in the interventional cardiology space to include renal denervation, to include transcatheter valve technologies we think we have a sustainable interventional cardiology growth profile here for years to come.

So to us it is all about a portfolio of products, some at various stages of their product lifecycle.

So you continue to feed that and not only have those as growth drivers, but have that as a part of our overall program to have interventional cardiologists look to Medtronic as the partner that they want to have long term, which we think is going to help us move up from where our share physicians are on DES even from where we are.

Got it.

Thank you very much.

Time for one last question.

Joanne Wuensch, BMO Capital Markets.

Thank you very much for taking my question and good morning.

It is really two parts.

The first one is we have been hearing about inventory management of the ICDs and pacemakers now for several quarters.

At what stage is that inventory management done?

I mean for you to be able to drop 15% this quarter in one of those segments that is a lot.

Then the second thing is I was listening to your verbiage on M&A and a more ROIC focused management team.

Are you trying to tell us something?

Thank you.

The second one first, I mean I'm trying to tell you that ROIC is a big focus for us and just want to emphasize that, and that we will be very disciplined with our acquisitions.

The criteria that we have laid out is very clear, we want to cover dilution.

I mean there are always exceptions, but the hurdle will be very high and we want to cover first within the business, the business unit making the acquisition, and potential EPS dilution, then within the corporation.

And as a last resort we may decide to pass it on to the shareholders.

We will have to justify that, that hurdle is very, very high.

If you do that then that drives better ROICs and we are looking at ROIC as a very active measure.

To make it even stronger we are making sure that our management team and beyond are being compensated as a result of that, so that is all I'm trying to say that ROIC is extremely important.

As for the inventory management questions around the pacemaker and ICD market, we are very much managing that from the standpoint that we are, as Omar mentioned, cutting back on the extent of discounting that we provide for bulk purchases in that area because, frankly, we find that very matchable by competitors.

Whereas if we used that same level of discounting in broader multi-line product deals, especially now that we have Resolute Integrity in our bag and obviously leadership positions in multiple cardiology areas, we think those are much more difficult for competitors to match up to.

So we are very much in the process of managing those inventory reductions, and as you can see, we are able to do that in the context of the guidance that we provided.

Then the hospitals actually -- as I visit hospitals, look, the cost sensitivity in hospitals is very, very high.

They are looking over their books with a great detail and they find -- some hospitals and hospital systems are finding this to be an area where they are optimizing their inventory balance, which any good business ought to do.

I have got no idea how much more optimization there is to go, but like Mike mentioned, we have got a pretty good strategy that deals with it.

So I think that is where we stand on that one.

Thank you very much.

Thank you.

That does conclude our question-and-answer session for today.

I hand the program back over to management for closing remarks.

Thank you very much for all your questions.

On behalf of our entire management team, I would like to thank you all again for your continued support and interest in Medtronic.

We look forward to updating you on our progress on our Q2 call in November.

Thanks, again.

That does conclude today's conference call.

You may now disconnect.