美敦力 (MDT) 2014 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome, everyone to the Medtronic second-quarter earnings conference call.

(Operator Instructions)

Thank you.

Mr. Jeff Warren, VP of Investor Relations, you may begin your conference, sir.

Thank you, Shirley.

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

During the next hour Omar Ishrak, Medtronic's Chairman and Chief Executive Officer, and Gary Ellis, Medtronic's Chief Financial Officer, will provide comments on the results of our fiscal year 2014 second quarter, which ended October 25, 2013.

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.

And finally unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the second quarter of fiscal year 2013, and all year-over-year revenue growth rates were given on a constant currency basis.

With that, I'm now pleased turn the call over to Medtronic Chairman and Chief Executive Officer, Omar Ishrak.

Good morning, and thank you, Jeff, and thank you to everyone for joining us today.

This morning, we reported second-quarter revenue of $4.2 billion, and non-GAAP diluted earnings per share of $0.91, both representing growth of 3%.

Our Q2 revenue growth was in line with our output for the year, and we are performing at or better than the market in almost every one of our business lines.

Q2 also represents another quarter where our overall organization delivered balanced growth, with strong performances in some areas, offsetting challenges in other parts of our business.

Looking ahead, we are confident that our three primary strategies, therapy innovation, globalization, and economic value, will position us well to thrive in the transforming healthcare environment.

This quarter, we made significant progress in a number of new therapy growth drivers, that we intend to launch over the coming quarters.

These, combined with our continued focus on globalization and economic value, will not only help us improve our competitive position and overall growth profile, but will also further strengthen and geographically diversify our business, allowing us to reliably deliver consistent growth.

As you will recall, in Q1, I discussed three specific challenges that negatively affected our growth, and that we believed would improve going forward, US diabetes, US pain stim, and US ICDs.

I am pleased to report that we have made significant progress in all three businesses.

First, in the US diabetes, we received FDA approval in late September for our MiniMed 530G system, several months earlier than we estimated in August.

Our diabetes team executed well, ramping up manufacturing in a short period of time, to start shipping in mid-October.

While we are still somewhat supply-constrained as we transition our full manufacture into Puerto Rico, early signs are that the 530G system is going to be a big success in the market, and we expect our US diabetes business to grow in the mid-teens and contribute approximately 100 basis points to overall Medtronic growth in the back half of the fiscal year.

Second, in US pain stim, you will recall that we received FDA approval for our innovative MRI SureScan spinal cord stimulator much earlier than expected.

While this resulted in supply constraints last quarter and for the first two months of Q2, our neuro team diligently worked through these issues and is now executing the full product launch.

The early response from the market is impressive.

US pain stim grew in the mid-teens in the final month of the quarter, and we expect this level of growth to continue, contributing roughly 40 basis points to overall Medtronic growth in the second half of the year.

Third, in US ICD, you will recall that our Q1 results were affected by lower levels of bulk sales because of the phasing timing of our new high-power products, which as we anticipated, resolved itself in Q2.

Customers continue to adopt our latest generation devices, Viva and Evera, helping us, by our estimation, to gain share sequentially.

Equally important, our ICD pricing, which has been down in the low to mid-single digits for several quarters, was actually flat in Q2, based on the strength of our latest generation devices.

In addition to these improved performances, surgical technologies delivered another outstanding quarter, growing 11%.

All three of its businesses, EMT, neurosurgery, and advanced energy, continue to execute and deliver solid growth.

In particular, I'd like to recognize advanced energy, which grew over 20% again this quarter.

This is becoming a very important business for us, with cross-selling opportunities in spine, ortho and CRDM.

Advanced energy was formed from the first two acquisitions at the beginning of my tenure as CEO, and the business has been delivering strong double-digit growth in the five consecutive quarters since the first anniversary of these acquisitions.

These results illustrate that when we combine diligent strategic rationale, strong integration plans, and solid execution, we can generate significant returns on investment.

In Q2, our organization delivered on the bottom line, despite multiple pressures.

The most significant departure from expectations was in our gross margin.

It is important to note though, that pricing was in line with expectations and did not affect our Q2 gross margin performance.

Instead, we can point to three distinct issues.

First, FX pressure negatively affected the gross margin by 50 basis points.

Second, the manufacturing ramp of a number of new products caused higher levels of scrap and obsolescence, which had a negative impact of 20 basis points.

And third, as we mentioned last quarter, we aggressively continued to reallocate engineering resources to promptly and comprehensively address the specific quality issues outlined in our neuromodulation and diabetes warning letters.

This resulted in a shift to spending from R&D to cost of goods sold, thereby negatively affecting our Q2 gross margin by 40 basis points.

While diverting these resources is costly, ensuring the highest level of quality and regulatory compliance has and always will be a personal priority for me, and the central focus of everything that we do at Medtronic.

In the first half of our fiscal year, we generated over $1.8 billion of free cash flow, and over the next five years, we expect to generate over $25 billion of free cash flow.

Our organization remains focused in improving our already robust levels of free cash flow generation.

For example, we continue to make progress on our working capital improvement program, with the goal of increasing our inventory turns by 50% by FY17.

We are committed to returning 50% of our free cash flow to our shareholders through dividends and share repurchases, a commitment level we believe is appropriate, given our current mix of US and international free cash flow.

As you know, this mix continues to be constrained by US tax policy, which creates a negative incentive for us to repatriate cash for the US.

The remaining 50% gives us the flexibility to make the necessary investments for sustainable growth.

We continue to be very disciplined in how we deploy our capital, with a strong focus on returns.

Our potential M&A transactions must not only be strategically aligned, but they must also stand up to the high standards of growth, surpassing our mid-teens risk-adjusted hurdle rate, as well as minimizing the dilutive impact to shareholder EPS growth expectations.

As we look ahead, we not only have a number of near and mid-term growth opportunities, but we also have some challenges to overcome.

First, in Japan, our team has done an incredible job driving growth over the past four quarters, in the strength of several product launches in our cardiac and vascular group.

However, we will now be facing a period of difficult year-over-year comparisons from these product launches, as well as the biennial R-zone pricing adjustments that are anticipated to go into effect in April.

As a result, Japan, which contributed significantly to our total Company growth in the first half of the fiscal year is now expected to have closer to flat growth in the second half.

Next, our BMP business continues to be challenged.

In Q2, this business declined 17%, which was worse than we were expecting.

We continue to stand behind this product, based on the safety and efficacy profile and improved [communications].

However, the product remains under pressure, as some surgeons continue to reduce their usage through both patient selection and the use of smaller kits.

We continue to analyze the key drivers behind the customer purchasing decisions, [first with us] and we are urgently examining initiatives to optimize the strength of BMP in both US and international markets.

However, given that BMP has yet to show signs of stabilization, if current revenue trends continue for the remainder of the fiscal year, BMP revenue would decline in the mid-teens for FY14, similar to the decline we experienced in FY13.

Finally, our emerging markets growth in Q2 was 13%.

While this performance is respectable and these markets continue to contribute a large portion of our overall Company growth, our overall results this quarter were well short of our targeted levels.

Across our emerging market regions, there have been a number of region-specific challenges including product registration issues and distributor conversions, which have held back our growth.

We experienced overall slower growth this quarter, with the largest sequential slowing occurring in greater China, and central and eastern Europe.

In greater China, our results were affected by the phasing of new CRDM products, the discontinuation of the distributor relationship with CVG, and slower overall markets in CRDM than our competitors.

And second, we'll lead to Europe, which has been tracking above 20% in eight of the past nine quarters.

Growth was in the mid-teens in Q2, primarily due to Russia, where slower GDP growth, along with some major fiscal funding constraints, are negatively affecting healthcare budgets.

Looking at the emerging markets in total, I realized that over the past few quarters, our growth rates have modestly slowed.

However, the fundamental demand in the end markets remains strong, and we have several initiatives in place to capitalize on these opportunities.

We remain confident that growth rates will improve, and that emerging markets represent a significant long-term opportunity.

As you look into the future, we're convinced that our three strategic priorities, therapy innovation, globalization and economic value, will position us well to thrive in the transforming healthcare environment.

I'd like to update you on each of these strategies.

Starting with therapy innovation, it is important to note that Medtronic's ability to create innovative therapies in new markets is fundamental to our overall growth strategy.

It is a strategy that is deeply rooted in our culture, one that we are extremely proud of, and an area where we have a proven track record of executing.

As we look ahead, we're on the verge of bringing a number of new therapies to market over the coming quarters.

In addition to the our recently launched Viva CRT-D, Evera ICD, and Advisa MRI pacemaker products, the CRDM business intends to launch their Reveal [Link] in Q4.

This is our next generation implantable loop recorder, which will further expand our footprint upstream in cardiac diagnostics.

In spine, we continue to work with the FDA to bring our next generation cervical disc, Prestige LP, to the US market, and we expect to follow that launch with a series of cervical plate launches in FY15.

In neuromodulation, the pain stim business will build upon the US launch of RestoreSensor MRI by continuing its global rollout of the Q3 launch in Japan.

In surgical technologies, we're developing a full pipeline of new power imaging and navigation equipment that improves the economic value proposition for hospitals.

In diabetes, in addition to the ongoing US launch of the MiniMed 530G system with the Enlite Sensor, our next-generation insulin pump system, the MiniMed 640G remains on track for launch by the end of the fiscal year.

And finally, we are making excellent progress on three fundamentally new therapy areas, that meaningfully impact our outlook for FY15 and beyond.

Our CoreValve transcatheter aortic valve, our Symplicity Flex renal denervation system for treatment-resistant hypertension, and our In.

Pact Admiral drug-eluting balloon.

All three of these products are market-leading in Europe, and we are planning to launch all of them in the US over the coming quarters.

CoreValve, for extremely risk patients is now expected to launch late this fiscal year.

CoreValve for high-risk patients in mid-FY15, Symplicity Flex in late FY15, and In.

Pact Admiral in early FY16.

Suffice it to say we have set ourselves up to deliver what is arguably one of the strongest launch cadences of innovative therapies in our industry.

And while innovative therapies are central to our success, and have fueled growth in our industry for decades, they are no longer enough.

In order to unlock the full potential of med tech in transforming -- in the transforming healthcare environment, we are taking meaningful action in the areas of globalization and economic value.

We believe successful execution in both of these areas will position us to win in the changing healthcare marketplace, and will be instrumental in establishing durability in our long-term performance, while creating potential upside to our baseline expectations.

With globalization, the key to sustainable growth in emerging markets will be addressing the barriers of access to life-saving medical technology.

We've had teams in place for several quarters focused on identifying local opportunities in all of our geographies, to remove the barriers of awareness and training.

In CVG, programs like healthy heart for all are generating results.

In RPG, we have four spine product development offices set up and running in Europe, China, Japan and India, focused on adapting spine products for the local market.

Additionally, in China, we developed [Diheart], a cranial plating system, that in 18 months went from design in Shanghai to manufacturing in Changzhou, and is now being launched by our surgical technology sales force under the Kanghui brand.

While this is a small product line, it is symbolic of the type of local innovation we want to do across all of our businesses.

Likewise, our organization is focused on incorporating economic value into all functions, businesses and geographies.

We are collaborating with a broader set of stakeholders in developing new business models that deliver economic value to these stakeholders.

Essentially, we are moving from being accountable for a product to being accountable for an outcome.

The industry is still early in this process, but we are leading this effort, and have targeted two areas where we can immediately offer solutions for healthcare systems around the world, disease management and hospital efficiency.

In disease management, the integration activities of our Cardiocom acquisition are progressing well.

With Cardiocom, we intend to pair our existing market-leading therapies with a set of complementary services and technology solutions to more effectively treat broader patient populations across the care continuum.

These services and solutions offer benefits that are particularly compelling to the broader set of healthcare decision-makers, including governments, payers, and hospital systems.

One such solution that Cardiocom is developing is called [Read 30], a cost effective 30-day readmission reduction program that is focused on minimizing heart failure readmission penalties, which hospitals in the US are increasingly focused on trying to address.

The other area where we are exploring solutions for healthcare systems is hospital efficiency, and this has led to the formation of our new Hospital Solutions business in Europe.

Hospital Solutions is a unique service offering, whereby you enter into long-term contracts with hospitals to upgrade and more effectively manage their cath lab and hybrid operating rooms.

This is expected to result in wins for all stakeholders.

The hospitals see an improvement in cath lab efficiency and profitability, physicians get access to the latest technology that can lead to better patient outcomes, and Medtronic benefits not only through the increased use of our technology but also through incremental service revenue, reduced pricing pressure, better inventory management, and more efficient use of our service personnel.

While it is still early, we already have five accounts in long-term contracts for cath lab managed services, representing approximately $300 million in revenue over a seven-year time horizon.

We are particularly encouraged by the positive reaction in the market to our offering, and have built a solid pipeline of potential deals.

Ultimately, medical technology has the potential to transform healthcare from being a cost burden for most societies today to an economic driver.

Nations can achieve a long-term economic advantage by utilizing medical technology to more effectively and efficiently restore health to the sick, and manage chronic disease, to keep their populations healthy, allowing more people to be contributing members to society.

While we realize this opportunity will certainly be a big challenge, it is one where Medtronic has the capabilities and the intention to lead.

Our market-leading products, in-hospital footprint, healthcare economics expertise, lean Sigma resources, and financial strength give us unprecedented breadth, global reach and scale, allowing us to offer broad valuable solutions.

We're determined to transform Medtronic from being a primarily a device provider today into the premier global medical technology solutions partner of tomorrow.

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

Thanks, Omar.

Second-quarter revenue of $4.194 billion increased 2.4% as reported, or 3.3% on a constant currency basis, after adjusting for a $38 million unfavorable impact of foreign currency.

Q2 revenue results by region were as follows.

Growth in Middle East and Africa was 21%.

Central and Eastern Europe grew 14%.

Growth in greater China was 11%.

Latin America grew 10%.

Growth in Japan was 8%.

South Asia grew 6%.

And the growth in other Asia-Pacific was 4%.

The US grew 2% and growth in Western Europe and Canada was 1%.

Emerging markets grew a combined 13% in Q2, and represented 12% of our total sales mix.

Q2 diluted earnings per share on a non-GAAP basis were $0.91, an increase of 3.4%.

Q2 GAAP diluted earnings per share were $0.89, an increase of 41%.

This quarter's non-GAAP pretax adjustments included a $24 million certain litigation charge related to two previously disclosed government investigations in our CRDM and diabetes business, as well as patent litigation in our coronary business.

In our cardiac and vascular group, revenue of $2.199 billion grew 4%, with all businesses contributing to growth.

CRDM revenue of $1.273 billion grew 5%, which included $11 million from our recent acquisition of Cardiocom, that is recognized in our AF and other revenue line.

Worldwide ICD revenue of $713 million grew 4%.

We estimate that both the global and US ICD markets grew 3%.

If you look at the first half of our fiscal year, we estimate both the global and US ICD markets grew 1%, which is encouraging and reflects continued stability.

In addition, we estimate we gained a point of ICD share in international markets, and we held share in the US in this time period.

Our top technology peers are now significantly differentiated in the marketplace.

Both Viva and Evera feature enhanced shock reduction algorithms, including our proprietary lead integrity alert, which the FDA recently approved for monitoring competitors' defibrillation leads, when connected to our devices.

Our Viva CRT-D also has proprietary adaptive CRT algorithms, which has been clinically proven to improve CRT response rates, resulting in a reduction in heart failure hospitalizations.

In addition, in a late-breaking clinical trial at the Heart Failure Society of America meeting in September, adaptive CRT technology was shown to reduce the risk of AF in heart failure patients by nearly 50%.

Both Viva and Evera also have battery and capacitor design improvements to extend our industry-leading device longevity.

Pacing revenue of $477 million grew 2%, outperforming the global market by nearly 200 basis points.

In the US, pacing declined 1% year-over-year, as we continue to see the trend of stabilization in this business.

The Advisa MRI pacemaker continue to drive share gains in the US, on both a sequential and year-over-year basis.

In a late-breaking clinical trial in a the American Heart Association meeting yesterday, results from the MINERVA trial were presented, which showed in a large trial of over 1,000 patients with sinus node dysfunction, and a history of atrial tachycardias, that our proprietary pacemaker features MVP and Reactive ATP significantly slowed the progression to permanent atrial fibrillation by 61% compared to patients with standard pacemakers.

Looking ahead, assuming stabilization continues in the back half of our fiscal year, US pacing would add approximately 30 to 40 basis points to overall Medtronic growth in FY14 compared to FY13.

AF solutions grew in the mid-teens, as we continued to gain share in the AF market, driven by our Arctic Front Advance Cryoballoon system, which grew over 20%.

Customers continued to adopt this second-generation system, due to its more efficient, safe, and effective treatment for paroxysmal AF.

Looking ahead, we intend to launch our next-gen phased RF product, PVAC Gold, in Europe, before the end of the fiscal year.

Coronary revenue of $427 million grew 1%.

Worldwide DES revenue in the quarter was $274 million, including $103 million in the US, and $25 million in Japan.

While DES pricing remains under pressure, we continued to gain the ES share on a sequential and year-over-year basis, both globally and in the US.

Our Resolute Integrity's deliverability, positive data regarding early dual anti platelet therapy interruption, and unique FDA labeling for diabetes, and long-term clinical performance, is receiving strong customer acceptance globally, despite competitive product launches of next-generation products.

In renal denervation, while revenue continues to be modest, we are investing in developing referral networks, reimbursement, technology development, and clinical and economic evidence to further strengthen our leadership position for this large long-term opportunity in hypertension.

We are anticipating the full launch of our next-generation Symplicity spiral multi-electrode catheter before the end of the fiscal year.

On the clinical front, we enrolled our first patient earlier this month in our Symplicity HTN-4 trial, which is focused on expanding the indication to include uncontrolled hypertension patients with a systolic pressure between 140 and 160 millimeters of mercury.

We expect the results of the HTN-3 US pivotal study to be presented this coming spring.

In structural heart, revenue of $281 million increased 4%, driven by strong growth in our transcatheter valve franchise.

We had an outstanding showing at TCT, where data for our CoreValve US pivotal trial for extreme risk patients were presented.

The trial met its primary and secondary endpoints, and the results were exceptionally positive, with a low rate of major stroke, low rate of aortic regurgitation that improved over time, and no association of mild or moderate residual paravalvular leaks on late mortality.

The FDA decided it will conduct separate reviews for the extreme and high risk studies, and it also determined that no panel review is necessary for extreme risk approval.

Given these developments, we now expect US approval of CoreValve for extreme risk patients by the end of this fiscal year.

For high-risk patients, we continue to expect FDA approval in mid-FY15.

We've also started our CoreValve Evolut R study of our next-generation recapturable TAVR system that features EnVeo InLine sheath, a 14 French equivalent delivery system.

On the CoreValve renal front, while our Q2 results were affected by the injunction of CoreValve in Germany, we were pleased that the higher German court ordered the discontinuation of the injunction last week.

Our German customers were elated to learn that they once again have access to our differentiated transfemoral technology with our unique valve sizes, catheter sizes, and indications for use options.

In endovascular, revenue of $218 million grew 5%, with solid growth in both our aortic and peripheral businesses.

In our aortic business, we grew our AAA share sequentially, both in the US and globally, on the strength of our market-leading Endurant II stent graft.

Our thoracic product line posted double-digit growth, as our Valiant Captivia stent graft is gaining broad adoption.

In our peripheral business, we received FDA approval for an expanded indication for our Complete SE vascular stent, which is now approved for use in the SFA and PPA in the upper leg.

It is also worth noting that we divested our Pioneer Plus re-entry catheter product line, which represented $11 million of sales over the past year.

Now, turning to our restorative therapies group, revenue of $1.602 billion grew 2%.

Results were driven by growth in surgical technologies in neuromodulation, partially offset by declines in spine.

Spine revenue of $746 million declined 3%.

Core spine revenue of $636 million, which includes BKP, declined 1%.

The US core spine market continues to decline in the low single digits, with flat procedural volumes and positive mix, partially offsetting price declines.

Excluding BKP, our core spine business was flat globally and declined 1% in the US, relatively in line with the overall market.

However, our core spine results were below our expectations, as certain underperforming product lines offset the positive momentum that has been building from our new product and procedural innovations.

Our thoracolumbar, cervical, and other biologic product lines all grew this quarter, both globally and in the US, driven by our procedural innovation in new technologies.

Cervical, in particular, had a solid quarter, with product line extension to our Vertex platform, as well as our new Bryan artificial cervical disc contributing to growth.

Our spine business is also increasingly differentiating itself in the competition, to enabling technologies that we leverage from our surgical technologies business, including O-arm imaging, StealthStation navigation and POWEREASE for surgical instruments.

Hospitals are investing in our capital equipment for spine surgery, as they see clear value from improved surgical precision and more efficient procedures.

And this is resulting in increased revenue for our spinal implants, as well as solid growth of capital equipment sales in our surgical technologies business.

In fact, we are seeing core spine growth in the upper single digits in accounts that have adopted our O-arm technologies.

Outside the US, we continue to work on integrating our Kanghui acquisition in China, which is offsetting the lost revenue from our former Weigao joint venture.

While there is certainly bright spots in our spine business, we continue to face challenges in other parts of the business, including BMP and BKP, as well as some recent challenges in interbody.

We intend to bolster our interbody product line with the launch of new products, including next generation expandable cages.

In BKP, while we did see a sequential improvement, current trends of increased competition continue, and we are working on new products to address it.

Turning to surgical technologies, revenue of $377 million grew 11%, with broad-based growth across all three businesses, BMP, neurosurgery and advanced energy.

BMP grew double digits with its core capital platforms of fusion image guided surgery, as well as NIM ENT nerve monitoring driving growth.

In neurosurgery, capital upgrades of the StealthStation S7 surgical navigation system contributed to another solid quarter.

Advanced energy grew over 20% again this quarter, as we continue to see strong adoption of our proprietary Aquamantys transcollation and PEAK PlasmaBlade technologies in the orthopedics, spine, breast, and CRDM replacement markets.

Turning to neuromodulation, revenue of $479 million increased 6% on solid global growth in DBS, as well as a strong finish to the quarter in US pain stim.

Our market-leading DBS business delivered another solid quarter, driven by strong implant growth in both the US and Western Europe.

The results of our EARLYSTIM trial, which showed DBS provides superior benefits for patients with early motor complications from Parkinson's Disease, is generating significant interest in international markets.

In pain stim, while we were supply constrained in the first part of the quarter due to the new product launch, the business did grow double digits in October based on a strong implant growth, following the full launch of the RestoreSensor SureScan MRI spinal cord stimulation system in the US.

In gastro-uro, while the business continues to grow, it has slowed from its previous double-digit run rate, due to new therapies that are in the market.

However, we are confident that InterStim is the most compelling therapy available, and while we may continue to see some near-term pressure, we expect it to continue as a long-term growth driver as its value prevails in the marketplace.

Now turning to our diabetes group.

Revenue of $393 million grew 3%.

We received approval for the MiniMed 530G with the Enlite CGM sensor and started shipping to customers late in the quarter.

This is the first system in the US that automatically stops insulin delivery, if sensor glucose levels fall below a predetermined threshold, an important step toward our goal of developing a fully automated artificial pancreas.

Multiple peer-reviewed studies have demonstrated the value of our threshold suspend feature, including the ASPIRE study in the New England Journal of Medicine, as well as the study out of Western Australia that was published in JAMA in September.

Every MiniMed 530G pump ships with our new Enlite sensor, which is smaller, more comfortable, and more accurate.

Regarding accuracy, our FDA labeling indicates that Enlite, with its 13.6% overall MARD is comparable to competitors' sensors.

When you combine these improvements with the threshold suspend automation feature of the MiniMed 530G system, we believe we have the best system in the market, and we'll be focused on taking share over the coming quarters.

In addition, we began shipping to customers that had enrolled in our technology guarantee program, which is the trigger for recognizing some of the revenue that we deferred in the prior quarters.

As of the end of Q2, we have $27 million of deferred revenue that we expect to recognize over the next two quarters.

Looking ahead, our next-generation pump platform, the MiniMed 640G, remains on track for launch in the international markets by the end of the fiscal year.

This platform will have a number of innovative features, including a new look and feel, a simplified user interface, and the next step toward a fully automated artificial pancreas, predictive low-glucose suspend.

Now turning to the rest of the income statement.

The Q2 gross margin was 74%.

As Omar mentioned, there were a number of issues that negatively affected our gross margin this quarter by a combined 110 basis points, and compared to last quarter, we recognized an additional $12 million in manufacturing variances, which had a sequential 30 basis point negative impact.

However, our standard gross margin was flat year-over-year, as we continue to successfully offset pricing pressure through our five-year $1.2 billion cost of goods sold reduction program.

Given our ongoing spend to address quality issues, we expect our Q3 gross margin to be in the range of 74.5% to 75% on an operational basis, and for a negative FX impact of 30 to 40 basis points.

For Q4, we expect gross margin to be in the range of 75% to 75.5% on an operational basis.

Second-quarter R&D spending of $372 million was 8.9% of revenue.

We continue to invest in new technologies and evidence creation to drive future growth.

We expect R&D expense for the remainder of the fiscal year to be in the range of 8.5% to 9%, due to the shifting of R&D resources to enhance our quality systems, which gets recognized in the cost of goods sold as well as trade-offs we're making to partially offset the US medical device tax.

Second-quarter SG&A expenditures of $1.438 billion represented 34.3% of sales.

After adjusting for the 10 basis point negative impact from foreign exchange, Q2 SG&A was 34.2%.

We continue to focus on several initiatives to leverage our expenses, although it is worth noting that in Q3, SG&A spending is expected to be modestly higher, given the accelerated ramp of our US CoreValve sales force ahead of the expected US approval.

In FY14, we expect to drive 30 to 50 basis points of improvement, which would result in SG&A in the range of 33.8% to 34% on an operational basis, and it is worth mentioning that we typically see most of our leverage in the fourth quarter.

Amortization expense for the quarter was $88 million.

For FY14, we would expect amortization expense to be approximately $85 million to $90 million per quarter.

Net other expense for the quarter was $33 million, including net gains from our hedging program of $15 million.

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

Based on current exchange rates, we expect FY14 net other expense to be in the range of $190 million to $210 million, which includes an expected $120 million impact from the US medical device tax.

In Q3, we expect net other expense to be in the range of $50 million to $60 million, based on current exchange rates.

Net interest expense for the quarter was $33 million.

At the end of Q2 we had approximately $12.6 billion in cash and cash equivalents, and $12.3 billion in debt.

Based on current rates, we would expect FY14 net interest expense to be in the range of $125 million to $135 million.

Our effective tax rate in the second quarter was 19.2%.

Excluding the impact of one-time items, our non-GAAP nominal tax rate in Q2 was 19.4%.

For FY14, we expected non-GAAP nominal tax rate in the range of 19% to 20%.

Our forecast does not assume the US R&D tax credit, which expires on December 31, will be extended.

Currently, the R&D tax credit provides the benefit of approximately $8 million per quarter.

In the first half of FY14, we generated $1.8 billion in free cash flow.

We are committed to returning 50% of our free cash flow to shareholders.

In Q2, we paid out $279 million in dividends, and we repurchased $713 million of our common stock.

As of the end of Q2, we had remaining authorization to repurchase approximately 68 million shares.

Second-quarter average shares outstanding on a diluted basis were 1.009 billion shares.

For the full FY14, we would expect diluted weighted shares outstanding to be approximately 1.012 billion shares, including 1.010 billion shares in Q3.

Our fully-diluted share count for the remainder of the year is expected to be higher, due to the higher current share price.

However, it is important to note that the cash we receive from stock option redemptions, which was $249 million in Q2, will also continue to be used to repurchase shares on the open market, to partially offset the dilutive impact.

These share repurchases are incremental to our commitment to return 50% of our free cash flow to shareholders.

Let me conclude by commenting on our FY14 revenue outlook in earnings per share guidance.

Based on the performance in the first half of our fiscal year, we continue to believe that full-year constant currency revenue growth of 3% to 4% remains reasonable for FY14.

While we can not predict the impact of currency movements to give you a sense of FX impact, if the exchange rates were to remain similar to yesterday for the remainder of the fiscal year, then our FY14 revenue would be negatively affected by approximately $140 million to $180 million, including a negative $30 million to $50 million impact in Q3.

Turning to the guidance on the bottom line, we continue to expect FY14 non-GAAP diluted earnings per share in the range of $3.80 to $3.85, which implies annual earnings per share growth of 6% to 8% on an operational basis after adjusting for certain tax benefits that we received in FY13, as well as the headwinds from the medical device tax, and incremental interest expense in FY14.

As in the past, my comments on guidance do not include any unusual charges or gains that might occur during the fiscal year.

I will now turn it back over to Omar, who will conclude our prepared remarks.

Omar?

Thanks, Gary.

Before opening the lines for Q&A let me briefly conclude by noting that over time, we are striving to reliably deliver on our baseline expectations, which are consistent single-digit revenue growth, consistent EPS growth 200 to 400 basis points faster than the revenue, and returning 50% of our free cash flow to shareholders.

As I mentioned earlier, over the coming quarters we are on the verge of bringing a number of new therapies to market, and we have set ourselves up to deliver what is arguably one of the strongest launch cadences of innovative therapies in our industry.

We believe that crisp execution of both our baseline and long-term growth strategies, combined with strong and disciplined capital allocation, will enable us to create long-term dependable value in healthcare.

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

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

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

If you have additional questions, please contact our investor relations team after the call.

Operator, first question please?

Mike Weinstein, JPMorgan.

Couple questions.

So if we look at the ICD market growing 3% this quarter, I don't think any of us really think the ICD market's going to sustain that type of pace.

So help us back out, if you would, the stocking impact.

At least for you, that was a negative last quarter, that was a positive this quarter, and maybe help us get to what we think the underlying market is doing?

And then second, just on the buildout of the field specialists, ahead of the US CoreValve launch, are you assuming in the fourth quarter that you'll have CoreValve revenues to start to leverage that?

Seems like they were suggesting you would get some leverage in the fourth quarter.

Is that just implying there will be some revenues there?

Thanks.

I'll let Mike take both of those, Mike Coyle will take both of those.

Let me start with the ICD market.

As you remember, last quarter, we talked about the challenge being the new product launches that we had, and trying to get those on contract when we were looking for an ASP increase.

So that led to some destocking of hospital inventories as we worked through the process in hospitals that have obviously put up some larger barriers through the agreement to ASP increases.

That worked itself out during the course of the second quarter, and I think you can reasonably assume that basically they're back to having stocked to where they are comfortable stocking.

So that now makes it a pretty reasonable picture, to just look at the full first half of the year, and say, what does the overall growth profile look like?

And that is where we get to this roughly 1% global market growth, so that I think should give you a picture of what we think is happening with the overall market.

On the second question regarding CoreValve, we are not counting on any revenues coming -- any meaningful revenues coming in the fiscal year, from CoreValve.

And we are going to be obviously ramping our field representation in advance of the launch so that's in our current set of assumptions, obviously what FDA decides to do in terms of approval is up to them.

Mike, this is Gary.

Just to add to what Mike said, the leverage we're talking about in Q4 is not necessarily coming from CoreValve, it's just our natural leverage.

If you go back over history, historically our fourth quarter, because we have more selling days and it's our strongest quarter, there's more leverage in that fourth quarter, and that's what we were referring to.

Understood.

And then just one follow-up.

Omar, do you want to spend another minute on China?

And more broadly some of the slowdown in emerging markets this quarter and just the confidence in a reacceleration even if it's not next quarter over the next several quarters?

Thanks.

Yes.

I think this quarter, we just happened to have a bunch of different regions slow down.

Just by coincidence, everything happened together.

We expect this to rapidly start to re-accelerate.

Because everywhere I go, the fundamental growth drivers are clearly there, as patients everywhere who need attention from existing therapies.

In addition, we've got several very concrete plans in place, that will start to deliver real revenue growth over the next few quarters, and will share that with you as they mature.

In terms of China itself, I mentioned a few very specific items, in terms of distributor conversions and some new product things.

On the overall environment there, there's some noise out there, because of different regulatory-type concerns, but in general, we don't have any hard data to support anything.

Our teams are still calling for good growth going into the back half of the year.

Perfect.

Thank you.

Matthew Dodds, Citigroup.

Question either for Omar or Chris, for spine, the core spine looks like declined again.

The comps weren't that tough.

Your next biggest competitor's having integration issues.

You put a lot of money into it, especially focusing on MIS.

What parts of the business are underperforming?

And why is the big picture thesis you had not coming together quicker?

Let me make one brief comment, and then I'll let Chris talk to that.

The way that we look at all our businesses, we look at an overall period of time.

And if you recall last quarter we actually had a pretty strong spine performance.

This quarter there was some dynamics which Chris will talk to, but we've got every confidence that, like I mentioned in the commentary, the cadence of product launches we have in spine actually will deliver, over the next few quarters.

But I think it Chris can answer the question more specifically.

Matt, thanks for the question.

I think the spine market as we talked about in the past is really bouncing around flat, and our performance has been flat to slightly up in the core spine business.

And really separating out core spine from the BKP and the BMP business, I think it a lot of the same fundamentals are in place.

Maybe the biggest difference this quarter is we have a little less benefit from mix, from positive mix, given that we're in the later stage of our launch cycle on some of the big platforms like Solera.

But overall procedural growth rate is quite flat, and our pricing has been stable down in the low to mid-single digits.

And so, this quarter was a little bit softer, particularly in the US, and in a couple of countries outside the US, namely Germany, Japan and Latin America.

But the fundamental drivers are still very much there.

It is about the product refresh, first of all.

Second of all, it's the procedural innovation, we're getting good uplift from our MAST mid-lift program, and our OLIF, our new OLIF procedure.

And then as Gary pointed out, the tailwind from our enabling technologies like surgical navigation, we continue to perform much better, and accounts that have O-arm, and continue to see uptake in technologies like POWEREASE and the nerve monitoring.

So there are a couple holes in the product line, particularly in the interbody space.

And there are a couple small categories like PEEK rods and IPDs that remain under pressure.

Overall I think our perspective is that it's a relatively stable situation, and we expect that core spine business to be stable into the back half of the year.

As pointed out, the BMP and BKP businesses are both hurting us right now, although the kyphoplasty business does seem to be showing signs of stabilization in the US, and we watch the BMP part closely.

So that's the way I'd characterize it, Matt.

And then just a quick one for Gary, I know you don't give quarterly guidance.

When you look at the back half of the year, the gross margin in the third quarter is a little lower than the consensus.

You've got a tough tax comp in the third quarter.

Should we be thinking more about the back-end loading the second half to the fourth quarter versus the third quarter, since the guidance is unchanged?

Matt, obviously as you said we're not going to give get necessarily quarterly guidance, but I think you highlighted a couple issues, I think that market should take into consideration.

Our Q3 last year did include some significant tax benefits, et cetera.

When you back those out, you're probably more likely to earnings per share of $0.88, which was similar to what we were last year in Q2.

And our Q2 and Q3 tend to be somewhat similar, they're pretty close.

And so, where the consensus is right now on Q3 based on the gross margin issues we highlighted, which we think will improve in Q3 and as we go into Q4, but it will be a little bit more in Q3, here with these quality costs that we've talked about, and the launch of the CoreValve product line.

I wouldn't be surprised to see people move in $0.01 or $0.02 from the Q3 to our Q4.

We are not changing our full-year guidance, and we wouldn't expect the overall consensus to change, but seeing some shift occur from Q3 to Q4 would not be unexpected.

Thanks, Gary.

Thanks, Chris.

Thanks, Omar.

Kristen Stewart, Deutsche Bank.

Just a quick one, Gary.

Following up on the gross margin, you did, sounds like, moderate full-year gross margin expectations.

Can you walk through what the changes for that is?

Is it just the higher product obsolescence costs, or is there maybe some of the warning letter charges perhaps coming in a little bit higher?

I think it's a little bit of all those factors.

First of all, clearly the FX impact in cost of sales have been greater than we probably expected even a quarter ago, and that will obviously vary.

We just don't know exactly how that will play out, but it clearly is a little bit more negative.

But the big surprises really were in the situation that, as we've ramped up all these new product lines, which is good news, is we're getting additional revenue from that.

The bad news is there's additional costs in ramping up.

You don't get the initial yields you expect right away, and especially when you're having to ramp up very, very quickly, the scrap and obsolescence also becomes higher just due to the fact that, for example, on some new products the older products are no longer as much in demand, so we have a higher obsolescence.

That's the good news of having some of these products being so well accepted in the marketplace.

The bad news is that it affects gross margin.

So those that actually are little bit more one-time and will start to work themselves off, after Q2 here with the launch of a lot of these new products.

But the quality issues, as you highlighted, we do expect will continue for at least the next quarter or two as we make significant investments in shifting resources from really the R&D efforts up into addressing our quality compliance issues both in neuro and diabetes.

And so that's why we pulled things back a little bit.

The good news is pricing is actually, if anything, in line with what we expected, and maybe even slightly better and we're offsetting that with the cost reductions we have across our various product lines.

But these one-time other product type costs clearly impacted us more than we expected in Q2, and we're assuming that will play a little bit into Q3, and that's why for the full year we're down.

As we go forward, we expect those obviously would not be as significant as we go into next year.

Okay.

And then Omar, just for you, you commented in your prepared remarks just around medium-term outlook of getting back into the mid-single digits, and you talked about obviously the number of new products coming.

What is your confidence that -- I know you're not giving guidance for FY15, but as we are exiting out of 2014, you're well-positioned to get back to that mid-single-digit growth rate in 2015?

Or do you think that maybe some acquisitions might be needed to help get you there?

Well, first, the main comment here is that, like I pointed out in the commentary, the number of new products coming out is really unprecedented, at least since I've been here and for several years, probably before that.

And not only in Medtronic, but if you look across the industry, that number of products coming out with that regulatory across the breadth of our businesses, when you talk about the different businesses in CRG or some of the stuff that we're doing in spine that we think will accelerate growth there, or you talk about diabetes.

So if you look across the entirety of our businesses, this is quite a change.

And it's going to have some impact.

And right now we're close to mid-single digits, if you recall, last year we were virtually there.

And we've had a few quarters here where we had some pressures, which offset, but we're borderline.

So I would expect that to these launches will help that.

They have to.

In addition to that we've got a series of other activities that we're doing, particularly around globalization which we expect will also help us.

Having said that, Kristen, we live in a place where surprises are not uncommon, and markets have still volatility across the world, healthcare is a big issue in terms of government focus and spending.

And we always have to be a little cautious about where surprises can come from.

But in balance, I think we are positioned at this stage is about as good as it's been since I've been here, in terms of future outlook.

Okay.

Thank you.

David Lewis, Morgan Stanley.

Just a few follow-ups here.

Gary, I know we've had a lot of commentary on gross margins, but if you go from the second quarter here to the fourth quarter, at the upper end of the range is about 150 basis point improvement.

What specifically on FX and quality, how much of a contribution are just those two factors in that 100 to 150 basis point improvement heading into the fourth quarter?

Well, into the fourth quarter, the reality is that your FX going into the fourth quarter is much less than right now, based on the rates where you're at and that's what it's all based on.

The FX impact in the fourth quarter would be relatively minor, and so you pick up almost 40 basis points right there, just due to FX.

The other piece would be the quality items that we're talking about will also -- there will still be some costs occurring in the fourth quarter as we continue to focus on getting -- addressing the warning letters, but you're also having that cost on a much higher revenue number.

And so that's what also drives your gross margins in the fourth quarter, if you look back historically, our gross margins in the fourth quarter also tend to be at a higher level than mentioning the SG&A, because you have a fixed cost that's on a much higher revenue number.

And so in general, part of it is just your historical trends, the gross margin several -- 40, 50 basis points higher in the fourth quarter.

Part of it is related to FX, and part of it is related to the quality cost, should start to become -- start to minimize as we go through in the fourth quarter itself.

Okay.

Very helpful and Mike, maybe just two cardio questions or broader cardio questions for you.

The first is just the outlook for your coronary business, considering your next-generation sensors systems in the market.

Is that a concern for us on volume or price or neither?

And just another question on CoreValve.

Should we assume next quarter we see normalized market growth, given the inventories?

And if there any pricing concessions given in Germany, should we assume you can get back to your prior pricing?

Thank you.

We would expect normalization in the German market to take place over the next two quarters, just because of the big volatility that took place over the last two quarters.

So I wouldn't say it will all be back to normal here next quarter, but certainly by the end, when we get to the fourth quarter, I would expect normalization would occur.

On the DES side, what I'd point out is we're now six, seven quarters into the US launch of Resolute Integrity.

We have lapped its launch in every major market around the world, and we continue to show share capture.

And I think what that is about is a couple things.

One is the performance of the product, the handling of the product, the diabetes labeling, the recent data on [BABT].

It's a great product and I think the more use it gets, the more physicians are coming to appreciate that.

But it also fits very nicely into our broader CVG strategy, in that we have moved increasingly toward having Resolute Integrity involved in multi-product line bundles across our businesses, which include services and programs in those bundles, and that product line has been the biggest beneficiary of it.

So if you look historically, it seems to be -- used to be when you brought out a new stent product, your share would move in the first two, three quarters, and then that would be it.

What we're seeing is continued growth in our share position in DES.

And we think it's because it's a great product, and it's fitting into a great broader strategy for CVG.

Great.

Thank you very much.

Bob Hopkins, Bank of America.

So first, just a couple quick questions on the pipeline and visibility of the pipeline, I wanted to confirm that the American College of Cardiology Meeting will be the place that we'll probably see the data from your renal denervation trial, the US trial, as well as the next edition of the CoreValve data?

And then also wanted to confirm just that the drug-coated balloon data is still on track for showing it in early April at Charing Cross.

Just wanted to confirm those dates.

Those continue to be our operating expectations.

Okay.

Great.

And then I was wondering if you could talk just a little bit more about the ICD market, and why it's improving.

And understanding there's some stocking issues and you made some comments earlier.

But I was just wondering is this uptick in the market purely a function of a lot of new products in the market for the first time in a while, and maybe seeing better pricing or do you actually think that there's been a unit uptick in the ICD market?

Go ahead, Mike.

So we've certainly seen stabilization in the initial implants for ICDs, which is a good sign, obviously something we've been looking for and have now seen.

On the pricing side, basically, it's flat overall pricing.

We are seeing price increases tied to the new product launches in our high tier, but we continue to see pricing pressure in the mid-tier technologies, you net it all out, it's relatively flat ASPs, which of course is a nice improvement over the 4% or 5% ASP declines we were seeing this time a year ago.

So generally speaking it's market stabilization that we're seeing.

Josh Jennings, Cowen & Company.

Omar, I just wanted to ask you quickly about the Cardiocom business, your venture into disease management space.

How important is that for -- how should we be looking at it, in terms of is it a growth driver, is this a service that Medtronic's going to be providing to try and ensure deeper partnerships with hospitals and hospital systems, and how much investment do you need to develop or acquire new technology platforms to truly optimize the offering?

And then specifically for the important avenue of heart failure rehospitalization prevention, there's a potential pulmonary pressure monitoring device going to be approved by the FDA.

Can you speak to Medtronic's views on pulmonary pressure or intra-cardiac pressure monitoring, the role it will play in the important market opportunity, and how Medtronic can tap into this, and any internal plans to leverage the Cardiocom platform?

Thanks.

Okay.

Let me give you some perspective.

First of all, Cardiocom is an operating business with strong results and strong growth prospects, with what it has.

There's some unique capabilities and we're excited about what they're doing, and they have strong momentum and growth by themselves.

Now, when we take Cardiocom, and latch that on to our distribution team, which is far bigger than what Cardiocom had it on their own, we obviously opened up a lot more opportunities for that business to grow, and increase their sales of existing products.

In addition to that, the combination of our devices now, going after a more selected patient pool, together with Cardiocom's support services, offer up a future opportunity that is unprecedented in that device company, and a cardiac monitoring company, we've got together in this way.

And we expect real improvement in growth, going forward as a result of that.

Now, with respect to other things that we can do, look, as you know, studies have shown that to move the needle in things like heart failure requires a broad set of services, a broad set of solutions that have to be executed through multiple stakeholders.

We're in the process of creating that holistic solutions business, and leading that effort.

And we think Cardiocom is a big asset in that journey.

Other things will certainly be required, but on its own, Cardiocom is an extremely good platform for us to base this journey on.

It's really a long-term effort.

I'm going to say as well that in terms of the heart failure rehospitalization, we've got evidence already that using the Cardiocom capabilities, we can have an impact, a measurable impact on reduction of heart failure in specific hospitals, when we think that's a very cost effective method, to which you can achieve that goal.

Sensors will be developed over time that will enhance that capability, but in our experience, just doing one thing in an area of that type, is usually not enough, but a broad solution is required.

I'll let Mike comment on specifically the product and technology and his views on that and maybe our plants.

I think it's important to look at heart failure as both a short-term issue and a long-term issue.

The short-term issue is the 30-day rehospitalization challenge which all hospitals in the US agree is something that is a big challenge for them to manage, and that's where the Cardiocom solution, which is a basically very fixed window of time in which the impact has proven to be very effective.

The alternatives that are being looked at are permanent implants for what are very expensive solutions, which really are not the right answer for the short-term challenge.

But the question would be, are they the right solution for the long-term challenge of heart failure management?

In that case, clearly as Omar just mentioned, there are a lot of variables involved here.

It's not just the availability of the measurement from the device, but also the tracking of that data, the specificity and sensitivity of those data, and the cost of managing that information.

And we think that's a very expensive solution that's being looked at for the long-term.

We are really focused on trying to focus in that near-term window, not only with Cardiocom, but also with some of the predictive diagnostics that are coming of our CRDM organization.

So with Reveal, we talked about the Reveal Link, which is the next generation loop recorder that we have, and there are other predictive diagnostics you're going to see us talk about over the course of the next six months, that we think can be very helpful in managing heart failure patients, in that window where there's a very clear economic need.

So that's how I would characterize our approach to the strategy.

Thanks, Josh.

Operator, we've run past the top of the hour, but let's just take a couple of questions before wrapping up.

Bruce Nudell, Credit Suisse.

Mike, several questions for you.

Firstly, common wisdom is that the partner one indication in the US is flattening out.

As you into that market, do you see much opportunity for growth prior to indication expansion?

Secondly, I know you have had a little sluggishness in enrolling SURTAVI and there's been talk about extending it to STS 2. Any progress on that front?

And thirdly given the joint FDA CMS approval track for renal denervation, how should we be thinking of that uptake in the States, now that we have definitive evidence relative to what we've seen in Europe?

Thanks so much.

Let me take the first.

On the question of -- the second one let me ask Jeff, do you want to comment --

Bruce, on SURTAVI, we're talking to the FDA but there's really no update on looking at lowering the enrollment criteria.

And first question was partner?

So first I think it's important to point out what we're seeking approval for, in terms of the range of sizes and alternative access routes for CoreValve, should significantly expand the number of patients who are going to be candidates for TA-AVI, because currently the current approved devices from -- competitive devices are fairly limited in terms of their size and also the invasiveness of the trans apical approach.

So we think that there is still plenty of opportunity to both take share in the existing segment as well as to expand the number of patients who are getting treated within the extreme risk.

So we are confident that what we've guided you to in terms of our overall expedition for market size continues to be what we would expect to see.

And the third question was?

The renal denervation -- FDA approval.

Obviously this is one of the first that's on the joint track of both CMS approval as well as FDA approval.

Our goal would be to have essentially a three-month window between those two, FDA approval and follow-on reimbursement.

But again this is fairly uncharted territory so we're going to have to see where that leads, but that's certainly what we are managing our strategy to.

Bruce, we would expect that obviously having that data we've always said having the data the proven information in the US, we think will actually help accelerate the marketplace, and reimbursement at the same time obviously, or close to it, would obviously help.

So we expect the uptake in US would be much faster than obviously what we've seen outside the United States.

Perfect, thank you.

One last question, please.

Rick Wise, Stifel.

On CoreValve, again, can you give us a little more perspective?

Mike, do you think you've lost share as a result of the injunction given what seems to be some heavy selling into the market in advance of this, and can we assume that you're shipping normally now?

And remind me, I think you said you have a strong growth in TA-AVI in Europe.

Can you quantify that more specifically with a more specific number?

Thank you.

So on Germany, obviously, if you just look at total revenues we just reported in the rep in the quarter we lost share on a reported basis, because we had no product that we were able to sell other than for the compassionate use side.

But as you may recall from the first quarter, when customers learned that they were going to lose access to this product, there was a lot of demand that basically accelerated purchases.

So in terms of overall share of implants it's hard to say, but I don't think there probably was a lot of share loss in the quarter.

And obviously now that we will be able to go back into the market with the full offering, I don't expect there will be going forward, but it's going to take a couple of quarters here for that to normalize overall.

And on the diabetes side, just as a follow-up, is there any way to size the opportunity for the 530G and any sense of the patients that are getting the devices, are these patients already on Medtronic pump and upgrading?

MDI patients converting or competitor pumps?

Any perspective there would be welcome.

Thank you.

It's a little early to get too much data on this because we just started shipping it but I'm going to tell you that, first of all the response has been outstanding.

Both from patients who received the device, and just in anticipation of what the product can do.

So we're really confident about the outlook and the general acceptance of this product, as we see it.

I think in general, most of them are Medtronic patients who are upgrading at this stage.

But we expect some conversions as well.

I doubt there's going to be too many MDI patients going to this technology first.

But again, it's very early.

We just started shipping this product in the last, almost just about a month or so.

So let's wait and see, but like I said, the anticipation is from our patients, very high.

And a lot of excitement around it.

Thank you.

Okay.

So with that, it's time to conclude.

Thank you all very much for your questions.

And I'd like to briefly note that as you work on filling your 2014 calendars, we plan to host our institutional investor and analyst meeting on June 5, which will be held again in New York City.

With that, and on behalf of our entire management team, I'd like to thank you again for your continued support and interest in Medtronic.

And for those of you in the US, I want to wish you and your families all a very happy Thanksgiving.

We look forward to updating you on our progress on our Q3 call, which we anticipate holding on February 18.

Thank you.

This concludes today's conference call.

You may now disconnect.