美敦力 (MDT) 2016 Q2 法說會逐字稿

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

(Operator Instructions)

I would now like to turn the call over to Ryan Weispfenning, Vice President of Investor Relations.

Please go ahead.

Great.

Thank you, Maria.

Good morning, and welcome to Medtronic's second-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 FY16 second quarter which ended October 30, 2015.

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 division summary.

We also updated our combined historical Covidien Medtronic financial statement presentation, which is posted to our Investor Relations website.

This presentation now contains FY15 quarterly P&Ls stated on a month-aligned basis, instead of the prior quarter aligned basis.

Comparisons made today will be against the month-aligned P&L.

Next, 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, and we do not undertake to update any forward-looking statement.

In addition, the reconciliations of any non-GAAP financial measures are available on the Investors portion of our website at Medtronic.com.

Unless we say otherwise, references to quarterly results increasing or decreasing are a comparison to the second quarter of FY15, and all year-over-year growth rates are given on a comparable constant currency basis, which adjust for the negative effect of foreign currency translation, and includes Covidien plc in the prior year comparison aligning Covidien's prior year monthly results to Medtronic's fiscal quarters.

These adjustment details can be found in the reconciliation tables included with our earnings press release.

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

Omar?

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

This morning, we reported second quarter revenue of $7.1 billion representing growth of 6% at the upper end of our mid single-digit expectation.

Q2 non-GAAP diluted earnings per share were $1.03, growing at 11% on a comparable constant currency basis and reflecting 480 basis points of leverage above our baseline expectation of 200 to 400 basis points.

Q2 was a strong quarter.

Our operational performance remains consistent, and we believe sustainable across all our functions, groups and regions.

At the same time, we are outperforming the overall market and delivering operating leverage.

We are also executing on our value capture programs from the Covidien integration, and realizing the targeted cost synergies.

This combination of solid top line growth and leverage is generating significant accessible free cash flow which provides us enormous flexibility to deploy through strong returns to our shareholders, paying off debt, and pursuing targeted acquisitions.

Despite our strong performance, however, we recognize foreign currency translation is a significant pressure to our bottom line on a reported basis, as it is for most multi-nationals, but we are attempting to offset this as much as possible by stretching our operations and through our conventional hedging programs.

As we look ahead though, our confidence continues to grow around our ability to develop the right mind-set, business models, and offerings to lead and compete in the emerging value-based health care models around the world.

I am pleased with our organization's willingness and aptitude to explore new and novel ways for Medtronic to not only deliver better clinical and patient outcomes, but to tie our success to these outcomes with providers, payers and governments.

Our strong revenue growth is resulting from crisp execution on three growth strategies: therapy innovation, globalization, and economic value.

These strategies are designed to create competitive advantage for Medtronic by capitalizing on three long-term trends that we see playing out in health care, namely the continued desire to improve clinical and economic outcomes, the growing demand for expanded access to health care, and the optimization of cost and efficiency within health care systems.

We have translated each of our strategies into three independent growth vectors, and we continue to quantify and communicate our performance against these goals.

In Therapy Innovation, we are seeing very strong adoption of our new products.

Our new therapies growth vector accounted for nearly three-quarters of our total Company growth, contributing approximately 420 basis points.

This remains well above our goal of 150 to 350 basis points.

In our Cardiac & Vascular Group which grew 8%, we continue to see strong growth from recently launched products that are helping to create important, rapidly growing new med tech markets such as transcatheter aortic valve replacement, drug-coated balloons, AF ablation and insertable diagnostics.

CVG is also seeing new therapies drive growth in its base businesses, such as our recently launched Evera MRI ICD which is helping to drive both sequential and year-over-year global high power market share gains.

Over the coming quarters, we expect to launch a number of additional exciting new products that will continue to differentiate us in the market, and help protect and grow our leadership position.

For example, we continue to make progress on bringing our revolutionary Micra Transcatheter Pacing System to the US.

Last month, we had a very successful late-breaking data presentation at AHA, and a simultaneous New England Journal of Medicine publication.

This data formed basis for our FDA submission which we filed in Q2.

In addition, CVG continues to invest in key intermediate to long-term technology programs.

Building on our success in transcatheter aortic valves, we're particularly enthusiastic about our recent acquisition of Twelve.

This company has a differentiated transcatheter mitral valve which has the potential to create a new multi-billion dollar end market.

We're also making progress in enrolling our SPYRAL HTN filter program for renal denervation, an important therapy that we are pioneering.

Renal denervation has the potential to help fulfill the huge unmet need in treatment resistant hypertension.

Overall, I feel that our strategy has positioned us exceptionally well in the global cardiovascular device market.

The team is executing consistently, gaining share, developing new markets, and effectively leveraging its breadth of therapy innovations to positively affect the lives of thousands of patients around the globe.

In our Minimally Invasive Therapies Group which grew 3%, new therapies such as our differentiated Endo GIA reinforced reload stapling system and LigaSure Maryland Jaw Laparoscopic Sealer and Divider are driving strong growth.

MITG has a full therapy innovation pipeline with a specific focus on four areas: the transition from open surgery to minimally invasive surgery, respiratory compromise, lung cancer and gastrointestinal cancer.

Across these growth drivers, we're developing solutions that span the entire continuum of care, aspiring to enable earlier diagnosis, better treatment, faster complication-free recovery, and enhanced patient outcomes through less invasive solutions.

I'm pleased with the clear strategic road map the MITG team has developed, from a very complex mix of products and capabilities.

The strategy supports the outcome space Medtronic mission, and will serve as the foundation against which we are assessing our entire MITG portfolio.

In our Restorative Therapies Group which grew 5%, we have a number of new products driving growth.

In Surgical Technologies, we recently launched our O-arm [2] Surgical imaging system and NuVent sinus balloon.

In Neurovascular, our Pipeline Flex and Solitaire FR devices are leading the rapidly growing stroke market.

In Spine, our business outside the United States performed well, and grew above the market.

In the US, while our performance was below market, we did see sequential improvement after adjusting for the extra week in Q1.

In Neuromodulation, while we continue to make progress against our FDA Consent Decree commitments and are focused in resolving this matter, our drug pump revenue has been somewhat affected by the situation.

We also are facing increased competition in Pain Stim, where our sales were flat compared to last year.

Our Restorative Therapies Group is urgently addressing these specific issues, as well as leveraging the breadth and scale of the group through the commercial implementation of surgical synergy.

One example is a program that combines O-arm placements with increased spine implant commitments.

Under our new integrated RTG sales management structure, we've already finalized several of these contracts in the first half of this fiscal year, and have seen notable increases in our spine implant sales in these accounts.

While it's still early, our expectation is that strategies like this will result in improved performance.

Our Diabetes Group which grew 11% also has new products driving growth including the MiniMed 530G and 640G systems, as well as MiniMed Connect which provides convenient and discrete access to patient data and remote monitoring from the user's smartphone.

In our Non-Intensive Diabetes Therapies division, we recently launched Pattern Snapshot for iPro Professional CGM which uses new algorithms to streamline data interpretation for health care professionals.

These advancements, along with a full pipeline of new products and solutions are aimed at creating an annual cadence of innovation that can extend our leadership position globally.

As a result of the products that are currently launching, as well as our robust pipeline, and the potential of new markets across all of our groups, we believe we can sustain our new therapy growth vector at the upper end of the 150 to 350 basis point range.

Now let's turn to our globalization strategy.

In Q2, emerging markets grew 11%, a sequential improvement over the prior quarter and contributed approximately 140 basis points to our Q2 total Company growth.

This was just below our baseline goal of 150 to 200 basis points, but we're encouraged by relatively consistent above market performance in countries that are under significant macroeconomic pressure.

We continue to see increased diversification of our emerging market revenue, which stabilizes the growth rate, and reduces the dependency of any single market.

In Q2, Greater China, the Middle East and Africa, Latin America, India and Southeast Asia all grew double-digits.

In Mainland China, we grew 13%, and improved sequentially with balanced contributions from each of our four groups.

We continue to implement our channel optimization strategy in China, which is focused on transitioning our distribution channel to include consolidated platform distributors.

We're also leveraging the breadth of our therapies to establish expanded multi-line selling presence in Tier 2 and Tier 3 cities.

Another priority is to develop deep partnerships with the Chinese governments, such as the one that we have already forged with the Chengdu government in Sichuan province, and are looking to further broaden.

Recently, our entire Executive committee spent a week in China, meeting with several provincial and central government officials to discuss the creation of more partnerships across all of our businesses.

Although complex, China will become the largest health care market over the long-term, serving more patients and doctors than any other country.

We can never lose sight of this potential.

In the Middle East and Africa we grew 10%, driven by a newly formed joint venture with our largest Saudi distributer.

Despite political instability in the region, our team continues to deliver strong growth, reflecting the fact that governments in this region continue to prioritize health care investments.

In Latin America, we grew 11% driven by Mexico, Chile and Argentina.

In Brazil, we significantly outperformed the market, with the strength in MITG, Neurovascular and Neuromodulation.

While the outlook in Brazil remains uncertain, given the macroeconomic and health care challenges in the country, we believe we can outperform the market by continuing to partner with health care stakeholders to reduce costs while improving patient outcomes.

We did experience some weakness this quarter in Eastern Europe and Russia, which together account for less than 10% of our emerging market revenue.

This was a result of a planned distributor changeover in Eastern Europe, continued weakness in the Ukraine and Belarus, and the year-end procedure delays affecting our MITG business in Russia.

We continue to make progress in pursuing potential opportunities, such as government partnerships, to improve growth in this region.

Across emerging markets we are applying our standard market development activity, as well as our differentiated approach of local channel optimization in China, India and Saudi Arabia, and establishing government partnerships like the one in Chengdu.

In addition, we are developing unique partnerships with private entities such as the Abraaj Group.

In Q2, we made a commitment to the Abraaj Group's growth markets health fund, which is focused in improving access to health care in Asia, the Middle East and Africa, as well as other developing markets.

Abraaj purchases or builds hub hospitals, surrounded by networks of referring hospitals and clinics.

We are strategic partners in this market development effort, with a commitment to improve patient access, health care delivery outcomes and efficiency, and product supply within these Abraaj hospital networks.

In summary, we believe that the penetration of existing therapies into emerging markets represents the single largest opportunity in med tech over the long term.

Turning now to our economic value growth strategy.

Our services and solutions growth vector contributed approximately 20 basis points to our Medtronic growth.

While this overall result is below our goal of 40 to 60 basis points, it represents strong mid-30s growth, almost all organic.

We expect to further improve our growth, as services and solutions is adopted and expanded across all our business groups.

In Care Management Services, formerly known as Cardiocom, we had high-teens growth in Q2, driven by a strong performance within the US VA health care system.

This business represents an important platform for us, especially as post-acute care services become even more critical in the bundled payment models of the future for different disease states.

In cath lab managed services, or CLMS, where we provide administration operational efficiency expertise and daily management of cath labs within hospitals, we continue to generate rapid growth.

In Q2, we expanded our CLMS business into Latin America by purchasing a majority stake and option to acquire Cardiored, a privately-held Chilean cath lab managed services provider.

Cardiored already has a presence in Chile, with a long-term -- with long-term agreements to operate 10 cath labs at nine private clinics throughout the country.

We expect that Medtronic's scale will help to quickly expand Cardiored's presence, both within Chile and throughout Latin America.

We also continue to expand our operating room managed services, or ORMS, offering, which applies our cath lab business model to an operating room setting, utilizing the breadth of our MITG products and expertise.

We have now signed six ORMS deals, representing approximately $140 million in cumulative revenue with an average life of seven years.

Since starting Hospital Solutions two years ago, we have now completed a total of 66 long-term CLMS and ORMS agreements with hospital systems, representing over $1.5 billion in revenue over an average span of six years, and we have a large number of potential contracts at various stages of negotiation with providers around the world.

We also continue to expand our solutions offerings into diabetes care delivery with Diabeter, a Netherlands-based diabetes clinic and research center that has developed a unique care model that incorporates standardized and scalable protocols.

And we continue to grow the number of Diabeter patients, and expect to expand Diabeter beyond the Netherlands to other countries around the globe, as we transform our diabetes group from a market-leading pump and sensor company to a holistic diabetes management company.

All of these activities are expected to serve as building blocks for value-based health care, where payment is based in actual outcomes over a specific time horizon.

Specifically, we are creating unique offerings that combine bundled solutions across the care continuum to target specific patient populations or cohorts within a particular disease.

This is consistent with the direction of CMS' bundled payment initiative which we fully support, and are encouraging expansion into other disease states where we participate.

In the end, we remain convinced that there is an incredible amount of value to be realized in health care, and we believe our technologies and services can play a central role with providers, payers and governments to make the shift to value-based health care successful.

Turning now to the P&L.

And as I mentioned earlier, we delivered EPS leverage in Q2 of 480 basis points on a comparable constant currency basis which exceeded our baseline expectation of 200 to 400 basis points.

All areas of our global operations are executing to the plan we laid out at the beginning of the fiscal year, as we deliver on our productivity improvements and cost synergy expectations.

We also executed below the operating income line, delivering above plan financial performance through higher interest income, a lower tax rate, and fewer shares outstanding.

It is also worth noting that the strong performance was against a difficult comparison due to legacy Covidien's fiscal year end in the prior year.

For the back half of this fiscal year, we expect to significantly exceed our baseline EPS leverage expectation of 200 to 400 basis points.

As we've communicated, this over-performance will be driven by planned cost synergies from the Covidien integration.

The integration of Covidien is in fact, going very well.

We are executing on our priorities of preserve, optimize, accelerate and transform.

Our cultures continue to come together.

Talent retention and employee satisfaction, which we monitor and quantify through frequent employee surveys and focus groups, remains strong.

Our cost synergy efforts thus far have been focused in the following areas: indirect sourcing, where we are using best-case contracts and improved purchasing power to achieve meaningful savings; common expense policies, which we are driving across the organization; real estate, where we've now closed over 80 redundant sites, mostly back office and field distribution centers.

And SAP, where we are bringing legacy Covidien entities onto Medtronic's common enterprise system, leveraging our internal expertise from having orchestrated similar system-wide implementation within legacy Medtronic.

In addition to executing on the promised cost synergies, every function is uncovering additional opportunities for savings.

The Covidien acquisition is truly serving as a catalyst to reexamine and redefine our overall operating models and cost structures.

Another key element of the Covidien acquisition that we are just beginning to execute on is unlocking our trapped cash.

We were able to free a significant amount of our trapped cash in Q2, transferring $9.3 billion into accessible cash through an internal reorganization as part of the Covidien legal entity integration.

The ability to deploy this cash in the US gives us increased flexibility and options.

We are working quickly and diligently to determine the best way to utilize this cash, with a priority of creating long-term shareholder value, and we will communicate our strategy in the very near-term.

This is just one more example of the benefit of the Covidien acquisition, perhaps even more meaningful than the cost synergies that we are delivering.

The improved financial flexibility, and our ability to invest in US technologies and products, as well as return additional cash to shareholders is, and is expected to continue to be a significant differentiator for Medtronic shareholders.

Our strong revenue growth and focus on operating leverage is generating significant free cash flow.

In Q2, we generated $1.1 billion, and are expecting to generate nearly $40 billion in free cash flow over the next five years.

We are deploying our capital with a focus on M&A investments, providing strong returns to our shareholders and meeting our debt commitments.

Earlier this fiscal year, we increased our dividend by 25%, and we expect to grow our dividend rate faster than earnings, with the intent of reaching a 40% pay-out ratio on a non-GAAP basis within the next few years.

As an S&P Dividend Aristocrat, we remain focused on delivering dependable long-term dividend growth.

This quarter, we also accelerated our share repurchase activity from our prior plans, and are committed to returning a minimum of 50% of our free cash flow to our shareholders through dividends and share repurchases.

Regarding investments, we remain disciplined when evaluating potential M&A opportunities.

Any investment we must make must be aligned with and ultimately strengthen one or more of our three growth strategies, while at the same time offer high return metrics and minimize near-term shareholder dilution.

In summary, I'm extremely pleased with how our team is executing.

And Gary will now take you through a more detailed look at our second quarter results.

Gary?

Thanks, Omar.

Second quarter revenue of $7.058 billion increased 62% as reported, or 6% on a comparable constant currency basis, which excludes the $452 million unfavorable impact of foreign currency.

Acquisitions and divestitures contributed a net 30 basis points to Q2 revenue growth.

Q2 non-GAAP EPS was $1.03, an increase of 1% versus the $1.02 delivered by Medtronic Inc.

last year, or an increase of 11% on a comparable constant currency basis after adjusting for the $0.12 impact to earnings per share from foreign currency translation.

Q2 GAAP diluted earnings per share were $0.36, a decrease of 57%.

This quarter's non-GAAP adjustments to earnings on an after-tax basis were a $442 million certain tax adjustment primarily related to the internal reorganization that resulted in approximately $9.3 billion of previously trapped cash becoming accessible, and a $29 million loss on forward interest rate swaps related to the [same] internal reorganization, a $373 million amortization charge, a $56 million net restructuring charge, and a $32 million acquisition-related items charge primarily related to the Covidien integration, and a $17 million certain litigation charge related to Infuse product liability.

Our Cardiac and Vascular Group which accounted for 35% of our total Company revenue grew revenue by 8%.

CVG had strong performances in all three of its divisions, with each growing above the Company average.

Cardiac rhythm and heart failure or CRHF had another strong quarter with 7% revenue growth, which included mid single-digit growth in both High Power and Low Power, high-[20s] growth in AF solutions and low-[30s] growth in services and solutions.

We estimate CF-- CRHF implantables market is growing in low single-digits, and we continue to take share both year-over-year and sequentially.

High Power had a particularly strong quarter in US ICDs, driven by the launch of the Evera MRI ICD, the only FDA approved MR-conditional ICD system.

We also continue to see strong customer acceptance of our differentiated CRT-D technology, including our Adaptive CRT algorithm, Quadripolar leads, VectorExpress programming, and improved device longevity.

In Low Power, we are seeing strong demand for Reveal LINQ, which resulted in robust diagnostic growth in the mid-20s.

Pacemaker sales also had solid mid single-digit growth in the US where we gained over 400 basis points of share through the strong pacing pull through generated by Reveal LINQ, and increasing customer preference for MRI safe technology, including our recently FDA approved Advisa SR MRI Single-Chamber device.

Looking ahead, we are expecting to receive FDA and CE Mark approvals for both our Amplia MRI and Compia MRI CRTDs, along with our Visia AF MRI Single-Chamber ICD by the end of the fiscal year.

Our Coronary and Structural Heart division grew 10% with mid-20s growth in heart valve therapies, mid single-digit growth in Coronary, and low single-digit growth in Extracorporeal Therapies.

In Heart Valve Therapies, transcatheter valves grew in the high-[30s] globally and over 50% in the US, our first full quarter of US commercial launch of the CoreValve Evolut R.

We estimate the global TAVR market is growing nearly 30%.

In Japan, we are expecting reimbursement and launch of CoreValve in Q3.

Regarding the intermediate risk, we expect to meet our SURTAVI trial enrollment target this winter, and submit to the FDA by the middle of FY17, with data expected at ACC 2017.

In our Coronary business, drug-eluding stents grew mid single-digits globally, including high single-digit growth outside the US on the strength of Resolute Onyx, and mid single-digit growth in the US from the continued acceptance of Resolute Integrity.

In balloons, we grew low double-digits as we continued to gain share with our differentiated Euphora and PTCA product family.

In the Aortic and Peripheral Vascular division revenue grew 10%, including mid single-digit growth in Aortic, low double-digit growth in Peripheral and mid-teens growth in endoVenous.

In Aortic, while we face increased competitive pressure outside the US and felt the impact of market reimbursement cuts from Japan, the business grew in high single-digits in the US, driven by continued market adoption of our Endurant IIs AAA stent graft.

We also are seeing strong adoption of our Aptus EndoAnchor technology, which is resulting in competitive [pump] conversion and AAA device pull through.

In Peripheral, we continue to execute on our US launch of the IN.

PACT Admiral drug-coated balloon, and maintain our leading market position on the strength of our exceptional clinical and economic data.

Data presented at [TCT] and published in JACC showed substantial -- showed sustained superiority in primary patency and re-intervention rates over balloon angioplasty at two years, and cost effectiveness data released at VIVA showed IN.

PACT Admiral lowers the overall cost of treatment.

In endoVenous, we launched VenaSeal closure system in the US last month, and expect it to drive growth in this business going forward.

Across CVG, the use of wrap-around programs, services and solutions bundles, and multi-line contracting strategies continue to drive growth, with a number of cross-business multi-line contracts growing over 20% in the US.

Now turning to our Minimally Invasive Therapies Group.

Revenue grew 3% and accounted for 33% of total Company revenues.

MITG's revenue performance was driven by mid single-digit growth in Surgical Solutions, and low single-digit growth in Patient Monitoring and Recovery.

It is worth noting that MITG's growth this quarter was slightly slower than its historical run rate, as a result of a difficult comparison due to the legacy Covidien fiscal year end in the year-ago period.

Surgical Solutions growth of 5% including mid single-digit growth in the advanced surgical and early technologies, and low single-digit growth in general surgical.

Advanced surgical continued to benefit from new products, and the continued shift from open to minimally invasive surgery.

The business had solid growth in Endo stapling, driven by the Endo GIA reinforced reload stapling systems, as well as in vessel sealing as a result of the continued acceptance of the LigaSure Maryland Jaw.

We estimate that surgical volume market growth in the US, while still growing has normalized.

General surgical benefited from the RF Surgical acquisition which closed in Q2.

Early Technologies delivered strong results, particularly in the US from growth in gastrointestinal diagnostics.

The Patient Monitoring Recovery division grew 1%, in line with its markets.

Respiratory and Patient Monitoring, as well as patient care and safety grew in the low single-digits, with nursing care declining in the low single-digits.

Respiratory and Patient Monitoring results were driven by growth in sensors and acute ventilators.

Patient care and safety results were driven by strength in electrode sales, particularly in the US.

While nursing care declined, it had strength in enteral feeding.

Now moving to our Restorative Therapies Group.

Revenue grew 5%, and accounted for 25% of the total Company revenue.

Results were driven by low-[30s] growth in Neurovascular, and high single-digit growth in Surgical Technologies, with low single-digit growth in Neuromodulation, and flat results in Spine.

In Spine, our overall international sales grew 5%, and Core Spine business grew 6% which was significantly above the market.

Spine had strong double-digit growth in Japan and the Middle East and Africa, and solid mid single-digit growth in Canada and Latin America.

Offsetting Core Spine strong international performance was BMP, which had flat international sales in the quarter due to the InductOs stop shipment in Europe.

This issue is limited to a third-party manufacturing facility that only supplies the European market.

While the supplier has identified a remediation plan, we do expect to be off the market for the remainder of the fiscal year, reducing our expected international BMP revenue by approximately $7 million per quarter.

In the US, Spine declined 2%, and the Core Spine business declined 4%, underperforming the market which grew in the low single-digits.

We expect our US Core Spine performance to improve as we realize the results from our recently realigned RTG commercial sales management, as well as the implementation of the surgical synergy programs that Omar mentioned earlier.

In addition, we expect Core Spine results to improve, as numerous recent and upcoming product launches reach scale, including our ELEVATE expandable cage, and Solera Voyager system in thoracolumbar, as well as DIVERGENCE Stand-Alone Innerbody Cage, ZEVO anterior cervical plate system, PRESTIGE LP Cervical Disc, and Anatomic PEEK PTC interbody spacer and cervical.

Turning to Neuromodulation.

Revenue increased 2%.

We continue to face challenges in our drug pump business, as a result of the FDA Consent Decree.

The division had strong growth in Deep Brain Stimulation, driven by [referral] development, emerging market expansion, and a commercial focus on surgical synergy, which combines Activa BBS implants with our PEAK surgery system, TYRX Antibacterial Envelope and O-arm imaging.

In Pain Stim, while we are facing competitive pressure, we are receiving good reception of our AdaptiveStim HD programming options.

In Gastro/Uro, we continue to see solid growth of our InterStim system for bladder and bowel control, and we expect the recently launched Verify evaluation system to result in increased implants going forward.

In Surgical Technologies, revenue grew 8% driven by mid-teens growth in advanced energy, on strong sales of the PEAK surgery system and Aquamantys system.

ENT growth was driven by sales of the NuVent sinus balloon and a back order release of the powered ENT blade.

The Neurosurgery business also had a strong quarter, driven by the US launch of the O-arm 2 Surgical Imaging system.

Our Neurovascular division had another strong performance in Q2, with revenue growth of 32%.

Growth was driven by stent retrievers for treating acute ischemic stroke, where recent clinical data and AHA ASA stroke treatment guidelines are driving rapid adoption of our Solitaire FR revascularization device.

The division also had very strong results in flow diversion, led by continued adoption of the Pipeline Flex device for the treatment of intracranial aneurysms.

During Q2, the Neurovascular division announced two technology acquisitions.

Medina Medical, with its aneurysm embolization mesh technology for hemorrhagic stroke which we believe can disrupt the coil market, as well as Lazarus Effect and its mesh cover technology that is complementary to our Solitaire stent retriever platform.

Now moving to Diabetes Group.

Revenue grew 11%, and accounted for 6% of total Company sales.

The intensive insulin management division grew in the mid-teens, including growth of nearly 40% in Europe as a result of the strong sales of our MiniMed 640G insulin pump system, with the Enhanced Enlite CGM sensor.

This next-generation system features SmartGuard predictive low glucose management technology, as well as a new insulin pump design featuring a full color screen.

We continue to make progress in bringing this technology to the US, as we have completed the clinical trials, and are on track for an early calendar 2016 submission to the FDA.

In our Non-Intensive Diabetes Therapies division, revenue doubled on strong sales of the iPro2 Professional CGM technology.

In addition to professional CGM, the NDT division continues to focus on market access, and integrated patient care solutions for people with Type II Diabetes.

In our Diabetes services and solutions divisions, revenue grew in the mid single-digits, driven by strong growth in consumables, new Diabeter service revenue, as well as sales from the recent launch of the MiniMed Connect.

The uptake and user feedback on MiniMed Connect have been extremely positive, and it is currently the highest rated connected glucose monitoring app in the US.

We also continue to partner with IBM Watson, combining our clinical expertise, closed loop algorithm development, and CareLink data analytics with IBM's Watson Cloud and Watson Analytics and machine learning capabilities.

An early pilot run using the database of 100 anonymized patients was able to predict some near-term hyperglycemic events, demonstrating the potential possibilities of applying cognitive computing to support diabetes management.

Now turning to the P&L.

As I discussed in the opening operating items, it is worth clarifying again that my comments will be made on a non-GAAP comparable constant currency basis unless I say otherwise.

The Q2 operating margin was 28.4%, which excludes a 100 basis point negative impact from foreign currency, and represented a 20 basis point improvement over the prior year.

This operating margin improvement included a 60 basis point improvement in SG&A, offset by a 20 basis point decline in gross margin, a 5 basis point decline in R&D, and a 20 basis point decline in net other expense.

This resulted in operating profit growth of 6.4%, or operating leverage of approximately 60 basis points over revenue growth.

In the coming quarters, we expect this leverage contribution to grow, and be a majority contributor to our overall EPS leverage.

In line with our expectations, the amount of Q2 operating leverage was lowered due to the difficult comparison against legacy Covidien's fiscal year end quarter, which included strong fiscal year end sales.

We estimate that the total benefit in the prior year was approximately $50 million on an operating profit line.

Adjusting for this, operating profit growth would have been approximately 9% in Q2, representing operating leverage of approximately 300 basis points.

Our operating margin including gross margins of 70.2%, SG&A of 33% and R&D of 7.4%.

Also included in our Q2 operating margin was net other expense of $57 million, which included net gains from our currency hedging program of $71 million.

We hedged the majority of our operating results in developed market currencies to reduce volatility in our earnings from foreign exchange.

However, a growing portion of our profits are unhedged, especially in emerging market currencies, which can create modest volatility in our earnings.

Assuming recent exchange rates for the remainder of the fiscal year, which includes a [$1.06] euro and JPY123, we expect FY16 net other expense to be in the range of $100 million to $130 million, which includes an expected impact for the US Medical Device Tax of approximately $210 million.

For Q3 FY16, we expect net other expense to be in the range of $10 million in income to $10 million in expense, based on the previously mentioned exchange rates.

We expect our operating margin for the second half of FY16 to be in the range of 29% to 31% on an as reported basis, including 28% to 28.5% on an as reported basis in Q3.

This forecast implies over 100 basis point improvement in our full fiscal year operating margin on a comparable constant currency basis, which on a reported basis is almost completely offset by a similar amount of negative FX based on current rates.

This strong operating margin improvement supports the significantly greater than 400 basis points of earnings per share leverage we intend to generate in the back half of the year, primarily a result of the Covidien cost synergy programs.

We continue to expect the value capture programs to result in $300 million to $350 million in FY16 savings, and a minimum of $850 million by the end of FY18, spread roughly equally across the three fiscal years.

Below the operating profit line, Q2 non-GAAP net interest expense was $172 million, which was an improvement to our forecast due to modest outperformance in certain investment income classes.

Based on current rates, we would expect FY16 net interest expense to be in the range of $700 million to $750 million, including $160 million to $180 million in Q3.

At the end of Q2, we had approximately $35.8 billion in debt, and approximately $17.2 billion in cash and investments, of which approximately $6 billion was trapped.

This cash mix is a significant improvement from prior quarters due to the $9.3 billion internal reorganization we executed in Q2, as part of our Covidien integration.

We expect to announce our strategy on how we intend to use these proceeds in the very near-term, with a likely focus on share repurchases and accelerated debt pay down, while preserving financial flexibility.

These potential actions are not contemplated in our current outlooks.

Our non-GAAP nominal tax rate on a cash basis in Q2 was 16.5%, which was an improvement from our forecast as a result of operational tax adjustments, and the allocation of profits among jurisdictions in which we operate.

On a full year basis, we continue to expect our non-GAAP nominal tax rate on a cash basis to be in the range of 16% to 18%.

We expect to be at the higher end of this range, until the presently expired US R&D tax credit is reinstated.

In Q2, free cash flow was $1.1 billion.

We remain committed to returning a minimum of 50% of our free cash flow, excluding the cash impact of non-GAAP adjustments to earnings, to shareholders and also continue target in a credit profile.

In Q2, we paid $537 million in dividends, and accelerated our share repurchase activity repurchasing $710 million of our ordinary shares.

As of the end of Q2, we had remaining authorization to repurchase approximately 90 million shares.

Second quarter average daily shares outstanding on a diluted basis were 1.429 billion shares.

For FY16, we now expect diluted weighted average shares outstanding to be approximately 1.430 billion shares, including approximately 1.427 billion shares in Q3.

Let me conclude by providing our FY16 revenue outlook and earnings per share guidance.

We now expect revenue for growth for the back half of fiscal year to be in the upper half of our mid single-digit baseline range on a comparable constant currency basis.

Our second half revenue outlook assumes that MITG grows in the low to mid single-digits, RTG grows in the mid single-digits, CVG grows in the mid to high single-digits, and Diabetes grows in the high single to low double-digits.

While we cannot predict the impact of currency movements, to give you a sense of the FX impact if exchange rates were to remain similar to yesterday for the remainder of the fiscal year, then our full FY16 revenue would be negatively affected by approximately $1.45 billion to $1.65 billion, including a negative $330 million to $390 million impact in Q3.

Turning to guidance on the bottom line.

Based on our first half performance, we now expect non-GAAP cash earnings per share in the range of $4.33 to $4.40, which includes an expected $0.45 to $0.50 negative foreign currency impact based on current exchange rates, and approximately $300 million to $350 million of targeted value capture synergies from the Covidien acquisition.

As we look at the back half of our fiscal year, it's worth pointing out the uncertainty surrounding the US R&D tax credit, which expired at the end of 2014.

If Congress retroactively renews the credit for 2015, we would see a $0.03 benefit in FY16, and both the renewal and non-renewal scenarios are reflected in our earnings per share guidance.

While we don't give quarterly earnings per share guidance, when looking at the [gaining] earnings per share consensus, we would not be surprised to see approximately $0.04 to $0.05 shifted from Q3 to Q4, which assumes that the R&D tax credit is renewed in Q3.

Finally, I want to point out that the updated historical Covidien Medtronic financial presentations that Ryan mentioned earlier reflect a lower FY15 comparable earnings per share; however, this has no impact on our FY16 expectations.

As in the past, my comments on earnings per share guidance do not include any charges or gains that are recorded or would be recorded as non-GAAP adjustments to earnings during the fiscal year.

Before turning the call back to Omar, I would like to note we plan to hold our Q3 earnings call on March 1, and our Q4 earnings call on May 31.

In addition, we plan to host our Investor Day on June 6, which will be held again in New York City.

Omar?

Thanks, Gary.

And before opening the lines for Q&A, I would like to reflect on our overall performance.

Our team has come a long way, executing quarter after quarter.

We're building a business with solid and diversified growth drivers, operational excellence, strong cash flow generation, and disciplined capital allocation.

But it is also important for us to remember that we have a long journey ahead of us, and our work of fulfilling the Medtronic mission goes on.

I am confident this team can execute consistently, balancing trade-offs and offsetting pressures to create long-term, dependable value in health care.

With that, we will now open the phone lines for Q&A.

In addition to Gary, I've asked Mike Coyle, President of our Cardiac and Vascular Group; Bryan Hanson, President of our Minimally Invasive Therapies Group; Geoff Martha, President of our Restorative Therapy Group; and Hooman Hakami, President of our Diabetes Group to join us.

We are rarely able to get to everyone's questions, so please limit yourself to only one question, and only one follow-up.

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

Operator, first question please?

Our first question comes from the line of Mike Weinstein of JPMorgan.

Good morning, can you guys hear me okay?

Yes, we can, Mike.

Perfect.

Well, first off, congratulations on another nice quarter.

Let me, Gary, just circle back on your commentary on the repatriated cash.

My first question is really, it sounds like there's some commentary forthcoming in terms of exactly what you're going to do with that cash.

Any reason you are not being more explicit today, other than the comments you made about potentially accelerating share repurchase and paying down debt?

Yes, Mike.

As we indicated in our comments obviously, we are looking at this, we're excited about the opportunity that we were able to get access to this cash and make it available.

We're looking at different options.

And as we indicated in our comments, obviously the main focus of that will be, we did take on a lot of debt related to the transaction.

We have a commitment on the debt side that we want to look at.

But obviously, the other opportunity for us is to take a look at share repurchases, and accelerate that as a potential.

We're looking at those options, we're evaluating that, we're having conversations with our Board.

And as we make decisions, once we make those decisions, then we will communicate what our plans are.

But we just don't want to get ahead of ourselves, in communicating before we've had a full dialogue and discussion with the Board.

Okay.

Let me ask you about a couple different businesses that to me, stood out this quarter.

Your -- there's a whole bunch of them, but let me just target a couple of them.

One was your diabetes business, and you commented on the growth you're seeing in diabetes, particularly in Europe where you've got newer technologies available.

Can you talk about the growth there, number one?

And number two, your neurovascular business continues to do extremely well.

We're seeing that obviously, because of the ischemic stroke trials and what's happening in that market, but could you give us your own thoughts on sustainability, and what you want to do with that business going forward?

Okay, Mike, I'm going to let Hooman and Geoff answer both of these questions.

So Hooman, why don't you go ahead with the diabetes.

Sure.

Hey, Mike.

Yes, we saw great growth in diabetes, 11% overall.

The European growth was really I think, something that stood out.

We had just incredibly strong growth from 640.

We saw that not only in Europe, but also in Asia Pacific.

And I think what it shows is that new innovation here matters, and this is something that we're going to continue to drive.

We've got a plan to launch this product in United States.

You heard from the commentary that the trial is done, and we are going to release it to the FDA in early 2016, so we're excited about that.

And I think what you're also seeing, that I think is worth noting is that the 530G is doing incredibly well in the United States, and we are seeing very, very good performance there on tough comps.

So when you take a look at those two things, I think we're seeing great performance within the group, and we expect this to continue.

Okay.

Geoff?

Yes, on the stroke side, it's a huge opportunity, not just for the Restorative Therapies Group but for Medtronic.

First of all, you saw we did -- these guys have done -- our team at Irvine has done a great job resulting in the technologies and the clinical evidence.

And we want to maintain that leadership, so the two tuck-in acquisitions we did last quarter I think, take our technology road map out several years to maintain our leadership there.

So that's one.

And then two, we're looking at the broader stroke care continuum, from diagnostics working with Mike Coyle's group here in the LINQ technology, and into patient management and referral systems.

So we think beyond the technology, if you look across the care continuum there's several waves of innovation here.

And this is a top priority, for not just my group, but for Medtronic.

Okay.

And then maybe just a last question, and I'll let others jump in.

So Omar, one of the questions we talked about last call, last call you remember I think the Street was a little bit frustrated on the pace of margin improvement, and part of it was tough to see because of the FX headwind you guys were seeing.

But one of the questions was, the degree to which some of the Covidien synergies, and effectively some of the upside to the synergy targets might get reinvested back into the business, versus shown down to the bottom line to shareholders.

You want to just give us your own updated thoughts on that, and how investors should be expecting Covidien synergies to play through here?

Yes.

We've already said, and as I said in my commentary that we're expecting significant upside, to our 200 to 400 basis point range, and we'll show that in the coming quarters.

So that's where we stand, it's pretty straightforward.

Most of these synergies will fall through, and we'll go from there.

But I don't want to minimize our operational performance outside of the synergies as well, because there's good work going on in productivity improvements in our products, in SG&A.

Some of it is using some of the new structures we're creating under the integration.

But across the board, we are delivering productivity.

And to the extent, especially this year with the Covidien synergies, we really expect by the end of the year, we'll be above our -- the range that we've talked about.

As we've actually already done to a small extent in the first two quarters, but that amount will increase in the coming quarters.

Perfect.

Thank you, Omar.

Thanks.

Our next question comes from the line of David Lewis of Morgan Stanley.

Good morning.

Omar, just wanted to come back to revenue for a second.

I think your guidance for the upper end of 4% to 6% is consistent with what you said last quarter, but it's the most bullish component of the report this morning.

So what is giving you the confidence in the acceleration in the back half of the year?

And I only say acceleration, because the comps get so dramatically harder as you anniversary the acceleration last year.

So what gives you the confidence, you can still sustain that momentum in the upper half of revenue in the back half, as those comparables get harder?

I think the direct answer there, is our new product momentum.

I don't think -- we've been in a position in this Company today with the products that we've already launched, and the upcoming pipeline that we have across the board in virtually every group.

The cadence of product innovation across the board has increased significantly, and when you sort of combine all of that together, it makes quite a difference.

That is our goal after all.

We're in the end, a technology Company striving to sort of change outcomes.

Now in addition to that, we're completely cognizant of the fact that one of our main growth strategies is to diversify the sources of growth.

And so, we see emerging markets actually steadily improving into the back half of the year, and service and solution again, starts to keep growing because the programs that we're implementing across-the-board are gaining traction across multiple regions.

So those are fairly slow.

It takes a little time for them to come through, but in aggregate they do come through, and they all contribute.

So when you add all of that up together, we feel pretty confident to be in the upper half of the range.

And again, for this to be sustainable, a good year doesn't mean that the next year will be bad.

It has to continue to improve.

So that's the outlook that we have on this.

Okay.

Very helpful.

And I just had quick follow-up for Gary, and maybe one for Geoff.

Gary, our math implies 12% to 15% constant currency earnings in the back half of the year.

That's an acceleration from the first half.

Does that jive with your math?

And how are you feeling about the $850 million number?

And then, for Geoff, I know it hasn't been very long that you've been at the helm at RTG, but I wonder if you could just briefly comment on the ability to achieve the type of network effects in RTG that have been so successful in accelerating Medtronic cardio.

Thank you.

Well, David, to your first comment about the earnings per share, the answer on constant currency would be yes, that's what we would expect to see in the back half of the year.

That's not -- if you look at the first half of the year, basically we've seen between 11% and 12% constant currency comparable growth overall.

And so, we expect that to accelerate a little bit in the back half of the year as we talked about, primarily because of more of the benefits of the Covidien integration, and all the integration efforts coming through.

And so, in total as related to the $850 million comment that we've committed to by FY18, we are right in line -- in fact maybe slightly ahead of our plans to deliver $300 million to $350 million in the current year, and right in line with the expectations on doing that for the full $850 million by FY18.

So we feel very confident about that.

We feel confident about that in our earnings per share guidance we're providing to the organization, or to the investors.

But in general, yes, that's right in line with our expectation.

But foreign exchange does continue to be a negative headwind for us, obviously, but on a comparable constant currency basis, we're seeing acceleration in our growth.

Geoff?

David, on -- a good question.

I'd answer it, three parts to the answer.

One from a market perspective, one thing that's helped the cardiovascular space is the emergence of the cardiovascular service line globally, and we're seeing that, not to the same effect yet.

It's where -- I don't know,10 plus years behind as the neuro service lines, neuroscience service lines emerge, but we are definitely seeing that trend emerge.

And the more that happens, the more it plays to our hand, because we have by far the best breadth to cover those neuroscience service lines.

So that's one, and that is a tailwind for us.

The second is our internal capabilities of taking -- and this is different than actually cardiovascular.

We have implants that work with intra-operative imaging and navigation, and we have both platforms, and that gives us some flexibility.

Now we have to integrate those better, and take them to market, selling benefits versus features, and we're working on that.

But that's another tailwind.

And the intra-operative imaging and navigation is a key driver to us getting this network effect, so we can sell like I said, solutions versus features.

And then thirdly, which we're copying the play book from our cardiovascular group, is changing the way our operating principles and mechanisms, so that our businesses -- the silos come down to a certain extent, and they are incented to drive these cross-business unit deals where it makes sense.

So when you're bundling if you will, intra-operative navigation and intra-operative imaging navigation with some of our implants, you need to have the incentives and operating mechanisms and the analytics to do that.

And so, we're in the process of doing that.

So those three things are the things that are driving it.

But one thing gating it, is the neuroscience service line evolution in the marketplace.

Thank you very much.

Our next question comes from the line of David Roman of Goldman Sachs.

Thank you, and good morning, everybody.

Omar, I was hoping you could go back to one of the things you referenced in your prepared remarks was the contribution from new products I think being above the historical level or your target levels.

Can you maybe talk about what specifically influenced that, and why that wouldn't translate into better overall top line growth?

Is there any part of the new product story that is at all cannibalistic of the base business, or something that's happening in the end markets that would not have led that 400-plus basis points of new product to drive better overall top line growth?

And that's obviously not to throw any water on the results here, but just for some perspective?

Well, a number of things.

First of all, the new product growth includes the baseline product line, so that's inclusive of all of that.

So the only answer if you do the math, is that the emerging markets and service and solutions have to pick up.

Remember, service and solutions because of the integration together with Covidien, the baseline has changed.

So therefore, it's a 20 basis points where our number is like 40 to 60, so there's one aspect that will drag it down.

Those numbers are small, but in the context of what you're talking about, you're talking about the ranges of the upper end here.

So we're talking about 10s of basis points rather than 100s, so they do make a difference.

And then in emerging markets also, as we climb up into the range, it probably will help.

And outside of that, it's a matter of how much above the [$350 million] we actually get.

And again, like I've said before, we just want to be a little cautious, not so much because of our product launch activities, but because of the environment around us, which you just never know.

We just have to be a little cautious about macroeconomic pressures, political instabilities.

Those things or some health care rule changes, so we've -- given our past experience of these things surprising us, we're just going to be a little cautious.

And so, that's really the best way I can answer this, that I'd really like to see all three of our growth vectors above our projections, before we're really confident that we can extend the range, so that we get that level of diversification.

But in no way am I -- any sort of less confident about our new products execution, just because of the breadth of our pipeline.

I think that's going to happen.

I just think that macroeconomic circumstances, we just want to be a little cautious about that.

And therefore, I want to see the other growth vectors also climb to the same range, before we can get more bullish.

Okay.

That's helpful.

And maybe just a follow-up for Gary on the P&L and cash flow side.

As we think about the underlying operating profit of the business, obviously FY16 is a sort of a tale of two halves.

As we think about the normalized run rate of the business, should we think about that 30% number that you're talking about exiting the year, as sort of the right underlying profit of the business, off of which to think about forward forecasts?

And then on the free cash flow side, the $1.1 billion you're talking about for this quarter, if you annualize that, that's pretty close to what you were generating as an independent Company pre-Covidien.

So when do we start to see the benefit flow through to free cash flow, and move toward that target you've put out there for FY19?

Well, with respect to the profit margin, I mean, you can't take our Q4 number and annualize that, because if you've looked historically, the same way that you had with Covidien that we just talked about as far as the tough comparison, our Q4, the profit margin is always much higher than the previous three quarters.

That's just historical, because we have a strong close, and so you have a lower rate.

So you can't annualize the fourth quarter.

But obviously, if we're in the 20%, 29% range for the full year that we've been talking about, then we would obviously continue to build on that number.

So that's kind of the -- take the average for the year, and then build on that from the standpoint of the incremental improvements that we would see from value capture going forward, is what you should assume.

But my only point is, just don't take the fourth quarter and annualize it, because it's an unusual -- it's by far -- the best profit operating margin tends to be in the fourth quarter, but we would obviously, could expect it to continue to improve.

The cash flow in the quarter, that $1.1 billion also includes some restructuring costs and charges and stuff like that.

So if we pull that out, you're probably closer to $1.3 billion.

And the point is, if you look historically at Medtronic and Covidien, the cash flow, also similar to the profits grows as you go through the year.

So it's always -- actually that $[1.2 billion] or $[1.3 billion] is kind of about 40% or 50%, versus where Medtronic Inc.

itself was a year ago in the quarter.

So it's -- we would expect still for the current year there, we're going to be somewhere around $6.2 billion to $6.5 billion in free cash flow.

And similar to what we've talked about in the profits, the cash flow also improves in the back half of the year which is normal, because first half of the year we're paying off bonuses and things like that from the prior year, and the cash flow is just by its historical nature is just lower, but the back half that will accelerate.

So we're still very confident that for the current year, we'll be in that $6.3 billion to $6.5 billion.

And similar to what we've been talking about earnings growing close to double-digits on that cash flow going forward over the next several years, and generating as we talked about close to $40 billion in free cash flow over the next five years.

We're still very confident about that.

Okay.

Next question, please?

Our next question comes from the line of Larry Biegelsen of Wells Fargo.

Good morning.

Thanks for taking the questions.

Let me start with the Puerto Rico tax issue.

I think in September at our conference, you said there would be a briefing in October.

Did that happen, and do you still expect a decision in late FY16?

I think in the past, you said most of these cases settle before a decision.

Do you still feel that a settlement is more likely here as well?

And I had a follow-up, thanks.

Well, I mean, as far as the trial process, yes, there was a process where there was briefings that had to be provided by both parties, like the government and Medtronics, that occurred I believe in October.

That's all taken -- has been done from what I understand.

And now we're in a situation that it's in the judge's purview.

The judge has the option to take as long as she would like in this case.

We are assuming that some -- towards the end of our late, our FY16, early into FY17, is what she will make a decision, or [maybe later than that].

But it can go longer too.

This is up -- this is her decision on how quickly she move in making that decision.

As far as settlement discussions, again, I can't say anything on that because obviously settlement discussions require two parties to come together.

And at this point in time, I can't say anything about that at all.

I mean, if it happens, it happens, but in the meantime we're just waiting to see what the decision is from the court case.

Thanks.

And then, on emerging markets, Omar, you bounced back this quarter plus11%.

And based on your earlier comments, it sounds like you expect that to -- I just wanted to be clear, it sounds like you expect that to improve in the second half.

And I'm asking because, if we do look across med tech, emerging market growth does appear to have slowed.

So I just wanted to be clear that you think you can in the second half of this year build off of the 11%, and actually accelerate?

And is that mid-teens growth that you've talked about in the past still realistic?

Thanks for taking the questions.

First, yes, we really expect this growth to increase.

And the words that I'd like to use, and that I think I used in the commentary was that, we would like to see steady increase, and improve consistency.

So I don't want this to bounce back and forth between 15[%] and 8[%] or whatever.

This thing has to grow steadily, and our diversification across the emerging markets helps with that, and I think we'll see that.

The mid-teens goal is completely realistic over a period of time, and that's what we're aiming to get to.

The market opportunity is massive, and it's really up to us to execute our variety of strategies and get the benefits from them.

So in short, I expect this to steadily improve quarter after quarter.

Thanks for taking the question.

Thanks, Larry.

Our next question comes from Robert Hopkins of Bank of America.

Thanks.

Can you hear me okay?

Yes.

Great.

Good morning.

So a couple quick things.

First for Gary, the synergies that predicted of $300 million to $350 million for this year, can you just give us a sense as to how much has been realized here in the first half?

And also, Gary, if you wouldn't mind, just walking through in a little more detail, why you think the Street needs to shift a little bit from in terms of earnings from Q3 to Q4?

Well as far as the synergy number of $300 million to $[350] million, I'd say right now, we probably have already achieved about 40% of that, 35% to 40% of it has already been incurred.

We've indicated previously that a bigger portion would be in the back half of the year, and that's what we're still expecting.

So I would expect that 60%-plus of the benefit will occur in the back half of the year.

So we're right in line with our plans and our targets, in fact slightly ahead of where they are at.

But approximately 40%, we've already realized up to this point.

With respect to the guidance, just as far as taking a look at the quarters and stuff, all we're looking at is that if you look historically, our Q2 and Q3, historically both revenue and bottom line are relatively consistent.

There's not a big change overall between those two.

And we did a $1.03 here in the current quarter.

We're assuming that there will be an R&D tax credit that there's a benefit for in the third quarter.

And so, overall that would get you more in the $1.05 to $1.06 range.

And all we're saying, that's versus where the Street is at, I think they are a little bit higher than that number.

On the other hand, I would tell you I think the Street is a little lower in Q4, versus what we historically would see as far as an up lift.

So all we're saying is, if you look at our historical modeling, Q2 and Q3 are relatively consistent.

And it's Q4 where you see the big jump.

I think there's been too much weighting put into Q3.

And but again, these are your models.

You guys can put together how you'd like, but that's if you look at history, I think you're going to see that you're a little bit probably too high in Q3.

And then, for Mike or Omar, and thanks for that Gary, can you guys just put into perspective the MRI safe ICD launch in the United States?

Maybe relative to the MRI safe Pacer launch, just how should we think about this launch in terms of the ability of this product to take share, while you're the only one in the market with such a product?

And then, Omar, I was wondering if you could just give broad thoughts on state of med tech right now, in terms of what you're seeing across your businesses, in terms of surgical procedure volumes, pricing, just kind of a broad look at the current point in time if you don't mind?

Okay.

Mike, you want to go first?

Bob, maybe the best way to think about it is just some statistics around mix.

Right?

If you look at dual chamber pacemakers right now, probably two-thirds of our product is MRI safe, as we sell into initial implants.

And with the recently -- two quarters ago, we launched the single chamber, we're probably now up to somewhere around 40% mix in single chamber for MRI safe.

We just launched the MRI safe ICD.

And our mix in the quarter would be probably somewhere around 20%, so there's still a lot of room to run there.

And obviously, we've not yet released the MRI safe CRTD, which we expect to do by the end of the year.

So I think that might give you some sense of how we see the mix change taking place within our business.

And with respect to the overall med tech market, look, we've had a -- the med tech industry has actually had a pretty good year.

And I think a lot of that as you'll acknowledge is driven by US growth.

So the US has been stronger than I can remember for a long time.

And that's not only the med tech sort of companies, but also hospitals.

Now as we go into sort of calendar year 2016, there will be some anniversarying that's happening.

And also some of the hospitals have reported slightly sort of lower growth rates.

And so, we're watching this carefully.

I don't know to what extent the procedure growth will continue at the same rate of growth.

I don't think it will slowdown per se, but the growth rate might well slow down.

So that's what we are watching very carefully.

And I think coming up to the next couple months, it's pretty crucial to see how procedures go.

But again, it really at the end of the day, it is a US story.

And to a certain degree, emerging markets, med tech has been resilient in emerging markets, compared to other industries, simply because of the nature of the industry itself, that governments continue to invest there.

So that hasn't -- the bottom really hasn't fallen off that at all.

And although I think we've outperformed the overall market, the market in general has been pretty resilient.

So those things holding, US growth is what's driven med tech industry.

I think US growth will anniversary, probably steady a little bit.

On the other hand, med tech in emerging markets might well start to improve.

I mean, I don't know.

I know our projections are that we'll start to improve.

Overall, we'll have to see.

Thank you.

Hope that helps.

Very much, thank you.

We have time for one more question, operator.

Our final question will come from the line of Josh Jennings of Cowen and Company.

Hi, good morning.

Thanks a lot for taking the questions.

Just wanted to, Omar, start with first one is, although it's relatively early since the close of the Covidien transaction, you've had three quarters of combined entity experience.

Just wondering how you're evaluating the entire product portfolio, and whether or not you feel like you have increased flexibility now to prune the portfolio, or weed out lower growth, lower margin products and business units, and whether we should be expecting that?

I think I kind of alluded to that a little bit.

First of all, in the -- since the acquisition we've set up the minimally invasive therapies group under Bryan.

And Bryan and his team have really chartered a very clear and compelling vision for the future, which is outcomes-based, and very aligned with the Medtronic mission.

So that was the first step, and I think I talked about the four areas of focus within MITG.

Now we're looking at the entire range of assets that we have within MITG, and kind of assessing that against the strategy.

And as we go through that process which we're in the middle of doing, in the next six months or so, we will have, we will take action as is necessary.

But that's the way in which we're gauging it.

So the first step was to decide clearly, and get full sort of excitement with the team, and agreement with the team, that this is where we should go, which I think the team has put in place, and understand what the core product technologies that drive that, and solutions that are necessary for that.

Next is to look at the breadth of everything else, and see what fits and what doesn't.

Now some things clearly don't, and we'll have to see how we monetize those assets as we -- as you move forward.

But by and large, that's the way in which we're looking at this.

Great.

And then, just a follow-up for Omar and Gary.

Any updated views on potential revenue synergies outside of peripheral and neurovascular?

Thanks a lot, gentlemen.

That is an area that is pretty active.

I mean, one thing that you just heard about was in stroke, where the LINQ product feeding into the stroke care and neurovascular channel is one that's pretty high on our list.

I can tell you that as a business, we worked as a leadership team, we worked to figure out methodologies where internally we can have our selling group sell multiple products, and do it in a way that's scalable and sustainable, and done in an organized way around the world.

I think that first step was pretty important.

So that area certainly is a big sort of enabler for us to move products around various sales channels, and we've done that.

We'll have to see how these things go forward, because a lot of discussion between sales teams using those principles, without getting distracted from their main focus as to how to accelerate their growth.

So we're optimistic that we'll start to see those, but the specifics of those right now are still sort of being generated.

The other area that I'll point out, is the translation of the operating room managed services from cath lab.

That's a big step for us, and the acceleration there is pretty exciting.

As you can see, like I've said we've already closed six of those deals, $140 million in cumulative revenue.

That's much faster than anything that Covidien was originally planning for, and we're only beginning there.

So those are the ways in which we're looking at this right now.

And over time, we're creating a structure where we can use the combined nature and assets of our Company to address many different problems, both from a technology perspective and from a co-morbidity perspective, which will be an increasing problem in health care, where we think we have the breadth of assets that we can address very effectively.

Okay, so with that, thank you all very much for your questions.

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

We look forward to updating you on our progress in our Q3 call in March 1. Thank you, and all of you, please have a great day, thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.