美敦力 (MDT) 2016 Q3 法說會逐字稿

Good morning, my name is Jackie, and I will be your conference operator today.

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

(Operator Instructions)

Thank you.

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

Please go ahead.

Thank you, Jackie.

Good morning, and welcome to Medtronic's third-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 third quarter, which ended on January 29, 2016.

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 issued for the first time, a presentation that provides additional details on our revenue performance, and as result have reduced our prepared revenue by division commentary in Gary's section.

Next, you should note, that many of the statements made during this call maybe 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 in comparison to the third 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.

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

This morning, we reported third-quarter revenue of $6.9 billion, representing growth of 6%, in the upper half of our mid single-digit baseline expectation.

Q3 non-GAAP diluted earnings per share were $1.06, growing at 17% on a comparable constant currency basis, and reflecting 1,150 basis points of leverage, significantly above our baseline expectation of 200 to 400 basis points.

Our performance in Q3 was solid, with sustained execution resulting in another quarter of market outperformance.

We continue to deliver on our three growth strategies, therapy innovation, globalization and economic value, which are driving increased diversity of our growth, an important and differentiated attribute of our Company.

Our revenue growth may modestly ebb and flow from quarter to quarter, indicative of the challenges we are absorbing in certain businesses or regions, as we capitalize on success in others.

However, our confidence around the sustainability and consistency of our revenue growth within the mid single-digit range continues to build with each passing quarter.

In addition, the Covidien integration is delivering robust operating leverage, as we realize our committed cost synergies, which combined with our financial leverage drove high teens EPS growth and double-digit EPS leverage in Q3.

Through [FY18], as we continue to realize cost synergy benefits, we expect to be at the high end of, or exceed our EPS leverage goal of 200 to 400 basis points.

While our operational performance remains strong, we recognize foreign currency translation is still a significant pressure to our bottom line on a reported basis, as it is for most multi-national companies of our size and diversity.

We are attempting to offset this as much as possible, by stretching our operations, and through our conventional hedging programs.

We also continue to generate significant accessible free cash flow which we are deploying with discipline, investing for our future while at the same time allocating capital to reduce debt, and provide strong returns for our shareholders, through dividends and share repurchases.

In summary, our formula for long-term success is to deliver consistent mid single-digit revenue growth, with 200 to 400 basis points of EPS leverage, and a return -- and return a minimum of 50% of our adjusted free cash flow to shareholders through dividend growth and share repurchases.

The expected net result is creating enormous value, with sustainable double-digit total shareholder returns.

Now let's turn to the drivers of our revenue growth.

As we've noted before, we have three growth priorities stemming from our overall strategies, new therapies, emerging markets and services and solutions, with specific growth expectations for each.

We continue to quantify and communicate our performance against these goals.

In therapy innovation, we continue to see strong adoption of our new products, and our pipeline remains robust.

Our new therapies growth vector accounted for nearly two-thirds of our total Company growth, contributing approximately 350 basis points, at the high end of our goal of 150 to 350 basis points.

Based on our pipeline and product breadth, we believe performance in the upper half of this range is sustainable over the long-term.

In our cardiac and vascular group which grew 7%, we continue to see strong growth from recently launched products that are helping to create important, rapidly growing med tech markets, such as [transcatheter] aortic valve replacement, MRI-safe implantable technology, AF ablation, predictive diagnostics and drug-coated balloons.

CVG is also seeing highly differentiated new products drive growth in its base businesses.

In drug-eluding stents, our Resolute Onyx and Resolute Integrity stents are holding share, despite major competitive launches.

Our position in Europe has been strengthened further by the recent addition of new sizes and indications for Resolute Onyx.

In High Power, the Evera MRI ICD that we launched last fall resulted in improved pricing in the US ICD market, and a multi-year high share position.

Looking ahead, we have a number of new products that will continue to differentiate us in the CVG market, and help protect and grow our leadership position.

These include our MR Conditional CRT-D devices which recently received FDA approval and are currently launching in the US and Europe.

We also continued to make progress in bringing our Micra transcatheter pacing system to the US and Japan, and we had a successful FDA advisory panel on this technology two weeks ago.

Our longer-term CVG pipeline is also robust, with potentially disruptive therapies like our drug-filled stent, Intrepid transcatheter mitral valve, and Symplicity Spyral renal denervation system.

Our minimally invasive therapies group grew 5%, with surgical solutions growing above market, and PMR growing at market.

Innovative technologies that advance and enhance minimal invasive surgery are driving strong above market growth.

Looking ahead, the majority of MITG's growth will come from five key growth drivers.

Within surgical solutions, open to minimally invasive surgery or MIS, gastrointestinal cancer and lung cancer, and within PMR, end-stage renal disease and respiratory [compromised].

Of these, the largest contributor to growth is expected to come from our open to MIS strategy, which is focused on sustainable long-term surgical market leadership by improving open surgery, transitioning open surgeries to MIS, and advancing MIS technologies.

Our recently created new business, renal care solutions, supplemented its breadth with the acquisition of Bellco last month.

Bellco has a full line of therapies and systems for the treatment of renal failure.

This combination of Bellco with our legacy renal access business, and our internally developed portable dialysis system offers a complete product solution for end-stage renal disease.

To fuel the global growth drivers that I just mentioned, MITG has a strong product portfolio, and expects to launch more than 20 products through the end of FY17, with approximately 75% in surgical solutions, and approximately 25% in PMR.

These new offerings are expected to generate approximately $500 million in cumulative revenue over the next three years.

Across MITG, we are developing solutions that span the entire care continuum, enspiring to enable earlier diagnosis, better treatment, faster complication-free recovery, and enhanced patient outcomes through less invasive solutions.

In our restorative therapies group which grew 4%, we also have a number of new products driving growth.

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

Following the four clinical trials published last year in the New England Journal of Medicine, the market continues to adopt our Solitaire mechanical thrombectomy device, a segment of the global ischemic stroke market that we think can triple in size by 2020.

In surgical technologies, we are seeing strong growth from our recently launched [OYarm O2] surgical imaging system.

In spine, despite posting mid single digit growth in international in core spine, and double-digit growth in US BMP, Q3 results came in below our expectations, primarily because of weakness in US core spine.

We are focused on executing our turnaround plan in spine.

Our primary focus is growing our market share through what we are calling speed-to-scale product launches.

Speed-to-scale involves coming to market with a steady cadence of new products as a result of faster innovation cycles, and launching these products at scale with sets available for the entire market.

These new products will also be combined with enabling technologies, biologics, and targeted physician training at the time of launch.

The goal is to constantly innovate procedures such as OLIF and TLIF, and improve upon their outcomes.

We have several near-term launches including accelerated ramps of SOLERA Voyager, and our elevated expandable interbody device, both of which are expected to improve our share in TLIF procedures, an area where we have been struggling.

This quarter, we will launch the Atlantis Essentials, another Cervical Plate System, the first product in our Spine Essentials platform.

Spine Essentials will bring efficiency to the most common spine fusion procedures through more streamlined pre-sterilized sets.

Additionally, we are further integrating the development roadmaps of our enabling technologies with our spine instrumentation, offering a differentiated surgical synergy experience for our customers.

And finally, we intend to focus our efforts in gaining share in [bio grafts], utilizing our broad biologics portfolio including Infuse.

We are challenged this quarter in our neuromodulation division as well.

While we continue to make progress against our FDA consent decree commitments, and are focused on resolving this matter, our drug pump revenue has been affected.

We are also facing increased competition in pain stim, our recently approved MRI Surgical Lead is expected to help our competitive position in pain stim, as we are the first Company to have a complete spinal cord stimulation system approved for full body MRI scans.

In addition, we continue to market the benefits of our differentiated AdaptiveStim and SureScan MRI technology, and more surgeons are adopting our AdaptiveStim HD high-density programming options.

While we are focused on solving the issues in spine and neuromodulation, and our efforts in spine are expected to result in steady improvement, neuromodulation could be under some pressure for the next several quarters resulting in overall RTG growth around the low end of the mid single-digit range.

In our diabetes group which grew 11%, we continue to see strong adoption of our MiniMed 640G system in the markets where it is available, as well as strong demand for our MiniMed Connect, which is the only system providing remote access to pump and sensor data on the user's smartphone.

We also continued to make excellent progress in bringing the world's first hybrid-closed loop system, the MiniMed 670G to market.

We expect to complete enrollment in our pivotal trial in the next few weeks, with PMA submission to FDA targeted before the end of June.

Outside the US, we had strong Q3 performance.

We were pleased by the positive guidance recently issued by NICE in the United Kingdom which recommended the MiniMed Paradigm Veo as the only system for reducing the risk of potentially life-threatening hypoglycemic episodes.

In our non-intensive diabetes therapies business for Type 2, our partnership with Henry Schein is underway, and we are already starting to see interest from primary care physicians for our iPro2 Professional CGM system with Pattern Snapshot.

In our diabetes solutions and services business, we are preparing to bring our standalone CGM system, Guardian Connect, to market with a PMA submission in US next week, as well as expected launch in Europe in earlier FY17 This product will allow us to provide both Type 1 and Type 2 patients on multiple daily injections with a real-time glucose monitoring solution.

When you combine our standalone CGM product with the applications, and cognitive computing capabilities that people bring through a partnership with IBM, we are well-positioned to provide patients with not just a sensor, but with a comprehensive diabetes management solution.

Overall, we are excited by the progress of our diabetes business, and feel we are well-positioned for sustained growth.

Next let's discuss our globalization strategy.

In Q3, emerging markets grew 14%, and contributed approximately 190 basis points to our Q3 total company growth, at the upper end of our baseline goal of 150 to 200 basis points.

We have consistently delivered double-digit growth in emerging markets, despite the fact that several of these markets have faced macroeconomic pressures.

This is a result of continued execution of our differentiated strategies, in channel optimization, and in developing public and private partnerships.

We have also benefited from increased geographic diversification of our emerging market revenue, which stabilizes the growth rate, and reduces the dependency on any single market.

In Q3, Middle East and Africa, Southeast Asia, India, and Greater China all grew in the mid to upper teens.

In China, we grew 14%, where our strong sales execution and expansion of our multi-line selling presence into Tier 2 and Tier 3 markets is resulting in above market growth.

We continue to implement our channel optimization strategy, which aims to transition our distribution partnerships to include consolidated logistic platform distributors.

We are also developing comprehensive partnerships with provincial governments, like that with the Chengdu government in Sichuan province where we previously announced a partnership to manufacture our portable hemodialysis equipment.

In Q3, we broadened our partnership with Chengdu, agreeing to manufacture our next-generation diabetes pump technology in Chinese language for the local market in Sichuan, while working together with local authorities to expand access for this product.

China continues to represent a tremendous growth opportunity.

Despite the complexities of this market, we have shown that we can grow double-digits in China on a sustained basis.

We believe China will become our largest health care market over the long-term, serving more patients and doctors than any other country, and we can never lose sight of this potential.

In the Middle East and Africa, we grew 19%, driven by the joint venture we formed earlier this year with our largest Saudi distributer as part of our channel optimization strategy in the region.

In Latin America, we grew 10% including [some percent] growth in Brazil.

While we continue to outperform the market in Brazil, we do see continued market volume weakness, resulting from public spending constraints, as well as some difficulty in getting inventory into the country because of customs holds.

Across the emerging markets, we are applying our standard market development activities, as well as our differentiated approach of local channel optimization, like in China, India, Saudi Arabia and Turkey.

establishing government partnerships in Chengdu, and developing private partnerships like the one we established with The Abraaj Group last year -- last quarter.

All of these initiatives have the ability to accelerate growth in these regions, and lead to sustained market outperformance.

We believe strongly that the penetration of existing therapies into emerging markets represents the single largest opportunity in med tech over the long-term.

Turning now to economic value growth strategy.

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

While this overall result was below our goal of 40 to 60 basis points revenue growth, our revenue growth was in the mid 30%s and contributed 50 basis points to CVG growth, where our efforts are most developed.

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

In care management services, formerly known as Cardiocom, our growth rate was in the mid 20%s in Q3, driven by strong performance within the US Veterans Administration healthcare system, where we are managing a cohort of over 85,000 patients with multiple comorbidities.

Care management services represents an important platform for us, especially as post-acute care services become even more critical in bundled payment models for different interventions.

In our hospital solutions business, through which we provide expertise and operational efficiency, as well as daily administrative management of hospital cath labs and operating rooms, we have service revenue growth rates in the mid 30%s.

Since that time we started this business, a little over two years ago, we have now completed a total of 72 long-term managed service agreements with hospital systems, representing more than $1.7 billion in contracted service and product revenue over an average span of six years.

While the majority of these hospitals are in Europe, we also have seven hospitals in Latin America, and seven in the Middle East and Africa.

We continue to attract strong customer interest in hospital solutions in regions around the world, and we have a full pipeline of potential contracts.

We are pleased with the progress we are making, in expanding hospital solutions into operating rooms, utilizing the breadth of our MITG products, and associated expertise.

We have signed five operating room managed services deals, representing approximately $140 million in cumulative revenue, with an average life of seven years.

We are also expanding our solutions offerings into chronic disease management through Diabeter, a Netherlands-based diabetes clinic and research center we acquired almost a year ago.

We continue to grow the number of contracted patients, and expect to expand Diabeter beyond the Netherlands over time.

Through initiatives like Diabeter, as well as others that I mentioned earlier, we are transforming our diabetes group from a market-leading pump and sensor business into a holistic diabetes management business.

While all of these services and solutions, care management services, cath lab and operating room managed services, and Diabeter, are still relatively early-stage businesses, they represent important future building blocks that we will use to create comprehensive value-based healthcare offerings, where payment will be based on measurable patient outcomes over a specific time horizon.

We are rapidly developing expertise in these areas, with a particular focus on supporting bundled solutions across the care continuum, targeting specific patient cohorts requiring a particular intervention.

This is consistent with the direction of CMS's bundled payment initiative, and their first implementation of comprehensive care for joint replacement or CJR, which we fully support.

While this initiative is still evolving, it is one that's mandatory, consistent and measurable, which allows it to be scalable.

We encourage CMS to expand bundled payments to other clinical areas, where we participate more broadly.

Healthcare is going through a necessary transformation, where stakeholders are seeking not only to improve clinical outcomes and expand access to care, but are also looking for solutions to optimize cost and efficiency.

Our confidence continues to grow in Medtronics' ability to lead and compete in these new value-based healthcare models around the world.

Our organization is exploring new and novel ways, to not only deliver better clinical and economic value, but to tie our success to these outcomes through innovative new business models with providers and payers.

We remain convinced that our technologies and services can play a central role, to make the shift to value-based healthcare successful.

Turning now to the P&L.

As I mentioned earlier, we delivered EPS leverage of -- in Q3 of 1,150 basis points on a comparable constant currency basis, which significantly 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 fiscal year, as we delivered on our productivity improvements and cost synergy programs.

Operating leverage in the quarter was 510 basis points, driven predominantly by the improvement in SG&A, which is the line item where the majority of the Covidien integration cost synergies that we are realizing today are located.

The remainder of our EPS leverage was driven by improvements in our interest expense and tax rate, as well as share repurchase activity.

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

In Q3, we generated $1.8 billion, and expect to generate nearly $40 billion in adjusted free cash flow over the next five years.

We also continue to look for ways to [un-trap] on our balance sheet.

Last September, we announced that we had [un-trapped] $9.3 billion of cash, and last month, we announced how we intend to use these proceeds.

We are executing an incremental $5 [billion] share repurchase that we intend to complete by the end of FY18.

We intend to use a majority of remaining proceeds, to either prepay existing debt, or pay debt as it comes due by the end of FY18, in order to meet our commitments to our debt investors.

We are deploying our capital with a balanced focus in M&A investments, meeting our debt reduction commitments, and returns to shareholders.

We are committed to returning a minimum of 50% of our adjusted free cash flow to our shareholders, through dividends and share repurchases.

As an S&P Dividend Aristocrat, we expect to deliver dependable long-term dividend growth.

Earlier this fiscal year, we increased our dividend by 25%, and we expect to grow our dividend faster than earnings, with the intent of reaching a [40]% payout ratio on a non-GAAP basis, even earlier than we had previously announced.

Regarding share repurchases, with incremental $5 billion share repurchase, we expect return approximately $15 billion to shareholders over three years, more than double the amount we returned over the past three years.

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

Any investment we make, must meet our portfolio criteria which are, the target must provide a line of sight to improving outcomes, allow for Medtronic to allow value, and we must have a team that is positioned to win.

In addition, our investments must be aligned with, and strengthen one or more of our three growth strategies, meet our high financial return hurdles, and minimize any near-term shareholder dilution.

Before turning the call over to Gary, I would like to conclude by commenting briefly on our Covidien integration activities, which continue to go extremely well.

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

We have preserved, and in many cases, accelerated the growth of both companies.

Talent retention and employee satisfaction remain high, as our two cultures continue to come together.

Our value capture programs are resulting in strong operating leverage, and we have meaningfully improved the sustainability of both our growth, through the diversification of our revenue base, and our capital allocation goals through the increased access to our cash.

In summary, Q3 was another quarter of solid execution by our organization, our operating leverage is coming through as we expected, and I am pleased with how we are positioning the Company to deliver growth consistently and reliably.

Gary will now take you through a more detailed to look at our third-quarter results.

Gary?

Thanks, Omar.

Third-quarter revenue of $6.934 billion increased 61% as reported, or 6% on a comparable constant currency basis, which excludes the $344 million of unfavorable impact of foreign currency.

Acquisitions and divestitures contributed a net 20 basis points to the Q3 revenue growth.

Q3 non-GAAP earnings per share was $1.06, a decrease of 1% versus the $1.07 delivered by legacy Medtronic last year, or an increase of 17% on a comparable constant currency basis, after adjusting for the $0.11 impact to earnings per share from foreign currency translation.

Q3 GAAP diluted earnings per share were $0.77, a decrease of 21%.

In addition to the $374 million after-tax adjustment for amortization expense, this quarter's non-GAAP adjustments to earnings on an after-tax basis were a $43 million charge for acquisition-related items, a $16 million net restructuring charge, and a $25 million benefit resulting from the establishment of a deferred tax asset related to the realization of a one-time capital loss.

Our cardiac and vascular group which accounted for 35% of our total Company sales grew revenue by 7%, with all three divisions growing at or above overall Company growth.

CRHF grew 6%, as we took significant share in a flat global implantables market.

In High Power, our strong Evera MRI launch resulted in our highest US High Power share since early in the decade, despite the fact that we had declines in CRT-D.

While our CRT-D business experienced sequential growth in US implant share, we also had an intentional reduction in customer inventories ahead of our Q4 CRT-D MRI launch.

In coronary, we are holding global diluted earnings -- drug-eluting stent share in the face of major competitor data releases and product launches, which we attribute to increasing preference for the Resolute Onyx in Europe, and our CVG multi line contracts in the US.

In transcatheter valves, we grew in the low 30%s, consistent with the market.

Market share growth in Europe and the initial launch of CoreValve in Japan in the back half of Q3, balanced modest US share loss, where our competitor product launch, and a lack of having Evolut R in the largest valve segment limited total US growth to the mid 20%s.

We were pleased to receive IDE approval for our US low risk trial, and it is worth noting that we now expect the global TAVR market will grow to approximate $4 billion by the end of 2020.

In peripheral, we maintained drug-coated balloon market leadership globally, and in the US on the strength on of our clinically differentiated IN.

PACT Admiral balloon.

Our minimally invasive therapies group which accounted for 33% of our total Company sales grew revenue 5%, with strong at or above market performance in both divisions.

In surgical solutions, both Advanced Stapling and Advanced Energy grew in the upper single-digits, although we estimate that US surgical volumes have normalized now at 1% to 2%.

The PMR division grew 1%, as the business was affected by a product hold of the Puritan Bennett 980 ventilator, which resulted in an approximate negative $10 million to $15 million impact to the quarter.

This is expected to affect quarterly PMR revenue by approximately $20 million to $25 million, until the product returns to the market, which is expected in the first half of next fiscal year.

Our restorative therapies group which accounted for 25% of total Company sales grew revenue by 4%, with strong growth in neurovascular and surgical technologies offsetting declines in spine and neuromodulation.

In spine, while US core spine was challenged, we gained international core spine share.

In BMP, the US had strong low double-digit growth.

However, the InductOs ship hold in Europe is expected to continued through mid FY17.

In neuromodulation, we recently received FDA approval for Parkinson's patients with early-onset motor complications, expanding the number of potential patients that can be treated with DBS therapy.

Our diabetes group which accounted for 7% of total Company sales grew revenue 11%, with strong broad-based performance across all three divisions.

In IIM, our Type 1 business, we are seeing very good growth, driven by the MiniMed 640G.

In NDT, our Type 2 business, while the revenue base is still small, we are seeing growth over 250%, as we continue to drive our iPro2 Professional CGM solution, and the new easy to interpret Patterns Snapshot report into the primary care channel.

In DSS, our diabetes services solution business, we saw high single-digit growth, driven by US consumable sales, our Diabeter acquisition, and continued strong adoption of our MiniMed Connect remote connectivity platform.

Now turning to the P&L.

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

The Q3 operating margin was 29.2%.

This represents a140 basis point improvement over the prior year.

But this improvement was completely offset on a reported basis, by a negative 140 basis point impact from foreign currency.

The 140 basis point operating margin improvement included a 140 basis point improvement in SG&A, offset by a 20 basis point decline in gross margin, a 10 basis point increase in R&D, and a 20 basis point improvement in net other expense.

This resulted in operating profit growth of over 10%, or operating leverage of approximately 510 basis points over revenue growth.

Our operating margin included gross margins of 70.5%, SG&A of 33.3%, and R&D of 7.6%.

Also included in our Q3 operating margin was net other expense of $9 million, which included net currency gains of $78 million, primarily from our earnings hedging program.

It is worth noting that included in these net gains, was an unexpected $21 million expense, resulting from a reevaluation of the Argentine peso-denominated assets, which devalued by approximately 30%.

Regarding our earnings hedging program, while we hedge the majority of our operating results in developed market currencies, to reduce volatility in our earnings from foreign exchange, a growing portion of our profits are unhedged, especially emerging market currencies which can create modest volatility in our earnings.

Assuming recent exchange rates for the remainder of the fiscal year, which include [EUR1.09 ] and [JPY1.13], we expect Q4 net other expense to be in the range of a $5 million expense to a $15 million of income, which includes approximately $110 million in currency gain, and no longer includes the US Medical Device Tax which has been suspended.

We expect our Q4 operating margin to be in the range of 31% to 31.3% on an as-reported basis, based on current exchange rates.

This forecast implies an approximate 300 basis point improvement in our operating margin on a constant currency basis.

Our value capture programs, as a result of the Covidien integration remain on track, and we now expect to exceed our original FY16 savings goal of $300 million to $350 million, and continue to target a minimum of $850 million by the end of FY18.

Below the operating profit line, Q3 net interest expense was $176 million, in line with our forecast.

Based on current rates, we would expect Q4 net interest expense to be the range of $205 million to $210 million.

This is an increase over prior quarters, as the execution of our incremental share repurchases results in reduced interest income.

At the end of Q3, we had approximately $35.8 billion in debt, and approximately $17.3 billion in cash and investments, of which approximately $6 billion was trapped.

Our non-GAAP nominal tax rate on a cash basis in Q3 was 14.3%, which was an improvement from our forecast due to the permanent extension of the US R&D Tax Credit, as well as operational tax adjustments.

For Q4, we expect our non-GAAP nominal tax rate on cash basis to be in the range of 16% to 16.5%.

In Q3, adjusted free cash flow was $1.8 billion.

We remain committed to returning a minimum of 50% of our adjusted free cash flow to shareholders, and also continue to target an [A] credit profile.

In Q3, we paid $534 million in dividends, and repurchased $710 million of our ordinary shares.

As of the end of Q3, we had remaining authorization to repurchase approximately 81 million shares.

Third quarter average daily shares outstanding on a diluted basis were 1.422 billion shares.

For FY16, we now expect diluted weighted average shares outstanding to be approximately 1.427 billion shares, including approximately 1.419 billion shares in Q4.

Next I would like to comment on our revenue outlook.

We expect revenue growth for the fourth quarter of FY16 to be in the range of 5% to 5.5% on a constant currency basis, which is consistent with our prior outlook of second half revenue being in the upper half of our mid single-digit baseline goal.

This is solid revenue growth, especially when you consider the strong upper single-digit growth we delivered in Q4 of last year.

While we cannot predict the impact of currency movements, to give you a sense of the FX impact if the exchange rates were to remain similar to yesterday, for the remainder of the fiscal year, then our Q4 revenue would be negatively affected by approximately $180 million to $220 million.

Turning to guidance on the bottom line.

We continue to expect non-GAAP cash earnings per share in the range of $4.36 to $4.40, which includes an expected $0.45 to $0.50 negative foreign currency impact based current exchange rates.

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.

Next I would like to provide some high level framing comments on FY17.

While we intend to give our revenue outlook and earnings per share guidance per our normal practice on our Q4 call, here are some items to keep in mind, as you think about our next fiscal year.

First on revenue growth.

While we are not formally providing our FY17 and our revenue outlook, we believe it is reasonable to think about our revenue growth in the mid single-digit range on a constant currency basis, consistent with our baseline expectations.

However, keep in mind, that we had an extra selling week in the first quarter of FY16.

This will negatively affect our Q1 FY17 revenue growth rate by approximately 600 basis points, and our full fiscal year revenue growth rate by approximately 150 basis points, and has a commensurate impact to earnings per share.

Regarding foreign exchange, given current rates, we expect a few hundred million dollar negative impact in FY17 revenue, and expect it to negatively affect FY17 earnings per share by approximately $0.20 to $0.25, primarily from the loss of significant hedging gains we had in FY16, as well as continued pressure from unhedged emerging market currencies.

Based on the operating leverage from our Covidien integration activities, as well as the financial leverage from share repurchases, we expect to generate in FY17, we would expect constant currency earnings per share growth to be in double-digits to lower teens, after adjusting for the extra week in FY16, which would exceed our baseline goal of generating 200 to 400 basis points of earnings per share leverage.

Before turning the call back to Omar, I would like to remind you that we plan to hold our Q4 earnings call on May 31.

We also plan to host our Investor Day on June 6, which will be held in New York City.

Omar?

Thanks, Gary.

And we will now open the phone lines for Q&A.

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

We want to try to get to as many people as possible, so please help us by limiting yourself to only one question, and if necessary a related follow-up.

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

And Operator, first question, please?

(Operator Instructions)

Mike Weinstein, JPMorgan.

Thank you, guys and good morning.

Let me start with a couple of items.

So Gary, probably the first question people will have, is just the operating margin expansion this quarter, wasn't I think what people were hoping, and maybe which you were thinking last quarter.

Can you just talk about much of that was FX which you touched on, and any other comments just relative to the, question on the synergies from Covidien?

Yes, I mean, as we indicated Mike, I mean, obviously we're getting a lot of leverage in the quarter, 1,150 basis points on the bottom line, on a constant currency basis.

And as I mentioned in my comments 510 points on the operating margin line, just of leverage there and a 140 basis point improvement on an operating basis.

Unfortunately, with foreign exchange as has been a headwind all year, it is having a similar negative impact on the margin.

And so we did not get as much of an improvement that you might see on it as-reported basis just because of that.

So as we've been doing all year, we're basically, we're continuing to execute against our operating leverage plans, and our cost takeout synergies that we had from the Covidien transaction.

But as with many companies we're experiencing the foreign exchange that's mitigating or eliminating a lot of that benefit that we are, as we roll through that.

We're trying to manage the best we can, but clearly that's having a big impact.

The Covidien synergies, the integration costs were coming in right on plan.

In fact, as I mentioned in my comments, we are ahead of schedule, and we're probably going to -- we clearly will exceed the $300 million to $350 million that assumed in the current year.

We are seeing a lot of leverage here in Q3 and as we indicated.

And even in Q4, we'll continue to see improvement in that operating margin as a result of these synergies.

So we are right in line with things.

But I agree with you, I think FX does kind of camouflaging some of the real benefits you are seeing from an operations perspective.

And for FY17, the $0.20 to $0.25 that's -- let's say, $0.05 to $0.10 more than maybe you were thinking a month and a half ago?

Yes, I mean, I think overall, the gains we even set for the current quarter was like a $100 million, it's $100 million in Q4.

So we are generating almost $400 million in gains in the current year.

Obviously, we are not hedged at this favorable rates next year, and as result that's going to have a negative impact.

I think the -- the thing that's a little bit higher than what we would've even expected a month or two ago, is emerging markets, some of the currency in emerging markets have continued to weaken, and that's become greater part of the total.

But the biggest portion of the $0.20 to $0.25, the majority of that is just the hedging gains we will not have in FY17 that we had in FY16.

Right.

And then last one.

The CRT-D inventory drawdown that you highlighted in the quarter, any estimate for how much that was, because obviously, the ICD performance was a little bit weaker than the Street was expecting?

Mike Coyle will take that.

Yes, it was in the range about $15 million to $20 million.

Okay, that's helpful, Mike.

All right.

Thanks, you guys.

Thanks, Mike.

David Lewis, Morgan Stanley.

Good morning.

Just a couple of quick questions here.

I guess, Omar, I think the hallmark the last several quarters of the business has been, a significant strength in the US.

And this is the first quarter in a couple, where we've seen US performance was a little slower here in the third quarter versus the prior two or three quarters.

It was pretty broad-based, there were certain specific things you called out.

Is anything broadly you would comment on, as it relates to the US market performance in the quarter?

Like I had mentioned in the last call, the three things that we look at in US -- one is one which we knew was going to kind of slow things down a little bit was the anniversarying of the Affordable Care Act.

And that probably had a little bit of impact.

The overall procedure volumes, based on the economy, I think were more or less steady.

I think in surgical solutions, maybe a slight drop in procedure volumes.

But essentially, it was steady and there was no economy-related issues.

The third aspect was simply our new products.

And like I said these new products will kind of come and go on a quarter by quarter basis.

And in general, we still have pretty strong performance from new therapies, but in prior quarters it was even stronger.

It was even a larger synergy of different products coming in at the same time.

I think that's going to go -- float up and down, and that I think that is the main factor here, in the change in the US market.

But I have to point out that our whole model is based on the diversification, because we can't depend on just one market.

And as you saw this quarter, the emerging markets pick up a little bit, and essentially offset the drop in our US revenue.

But I think overall, from a market perspective it is pretty steady.

Okay.

And then, Omar for you, or the broader team.

Obviously durable growth is what you're trying to drive people towards.

I think there's an outsized fear over the next couple of quarters that your CRM performance is not sustainable.

Obviously that's going to weigh on relative growth the next couple of quarters.

Maybe either for Mike, why is CRM growth sustainable?

And, Omar or for the broader team, if you think about certain franchises, whether its Spine or PMR, what are the key franchises that start getting better if CRM performance begins to decelerate?

Thanks so much.

Thanks, Mike, you go first, and I'll talk.

Actually, we see the CRHF business as being one of the prime drivers of the near-term catalyst for the business over the next couple of quarters.

Obviously, CRT-D MRI being launched, not only in the United States, but with 3T we have the CRT-D MRI in Europe; we think that's going be big contributor.

We are going to continue to add expanded MRI capability in the standard ICD segment with the Evera MRI 3T for Europe, and that will follow-on into the US early next year.

The Visia AF is the single-chamber offering in that space, where we will be actually adding the free capability of the link diagnostics for a single-chamber device.

So really the first device that can actually detect atrial fibrillation.

We have the Micra that we would expect to come in in the first half of next year in the pacing segment.

At the upcoming ACC meeting we're going to be releasing the data on the FIRE AND ICE trial which is the first very large head-to-head comparison of cryoablation technology to point by point ablation technology.

Not to mention the fact that we also have things like CoreValve coming into Japan and LINQ coming into Japan next year.

So we think there are plenty of catalysts to keep the business growing here over the next several quarters.

Yes, I think we feel confident in our steady growth in CVG overall and certainly in CRM.

But like you point out, our business model is based on diversification of a variety of other products and I think the two examples that you gave are pertinent.

I think in PMR we will start to see an acceleration, especially as the ventilator starts to resolve the issues that we've had and we expect that early next year, early next fiscal year.

And in Spine I think we've tried to lay out in as much detail as possible our change in approach.

Like Jeff had mentioned earlier we expect to see results in Spine and steady improvement every quarter.

So an overall balance is what we look for and then we also have a pretty good cadence in diabetes as well.

But Mike's pretty confident that we can keep our growth rate in CRM going at least to a large degree.

Thanks, David.

Next question please.

David Roman, Goldman Sachs.

Thank you and good morning, everybody.

Omar, can you come back to Spine for a second?

It is obviously a business where there have been several iterations of a turnaround plan over the past, call it year or so.

I think at the analyst meeting right before announcing the Covidien acquisition, you were talking about the opportunity for cross-selling within RTG.

Now you are talking a little bit about ramping up the product cadence.

What sign posts are you watching to identify whether you have the right strategy in Spine?

And how long are you willing to continue to let this business underperform?

Obviously underperformance is not acceptable.

The thing is, the market is still a very attractive market for us and we've got core expertise.

So we've got to get this thing fixed.

I completely take your point with we've laid our these strategies earlier.

We hadn't talked about the new product in as much depth, we talked about it in general terms.

But as we started to dig into it under Jeff's leadership, we found that the way in which we were launching these products was completely suboptimal which was really almost compromising the value of these products.

The overall cross-RTG synergies, what was missing before is we just didn't have specific targets on this.

That's why we made the changes.

We made changes in the field level, we've made changes in the overall leadership level and we are looking at this thing closely on a quarter-by-quarter basis and we expect to see improvement.

But the real guideline here is US core Spine and the correlation of the product launches to an uptick in performance; I think it's as straightforward as that.

That's the benchmark that we are looking at, that's the benchmark that you should look at.

We're going to get this thing fixed.

Because again, like I said, we are in a position of high share.

We are in a position where we've got the biggest breadth with our customers.

We've got to make this thing right.

So that's the approach that we're taking and those are the guideposts that I suggest that we look at -- we'll point out and you should look at.

Okay.

And then for Gary, I know a lot of moving parts here around currency, synergy capture, et cetera.

Can you help us again -- I'm sorry -- frame the impact of the medical device tax suspension with currency hedging losses and how that all ties into your comments around FY17?

I would have thought that the positive impacts in the device tax suspension would at least give you some relief on currency and hedging losses.

Can you walk us through the different moving parts there again?

Yes, again we're not, obviously, giving FY17 guidance yet so I don't want to get too much into it what's going on there.

We tried to give some highlights of things to consider as go through the model.

But the point is as we've tried to highlight here, even for the current year and as we go forward, we are continuing to expect the revenue growth to be in that mid single-digit range as we go forward.

We are expecting we're going to continue to get the operating synergies and be at the high end of the -- and in fact exceed probably the earnings growth that we've been expecting from the value capture of the Covidien transaction.

That's going just as we expected.

It's coming in, in fact, a little bit ahead of the schedule at this point in time.

So we feel confident that will be positive as we go into the next fiscal year obviously.

Foreign exchange continues to be a major headwind for us as it is with many multinational companies.

In ours, because of the hedging programs we did, if anything, if you think about it from the foreign exchange, we had a $0.45 to $0.50 impact in the current year.

That was with significant gains we that had from our hedging program.

So our impact was somewhat muted from where other companies don't hedge were at.

That is going to come to a head for us in FY17.

And as we indicate, that's potentially another $0.20 to $0.25 of impact as we go into next year.

You are right, we are going to have some benefit from the medical device tax.

We are getting some already in the current year that's helping give us even more operating leverage than what we were expecting previously.

But again, the foreign exchange is offsetting it as we drive through this.

There's positives from the medical device tax; there's going to be positives from our share repurchase.

All those are factors we're taking into consideration.

But I think if you lay all those together I think you are going to find that they play out like we've indicated in our comments.

But the issue is foreign exchange is clearly still a significant headwind for us.

And then we obviously have a tough comparison next year in FY17 because of the extra week we had in the current year.

Those are all the factors that we've tried to lay out for you as you put together your models.

We will obviously provide more details and more guidance as we get to our Q4 call.

Thanks, David.

We'll take the next question please.

Bob Hopkins, Bank of America.

Hi, thanks and good morning.

To follow-up on that, two questions.

One, for Gary, I think you said in the prepared comments that while you're not giving guidance for 2017, your directional thought on earnings on a constant-currency basis was low double-digits to low teens.

But that excluded the $0.20, $0.25 and that also excluded the negative impact of the extra week.

Is that right, is that what you said?

That's correct.

Bob, what we indicated was that you're going to get to low double-digits, mid teens if you take out the impact of the extra week and obviously the impact of foreign exchange, which obviously are going to be there.

I'm not trying to minimize those.

We think even with the extra week, it depends on how you look at it, you are probably still probably close to double-digit growth on the operating earnings, even with the extra week in there.

But without it, you're back to the lower double-digits, mid teens is the expectation.

But foreign exchange of $0.20, $0.25 will obviously bring that down somewhat as we go forward.

So that's our expectations as we look for FY17 as far as the existing models.

Again, we are not giving you guidance but if you just ran through what we provided on those key attributes, that's what would see in your models.

Okay.

So then, directionally again, on a reported basis for earnings, that gets you to the high single-digits depending on what ends up happening with the medical device tax, how much you reinvest or don't.

That's right.

Okay, thank you for that.

Then to follow-up on one other thing, for Omar or for Mike Coyle.

On the High Power side, can you give us a sense as to what you expect for market growth as we look forward?

I'm curious, did we see the same inventory draw-down when you launched your traditional ICD MRI safe?

I don't recall that.

But I would love to get a quick history lesson.

Thanks.

No, we did not do a draw-down in advance of that.

Actually we wound up delaying the launch for a few weeks to allow that to occur.

That's what caused us to decide in this case to go ahead and do the inventory draw-down during the quarter.

In terms of the overall growth of the market, as we said, we think the overall implantables market was relatively flat during the quarter.

I'd point out two things to keep in mind, one is one of our competitors had an extra few days, an extra week, in their prior year quarter which is causing the market to look like it is slower than perhaps it actually is, in addition to the fact that we had this draw-down that I just referenced.

So if you correct for those items we think the overall market was relatively flat with Low Power growing in low single-digits and High Power basically declining in the low single-digits.

But we've had both not only nice share capture but also price improvements in the standard ICD segment tied to MRI.

We would expect to see a similar dynamic play out in the CRT-D segment which, of course, is larger.

So I think that would probably give you the best view of what we think is going to happen going forward.

Great, thank you very much.

Thanks, Bob.

Next question.

Matt Miksic, UBS.

Thanks, can you hear me okay?

Yes, we can.

I wanted to follow-up on the numbers that you gave for your long-term outlook for the TAVR market.

Obviously coming in just touch below what one of your competitors has come in with and maybe a touch below some of the comments that you talked about halfway to $5 billion, I think was you language over the past couple months.

Not to make too much of that, but would love to get a sense of how you feel about the market developing or what, if anything, we should read into those differences.

Okay, I will let Mike answer that.

Go ahead, Mike.

First, let me correct.

We never said that we thought the TAVR market was going to be $5 billion.

In fact, I think the last update we gave prior to today would have been around the $3.5 billion market around 2020, 2021.

I'm not quite sure where that comment came from.

In terms of overall growth in the quarter, we were quite pleased, in fact, that we essentially grew with the market in the low 30% range for transcatheter valves.

Obviously that market growth is quite robust and above the range of estimate that we had given previously of 25% to 30% for FY16.

In addition, given the fact that we had a major competitive launch into the United States during the quarter, we were actually quite pleased that our global transcatheter valve business is essentially splitting the market in terms of the growth rate growing with the overall market.

In terms of the guidance to a potential $4 billion market that was included in the commentary today, there are a number of moving pieces here, obviously, we have not seen relative to the intermediate risk group going to be not inferior or superior.

We obviously are just getting started with the low risk group so we are basically have air bars, if you will, around the range.

It's probably between $3.5 billion to $4 billion in terms of a 2020, 2021 timeframe.

That's where we landed in the middle on the $4 billion.

But I think that will give you a sense of at least how we're thinking about it today.

Obviously that will evolve as data gets presented on the performance in these patient cohorts.

Sure, that's helpful color.

Thank you, Mike.

Omar, just to clarify your comments on the ACA and the volume trends, the annualizing the ACA.

Is it fair to say much of that volume that you are seeing is in the MITG space that it was a pull ahead and equalizing this year?

Or is that something that you are seeing more broadly across your businesses?

No, it is primarily MITG.

Bryan, you want -- some color on that.

Go ahead.

It was very clear too, because we saw an increase for four quarters exactly.

Two quarters ago that ended.

We saw basically the US volumes go up to about 4% growth and now they've come down to about 2%.

They were 3%, 4% during that fourth-quarter period and they're 1% to 2% now.

We definitely saw an increase and a drop off as those annualized.

But it is specific --

And then stable at that level.

Yes, it is not like we are declining, we're just not growing as fast as we were during that four-quarter period.

Got it.

Helpful, thank you.

Thanks, Matt.

Next question.

Kristen Stewart, Deutsche Bank.

Hi, thanks for taking my question.

I wondered, Bryan, if you could give an update on the overall MITG Group and any new products that we should be looking for or any highlights as we are heading into the SAGES meeting?

Go ahead, Bryan.

Generally speaking, I would say, if you look at MITG, everything is going well.

I will pull back and talk about that for second and then I'll get into the products and the health of the business.

We do, on a monthly basis, an employee engagement survey just to check the pulse of the organization as we're going through the integration.

Happy to say that those results come back very positive.

As a matter fact, within MITG the scores are slightly higher even than legacy Medtronic.

So being acquired and having a number of changes that are occurring in our business and still having those scores come back and engagement perspective that high, gives me confidence that we're going to have a retention of key talent which we're working very hard to do.

And we're going to continue our momentum.

I think that's probably first and foremost in my opinion the most important thing.

Second to that, at SAGES, we're going to see a number of nice things coming from our surgical business.

I referenced in the prepared document that we have greater than 20 products across MITG being launched.

That would drive close to $0.5 billion in revenue over the next three years or so.

So we have a very healthy portfolio of products.

Just a couple that I will call out that you will see again at SAGES would be new generators that we have in our Advanced Energy line.

One of them will be a next-generation ForceTriad generator that will focus on better speed to seal and also provide the capability to drive new LigaSure instruments.

And that's the most important thing about that generator.

It will give us the capability to drive instruments that will be a little more unique in the marketplace and I will talk about one of those in a second.

We also have a generator that we're launching that is specifically for emerging markets.

That will take that same capability in LigaSure and provide a lower cost generator so we can get access to those markets as well.

That actually launched a quarter ago.

And then one of the new instruments that I mentioned in energy will be a multi-function device.

This is important because what you are looking for in the perfect world in Advanced Energy is to be able to divide tissue to [skeletonize] either organs or vessels that you are trying to take.

And you want to do that typically with a product that divides well or cuts well.

But at the same time, you would like to use that instrument for sealing.

One of these products that we are going to be launching and talking about at SAGES will do both of those very well.

This has been elusive for everybody in the marketplace to get it done.

We think we've figured it out and we're going to talk about that at SAGES.

And then we have a couple of items in stapling.

We have got our next-generation powered stapling that's coming.

We are getting great reviews from customers.

And again, the most important thing about the powered stapling is it is a driver for our end defectors with utilizing Tri-Staple Technology.

So those are just a few things coming in the short term.

And then of course in the mid term, we've we talked about our robotics platform.

We will give you a little more insight in SAGES.

I want to be cautious to give you any specifics on when we are going to launch, but let's just say it's in the mid term and we are excited about that project as well.

Okay, great.

Then for you, Geoff, as you're now head of the RTG Group.

That business had obviously some pluses and minuses.

You saw some really good growth across the neurovascular business.

It's obviously a legacy Covidien unit and then some weakness still amongst the Spine business.

How quickly do you think that it will take to really turn the franchises around?

Clearly we've seen the turn within -- R&D functions within the Cardiac Vascular Group.

What are some of the different things that you are doing within Spine?

Are you wrapping some of the solutions around it?

Or what's the approach and change of their strategy within RTG?

Sure, thanks, Kristen.

First of all, on the businesses like Neurovascular in particular and Surgical Technologies business, the ENT business, the Advanced Energy business, we want to ensure those continue to perform.

We feel very good about where they stand in terms of their new product launches and the new clinical data that they all have coming out.

Very excited about that.

Spine, obviously a lot of questions even on this call regarding Spine.

That's a multi -- fully -- first answer, the turnaround there, we've been having steady quarter-over-quarter growth over the last couple quarters.

This quarter was a little bit of a step back in the US.

We anticipate returning to growth next quarter and a continued steady cadence of improvement.

There's a couple of things.

One, as Omar mentioned, our core Spine portfolio.

We are excited about the products.

Our upstream marketing guys have done good job building a number of new products.

Now we are focused on the downstream commercial execution and the launch of those products.

Just this quarter we have several new ones for lumbar fusion, this Voyager fixation system and this ELEVATE expandable cage.

And the one that I'm particularly really excited about is this OLIF procedure which we think, based on the physician feedback we're getting, is going to be fairly disruptive to the space.

We have a number of those new product launches and a big change is launching them at scale.

So making sure we have the right amount of sets and inventory to launch them at scale which is a change.

The other component here is our Biologics portfolio which INFUSE is the biggest piece.

That continues to rebound and we continue to get -- we just got a recent new indication for that OLIF procedure I just mentioned.

We are working on other indications there for INFUSE and our broader Biologics portfolio.

Finally, Omar already mentioned surgical synergy.

A little bit of a more nuanced view on this one.

First of all, when people look at our overall RTG performance, the Spine business dramatically helps our surgical technology business.

Our navigation, that business has been about high single-digit low double-digit growth platform for the last couple years powered by navigation and the imaging platforms.

Without Spine we wouldn't have that type of growth, full stop.

But what we need to do is move further upstream and have a tighter technology integration between those two unit, so that our customers feel a differentiated surgical synergy experience.

And then finally we are hiring what we are calling ETC reps.

These are enabling technology consultants that are really driving the penetration on the ground with the physicians for navigated spine procedures.

It is a number of different things and this is going to be a steady climb back.

We're pretty excited about the next two quarters, actually, regarding Spine.

Then getting back to overall RTG, the place that we have the most weakness, actually, is in Spine because it is moving is neuromodulation.

Our weakness in pain stim and pain pumps partially driven by the consent decree for pumps and competition for stim.

That's offsetting our growth in DBS and neuro.

That's going to take a few quarters to work through those dynamics.

Okay, thanks so much.

We will take questions from two more people please.

Vijay Kumar, Evercore ISI.

Hey, guys.

Thanks for taking my question.

Can you speak up a little bit, Vijay?

We can't hear you.

Can you hear me now?

Yes, that's better.

One quick one on the guidance.

I think you had mentioned low teens for next year.

And if you offset that by 1.5% from (technical difficulty) and a $0.20 to $0.25 from FX hedging gains, I want to make sure that the low teens EPS growth (technical difficulty) buyback (technical difficulty).

I think I caught most of it.

You were breaking up as you went through it.

Again, I want to make sure we're clear, we not giving guidance for FY17 yet and we just tried to put some items out there for you to think about as we go forward.

I'm not going to get specific about what we assume for share buyback, et cetera, because obviously we're not giving guidance yet.

But as we tried to highlight in our comments, obviously the revenue growth we would expect to continue in the mid single-digit revenue range as we talked about.

Clearly we are going to get a significant operating leverage improvement from the earnings standpoint on a constant-currency basis because of the value capture we are taking out, because of the medical device tax benefit and how much of that's reinvested and not reinvested, will come into play as we go through that whole discussion.

Obviously, as you indicate, there will be share buyback benefits that will be reflected in those numbers.

That's why we indicated that on a constant-currency basis we would expect that we are going to be in the low double-digit to mid teens earnings per share growth on a constant-currency basis.

If you take all those factors into consideration, that's after we take out the extra week of your -- just to compare apples to apples.

As a result of that, then you have the FX impact coming in to play.

All we are trying to highlight people is your assumptions going forward on our leverage assumptions, et cetera, are consistent with what we've been saying.

But just remember FX has not went away and just remember that we had an extra week in the current year.

Other than that I don't want to give you any more on the guidance aspect.

We will provide more details as we put together our guidance on the Q4 call.

That was helpful, Gary.

And maybe one for Omar.

Omar, I know that you've spoken about bundling the service offering and part of it was expanding the Covidien surgical offerings in the EM.

Ad I'm wondering if you could provide us any update on how that is tracking either in Europe or [the other markets].

Thank you.

Actually it is tracking very well.

This is the moving the cath lab managed services model to the operating room.

Like I mentioned, we've already got five contracts in place operating in Europe today with contracted revenue of $140 million already from both devices and services.

I think the pickup is about equivalent to what we experienced with cath lab managed services about four or five a quarter we expect to see.

Maybe accelerate that a little more as we go into more geographies more quickly.

But we are quite pleased with the progress there and we are developing good expertise in that area.

Okay, thanks, Vijay.

We will take our final question.

Raj Denhoy, Jefferies.

Hi, good morning.

Gary, I hate to come back to this but I wanted to get to the operating margin question again.

Really the reported number was slightly below the guidance you gave of 28% to 28.5% last quarter.

I understand currency had an impact, but you did also give us currency guidance which was -- and you did come in line with that.

So I'm curious what the disconnect was between what you actually did in currency and what you thought the impact would be on the quarter.

I think overall we gave currency guidance from the standpoint of revenue which did come in line with what we had expected.

But I think where currency was a little bit greater was on the bottom line, primarily because of the Argentine peso that I mentioned earlier, that cost us an unexpected, a little over $20 million, $21 million impact that we had not expected in the guidance that we provided back in the Q2 call.

That was the primary thing.

So FX was a bigger negative on the bottom line in the quarter than what we had originally expected at the beginning of the quarter.

As you indicated, the revenue was right in line but the bottom line was a larger impact.

From an operating margin perspective, we came in basically where we expected originally but it was a little bit more offset on the bottom line from FX than what we had originally expected.

So when we think about it, you gave us guidance also for the fourth quarter here of 31% to 31.3% on operating margins.

How again, do we get comfortable -- and I hate splitting hairs because I realize it's only 20 basis points or so, but given that it is the marker that investors are using for the integration of Covidien.

How do we get comfortable that we won't again see perhaps an outsized impact on currency?

Or is it just simply the nature of the beast here?

Again, I wish I could predict currency and be able to tell you that there's not going to be surprises positive or negative on the currency side.

Currency is what it is and the impact will be as we go forward.

Again, we worked hard to give guidance, as you said, 20 basis points, trying to call that was -- on our operating margin line with all the moving parts that are going on, is not easy.

We understand there are a lot of moving parts here.

Currency was negative in the quarter.

I'm not expecting another devaluation here in Q4 but if it happens in one of the currencies, that could be a little bit of a negative.

On the other hand, what we've tried to provide as far as guidance on what we expect based on what we know right now, and based on the current rates and where things are at, that gives the guidance on the operating margin.

So we feel confident about that assuming, again, that there's no surprises positive or negative.

That's the best we can do at this point in time, is give you some indication on which direction these things are going.

That's helpful, thank you.

Let me just add one comment.

The key element I want to make clear is the thing that we can control, the cost takeout, the synergies that we are getting from the standpoint of the Covidien transaction and the leverage we're getting across the rest of our organization.

That's the piece that we can control and that is going right as expected.

It's, in fact, ahead of our plans as I mentioned in our previous comments.

So the piece that we can control we are delivering on as expected.

That's clear, thank you.

That was our final question.

Should we close now, Ryan?

Go ahead.

Let's close, Omar.

Listen, first of all, I just want to also re-emphasize what Gary just said.

As I've said ever since I started here, we can work on things that we can control.

While we accept other variables and we try -- [you have to] understand completely that the valuation of the company is based on the actual performance, we can only drive that we can control as best we can, meet our commitments and drive as aggressively as we can.

And that we are completely committed to doing.

And on that basis, as Gary just pointed out, the cost synergies that we expect from Covidien, we've got a pretty granular look at that, we are delivering.

We're delivering, this operating team is delivering and they're stretching hard.

And then trying to cover for other things but there's only so far you can go about things that are not in our control.

So I do want to make that point that we haven't lost our operational focus on delivering these synergies one bit and many ways are a little bit ahead of our original commitments.

But there are lots of moving parts there.

And we are optimistic about the future and our plans are pretty solid going into fourth quarter and into next year.

Let me go back to the long term.

Really conclude by noting that our overall long-term financial model and let me remind you what is.

It is consistent with single-digit constant-currency revenue growth on a reliable basis which we will get through the diversification of our businesses as well as geographies and our new product cadence.

200 to 400 basis points of constant currency EPS leverage over the long-term and then some of that maybe a little higher in the next couple of years as we realize all the synergies from the Covidien acquisition as we saw this quarter.

Finally, returning a minimum of 50% of our adjusted free cash flow to our shareholders.

That, again, is a commitment that we are completely living up to and we expect to see that fulfilled in the upcoming quarters.

Stepping back even further, this Company is geared around fulfilling our mission of alleviating pain, restoring health and extend life and that mission continues.

We are confident that this team can execute consistently, balancing our trade-offs and offsetting pressures.

And in the end we're committed to creating long-term dependable value in health care.

With that, 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 on our Q4 call on May 31.

Thank you and have a great day, everyone.

Thanks.

Thank you.

This concludes today's conference call.

You may now disconnect.