美敦力 (MDT) 2016 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Medtronic fourth-quarter and year-end earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to Ryan Weispfenning.

Please go ahead.

Thank you, Jackie.

Good morning, and welcome to Medtronic's fourth 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 fourth quarter and FY16, which ended on April 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 an earnings presentation that provides additional details on our performance and outlook.

Next, you should note that many 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 statements.

In addition, the reconciliations of any non-GAAP financial measures are available on our website, InvestorRelations.

Medtronic.com.

Unless we say otherwise, references to quarterly or annual result increasing or decreasing are in comparison to the fourth quarter and full FY15, respectively, and all quarterly year-over-year growth rates are given on a constant currency basis.

All annual year-over-year growth rates are given on a comparable constant currency basis which in addition to adjusting for the negative effect of foreign currency translation, 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'm 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 fourth quarter revenue of $7.6 billion, representing growth of 6%, which was at the upper end of our mid single-digit baseline goal and exceeded our expectations for the quarter.

Q4 non-GAAP diluted earnings per share were $1.27, growing 18% on a constant currency basis.

Before providing more detail on our Q4 performance, I'd like to recap FY16.

FY16 was a transformative year for our organization, our first full year after closing the largest ever med tech acquisition.

It was a year where in addition to executing a large complex integration, we closed 14 additional acquisitions, totaling $1.5 billion.

It was a year where we launched a number of groundbreaking new products and extended our thought leadership within value-based healthcare.

We delivered record revenue of $28.8 billion, grew at the upper end of our mid single-digit baseline goal and capped off our fourth consecutive year of achieving mid single-digit revenue growth.

Our performance was broad-based with strong progress against each of our three strategic pillars, new therapies, emerging markets and Services and Solutions.

Our FY16 non-GAAP diluted EPS of $4.37 was in the upper half of the guidance range we established at the beginning of the year, representing constant currency growth of 15% and EPS leverage of 780 basis points.

We executed on the Covidien integration synergies, delivering approximately $355 million in the fiscal year, which contributed approximately 440 basis points to our FY16 EPS leverage.

We improved our operating margin by 100 basis points, including 120 basis points of improvement in SG&A.

We reinvested in R&D, organically as well as inorganically, absorbing any dilutive impact to EPS and capitalizing on our strong free cash flow generation.

These investments are in line with our stated strategy and further support the sustainability of our long-term growth and market leadership.

In FY16, we untrapped approximately $10 billion of our cash, which provided additional returns to shareholders, allowed us to pay down debt and increased our financial flexibility.

We also increased our dividend substantially, by 25%.

We returned $4.5 billion to shareholders in the form of dividends and share repurchases, well above our minimum commitment of 50%.

Despite our strong operational performance in FY16, our non-GAAP diluted EPS only grew 4%, after including the $0.47 negative impact of currency.

While we do have an earnings hedging program to reduce volatility, and are looking at natural ways to limit the impact, we do see this as largely outside our control and we feel that over the long-term, FX should balance itself out.

Now, moving to our Q4 performance.

6% revenue growth was very strong, especially when considering this was built upon a 7% growth quarter in Q4 FY15.

We continued to outperform the market and the strength of our diversified portfolio was evident across our groups and geographies.

Solid performances in Diabetes, CVG and MITG more than offset the challenges we faced in certain businesses in RTG.

Geographically, we had strong 15% growth in Emerging Markets and solid mid single-digit growth in developed markets, including 4% growth in the US, 8% growth in Western Europe and 11% growth in Australia and New Zealand.

Overall, we are pleased with the consistent performance in each of our three growth vectors, new therapies, emerging markets and services and solutions.

In New Therapies, we delivered above goal performance in Q4, contributing 390 basis points for our total Company growth.

In our Cardiac and Vascular Group, which grew 8%, new therapies are driving strong market outperformance.

We're helping to create rapidly growing markets, such as transcatheter aortic valve replacement, MRI-safe implantable technology, AF cryo-ablation therapy, predictive diagnostics and drug-coated balloons.

In CRHF, we continued to see strong share gains in high power from the ongoing launch of the Evera MRI ICD, as well as the recent launches of the Amplia MRI and Compia MRI Quad CRT-Ds.

We also saw exceptional growth of over 50% from our TYRX infection control product.

In Q4, we received FDA approval for our Micra Transcatheter Pacing System, the world's smallest pacemaker, one-tenth the size of a traditional device.

We also received FDA approval for our Visia AF ICD, a unique single-chamber device that can sense in both the atrium and the ventricle using proprietary detection algorithms, first developed for our highly successful Reveal LINQ insertable loop recorder.

In CSH, our Resolute Onyx DES drove sequential share gains in Europe and our Evolut R transcatheter valve gained sequential share in the rapidly growing TAVR market.

In APV, our Valiant Captivia thoracic stent graft and Heli-Fx EndoAnchor System drove above market growth.

Our IN.

PACT Admiral continues to outpace the fast growing drug-coated balloon market on the strength of its handling characteristics and differentiated clinical data.

Over the past two years, our CVG organization has demonstrated industry-leading levels of internally driven R&D productivity across its businesses and our forward-looking product pipeline looks equally robust.

Mike Coyle will share more details on what is ahead for CVG at our Investor Day next week.

Our Minimally Invasive Therapies Group grew 6%, led by strong above market performance in surgical solutions and low single-digit growth in Patient Monitoring and Recovery.

Growth in MITG is coming from five key growth drivers; Open-to-Minimally Invasive Surgery, or MIS, Gastrointestinal Diseases, Lung Cancer, End Stage Renal Disease and Respiratory Compromise.

Open-to-MIS grew double-digits in Q4, helped by the recent product introductions in our Advanced Stapling and Advanced Energy portfolio, including the LigaSure Maryland, Endo GIA Reinforced Reload with Tri-Staple technology and ValleyLab FD10 energy platform.

GI Diseases and Lung Cancer also grew double-digits, with solid growth in our GI Diagnostics business resulting from strong PillCam performance in the US and Europe.

We received FDA clearance in Q4, for expanded indications for our PillCam COLON 2 capsule to potentially reach more patients at risk for colon cancer.

Revenue in Renal Care Solutions doubled, largely as a result of the acquisition of Bellco, a pioneer in haemodialysis treatment solutions.

Respiratory Compromise grew in the upper single-digits, benefiting from our capnography market development efforts.

We also continue to make progress in bringing our new Capnostream 35 to market in FY17.

MITG continues to supplement their businesses with tuck-in acquisitions.

In addition to Bellco, the business recently agreed to acquire Smith & Nephew's highly profitable and fast-growing Gynecology business that will complement our existing global GYN product line.

We expect this acquisition to close this summer.

We also recently signed an agreement to take a majority ownership in the Netherlands Obesity Clinic, or NOK, which I will touch on later.

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

Bryan Hanson, will discuss these strategies in more detail at next week's Investor Day.

In our Restorative Therapies Group, which grew 3%, we also have a number of new products.

In Neurovascular, our Solitaire FR mechanical thrombectomy device is delivering strong results, solidifying our leadership position in the rapidly expanding ischemic stroke market, even after the anniversary of the New England Journal of Medicine articles last year.

Our Flow Diversion products for the treatment of intracranial aneurysms, Pipeline Flex in the US and Japan and Pipeline Shield in Europe, continue to lead the market.

In Surgical Technologies, we had mid-20s growth in Imaging, driven by strong customer demand for our new O-arm O2 Surgical Imaging System.

In Advanced Energy, a business annualizing it over $250 million, our Aquamantys System and PEAK PlasmaBlade are driving consistent upper teens growth.

In Core Spine, new product introductions across several procedures resulted in a sequential improvement to our growth rate.

Specifically, we are seeing incremental revenue from our differentiated OLIF procedures, as well as from the recent Solera Voyager, Elevate and PTC Interbody launches for TLIF and MIDLF procedures.

We're also realizing some early benefits from our Speed to Scale initiative, which accelerates innovation and enables rapid deployment of these products and procedures to the entire market.

Looking ahead, we're expecting FDA approval for our differentiated 2-level Prestige LP artificial cervical disc in FY17.

Strong seven-year clinical outcome data on the 2-level Prestige LP were presented earlier this month at AANS.

As expected, we face challenges in our Neuromodulation division.

While we continue to make progress against our FDA consent decree commitments, we are still experiencing double-digit revenue declines in our drug pumps.

Our revenue has been relatively stable sequentially for four quarters, so we expect drug pump growth to be roughly flat going forward.

In DBS and Pain Stim, we're facing increased competition.

But as we look ahead, we're optimistic that drivers such as expanded early onset DBS indication in the US that we received earlier this year and new strategies that focus our pain strategies on the growing opioid epidemic can improve our Neuromodulation results.

On balance, however, Pain Stim and DBS could be under some pressure for the next several quarters.

As we enter FY17, we are realigning our businesses within the Restorative Therapies Group to provide a stronger focus on the diseases and conditions that we serve.

Externally, we will report revenue results for four divisions comprising RTG; Spine, which includes our Core Spine, BMP and Kanghui businesses; brain therapies, which includes our DBS, which we're now calling Brain Modulation, Neurovascular and neurosurgery businesses; and pain therapies, which includes our Drug Delivery, Spinal Cord Stimulation and Interventional Spine businesses.

The remaining businesses, including Gastro/Uro, which we are now calling Pelvic Health, Advanced Energy and ENT will be reported externally as the Specialty Therapies division.

As part of these changes RTG is adopting the general manager structure that is proving very successful in driving a steady cadence of meaningful innovation in our Cardiac and Vascular Group.

Additionally, RTG has aligned its commercial organization to this new structure, enabling the group to use its breadth to deliver solutions to hospital administrators and payers, while maintaining focus on specialist physicians.

Geoff Martha will discuss these changes, as well as additional details on his turnaround efforts in Spine and Pain at the Investor Day next week.

In our Diabetes group, which grew 10%, we continue to see strong adoption of our MiniMed 640G System in markets where it's available.

Insulin pumps grew over 30% in developed geographies outside the United States, despite having anniversaried the launch of the MiniMed 640G this quarter.

We also had a strong quarter for MiniMed Connect, which is the only system providing remote access to pump and sensor data on the user's smartphone.

Regarding our pipeline, we are on track to submit the PMA for the MiniMed 670G with the Enlite 3 CGM sensor to the FDA before the end of the year.

Once launched, this will be the world's first hybrid closed loop system.

Also this quarter, we were pleased to reach an agreement with UnitedHealthcare to be their preferred insulin pump provider.

UnitedHealthcare saw what others, including UK's NICE, have seen; that we are the only company with evidence that clearly demonstrates the clinical and economic value of our integrated pump and sensor platform, for both patients and for the healthcare system.

Our agreement with UHC is a real affirmation of our strategy to invest in innovation that drives evidence-based outcomes.

In our Non-Intensive Diabetes Therapies business, we continue to make good progress driving our iPro 2 professional CGM system to type 2 patients being cared for by primary care physicians.

Through our partnership with Henry Schein and our recently announced collaboration with Qualcomm Life, we expect continued success in our type 2 business.

In our Diabetes Services and Solutions business, we are on track to launch Guardian Connect in Europe with the current Enhanced Enlite sensor in early FY17, and in the US, with the next-generation sensor in the second half of FY17.

Guardian Connect allows us to provide both type 1 and type 2 patients a multiple daily injections with a standalone real-time glucose monitoring solution.

When you combine our standalone professional CGM products with the applications and cognitive computing capabilities that we will bring through our partnership with IBM, we will provide both type 1 and type 2 patients with not just a sensor, but with a comprehensive diabetes management solution.

While the market remains competitive, we feel strongly that our Diabetes business is well positioned to drive sustained growth and Hooman Hakami will provide more details on our strategy and progress at next week's Investor Day.

Our new product pipeline is robust across all four of our business groups and we are confident that we can drive sustainable growth of our New Therapies growth vector in the upper half of our 150 basis points to 350 basis points goal.

Next, let's turn to Emerging Markets.

In Q4, we grew 15% and contributed approximately 185 basis points to our total Company growth, well within our baseline goal of 150 basis points to 200 basis points.

We continue to consistently deliver double-digit growth in Emerging Markets, overcoming macroeconomic pressures in certain countries.

This is a result of continued execution of our differentiated strategies of channel optimization, government agreements and private partnerships.

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

Our Emerging Market performance also benefits from increased geographic diversification, reducing dependence on any single market.

We continue to believe strongly that the penetration of existing therapies into Emerging Markets represents the single largest opportunity in MedTech over the long-term.

In Q4, our businesses in Middle East and Africa, Latin America, Southeast Asia and Eastern Europe all grew in the upper teens, and India and China grew in the low double digits.

Next week at our Investor Day, you will have the chance to share more details from the leaders of our global regions.

Turning now to our Economic Value growth strategy.

Our Services and Solutions growth sector contributed approximately 25 basis points to Medtronic growth.

While this overall result was below our goal of 40 basis points to 60 basis points, Services and Solutions continues to achieve revenue growth around 50%.

We expect to further improve our growth contribution as this model is expanded across all our business groups.

In Care Management Services, formerly known as Cardiocom, we grew in the high 20%s in Q4, driven by strong growth within the US Veterans Administration healthcare system.

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, to which we provide expertise in operational efficiency as well as daily administrative management of hospital cath labs and operating rooms, we had service revenue growth in the high 50s.

Since starting this business a little over two years ago, we have completed a total of 88 long-term managed service agreements with hospital systems, representing more than $2 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 management contracts in hospitals in Latin America and in the Middle East and Africa.

We are attracting strong customer interest in Hospital Solutions in regions around the world and have a full pipeline of potential contracts.

We continue to make progress in expanding the Hospital Solutions model from cath labs into operating rooms, utilizing the breadth of our MITG products and associated expertise.

We've already signed 10 operating room managed services deals, representing approximately $250 million in cumulative revenue with an average life span of seven years.

We're also expanding our solutions offerings into chronic disease management.

One example is Diabeter, a Netherlands-based diabetes clinic and research organization we acquired a year ago, which is currently operating four centers providing holistic diabetes care management.

Another example is NOK, a chain of clinics in the Netherlands for morbidly obese patients undergoing bariatric surgery.

We signed an agreement to acquire a majority stake in NOK this month.

NOK offers patients an integrated, comprehensive care model, including extensive screening, pre-care program, bariatric surgery, post-surgery program and long-term follow-up.

Their approach is highly successful and we plan to gain critical insights with the goal of expanding NOK's clinics to more countries, providing broader patients access to their multidisciplinary teams of specialists and improving patient outcomes.

Through initiatives like Diabeter and NOK, as well as the ones I mentioned earlier, we're uniquely positioning our business to focus on not just devices, but providing services and solutions across the care continuum.

While all of these Services and Solutions are still relatively early stage businesses, they represent important building blocks that we will use to create comprehensive value-based healthcare offerings where business models will be based on measurable patient outcomes over specific time horizons.

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.

Turning now to the Q4 P&L.

We grew non-GAAP diluted EPS by 18% and EPS leverage was 1,210 basis points, both on a constant currency basis.

Covidien cost synergies of over $100 million in the quarter, were in line with our expectation, helped drive a 180 basis point improvement in SG&A and were a major contributor to our strong EPS leverage.

In addition, our business also delivered strong underlying operating leverage in Q4.

The combination of Covidien's synergies and underlying leverage resulted in a 260 basis point improvement to our operating margin after adjusting for unplanned items.

Our non-GAAP operating margin including the negative impact of currency, was 30.3%, which was 70 basis points below the expectations we had at the beginning of the quarter.

This was a result of three unplanned items that negatively affected the gross margin.

First, an additional 30 basis points from the FX impact in inventory that is based solely on intra-quarter currency fluctuations.

Second, a 20 basis point impact from the one-time purchase accounting step-up on the Bellco acquisition inventory.

And third, a 20 basis point impact from higher than anticipated scrap and obsolescence across each of our groups.

Without these specific unplanned items, our non-GAAP operating margin would have been 31% and within our expected range.

Despite these pressures, we were able to offset unexpected items at the bottom line.

Turning to capital allocation.

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

We remain firmly committed to returning a minimum of 50% of our 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.

Last June, we increased our dividend by 25% and we expect to grow our dividends faster than earnings with the intent of reaching a 40% dividend per share payout of prior year non-GAAP EPS in the near-term.

Regarding share repurchases, in FY16, we began executing the incremental $5 billion share repurchase we announced earlier in the fiscal year, in addition to our ongoing share repurchase program completing a total of $2.3 billion in net share repurchases in FY16.

We also continue to use our capital to make strategic and disciplined M&A investments, which must meet our portfolio criteria, namely the targets must provide a line of sight to improving outcomes, allow for Medtronic to add value and we have a committed team in place that is positioned to win.

In addition, our investments must meet our high financial return hurdles and minimize any near-term shareholder dilution.

Before going to Gary, I'd like to note that in a transformative year with a significant number of complex moving parts, our team delivered.

Our strong results would not have been possible without the dedication, teamwork and fashion that our 85,000 employees around the world demonstrated every day.

We have undertaken a strategy to transform healthcare.

We don't take lightly the challenges this lofty goal places on our organization.

It has been amazing to see what our combined organization can accomplish.

We have formed a common culture and are collaborating with our partners in healthcare to serve millions of patients around the globe, fulfilling the Medtronic mission of alleviating pain, restoring health and extending life.

We're building on a track record of delivering consistent mid single-digit revenue growth and with every quarter, we're increasingly confident about the sustainability of this performance.

While we recognize that we still have a lot of work ahead of us, we are well on our way to meet our integration synergy, free cash flow generation and EPS leverage commitments.

We're looking forward to sharing details of these plans with you at the Investor Day next week.

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

Gary?

Thanks, Omar.

Fourth quarter revenue of $7.567 billion, increased 4% as recorded, or 6% on a constant currency basis, which excludes the $179 million unfavorable impact of foreign currency.

Acquisitions and divestitures contributed a net 60 basis points to Q4 revenue growth.

Our Cardiac and Vascular Group, which accounted for 36% of our total Company sales, grew revenue by 8%, with all three divisions growing above the high-end of our targeted mid single-digit range.

In CRHF, we expect to continue to grow above market due to our differentiated MRI implantables portfolio and other new product introductions that Omar mentioned.

We have you now started US physician training and shipments of our Micra TPS pacemaker.

In AF Solutions, our business grew over twice the market in the mid-30s and is now annualizing at over $0.5 billion.

AF Solutions had another very strong quarter with Arctic Front Advance following the compelling FIRE & ICE trial, which was featured as a late-breaker at ACC and simultaneously published in the New England Journal of Medicine.

Later this month, secondary end points from the FIRE & ICE trial on rates of rehospitalization and repeat ablation procedures will be highlighted in the late breaking clinical trials at the CardioStim congress.

In Coronary, we are holding global drug-eluting stent share in the face of major competitive launches.

Due to our customers' increasing preference for Resolute Onyx in Europe and many emerging markets, continued enthusiasm for the delivery characteristics of Resolute Integrity in the US, and our expanding use of CBG multi-line contracts in many geographies around the world.

In Transcatheter Valves, we are seeing strong growth and expect this market to grow to $4 billion to $4.5 billion by 2020.

Our US shares stabilized after the drop we saw in Q3 from not having a large size Evolut R. We have started our Evolut R XL clinical, which is a 60 patient, 30-day follow-up trial.

In Intermediate Risk, we completed enrollment in our SURTAVI trial, which is expected to lead to FDA approval and we are moving into continued access for intermediate risk patients at 60 US SURTAVI centers.

In Q4, we also saw a strong acceptance of CoreValve in Japan, following the first full quarter of launch.

In Peripheral, we had a number of strong data presentations on our IN.

PACT Admiral drug-coated balloon last month at Charing Cross, including mechanisms of action data, which are resulting in competitive account conversions.

We also received FDA approval for a change to IN.

PACT labeling, removing the requirement for pre-dilatation and replacing it with simply appropriate vessel preparation.

These labeling changes now position Medtronic as the only company in the US that develops, manufactures and sells both atherectomy and drug-coated balloons as combination therapy for SFA disease.

Our Minimally Invasive Therapies Group, which accounted for 32% of our total Company sales, grew revenue 6%.

We continue to monitor surgical volumes in the US, and we estimate there may have been a slight acceleration in the most recent quarter, with volumes now growing approximately 3% versus the 1% to 2% range we saw earlier in the fiscal year.

We are seeing stronger mid single-digit growth in the US outpatient surgery market, while inpatient surgeries are growing in the low single-digits.

In PMR, quality issues related to the Puritan Bennett 980 ventilator and the Capnostream 20 capnography monitor had a combined impact of approximately $25 million in Q4 revenue.

We expect to have both of these issues resolved this summer.

Our Restorative Therapies Group, which accounted for 25% of total Company sales, grew revenue by 3%, with strong growth in Neurovascular and Surgical Technologies and improved results in Spine, which offset low single-digit declines in Neuromodulation.

Our US Core Spine business declined 1%, a large improvement over the past two quarters.

We estimate the US Core Spine market is growing 2% to 3%, so while we lost share year over year, we did gain over a 100 basis points of share, sequentially.

We expect Spine to return to market growth over the coming quarters.

In Europe, we continue to be affected by the ship hold in InductOs BMP, which is resulting in an impact of approximately $8 million per quarter.

Our latest projection is that our third-party supplier will be able to resolve the issue sometime during Q3 FY17.

In Neuromodulation, it is worth noting that our Q4 growth was affected by the divestiture of the Intrathecal Baclofen drug, which occurred in late Q3.

This business was generating $7 million to $8 million per quarter.

Our Diabetes group, which accounted for 7% of our total Company sales, grew revenue 10% with strong broad-based performance across all three divisions.

It is worth noting that the Diabetes Group double-digit growth came in the face of a competitive US environment.

We attribute this performance to our focus on building diverse revenue streams through a geographic expansion and growth in our new businesses.

Products like MiniMed 640G System with Enhanced Enlite sensor and SmartGuard technology helped drive growth outside US, while our Non-Intensive Diabetes Therapies and Diabetes Service and Solutions divisions also contributed to overall performance.

While we expect the tough US competitive environment to continue until we get FDA approval for our MiniMed 670G hybrid closed loop system, we believe there are sufficient drivers to continue to deliver high single-digit to low double-digit global growth in our diabetes group.

Now turning to the P&L.

Q4 non-GAAP diluted earnings per share was $1.27, an increase of 18% on a constant currency basis after adjusting for the $0.10 impact to earnings per share from foreign currency translation.

Q4 GAAP diluted earnings per share was $0.78.

In addition to the $348 million after tax adjustment for amortization expense, this quarter's non-GAAP adjustments to earnings on an after tax basis were a $118 million charge related to the retirement of $2.7 billion of debt, a $97 million net restructuring charge, an $85 million charge for acquisition-related items and a $44 million impairment charge related to an investment in BioControl.

The Q4 operating margin was 31.8% on a constant currency basis.

This represented a 210 basis point constant currency improvement over the prior year.

After adjusting for the negative 30 basis points for the one-time Bellco acquisition inventory step-up and negative 20 basis points for the unplanned scrap and obsolescence, the operating margin would have shown a 260 basis point constant currency improvement, which fell in the range of our expectations.

It is worth noting that ASP declines were in line with previous quarters and did not affect the gross margin.

Our operating margin included a gross margin of 69.8%, SG&A of 31.1% and R&D of 7.4%, all on a constant currency basis.

Also included in our Q4 operating margin was Net Other income of $21 million, which included net currency gains of $102 million, primarily from our earnings hedging programs.

These currency gains were $37 million lower than the prior year.

Regarding our earnings hedging program.

While we hedged 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.

Below the operating profit line, Q4 non-GAAP net interest expense was $188 million, slightly better than our forecast.

At the end of Q4, we had approximately $31.2 billion in debt and approximately $12.6 billion in cash and investments of which approximately $5 billion was trapped.

In Q4, we prepaid approximately $2.7 billion of our debt, utilizing a portion of the $10 billion of cash that was untrapped in a transaction last September.

Our non-GAAP nominal tax rate on a cash basis in Q4 was 14.6%.

This was an improvement to our forecast and included an approximate $40 million benefit from the reversal of a valuation allowance associated with foreign net operating losses from our Interventional Spine business.

In Q4, adjusted free cash flow was $1.4 billion, which was below our expectations due to timing on certain items, but we expect it to recover going forward.

We remain committed to returning a minimum of 50% of our free cash flow to shareholders and also continue to target in the eight credit profile.

In Q4, we paid $531 million in dividends and repurchased $660 million of our ordinary shares.

As of the end of Q4, we had remaining authorizations to repurchase approximately 72 million shares.

Fourth quarter average daily shares outstanding on a dilutive basis were 1.416 billion shares.

Before turning to call back over to Omar, let me conclude by commenting on our initial FY17 revenue outlook and earnings per share guidance.

Our baseline goal is to consistently grow our revenue in the mid single-digit range on a constant currency basis.

For FY17, given current trends, we expect revenue growth to be in the upper half of the mid single-digit range at 5% to 6% on a constant currency basis, constant week basis, which excludes the estimated negative 150 basis point annual impact from the extra selling week we had in Q1 of FY16.

Assuming current exchange rates remain similar for the remainder of the fiscal year, which include a EUR1.11 and JPY110, our FY17 revenue would be negatively affected by approximately $25 million to $75 million, with modest FX headwinds in the first half of the year turning to modest FX tailwinds in the back half of the year.

In Q1, we would expect revenue growth to be in the lower half of our 5% to 6% annual revenue outlook range on a constant currency, constant week basis.

Our Q1 revenue growth outlook excludes the estimated negative 6 percentage point impact, or approximately $450 million, from the extra selling week we had in Q1 FY16, as well as a negative $25 million to $75 million FX impact on revenue based on current rates.

Turning to guidance on the bottom line.

We believe it is reasonable to model non-GAAP diluted earnings per share in the range of $4.60 to $4.70, which includes approximately $225 million to $250 million of targeted value capture synergies from the Covidien acquisition.

While the expected FX impact on earnings per share from our unhedged currencies has improved by approximately $0.05 since March, this has been offset by an increased expected FX impact on inventory.

Given this, assuming current exchange rates remain similar for the remainder of the fiscal year, foreign currency would have a $0.20 to $0.25 negative impact on our FY17 earnings per share.

Our guidance implies earnings per share growth in the range of 12% to 16% on a constant currency basis after taking into account the estimated $0.08 to $0.10 negative impact from the extra selling week in Q1 of FY16.

For the first quarter of FY17, we would expect earnings per share growth on a constant currency, constant week basis to be around the upper end of our annual earnings per share growth guidance range.

However, it is worth noting that on a reported basis, we expect Q1 earnings per share growth to be slightly down given the estimated $0.08 to $0.10 negative impact from the extra week and the expected negative $0.06 to $0.08 impact of FX based on current rates.

As usual, our earnings per share guidance does not include any charges or gains that would be recorded as non-GAAP adjustments to earnings during the fiscal year.

Omar?

Thanks, Gary.

While I have more to say next week at the Investor Day, I did want to take the opportunity to recognize Gary's service to Medtronic today and what is his last earnings call as Medtronic's CFO.

Gary has served in this role for the past 11 years, and since May of 2005, has been with -- since May of 2005 and has been with Medtronic since 1989.

Gary has been a constant counsel to me during the time that I've been here and his experience and knowledge and overall guidance has been critical and invaluable to both me and our overall team, as we navigated through a very complex environment.

Gary's expertise will be missed, but he will still stay on as IT and Operations Leader, at least for a little while.

And we'll still have the benefit of his strong counsel.

More on that at Investor's Day.

We will now open the phone lines for Q&A.

And in addition to Gary, I've asked Mike Coyle, President of our Cardiac and Vascular Group; Bryan Hanson, President of 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 any additional questions, please constant Ryan and our Investor Relations team after the call.

Operator, first question, please.

(Operator Instructions)

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

Good morning, guys.

Thanks for taking the question.

Let me just try and clarify a few items.

One, could you just maybe make a little bit clearer for us the FY17 guidance, what does that assume in terms of your margins?

Second, I think I understood the commentary on the first quarter.

Basically you're saying down slightly on a reported basis, so let's call it $102 million, $103 million.

Just want to clarify that?

Thanks.

Okay.

I'll let Gary take this one.

As far as FY17 margins, we would expect going forward based on the assumption obviously of the earnings per share on a constant currency basis, growing 12% to 16% as we indicated.

The operating margins would obviously continue to improve similar to what you saw in the current year.

Obviously, the synergies from the Covidien integration, as we indicated in the call, would be a little bit less for next year, but the operating leverage from the rest of the business would be obviously a little bit more as we move into the FY17 period of time.

So operating margin improvement, we're not getting specific on that, but basically the assumption would be, Mike, that assuming a 12% to 16% constant currency earnings per share growth.

You're going to see a similar kind of growth in operating margins, similar to probably what you saw in the current year as you model things.

As far as the Q1 guidance, what we're trying to indicate in the call is that, yes, being in the that upper end of the range would take into effect the extra week, et cetera, I think you're probably -- the $102 million, $103 million you mentioned, is probably right in that range as far as what people should probably be assuming.

And Gary, I was asking on the FY17 margin, just because the incremental inventory hit on -- from FX, I'm just trying to think about the actual impact on reported margins for the year.

I would assume that FX is going to negate that, right?

I agree.

It will be.

You're right, on a constant currency basis, we'll continue to see the kind of improvement.

The FX impact in the first quarter of $0.06 to $0.08 reflects that we are going to still see more FX on the inventory in that number.

We saw a little bit higher number here in Q4 than what we had originally expected and that's what we based on our guidance at this point.

Obviously, if that number continues to get even worse, that could be a different issue.

But right now, I think it will be a slight negative but -- mitigate, I should say, some of the operating leverage we're getting on a constant currency basis as we saw during the current year.

We would expect to see on a constant currency basis that would continue.

But as reported, you're right there might be less of an impact in Q1.

Thanks, Mike.

Omar, for you, maybe just two questions.

So one, the commentary around surgical volumes is obviously consistent with what we've seen from companies reporting from across the sector over the last month as well as not just device companies but hospital companies.

Can you just -- was the commentary about the uptick in surgical volumes consistent over the course of the quarter, being this is something that you've seen even in April and maybe into May, if you have insight into that?

And second, I was hoping you could just comment on the Diabetes business?

Because your international performance was exceptionally strong this quarter and just trying to look forward to what's going to play out in the US once you get 670G approved here.

Just a few words and then I'll let both Bryan and Hooman give you some more details.

First, I think we you saw a steady improvement in surgical volumes through the course of the quarter, and I'll let Bryan comment in a minute on the continued outlook.

Why don't you say that, Bryan, and then I'll check on Diabetes.

Go ahead.

I don't know that I would give specificity in the quarter, but I would say the same thing, across the quarter we saw more volume growth than what we had seen in the last few quarters.

We use a bunch of data points to be able to get to that.

One of the big data points that I personally use is calling our sales reps because they're out in the operating room and they see the number of cases.

And there's a definite feel, there was an increase in volumes during the quarter.

Now, until I see it for another couple of quarters, I'm not calling it a trend, it's one quarter, but it certainly felt nice in the quarter.

With Diabetes, I'll let Hooman comment.

Obviously, we're very excited about the potential of the hybrid closed loop system.

But I also want to draw your attention to much of the commentary around our broader based efforts, that that is one aspect of our growth in Diabetes.

I think we're very excited about what we can do about overall patient management and in our agreements that we can make with major stakeholders such as payers, like we did this last quarter.

Hooman, do you want to say a few words?

Sure.

Thanks, Omar.

Hey, Mike.

I would concur with what Omar said.

I think if you take a look at our performance this quarter, 10% growth is strong.

It was largely driven by O-US revenues and the 640G product and I think it just shows you what kind of uptake we can get with a new product launch.

The US continues to be competitive and here we have a product that was launched in September of 2013.

And so we don't have the benefit in the US of a new product like we do in Europe.

But I think this underscores a couple things.

One, is what Omar said, is that our revenue base is becoming more and more diverse and we are seeing more traction from O-US revenues, from emerging market revenues and from call it, non-type 1 revenues with type 2 and Services and Solutions.

The other thing that I think it shows is that when we do get a next-generation platform here in the United States, we can expect some great results.

The traction we're seeing in Europe and the feedback that we're seeing on our new pump platform is great.

We expect to see that here in the United States once it's launched.

So as we get the 670, we think there's going to be really strong uptick there and as you heard from the commentary, things are on track with respect to that.

And then finally, the last point I would make is that between now and when the next-generation pump comes out, Mike, we've got a lot of assets that we can leverage within the Diabetes business in the US.

The size of our sales force is the largest.

The size of our clinical team is the largest in the US.

We've got the largest scale and service infrastructure for patients.

We've got deep and broad payer relationships and on top of that, we've got a growing type 2 and solutions business here in the United States.

So we feel good.

Even though the competition continues to intensify in the US, we feel good about our overall global performance and then once things come with the new product, it will -- we feel very, very good.

Thanks, Hooman.

Thanks, Mike.

We'll go to the next question.

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

Good morning.

A few quick questions here.

First question, Gary, just to rectify FY17 guidance, some non-op items.

Your free cash guidance for next year is very strong.

I wonder if you could update us on two points?

One is just the size and timing of anticipated buybacks in the guidance as well as potential tax rate for FY17?

And I had a couple quick follow-ups.

Go ahead, Gary.

As far as the free cash flow, the guidance that we're giving of $6.5 billion to $7 billion for next year, is in line with what we're expecting from our operating earnings growth and continued focus on working capital.

So that expectation, we do expect as we've indicated previously and we'll talk more about it at the investor meeting, that our free cash flow will continue to grow very nicely, probably close to the double-digit range similar to the earnings as we go forward.

So we're feeling confident about that.

We're not getting specific obviously about what we're doing with share buyback, but as we indicated previously when we announced the incremental buyback, and if you watched historically, we tend to do that, we said we're going to be more front end loaded on that.

I think you could assume the same thing as we go into FY17, that it's more front end loaded than towards the back half of the year.

And so, but we're not getting specific about how much we're going to be including in that piece of it.

So as far as tax rate goes, there's obviously the benefit of the R&D tax credit catch-up during the current year.

If you take that out of the equation going forward, we haven't provided any specific guidance on tax rate, but we're basically saying that our tax rate's going to be relatively flat with where we're currently at.

So I wouldn't expect any significant uptick or reduction.

Okay.

And then just -- that's very helpful, Gary.

Thank you.

Maybe a follow-up or two here.

Omar or Gary, there's been a lot of focus as you know on quarterly margin performance but the net that we've got from senior management is that there's a long-term margin opportunity here.

Could you talk about your confidence and long-term margin assumptions?

Why you believe that double-digit earnings probably can sustain itself for a few years?

And I think about the Covidien synergy number you gave today, $225 million to $250 million, certainly gets you to an $850 million number in a few years, but it may not get you above that $850 million number.

What's giving you the confidence that you can deliver this double-digit earnings for longer?

A number of things.

The Investor's Day, this will be a core subject because we want to explain this to you in detail.

It starts with our revenue growth.

You've got to get to our mid single-digit revenue on a consistent basis.

Otherwise, you've got a big hill to climb here.

Revenue growth has to be sustainable and it has to be consistent.

That is something that we're feeling, as I said, better and better about.

Having said that, then we need operating leverage like you said.

And that in the short-term, comes from the Covidien synergies.

But what the Covidien synergies do, is it builds a platform for us from which we can continue the same work.

As we keep growing, taking advantage of our scale, in our functional costs primarily, we think we've got productivity that has a long tail, a long tail that we can continue to do.

And in addition to that, our product cost reduction will also have good sustainability as we consolidate our manufacturing operations, which really haven't even built into any of the synergies at all in our $850 million number because we feel that that would take longer than the initial three-year period.

In the interest of preserving revenue and not taking any risks, that's why we didn't jump into that.

What it does, is it gives us continued sustainability beyond the three-year period.

Those are the two main things.

It's an area of extreme focus for us and we think it's very important for us to build a plan that's sustainable and that's diversified in a way that is reliable.

And we'll walk you through a lot of those at Investor Day, but that's essentially our thinking.

Okay.

Thanks so much, Omar.

I'll jump back in queue.

Thanks, David.

We'll go to the next question, please.

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

Thank you, and good morning, everybody.

I want to go over to the CVG business for a second and maybe you could talk in a little bit more detail about the performance of the Transcatheter Valve business and help us understand the path to returning to market type growth in the US and maybe what you're seeing specifically from an end market growth perspective, how that's evolved since the ACC and highlight your relative competitive positioning?

Go ahead, Mike.

First, the overall growth of the market is at the high end of the ranges that we had been speaking about in prior quarters.

The global market appears to be growing in the mid-30s.

Our reported growth this quarter is in the high 20s.

I think the primary difference between our growth and the market growth is the performance of the large valve segment of the Evolut R. We don't have available yet the 34-millimeter version.

When we do get that product, we would expect to be able to have its share performance perform like the other three sizes do and provide us share growth opportunities.

So that would be the primary current dynamic.

In terms of overall market growth, obviously, both international and US growth is well above as I said high end of where we have been thinking the market would go.

We think the positive data in the intermediate segment that has been available, A, from a competitive and B, from our own subanalysis of our high risk data bodes well (technical difficulties).

Essentially an expectation that by the time we get to 2021, we should be looking at a market that is around $4 billion with some modest penetration of the low risk segment and of course, we've now started clinical trial activities in that low risk segment.

So I think that would be our picture of the market currently.

Okay.

And maybe just a follow-up on the P&L.

Clearly, you've elected not to give segment margin, P&L margin guidance or modeling help, whatever you want to call it for 2017 versus what you've given in the prior year.

And given the investor focus on those metrics, I want to be very clear about how to think about this for FY17, that the context should be essentially stable-ish to maybe slightly down gross margins, leverage on the SG&A line, you have this dynamic with other expense giving you modest reported operating margin expansion, a flat tax rate and down share count is what gets you to the $460 million to $470 million.

Are those the right moving parts to think about in the model for FY17?

That's pretty good.

Yes, without giving any modeling views --

You figured it out.

I think you've summarized it well.

Again, we're trying to focus on what the two levers that we are driving, revenue and the bottom line, and the leverage we talked about there.

But you're right, to achieve the constant currency earnings growth that we highlighted in here, we're going to have to continue getting operating margin improvement, which we expect with not only the Covidien integration synergies but clearly with what the other operating leverage components we're driving.

The gross margin, the only comment I would make to your comments is I'm not so sure that the gross margin will be down.

It's possible it will be on an as reported basis because of FX.

But the reality is we are expecting some of the operating -- excuse me, some of our synergies to start to be coming in the manufacturing line.

It's possible you could see the gross margin being flat to maybe even slightly improving.

That's probably the biggest fluctuation we saw here in Q4, so I think your assumptions for next year, the way you laid it out, is probably not a bad assumption right now until we can actually show that we can improve the gross margin a little bit.

Just to be clear, I was laying that out on as reported basis just to reflect the numbers that are going to end up in a consensus because that's where we're also myopically focused right now.

That's why I was saying down on a reported basis.

I agree.

But operating margins slightly better on a reported basis year-over-year.

That's right.

Got it.

Thank you very much.

Thanks, David.

We'll go to the next question, please.

Our next question comes from the line of Bob Hopkins with Bank of America.

Hello, thanks and good morning.

Can you hear me okay?

Yes.

Good morning.

So two questions.

One looking backwards and one looking forwards.

First looking backwards, Omar, I'd love to get your take on something.

You guys have really been performing very well on the top line, but over the last two quarters, you kind of struggled to get to your goals on operating margins.

And I just wanted to get your take on that.

Is this a case where you're just not quite giving yourself enough room with guidance to account for the normal fluctuations that you see or are synergies maybe you expected a little bit more?

Just wanted to get your take on the last two quarters from an operating margin perspective?

I think it really is the guidance being too tight.

Our main area of focus is overall EPS and we felt that with all these moving parts, that we're to balance and then get to an EPS number.

That tight of a guidance that we've talked about before was really directional in building to the overall EPS and if we knew that there was going to be that much scrutiny on the operating margin line, we would never have given such a tight range.

The sorts of things that happened, there was no way in which we could have predicted them.

And with things like the Bellco acquisition, and its math, we hadn't really done that accurately because we just closed the acquisition a week before we did our earnings call.

When we laid it out, some of these elements became obvious and there were pressures.

It's absolutely the right thing to do for the long-term and it's an extremely accretive positive deal for us, but on an immediate three-month basis, you can get surprises.

So really, our guidance should have been more thought through and we really feel that moving towards an EPS goal is the right way to look at our Company.

Because it's a company with a lot of assets and capabilities and we think that if it grows mid single-digits, deliver EPS leverage to an extent that gives us double-digit EPS growth, return 50% of free cash flow to our shareholders on a consistent basis, that's a pretty good deal if you can do that at a constant currency level.

Gary, do you want to say a few words?

Bob, I think you said it well.

In hindsight, if we would realize how much focus was going to be on the operating margin line, we would have probably clearly have given a broader range when we were talking about that at the end of our Q3 earnings call.

30 basis point range that we gave on an as reported number where the FX and everything else moving, 30 basis points is $20 million something.

So on a $7 billion Company with FX and all these other moving parts, that was my mistake.

We should have not have done that.

But we didn't realize the focus everyone was going to have on it.

The reason I think we were trying to address it and get it out there for the modeling was exactly that.

It's not that we're not getting the synergies.

In fact, if anything, the Covidien synergies and the other operating leverage we're getting across the organization, we feel very good about and we're tracking that on a very tight basis.

It's the other moving parts that you get from a large organization like this that we get specific on certain line items is creating an issue.

What we're trying to do as Omar said, is focus on we're driving the top line.

We have plenty of levers including all the cost synergies that we're achieving to drive the bottom line.

But in general, there's going to be some moving parts in the middle and we were way too specific in Q3 on the tight range on the operating margin and that was my mistake.

These moving parts, we hope to offset at the EPS level because then that gives you the full flexibility to be able to do that.

So that's the way in which we are modeling our business.

Thank you for that.

That's helpful.

And then one other question looking forward on the 2017 guidance.

First, are you going to provide any longer term directional guidance at the Analyst Day on the sixth?

And then secondly, it just seems like since the last time on the Q3 call, you gave some preliminary thoughts on 2017, and it seems like what you're doing today is just sort of narrowing that range with a few moving pieces.

But as I look across the business, there are a couple things that it would suggest have gotten better.

You've done a deal that looks a little bit accretive.

You did a refinancing that looks a little bit accretive.

I might have thought that the EPS guidance would be a little bit higher.

I just wonder if you could comment on those two things?

Any long-term thoughts and just maybe some thoughts on the 2017 guidance?

We'll certainly discuss the long-term strategy at the Investor's Day.

So just hold on for a week for that one.

And in terms of the guidance, look, like we just mentioned earlier, there are a lot of moving part here and we've been burned by FX before.

And so we just wanted to be reasonable in our approach and that's the most accurate.

It's not overtly conservative nor is it overtly aggressive, an estimate that we gave.

It's a fairly broad range and obviously, we do our best to maximize performance.

That's really the best I can do there with that range.

Again, remember, Bob, at the Q3 call, we really didn't give any guidance for FY17.

We just said remember these factors as far as when you're putting together your thoughts for FY17 and I think we basically have come in.

As you said, we tightened up a little bit from that as far as where we're at.

FX has been moving around.

You look at it even just a few weeks ago, it was probably not $0.05 benefit from where we were talking about, it was going to be as much as another $0.03 or $0.04 higher than that.

But then the dollar strengthens again a little bit.

We're being somewhat cautious because as Omar said, FX has continued to be a headwind for us and we expect that in the next year.

You're right, from an operating perspective, things are going very well.

The revenue is strong.

We're getting the operating leverage we would expect.

But there's also a lot of still moving parts.

We still have a lot of integration efforts we have to get done.

We're going live with SAP in Europe for the Covidien entities this week.

So there's just still a lot of moving parts and we think the range we've given is consistent with what we communicated before and consistent with our long-term strategy.

Thank you.

Thanks, Bob.

Next question, please.

Our next question comes from the line of Josh Jennings with Cowen and Company.

Hello.

Good morning, gentlemen.

Thanks for taking the questions.

I was hoping to just ask first question on organic top line growth guidance that you provided for FY17, it's a little bit of a tighter range than we're used to.

Clearly, you're confident in the lower end of the range, north of 5%.

Can you help us think about how you set the top end of the range at 6% and whether you're leaving some conservatism in the guidance and what needs to happen in order to get to the above that top end of the range?

Well, we need to deliver what we talked about first before we think about going above that.

First of all, the range is tighter, that's true.

And we did emphasize the words given current trends.

We are overall committed in the mid single-digit range and we feel that given our performance and given the diversity of our portfolio, we can get to the upper half of that range like we've discussed.

And we need to first deliver that consistently before we talk about meaningful upside beyond that.

Like I mentioned in previous calls, what will trigger any thought of consistently delivering over that would be if we overachieved on each of our growth drivers, new therapies, services and solutions and emerging markets for a few quarters in a row.

Only then we'll have confidence that more than 6% is sustainable.

You'll get the odd quarter where we do better, but you will get some pressures in other quarters.

So I don't want to bank on that yet.

Like you said, it is a tight range and it's something that we internally did debate about.

But given trends and the fact that we've been holding that level of performance over a significant period of time, makes us feel reasonably confident that it's something that we can achieve.

That's I think the best response I can give on that one.

Okay.

Thanks.

And just a question on longer-term margins.

As the Services and Solutions business continued to contribute to the revenue base and top line growth at more meaningful levels, can you just talk about how we should think about that contribution's impact to margins as we move forward into FY17, FY18 and beyond?

Thanks a lot.

We'll lay some of that out at the Investor's Day.

But essentially, as you point out, Services and Solutions net operating margin on its own is usually lower than what we get from a device perspective.

However, in almost all of these transactions and agreements that we make, there is a device component that gets attached to it and we get incremental overall revenue and we find that overall, our operating margin dollars go up significantly as a result of these transactions.

And then as we go forward, we expect to see productivity from those Services and Solutions arrangements, both from the services themselves, but also from hopefully, lower cost of sales in some of those accounts of support sales.

That's the way we're looking at it.

It's something that we feel that we have to cover in our overall model and yet deliver the EPS that we're talking about.

And that's what we're focused on and use every other variable that we have to cover for that.

Because we do think that the services and solutions gives us a sustainable long-term growth, which is very sticky.

And besides that, it's something that our stakeholders and customers want.

So it's something that we're going to manage from our overall business perspective and not get too line item focused on that one.

Do you guys want to add anything to that?

I think you said it, Omar.

In and of themselves, the Services and Solutions business has a lower margin just by its very nature.

But the reality is there's benefits that also benefit the rest of the Company from those Services and Solutions that actually can potentially help leverage some of the margins on those type of equations.

It's a little bit of a headwind, especially here in the near-term, as Omar said.

As we get more efficient at it, we get more productivity out of it, in general, we don't think it will have a huge impact on our overall operating margins.

And obviously, it will help solidify and give us more sustainability in our overall revenue growth and even in our overall shares.

So, we feel good about the prospect overall and how it increases the bottom line growth.

But you're right, in and of themselves, those contracts, the Services and Solutions component has a slightly obviously lower margin than the rest of the business.

I think that is an important point, if I can just follow up, just to give you specificity.

We just did this acquisition of NOK in the Netherlands.

That's a business which does bariatric surgery as well as other support areas.

And the net operating margin of that business is lower than our average but reasonable.

When you layer in our surgical devices into those contracts on a consistent basis, that drives up our volume on very high margin devices, which gets coupled to this transaction and therefore increases the overall margin rate significantly in those kinds of accounts from what NOK originally had.

And so that's the kind of thing that we think we can scale around the world and get significant benefit.

Great.

Thanks for all the detail.

Thank you.

We'll take two more callers, please.

Next question.

Our next question comes from the line of Matt Taylor with Barclays.

Thanks for taking the question.

Just want to go back to your earlier comments about surgical volumes.

I was curious if you had any thoughts around what's driving the incremental improvement?

Is it economy or coverage or products?

What do you attribute some of that improvement to?

Well, given that it is consistent with what all the hospitals are reporting, I've got to say that the overall healthcare demand if you like in the US, is something that is on an upward trajectory.

That's got to be the fundamental reason and it's probably -- some of it is just natural demographics which provides this.

The other is probably we're seeing some of the impact of the Affordable Care Act and all of the initial pieces of increased coverage might have been more upstream in nature in diagnostics and so on.

Some of these will lead to more procedures.

Those are the only things that I can sort of intelligently talk about.

Other than that, just what we experienced.

It is not something that is easy to predict to be fair and we look at all kinds of different factors and then do the best we can.

We have leading indicators.

We talk to people and we get a sense for it, but everything else that I just said was close to conjecture on my part.

I would say the same.

It's very difficult even to get -- you've got to go to different data points and triangulate just to get a sense for what's happening to the volumes to go deeper level than that and understand why it's difficult to make assumptions.

It's very difficult to pinpoint the specific reason.

The other thing I would reference beyond just the increase in overall volume, the other thing that we're seeing is a mix shift, a much greater growth in the MIS procedures versus open.

And this is pretty consistent when I look at other players in the marketplace and I look at their revenue growth in the quarter.

So I'm really happy about that and truthfully, that's probably the bigger opportunity, a small uptick in surgical volumes in the US versus a real change in mix shift to MIS.

I'll go with the mix shift to MIS all day long.

And that's pretty consistent, again, with what we've seen, what our reps are telling us, and what we're seeing from other companies that are playing in the same space.

That to me is really the story.

Thanks.

And just one on Spine.

You did a little bit better there this quarter.

You were flat.

Can you talk about your overall strategy there?

You recently announced this deal with Mazor.

Can you talk about some products flow and other improvements that could help Spine this year?

Sure.

We detailed some of that in the commentary.

I'll let Geoff comment on that directly.

So go ahead, Geoff.

Sure.

So hitting the Mazor deal, we are very excited about that.

That is I'll call it one leg of a multi-pronged strategy around what we call surgical synergies.

And we feel as we move out into the future, these surgical synergies will be in Spine, our calling card.

We've got very strong enabling technology platforms in navigation and imaging.

We're excited about the partnership in robotics with Mazor.

And then integrating these platforms as we move forward, to provide a differ -- to differentiate spine procedures, both economically and clinically and the surgeon experience, low radiation, just an easier surgical procedures, et cetera.

We think is going to differentiate our Spine business.

And so as you move forward, and this is not -- this isn't five years from now.

This is going to take place quarter-over-quarter as we continue to emphasize this.

So this is something we're very excited about.

And as we move forward, outside of surgical synergies, we do have a number of products.

Starting in our FY14, FY15, our Spine business put a lot of effort into revamping the product portfolio.

And the products that are hitting the market now, our Elevate cage for example, Voyager's another one, and this quarter launching our new OLIF procedures, I'm calling them our second-generation OLIF procedures, we're getting a terrific uptick in these things.

My only regret is that two quarters ago when we were planning, we didn't plan aggressively enough.

Because I think we're hitting our maximum with sets and if we had more sets we'd even see more growth.

That's something that we're take factoring into our planning going forward is to be a little bit more aggressive.

But both from a product standpoint and from what we call surgical synergies standpoint, things are looking very good for our Spine business right now.

As you pointed out, every quarter we've improved over the last five quarters.

And it's a big shift, takes a little bit of time to change the direction and you should continue to see continued improvement quarter-over-quarter.

Thanks.

Thanks, Matt.

We'll go to one more caller, please.

Our final question comes from the line of Kristen Stewart with Deutsche Bank.

Hello.

Thanks everybody.

Hope you all had a happy Memorial Day weekend.

I had a couple of questions.

Just wanted to go back to the RTG and the new reporting divisions.

Is there anything to be said for just the four different businesses?

Is it more just alignment with the underlying surgeons or is it just to facilitate maybe better structure to improve the performance?

How should we think about this?

I'm just kind of curious if it has anything to do with just perhaps isolating Spine and perhaps thinking about it as maybe less core?

No, actually it's not isolating Spine.

The other way around, actually.

There's a couple -- Kristen, there's a couple changes going on and we'll get into this next week.

Just summary, one, moving into these different reporting divisions is really putting the businesses, organizing them by disease state or condition versus technology.

And the example I'll give is Neuromodulation.

That was a business largely held together based on technology and planable stimulator.

And from whether it be gastro euro, which we're now calling pelvic health, or whether it be DBS, or pain stim, they're all calling on different physicians, specialities and we really felt we would get more traction if we organized by disease state versus by technology.

So, that's going to help us one, focus on the physicians appropriately and two, innovate.

Because when we're innovating, we're looking across the disease state and across the care continuum, rather.

That's one change.

And the other change that Omar mentioned in the commentary was moving to this general manager structure.

So that gets to more execution.

And this is something that CBG has done over the last four years, five years, where you're having GM's -- general managers, that are 100% focused on the individual therapy segment that they serve and those products within that therapy segment.

And so making your businesses more smaller, more focused and granular.

So that's another component of that.

And then along with this, we have fairly sweeping leadership changes across RTG.

And many of the leaders that are you now running the group are top performers from other parts of Medtronic.

And so combined with the different structure and its disease state, organization with this GM structure to drive innovation and new players, proven players, from other areas in Medtronic, we feel very good as we hit FY17.

And again, to clarify the Spine comment, look, there's a specific Spine customer.

The only thing that we did was remove interventional from it and that is not the same customer.

It made a lot more sense to group that together with Pain where we have a lot of associated therapies and we were missing the big picture look at Pain by splitting up all the different very significant non-opioid therapies that we had.

This was really a disease-based look and a look at our customers and that will drive innovation and it will drive a clearer picture of how we go to market with our sales force.

And then, it finally leads to value-based healthcare, driving for outcomes, that's the only way in which you're going to do it.

Another thing on Spine, regarding surgical synergies, as you know the enabling technology platforms sit in what we historically call the surgical technologies, which that component of it is now in our Brain business, so NAV and imaging.

We actually built a small surgical synergy team, which is a bridge between that business and our Spine business and looking at an integrated technology road map by procedure as we move out.

And that also works for DBS as well.

So before, we had two separate businesses that weren't linked quite close enough in my humble opinion to drive the surgical synergy benefit.

So we put a small team that includes marketing as well as engineering talent to drive that integrated technology road map and that value proposition.

So just in Q4 alone, we had 15 new combined capital equipment Spine core metal deals, which is significantly more than we've had in the prior three quarters combined.

And this is something that is a result of that.

And as we move forward, you'll see the technology road map more integrated.

So we've actually built a little bit of a bridge between Spine and our capital equipment business.

So taking the structure that was successful with CBG and overlaying that to --

Absolutely.

And then just a follow-up on Diabetes.

I saw today the announcement, or I guess it was last week, with Qualcomm with the type 2 diabetes.

Maybe if you could just have Hooman expand a little bit more on that?

It's been interesting to see more of the emphasis on type 2. This seems to be very early stage, but when might a product like this come out or just how should we think about what to I guess look forward to next week?

Sure.

Hello, Kristen.

Look, we continue to be excited about and focused on our type 2 business.

This is a new business unit that we put in place a little over a year ago and we'll talk to you about the product road map next week at the Investor Day session, so you'll get more insight there.

But suffice it to say that our focus within type 2, first, the type 2 population is 90% of all patients with diabetes.

So it's a huge market opportunity.

When you take a look at those 90% of the patients, what we have decided to focus on is really monitoring those 90%.

We could have gone the route of insulin delivery because that's also a core competency, but insulin delivery within that type 2 population only addresses about 10% of that 90%.

The broader opportunity is within monitoring.

And what you see with Qualcomm Life, what you're seeing with iPro 2 and our new pattern snapshot capabilities are really our efforts to bring more and more advanced monitoring solutions to those type 2 patients.

And at the end, our goal isn't just to deliver a sensor to those patients or just the product, it's really to deliver an integrated solution to those patients where we bring not just a technology, but capability through analytics and insights that can give those patients actionable information so that they can better manage their disease and also to do the same thing for physicians who are managing those patients.

So we're really excited about the opportunity.

As you said, we're just getting started, but we think there's a tremendous amount of runway in this business.

Thanks very much.

Thank you.

Okay.

It's time to close the call out here and I'd like to remind you that we plan to host our Investor Day next Monday, June 6, in New York City.

We look forward to having more detailed discussions with you on our plans to deliver on these strategies that we outlined today.

And I'd also like to note that we anticipate holding our Q1 earnings call on Thursday, August 25.

And finally, in conclusion, as we've noted, we continue to focus on delivering consistent mid single-digit constant currency growth, strong EPS leverage and returning a minimum of 50% of free cash flow to our shareholders.

FY16 was indeed a successful and transformative year for our Company and looking ahead, we feel we're well positioned to participate and lead in the transformation to value-based healthcare, which can ultimately create long-term dependable value for our shareholders.

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

Thank you and all of you please have a great day.

Thanks.

Thank you.

This concludes today's conference call.

You may now disconnect.