Medtronic Plc (MDT) — Q4 2015 Earnings Call Transcript

Thank you, Maria. 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's Chief Financial Officer, will provide comments on the results of our fourth quarter and fiscal year 2015, which ended April 24, 2015. After our prepared remarks, we’ll be happy to take your questions. First, a few logistical comments; earlier this morning, we issued a press release containing our financial statements and our revenue by business summary, which finalizes the preliminary revenue we issued on May 19, 2015. We also updated our combined historical Covidien-Medtronic financial statement presentation to include FY15 comparable revenue, as well as combined P&L for the past eight quarters. You should also note that some of the statements made during this call may be considered forward-looking statements and that actual results might differ materially from those projected in any forward-looking statement. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports filed with the SEC. Therefore, we do not undertake to update any forward-looking statement. In addition, the reconciliations of any non-GAAP financial measures are available on the Investors portion of our website at medtronic.com. Finally, unless we say otherwise, references to quarterly or annual results increasing or decreasing are in comparison to the fourth quarter and full year 2014, respectively, and all year-over-year revenue growth rates are given on a comparable constant currency basis, which includes Covidien Plc and the prior year comparison and aligns Covidien’s prior year monthly revenue to Medtronic’s fiscal quarters. 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, Jeff, and thank you to everyone for joining us today. This morning we reported fourth quarter revenue of $7.3 billion, which represents growth of 7% and Q4 non-GAAP diluted earnings per share of $1.16. Before providing more detail on our Q4 performance, I would like to recap the fiscal year. FY15 was a transformational year for our company, with the announcement of the Covidien acquisition in Q1 and the subsequent closing of this transaction in Q4. We believe the combination of our two companies meaningfully accelerates our strategies, diversifies our growth profile, and increases our long-term financial flexibility. I will cover the Covidien integration in more detail in a moment. Our FY15 revenue grew 6%, which was at the upper end of our mid-single-digit baseline goal and represented a 230 basis point improvement from FY14. FY15 was a strong year for therapy innovation at Medtronic, with our new therapies growth vector contributing 410 basis points for our full year growth, well above our stated goal of 150 to 350 basis points. All four of our groups launched meaningful innovations in FY15, including those that make advances into disease areas, innovate in our existing market-leading technologies, or enhance our diagnostic, therapy, and monitoring products with key wraparound programs. Gary will discuss the technologies that drove our results, as well as our future pipeline in more detail shortly when he recaps our business results. Revenue in emerging markets, our second growth vector, grew double digits again in FY15 and contributed 150 basis points to our full year growth. Our third growth vector, services and solutions, nearly doubled in revenue in FY15 and contributed 30 basis points to our full year growth. While legacy Covidien businesses will undoubtedly contribute to this vector in the future, we feel for FY15 it is more appropriate to look at this vector using the legacy Medtronic revenue as the base, given all the revenue in Q4 came from legacy Medtronic businesses; under this methodology, the services and solutions group vector contributed 50 basis points within our FY15 goal of 40 to 60 basis points. We continue to add additional services and solutions offerings. In addition to our existing Cardiocom and Cath Lab Managed Services platforms, we were excited to add Diabeter in Q4, a unique diabetes integrated care solution. We also initiated our first pilot of our Operating Room Managed Services, which combines the capabilities we have developed in the Cath Lab together with Covidien’s operating room technology and expertise to provide a full service offering to hospitals. All of these efforts are focused on addressing the evolving needs of our customers regarding delivery system efficiency and more integrated connected care models for patients around the world. We feel we are well-positioned to demonstrate the role medical technology and related services can play in improving system efficiency and care integration in key disease states and to serve as a key partner and collaborator with healthcare systems and governments for working to deliver better patient outcomes at lower costs. Looking at the FY15 P&L, non-GAAP diluted EPS was $4.28. While it is difficult to compare EPS to the prior year, given the acquisition of Covidien, we are looking at some key operating P&L line items on an approximate combined constant currency basis in order to better assess our operating performance. We also feel that these are the appropriate P&L metrics to evaluate our operating performance as we move through FY16. In FY15, our operating margin percentage improved by 60 basis points, including an 80 basis points improvement in SG&A, offset by a 50 basis point decline in gross margins, all on a combined constant currency basis, which corresponds to 200 points of operating leverage and was in line with our baseline expectations. While Gary will cover our earnings guidance in a moment, it is clear that FX is a major headwind in FY16. Despite that headwind, I want to emphasize that the management team is focused on driving significant operational leverage this year. Looking now at free cash flow, we had a very strong year in FY15 and met our commitment to return 50% of our free cash flow in the form of dividends and share buybacks. Our FY15 results ultimately reflect the dedication and passion of over 85,000 employees collaborating with our partners in healthcare to deliver therapies and services to millions of patients around the globe to fulfill our mission of alleviating pain, restoring health, and extending life. Now moving to our Q4 performance, Q4 was another strong quarter, the first as a combined company with Covidien. Our 7% revenue growth resulted from solid performances across all of our groups and geographies. Geographically, we had double-digit growth in emerging markets, strong upper single-digit growth in the U.S., and mid-single-digit growth in developed markets outside the U.S. CVG had another quarter of impressive double-digit growth, diabetes delivered strong upper single-digit growth, and both MITG and RTG had solid mid-single-digit growth. In RTG, we recently reorganized the structure of our sales teams, aligning sales management to disease states. We expect this to further optimize our focus on our neuroscience, integrated pain solutions, and surgical synergy strategies. In particular, we believe this should help our performance in spine, as we believe it will allow us to take better advantage of our overall capabilities. Q4 was the first quarter of integration with Covidien, while it has only been one quarter, I'm proud that our combined organization is staying focused on delivering on our commitments, avoiding any distractions during this transition period. As I’ve stated several times before, our first objective with the Covidien integration is to preserve the growth objectives of both companies. As we look ahead, we believe that our baseline goal of delivering mid-single-digit constant currency revenue growth on a consistent basis is still appropriate and reasonable over the long term. Although, similar to this quarter, there could be times when we exceed our baseline expectations. We continue to focus on executing our three growth strategies: therapy innovation, globalization, and economic value. These strategies are designed to create a competitive advantage for Medtronic by capitalizing on the three long-term trends in healthcare: the desire to improve clinical outcomes using technology, the growing demand for expanded access to healthcare in developing countries, and the optimization of cost efficiency in healthcare systems, including the move to value-based healthcare. In therapy innovation, we continue to deliver above-goal performance in Q4, as the new therapies growth vector contributed 560 basis points to our total company growth. This is a result of strong execution on product launches, as well as decisions we have made over the past few years to select the right products that solve not only our customers clinical needs but their economic needs as well; our pipeline remains full with a number of new therapies and services expected to come to market over the next few years. In globalization, emerging markets delivered 140 basis points to our Q4 total company growth, just below our stated expectations. We continue to implement changes aimed at improving our emerging market growth profile, including making progress in our public and private partnerships. On my most recent visit to China, I met with several private hospital CEOs and discussed potential opportunities to work together. In addition to partnerships, all of our emerging markets are focused on our channel optimization strategy, strengthening our customer relationships to better meet our customers’ needs while also recognizing the unique challenges of local healthcare systems. In countries like India and China, where we have a vast number of distributors, we are consolidating logistics to platform distributors in order to meet more stringent supply chain policies. In the Middle East, we are building strong joint venture partnerships with local distributors to accelerate therapy adoption in the local markets. In economic value, our services and solutions growth vector contributed 50 basis points to our growth in Q4 on the legacy Medtronic basis, within the goal of 40 to 60 basis points. In Cardiocom, we signed an additional 14 commercial contracts in Q4 and continued to increase patient enrollment in our existing hospital and home care provider accounts. In our CRHF Diagnostics business, we have begun penetrating the mobile cardiac, outpatient telemetry, and remote monitoring markets using our unique SEEQ-based diagnostic service. We have now started adding the heart failure diagnostic data provided by CRHF implantable devices into Cardiocom, creating a comprehensive heart failure management service. We also started offering Cardiocom as part of a broader bundle offering to our CVG customers. In Cath Lab Managed Services, we are generating rapid growth, as we are fast becoming the ideal partner for hospitals that seek to drive operational efficiency. While this business started in Europe, we are now expanding our Cath Lab Managed Services globally. At the end of Q4, we had 50 long-term agreements with hospital systems, representing $1.1 billion in revenue over the life of these contracts, which have an average span of about five to six years. We also have a full pipeline of potential contracts at various stages of negotiation with providers around the world. Turning to the P&L, Q4 non-GAAP diluted EPS was $1.16. Despite the incremental moving parts due to the Covidien transaction and increased headwinds from foreign exchange, our operating results were in line with our expectations, with our organization controlling spending effectively as we ended the fiscal year. Our gross margin continues to reflect ongoing elevated levels of spending to improve our quality systems in Neuromodulation. This quarter, we entered into a consent decree with the FDA, which provides a path to resolution of our issues in this division. We take the responsibility that has been assigned to us to provide quality products very seriously, and ensuring the highest level of quality and regulatory compliance has always been and will continue to be a personal priority for me and a central focus of everything that we do at Medtronic. We delivered $1.7 billion of free cash flow in Q4. We remain focused on allocating our capital with a focus on creating long-term shareholder value. As a result of the Covidien acquisition, we have increased ability to deploy our cash in the U.S., solidifying our commitment to return 50% of our free cash flow to shareholders. With this increased financial flexibility, we are in the process of reevaluating the mix of share buybacks and dividends. As an S&P dividend aristocrat, we remain focused on delivering dependable long-term dividend growth. In addition, we remain disciplined when evaluating potential M&A opportunities; any investment we make must be aligned with and ultimately strengthen one or more of our three growth strategies while at the same time offering high return metrics and minimizing near-term shareholder dilution. As we look ahead to FY16, we remain focused on delivering on our baseline financial expectations as we continue to integrate Covidien into Medtronic. We have four clear priorities guiding this process: preserve, optimize, accelerate, and transform. I mentioned preserve earlier; our first and highest priority is to continue to meet the financial commitments of both companies. Our second priority, optimize, is focused on achieving the detailed cost savings plans that are expected to result in a minimum of $850 million in cost synergies by the end of FY18. Our third priority, accelerate, is related to assessing and prioritizing the numerous revenue synergy opportunities, which today include leveraging Covidien’s peripheral vascular sales force to drive sales of drug-coated balloons, as well as leveraging Covidien's Neurovascular division to enhance our Neuroscience strategy in RTG. We are creating the industry's first true comprehensive stroke management business, leveraging our transformative therapy innovations, the Solitaire mechanical thrombectomy product in Neurovascular and CVG LINQ Insertable Cardiac Monitor, with its clinically proven role in the management of cryptogenic stroke patients. Our fourth and final priority is transform; as we observe and interact with healthcare systems around the world, we continue to see a push for experimentation with new models of delivery system operations, new payment schemes, and integrated patient care as critical mechanisms to balance their cost and access challenges. Each of these efforts seeks to drive higher patient and system value to move to value-based healthcare models around the world. This presents a unique opportunity for Medtronic because we believe medical technology can play an increasingly larger role in delivering higher levels of value in healthcare. The proper application of medical technology alongside the adaptive use of data and information associated with these technologies can help when the cost curve in healthcare and produce better clinical outcomes at the same time. This is pushing our organization to develop technology offerings, services, and business models that bring new forms of value across a given patient care continuum and within the healthcare delivery system itself. This continues to drive our organization to move beyond medical devices to create integrated health solutions that complement and enhance the value of our devices through traditional wraparound services and solutions. By addressing these trends now, we believe we will also uniquely position Medtronic to participate in the emerging bundle payment and risk-sharing models focused on specific disease states. We are actively partnering and collaborating with hospital systems, payers, and governments who are working on these new models, and we intend to continue doing so as leaders while leveraging our industry-leading products, deep clinical and economic expertise, global footprint, and financial strength. Ultimately, we believe this is what will differentiate Medtronic and uniquely position us to succeed in the ever-changing global healthcare marketplace. Gary will now take you through a more detailed look at our fourth quarter results.

Thanks, Omar. Fourth quarter revenue of $7.34 billion increased 60%, as reported, or 7% on a comparable, constant currency basis after adjusting for a $483 million unfavorable impact from foreign currency. Legacy acquisitions and divestitures from both Medtronic and Covidien contributed 80 basis points to growth. Q4 revenue results on a geographic basis were as follows: growth in the U.S. was 8% and represented 55% of our overall sales. The non-U.S. developed markets grew 5% and represented 32% of our overall sales. Growth in the emerging markets was 11% and represented 13% of our overall sales. Q4 diluted earnings per share on a non-GAAP basis were $1.16, a decrease of 2%. We will breakeven on a Q4 GAAP earnings basis after several significant charges primarily related to the Covidien acquisition. In addition to the $362 million adjustment for amortization expense, the Covidien-related non-GAAP adjustments on an after-tax basis included a $455 million charge related to the inventory purchase price step-up, a $286 million charge for acquisition-related items, and a $157 million net restructuring charge. We also had a $349 million charge related to certain tax adjustments, the majority of which related to the proposed agreement reached with the IRS, resolving all proposed adjustments associated with the Kyphon acquisition, a $61 million CVG product technology upgrade commitment charge, and a $27 million net litigation charge, primarily related to provision for additional INFUSE claims. In our Cardiac and Vascular Group, revenue of $2.596 billion grew 10%. This was a result of strong performance in all three divisions: Cardiac Rhythm & Heart Failure, Coronary & Structural Heart, and Aortic & Peripheral Vascular. In Cardiac Rhythm & Heart Failure, or CRHF, revenue of $1.398 billion grew 11%. This performance was driven by low-teens growth in Low Power, mid-single-digit growth in High Power, strong growth of over 30% in AF Solutions, as well as nearly doubling our revenue in services and solutions, which includes Cardiocom and Cath Lab Managed Service revenue. We estimate the global CRHF market is growing in the low to mid-single digits, and the strength of our new product introductions is resulting in share gains and generally improved pricing dynamics. Low Power growth continues to be driven by the global adoption of Reveal LINQ, which resulted in diagnostics revenue growth of over 40% sequentially, as well as solid pacemaker implant growth in the U.S. LINQ is resulting in not only increased diagnostic sales but also pacemaker pull-through, as LINQ is resulting in more re-cardiac diagnosis in syncopy patients. Looking ahead, we look forward to the launch of the Micra Transcatheter Pacing System in international markets this summer, followed by a U.S. launch in FY’17. In High Power, we continue to see strong market adoption of our Attain Performa CRT-D system with its differentiated next-generation Quadripolar technology, AdaptivCRT algorithm, and time-saving Vector Express programming. High Power also had a strong quarter in Japan, where we have now gained over 20 points of ICD share since the launch of our Evera MRI SureScan ICD in Q3. We expect to launch the Evera MRI ICD in the U.S. in this fiscal year. Our AF Solutions business continues to take share in the AF market with the continued strong growth of our Arctic Front Advance Cryoablation System, which is growing at more than double the overall market growth rate. Turning to Coronary & Structural Heart, or CSH, revenue of $792 million grew 9%. Our coronary business grew in the low single digits, driven by solid mid-single growth in drug-eluting stents. In Europe, our launch of the Resolute Onyx resulted in a 400 basis point gain in DES share sequentially and a sequential slowing of pricing declines. Resolute Onyx features enhanced visibility and thinner struts to improve deliverability. We began the U.S. pivotal trial for Resolute Onyx in March and are currently forecasting an FY’18 FDA approval. In our broader coronary product offering, we are also seeing increased strengths, particularly in balloons where we gained 400 basis points of share on the successful rollout of our differentiated Euphora PTCA balloon family. In renal denervation, we announced in April the initiation of the SPYRAL HTN global clinical trial program, which includes two global, prospective, randomized sham-controlled trials studying uncontrolled hypertension patients both on and off medication. Based on the outcome of these two initial studies, we will evaluate next steps for our pivotal study. Our Structural Heart business grew in the upper teens, driven by another strong quarter in transcatheter valves, which grew nearly 50%. In the U.S., our continued rollout of CoreValve is driving growth and resulting in both sequential and year-over-year share gains. We added approximately 40 additional new centers in the quarter and now have more than 275 U.S. centers trained since launch. In late March, we received FDA approval for the use of CoreValve in a failed bioprosthetic, also known as valve-in-valve implantation, which further contributed to our U.S. growth. As CoreValve is the only TAVI product approved for this indication, it makes CoreValve an indispensable offering for every practicing TAVI center. In international markets, our business took share sequentially due to the strong adoption of our CoreValve Evolut R. We are seeing strong customer enthusiasm for this next-generation self-expanding platform with its options to recapture and reposition the valve during the procedure. Its differentiated 14 French equivalent delivery catheter allows access to smaller annuli and is designed for inflow and skirt to help promote annular sealing. Evolut R is receiving tremendous feedback on its clinical outcomes, overall ease of use, and procedural efficiencies. The FDA submission of Evolut R is complete, and we are targeting the first half of FY’16 for U.S. approval. The FDA also recently allowed us to begin implanting Evolut R in a SURTAVI Trial and to reduce the enrollment requirement for the trial to 1,400 patients, which we believe brings the timeline for U.S. intermediate-risk approval forward by at least a year. We have already enrolled approximately 1,250 patients from SURTAVI and expect to complete enrollment over the next several months. In Japan, we received PMDA approval for CoreValve in March, and plans are underway for a full launch this fall, following anticipated reimbursement approval in October. In our Aortic & Peripheral Vascular division, or APV, revenue of $406 million grew 9%. The Aortic business grew in low single digits while the peripheral vascular business grew in the mid-teens, driven by the successful U.S. launch of our IN.PACT Admiral drug-coated balloon. We estimate that the IN.PACT Admiral is the leading DCB in the U.S. market in just its first quarter of launch. This leadership position was attained without benefiting from having a full quarter of a combined Medtronic and legacy Covidien peripheral sales force. We expect this DCB to drive growth in our APV division over the coming quarters through both its individual revenue contribution, as well as its ability to drive share across our broader peripheral vascular product line through multi-line contracting. Looking at our DCB pipeline, we expect to obtain FDA approval for our 150-millimeter IN.PACT Admiral balloon in Q4 FY’16, or early Q1 FY’17. We also expect to file for expanded indications for IN.PACT Admiral with a PMA U.S. filing in the second half of FY’16 for the in-stent restenosis indication, as well as the CE Mark filing by the end of FY’16 for the AV Fistula indication. We are also finalizing bench testing now on our redesigned DCB for use below the knee, which we expect to submit for CE Mark in FY’16. Now turning to our Minimally Invasive Therapies Group, which consists of the majority of legacy Covidien businesses, revenue of $2.387 billion grew 6%, which included a net 140 basis point contribution from acquisitions and divestitures. MITG’s revenue performance was driven by double-digit growth in Surgical Solutions and lower single-digit growth in Patient Monitoring & Recovery. Surgical Solutions revenue of $1.293 billion grew 10%, with high single-digit growth in Advanced Surgical, low single-digit growth in General Surgical, and growth of over 40% in Early Technologies. Advanced Surgical had a strong quarter with balanced low double-digit growth in both Stapling and Energy. Stapling results benefited from the continued rollout of new products, including the Endo GIA Reinforced Reload. In Energy, we are seeing strong procedural growth, particularly in Vessel Sealing. Our Early Technologies business also had solid growth across all three product lines: GI Solutions, Advanced Ablation, and Interventional Lung Solutions. Geographically, in Surgical Solutions, both the U.S. and China had strong quarters, delivering double-digit growth. Surgical solutions continue to focus on driving minimally invasive surgery adoption globally. Patient Monitoring & Recovery revenue of $1.094 billion grew 2%. The division was led by strength in the patient monitoring business, which grew in the mid-single digits, as well as both Nursing Care and Airway & Ventilation, which grew in the low single digits. This offset low single-digit declines in patient care. Growth in the patient monitoring business resulted from our strong U.S. flu season, which drove pulse oximetry sales. Moving to our Restorative Therapies Group. Revenue of $1.854 billion grew 5%. Results were driven by growth in Surgical Technologies, Neuromodulation, and Neurovascular, partially offset by modest declines in Spine. Spine revenue of $743 million declined 2%. Low single-digit growth in BMP was offset by low single-digit declines in Core Spine and interventional. Both the global and the U.S. Core Spine markets grew in the low single digits, consistent with last quarter. In our Core Spine business, both TL and cervical declined, but both of these businesses are expected to improve as we continue to launch innovative technologies into the market, which will become a larger part of our sales mix. In PL, we expect FY’16 rollouts of new technologies for our OLIF25 and the 51 procedures, our new alleviate expandable cage, and Solera Voyager, our new minimally invasive lumbar pedicle screw system. In cervical, we continue to see adoption of our PRESTIGE LP Cervical Disc and innovative ANATOMIC PTC interbody spacer. We are also beginning the launch of our Divergence Stand-Alone Interbody Cage and ZEVO Anterior Cervical Plate System. Our spine division also continues to develop and deploy our differentiated surgical synergy program, which integrates our enabling technologies, surgical tools, spinal implants, and expertise to improve surgical outcomes and efficiencies. This includes utilizing O-arm imaging and StealthStation navigation in spine procedures. Strong growth from these enabling technologies is recognized in our Surgical Technologies division. In Neuromodulation, revenue of $518 million increased 6%, driven by double-digit growth in DBS and mid-teens growth in Gastro/Urology. In DBS, our global growth focused on neurologist referral programs, and the strength of the EARLYSTIM data in international markets continues to drive solid growth. In Gastro/Urology, we continue to see strong growth in sales of the InterStim system. Our Pain stim business was flat this quarter, reflecting a continued decline in the U.S. market, resulting from a negative reimbursement change that affected trialing activity and new implant growth. However, we grew our global pain stim share sequentially on the strength of our RestoreSensor SureScan MRI spinal cord stimulation system, with its proprietary AdaptiveStim automatic simulation adjustment feature and access to MRI scans anywhere in the body. Turning to our Surgical Technologies division, revenue of $461 million grew 9%, driven by solid, balanced growth across all three businesses. Neurosurgery grew in the mid-single digits, reflecting record worldwide O-arm surgical imaging unit sales, continued strength in StealthStation navigation service revenue, and the contribution of Visualase MRI-guided laser ablation. ENT low double-digit growth was a result of continued strong customer adoption of our StraightShot M5 Microdebrider and NuVent sinus balloon, partially offset by the MicroFrance divestiture, which occurred in Q3. In Advanced Energy, strong adoption of our proprietary Aquamantys tissue sealing and PEAK PlasmaBlade technologies drove upper teens growth. In Neurovascular, revenue of $132 million grew 23%. The division, formerly part of legacy Covidien, had strong double-digit growth across coils, stents, flow diversion, and access. In stents, we saw strong adoption of our SOLITAIRE FR revascularization device following the presentation of four meaningful clinical trials at the International Stroke Conference in February and subsequent publication of three of these studies in the New England Journal of Medicine. These studies provided evidence that the standard of care for the treatment of stroke should be changed to include stent thrombectomy as primary treatment in addition to IV-tPA. In our flow diversion portfolio, we also saw strong growth as a result of the continued U.S. launch of the Pipeline Flex embolization device. In our Diabetes Group, revenue of $467 million grew 8%, with solid upper single-digit growth from the continued adoption of our CGM sensor-augmented insulin pump systems in both the U.S. and non-U.S. developed markets. In the U.S., we continued to see strong adoption of our MiniMed 530G with the Enlite CGM sensor. In non-U.S. developed markets, growth was driven by the launch of our next-generation MiniMed 640G system with the enhanced Enlite CGM sensor in Australia and Europe. In addition to incorporating a brand new insulin pump design and user interface, the MiniMed 640G System features SmartGuard technology, which can automatically suspend insulin delivery when sensor glucose levels are predicted to approach a low limit and then resume insulin delivery once levels recover. We continue to make progress in bringing this technology to the U.S. and plan to submit the PMA for this system later this calendar year. In Q4, we continued to advance the development of artificial pancreas technology through a minority investment in DreaMed Diabetes, which included licensing their MD-Logic artificial pancreas algorithm. We also continue to make progress in our Diabetes Services and Solutions division with three business development announcements in Q4. First, we made a minority investment in Glooko, a developer of a unified platform for diabetes management. Second, we announced a partnership with IBM Watson Health to develop a new generation of personalized diabetes management solutions. And third, we acquired Diabeter, the Netherlands-based diabetes clinic and research center, which has developed a unique integrated care model for people with diabetes that we intend to expand globally over time. Taken together, these announcements signify that we're focused on transforming our diabetes group from a market-leading pump and sensor company into a holistic diabetes management company focused on making a real difference in outcomes and costs. Turning to the rest of the income statement, after adjusting for certain non-GAAP items mentioned earlier as well as the 10 basis point negative impact from foreign exchange, our Q4 operating margin was 29.6%, which included non-GAAP operational gross margin, SG&A, and R&D of 70.8%, 32.6%, and 6.9%, respectively, demonstrating the leverage we normally see in the fourth quarter in SG&A and R&D. Also included in the operating margin was net other income of $20 million, including net gains from our hedging program of $139 million. We hedged the majority of our operating results in developed market currencies to reduce volatility in our earnings from foreign exchange. In addition, a growing portion of our profits are unhedged, especially in emerging market currencies, which can create modest volatility in our earnings. Based on current exchange rates, we expect FY16 net other expense to be in the range of $215 million to $275 million, which includes an expected impact from the U.S. medical device tax of approximately $205 million. For Q1 FY16, we expect net other expense to be in the range of $65 million to $75 million based on current exchange rates. It is worth noting that in Q4 we hedged the majority of the expected FY16 legacy Covidien operating results in developed market currencies, consistent with Medtronic’s recent market rate practices. Overall, we expect FY16 operating margins to be in the range of 28% to 29% on an as-reported basis, which includes over 100 basis points of improvement or approximately 400 basis points of operating leverage related to cost synergies, offset by an expected FX impact of approximately 70 basis points. The majority of the operating margin improvement will come in SG&A as a result of realizing cost synergies from our Covidien acquisition, as well as continued execution on legacy leverage initiatives of both Covidien and Medtronic. We would expect operating margins in the first half of the year to be below this range, improving in the back half of the year as the foreign exchange headwinds lessen and cost synergies accelerate. Below the operating profit line, Q4 net interest expense was $186 million, a significant increase from prior quarters, as we are now including the incremental interest expense from our December 2014 $17 billion bond offering used in the Covidien acquisition. At the end of Q4, we had approximately $19.5 billion in cash and investments and $36.2 billion in debt. In Q1, we expect to retire $1 billion of maturing debt using existing cash. Based on current rates, we would expect FY16 net interest expense to be approximately $750 million, including approximately $210 million in Q1. Our non-GAAP nominal tax rate on a cash basis in Q4 was 15.4%. This was lower than expected due primarily to the finalization of profit mix by jurisdiction, which resulted in a favorable catch-up as we reduced our annual tax rate. We would expect our FY16 non-GAAP nominal tax rate on a cash basis to be in the range of 16% to 18%, as we expect to be at the higher end of the range until the presently expired U.S. R&D tax credit is reinstated. In Q4, we generated $1.7 billion in free cash flow. We remain committed to returning 50% of our free cash flow, excluding one-time items, to shareholders. In Q4, we repurchased $300 million of our common stock and paid $435 million in dividends. While a portion of our dividend paid in April was treated for U.S. tax purposes as a return of capital, our expectation is that we will increasingly accumulate profits at the Medtronic plc level and move over time toward a dividend that is treated completely as a return of their earnings. As of the end of Q4, we had remaining authorization to repurchase approximately 30 million shares. Fourth quarter average daily shares outstanding on a diluted basis were 1.441 billion shares. It is important to note that the cash we received from stock option redemptions, which was $172 million in Q4, will also continue to be used to repurchase shares on the open market to partially offset the dilutive impact. These share repurchases are incremental to our commitment to return 50% of our free cash flow to shareholders. For FY16, we would expect diluted weighted average shares outstanding to be in the range of approximately 1.433 billion to 1.437 billion shares, including approximately 1.439 million shares in Q1. Let me conclude by commenting on our initial fiscal year 2016 revenue outlook and earnings per share guidance. We believe that underlying operational revenue growth in the range of 4% to 6%, plus incremental expected revenue from our Q1 extra selling week of 100 to 150 basis points, all on a comparable constant currency basis, is reasonable for FY16. This operational revenue growth expectation is consistent with our stated baseline financial goal of consistently delivering mid-single-digit revenue growth. Our revenue outlook assumes that CVG, MITG, and RTG grow in the mid-single digits and diabetes grows in the upper single to low double-digit range, all on a comparable constant currency basis and including the expected benefit of the extra week. While we cannot predict the impact of currency movements, to give you sense of the FX impact of the exchange rates were to remain similar to yesterday for the remainder of the fiscal year, then our FY16 revenue would be negatively affected by approximately $1.3 billion to $1.5 billion, including the negative $540 million to $600 million impact in Q1. Turning to guidance on the bottom line, we believe it is reasonable to model cash earnings per share in the range of $4.30 to $4.40, which includes an expected $0.40 to $0.50 negative foreign currency impact based on current exchange rates and approximately $300 million to $350 million of targeted value capture synergies from the Covidien acquisition. As you think about your FY16 models and quarterly gating, it is worth noting that this FX impact to earnings per share is $0.10 more negative than we estimated during our Q3 earnings call, as well as the fact that a higher percentage of the negative FX impact is in the first half of the year while more of the value capture synergies occurred later in the fiscal year. As in the past, my comments on guidance do not include any unusual charges or gains that might occur during the fiscal year. I will now turn it back over to Omar.

Thanks, Gary. Before opening the lines for Q&A, let me briefly conclude by stating that Q4 was another strong quarter, a good finish to a successful and transformative year. As we look ahead, while we are facing increased headwinds from foreign exchange, we must remain focused on the operations of the company striving to reliably deliver on baseline financial model, mid-single-digit constant currency revenue growth, and EPS growth of 200 to 400 basis points faster than revenue on an operational basis, and returning 50% of our free cash flow to shareholders. To achieve these goals we continue to execute on our three primary strategies, therapy innovation, globalization, and economic value. We expect our efforts to deliver consistent and reliable performance, combined with disciplined capital allocation, to enable us to create long-term, dependable value in healthcare. With that, we will now open the phone lines for Q&A. In addition to Gary, I’ve asked Mike Coyle, President of our Cardiac and Vascular Group; Bryan Hanson, President of our Minimally Invasive Therapies Group; Chris O'Connell, President of our Restorative Therapies Group; and Hooman Hakami, President of our Diabetes Group, to join us. We are eager to get to everyone's questions so please limit yourself to only one question and one follow-up. If you have additional questions, please contact our Investor Relations team after the call. Operator, first question please.

Good morning. And thanks everybody for taking the question. So Omar as a starting point, if I look at your U.S. business, this is certainly one of your better quarters in quite some time at the company. And I was hoping you could touch on your view of the health of U.S. med device end markets. You obviously have at Medtronic a number of products to drive specific growth linked to CoreValve across the portfolio. How do you feel about the health of the overall U.S. med device market? Do you think it’s picked up over the last few quarters?

Yes. Of course it has, because if you just look overall the number of procedures and look at what hospital systems are reporting in terms of their procedures and our own experience, certainly the market has picked up. But I would add three factors, some of which you mentioned already, which contributed to our performance. First is that there is an overall pickup and stabilization in the market, which correlates directly with the increased expectations from demographics. So that’s certainly there. I think in addition, like you pointed out, a convergence for our new products coming together at roughly the same time has given us a boost, and there is no question about it. Finally, we haven't fully quantified it yet, but there is a pull-through effect of some of our implantable devices from very strong diagnostic monitoring sales, particularly our LINQ device sales. We don’t know how much that is, but I think the combination of these three factors is probably driving this increased growth in the U.S.

Gary, let me get to the FY16 guidance. So the incremental impact on EPS from FX, the $0.10, is that in part because you hedged Covidien exposure, at some point, were less favorable rates? And then I assume from your commentary about the timing of the impact of FX, the timing of the benefit of synergies, as well as your tax rate, that we should expect the earnings cadence over the course of 2016 to be more back half loaded? Thanks.

Yes, Mike. Regarding the foreign exchange, yes, the majority of the $0.10 change from what we previously estimated on the FX is primarily related to the fact that, as we hedged Covidien in the fourth quarter, the rates were lower than where we provided guidance originally. So, indeed, that was a sizable factor contributing to the change. So, while we did hedge Covidien, by the time we integrated them into our hedging program, the rates had already adjusted unfavorably. As you indicated, the models are probably too much front-end loaded. There will be more weight in the second half of the year, especially as foreign exchange impacts and tax adjustments become more favorable. The value capture is anticipated to occur later in the fiscal year. So I think that models need some adjustment towards the back half of the year.

Okay. Perfect. I will let some others jump in. Thanks, guys.

Thanks, Mike.

Thanks, Mike.

Thank you. Good morning, everybody. I wanted to start with some of your comments towards the end of the call regarding capital deployment. I know in the February call you had started to talk about a potential shift as it related to the mix of dividends and buybacks, as well as the anticipated dividend update in June. I guess, A, is that still the case? And B, any additional color you could provide around the magnitude of that shift at this point in time?

Well, first, yes, we clearly have more flexibility, as we have discussed several times with the increased access to overseas cash. Our increased operating productivity from synergies is another factor to consider. Based on that, we are examining our overall capital allocation strategy and will update you shortly on this in a relatively short time frame. That’s all I can share at this point.

Okay. And then maybe just a follow-up on spine. This is a business that has ebbed and flowed over the past several quarters, but it does look like the overall end market has shown some signs of improvement. Can you go into a little bit more detail on exactly what the turnaround plan is for spine? And at what point do you think about significant changes in that business, whether it be senior management or at the sales level?

Well, a number of points: first of all, you are right, the business itself, spine taken in isolation, hasn’t quite kept up with the way the markets have trended at least in the last 12 months. There is a short-term strategy to this, likely tied to the timing of some new product launches, which we expect to play through in the coming quarters. The longer-term aspect is that our strategy in that space is really integrated, using our overall capabilities in capital equipment and surgical tools alongside spine to give us a competitive advantage. We’ve reorganized our commercial teams at the regional management level, and we will monitor how that plays out closely.

Okay. Thank you, David.

Thanks.

Hi. Thanks for taking the question. Gary, could you go into more detail about the tax rate? You mentioned during the quarter you settled some related to Kyphon; I am not sure if that’s all of the IRS settlement you were referring to at the Investor Day last year? Also, on the guidance for the full year of 16% to 18%, maybe just walk us through how you arrive at that, given the commentary you had with Covidien post-close, with the rate dropping by about 200 basis points. I'm not sure if it’s related to those settlements with the IRS.

With respect to the Kyphon aspect and the charge we took in the quarter, this relates to an issue we had raised by the IRS regarding our acquisition of Kyphon several years ago. What we’ve ended up agreeing with the preliminary decision still to be approved by the Board, but we agreed to pay about $275 million to settle that issue and the interest on top. This is not the transfer pricing issue that we've talked about in previous meetings, which will significantly impact cash flow going forward; it’s a more one-off item related to the acquisition. As far as the tax rate going forward, 16% to 18% is basically in line with what we’ve expected. Medtronic previously was in the 18% to 20% range, while Covidien was in the 16% to 17% range. We're guiding to that overall range based on the effective rates going forward.

What’s the impact on the R&D tax renewal for that number and what is the updated timeline on the resolution of the transfer pricing issue?

Well, the R&D tax credit probably has an impact of about 50 basis points or so on the overall rate, so it’s not huge but it does impact. The transfer pricing issue is with Puerto Rico, which is in the court process now. We’ll likely not hear anything until the end of FY due to the court's timeline.

As the judges said, they want at least the year to review it.

So it’s all based on their timing.

Okay. Thanks very much.

Thanks, Kristen.

Good morning. Just two quick questions. First for Bryan, the surgical solutions business continues to remain above market growth, even though you’re getting a more concerted effort from your chief competitor? So, I guess, you could focus on what's driving that success and what gives you the confidence of above market growth going forward. And then I have a quick follow-up.

Yeah. I appreciate the question. I feel pretty confident; you have to balance the fourth quarter, which was very strong for surgical solutions. However, if you consider that, we’re more in the 7% growth range organically, which is still solid compared to the market? There has indeed been significant effort from our chief competitor, but we have a lot of confidence in our strategy. We’ve got strong momentum driven by differentiated technologies in advanced stapling and energy, both of which we will continue to launch. In fact, somewhere around 30 products will launch in FY16, expected to drive $60 to $70 million of revenue.

Okay. And then for Omar, you’ve been very focused on this three-prong strategy. Yet, certain business lines within patient monitoring and recovery seem less strategic or perhaps not fitting within every piece of your strategy? Do you see these businesses as important to Medtronic's strategy and can you comment on the likelihood of targeted divestitures now that you have the deal at least to close?

The way we view these businesses is first, are they aligned with our mission? Second, do we see room for improvement in terms of technology that drives better outcomes? Third, is the market space attractive for growth? Finally, is our team capable of delivering growth? Within those parameters, we will evaluate our overall portfolio. Divestitures may happen if we feel certain divisions don’t fit strategically. However, we believe that many of these businesses can contribute significantly.

Thanks, David.

Thanks. Can you hear me, okay? Good morning.

Good morning, Bob.

Good morning.

So, first question for Gary, just on 2016 guidance as it relates to free cash flow? Can you give us a sense of what you expect for 2016 global free cash flow? Additionally, can you update on the percentage of that free cash flow that you think you will have access to? From some of your slides recently suggested between $7 billion and $7.5 billion of free cash flow in ’16, just wanted to confirm that?

I think the free cash flow, using our Q4 free cash flow of $1.7 billion and annualizing that puts us at about that $6.8 billion to $7 billion range, overall. However, foreign exchange has a significant impact on that free cash flow as well. Thus, based on current rates, we would see that free cash flow closer to the $6.5 billion to $7 billion range. We also expect approximately 60% of that cash would be accessible for FY16. This will affect our commitment to return 50% of our free cash flow to shareholders. However, we have the flexibility around that with that expected 60% access.

Great. That's very helpful. Thank you. And then one also for Omar, now that you’ve had Covidien for just a few months, we’d love to hear your updated thoughts on where you think you can leverage that acquisition beyond cost synergies. How do you think this acquisition helps you with your M&A strategy going forward?

Beyond cost synergies, I want to remind you that there are two specific areas—drug-coated balloons and neurovascular—where we are getting immediate benefits and expect growth acceleration. We've begun exploring opportunities to leverage our technology, and from an M&A perspective, we're looking at early technologies in the U.S. where we haven’t participated as much as wanted to create our long-term technology pipeline.

Great. Thank you.

Thanks.

Hi. Thanks for taking the question. I just wanted to ask one about your emerging markets strategy. You talked about a little around partnerships there and it seemed like some significant things you’re doing to get the current rate higher. I guess I was just curious to see if you’ve changed your views on what that growth could be sustainably and whether or not Covidien integrated into Medtronic structure could help you grow faster in emerging markets?

First of all, our confidence in the long-term opportunity in emerging markets is completely unchanged. The overall growth rate has been slower than we originally thought due to increased complexity, but there is certainly respectable double-digit growth that we can expect reliably moving forward. Covidien enhances our strength in certain markets, particularly in the Middle East and Latin America, allowing for more product penetration across regions and we’re redistributing sales forces to better cover under-penetrated markets. We haven’t pieced everything together yet, but we aim to improve the growth profile strategically and significantly.

Thanks for that. And I guess on your synergies, you talked about at least $850 million; previously, you referenced some opportunities to further that number through network consolidation. When do you think you will be in a position to provide a quantifiable update on the synergies that you estimate can result from the combination?

First, we will mask our productivity and keep track of value capture efforts with detailed programs. I think our synergy efforts, once we account for completion versus initiatives already in place, will reflect ultimately productive benefits beyond the three years projected. The productivity expectations from this synergy integration will be beyond just initial synergies and extend into longer-term productivity improvements.

Thanks. We’ve passed the top of the hour, but we will take two last questions.

Good morning. Thanks for taking the question, and congrats on the strong quarter. Hey, Gary, I need clarification. Is the R&D tax credit assumed in the guidance or not assumed?

On the tax rate, it’s assumed in the guidance, Larry. But what we are saying is that it’s probably towards the higher end of the range until the credit has been approved but assuming it gets approved, we could be in that range.

Okay. That’s helpful.

It’s basically assumed in there, yes.

All right. And then for my real questions. First to Gary, the guidance implies constant currency EPS growth of about 5.6% to 10% and your sales guidance is about 5% to 7.5%, if you include the extra week. Therefore, the EPS guidance, at the low end of the range, doesn’t imply any leverage. Another way of looking at it is the EPS guidance is implying 4% to 6% underlying sales growth, adding the benefit of the extra week, and then adding the 200 to 400 basis points of EPS leverage; that gets you to 7% and 11.5% constant currency EPS growth. I'm just curious to know why the EPS guidance appears conservative and I just have one product question? Thanks.

I can’t go through all the numbers you just laid out because I don’t have those in my mind. But let me look at it differently. You are right; our revenue growth overall as we indicated is expected to grow, plus the 1% to 1.5% related to the extra week. So using the midpoint of the range of 5%, that puts us around 6% to 6.5% revenue growth. Our operating margin perspectives indicate we are driving about 400 basis points of operating leverage. Unfortunately, FX changes have created a headwind against most of our plans. The guidance is in line with what we're expecting for overall EPS growth, given the uncertainties surrounding foreign exchange.

Okay. That’s helpful. And then on the Reveal LINQ for Mike, it's annualizing now at about $500 million. Q4 was very strong with over 20% sequential growth. Where are you in the adoption of that product and how should we think about growth in the near-term and possibly the next three to five years? Do you see any headwinds from new competition or reimbursement pressure? Thanks for taking the questions.

So on LINQ overall, you'll have to think about it in terms of its three indications: syncope, cryptogenic stroke, and atrial fibrillation. On the syncope side, we are probably in the low to mid-20% penetrated, about 0.22%. Again, I’m just talking about the U.S. and Europe because that's where the majority of our revenues are generated. In cryptogenic stroke, it's more like 5% penetrated. Looking at atrial fibrillation, it’s approximately 1% to 2% penetrated. So there’s still plenty of growth opportunity left obviously in the product. We don’t expect competitors with basic capabilities in electronics to ignore this market, so we anticipate seeing new competition, but frankly, we haven't seen anything yet. We believe this could be a billion-dollar contributor in the next five years. There are significant implications for Low Power growth from LINQ, and the technology is also positioned for future service revenue opportunities.

Thank you.

Thanks, Larry. And now time for one last question.

Hey, guys. This is Matt in for Bruce. Thanks for taking the questions. First for Mike, just in your press release, you highlighted revenue growth of 50% worldwide and 30% in the U.S., which implies pretty significant growth ex-U.S., about 60% year-over-year, which I think would be a $30 million step-up according to our math. Are the numbers reasonably correct? Can you give us any color on what drove the gains there? Was there any destocking ahead of or with the launch of the new sizes or anything else there?

Just to clarify, the 30% number is referring to heart valve therapies, which include our transcatheter valves and surgical valves; so actually the TAVI growth in the U.S. is faster than the international growth.

Okay. That makes sense. Can you give us any color on how those split out?

Our overall growth in the U.S. was about 50%. We almost doubled our revenues in TAVI during the quarter on a year-over-year basis. So the U.S. is considerably faster overall.

Okay. That’s helpful. And then just one follow-up on the spacer launch you mentioned for this summer. Can you discuss when reimbursement will be in place? When do you expect the product to be fully launched? Do you see this more as an opportunity for gaining unit share or premium pricing?

We don’t do any meaningful stocking of transcatheter in the U.S. just addressing your first question. For the transcutaneous pacing product line, we are now in Europe with CE Mark. There is no specific reimbursement for this product line obtaining a different reimbursement in Europe. It targets a specific patient population who might be at risk for infection and is a single-chamber patient population. We see the potential for more single-chamber pacing due to the lower complication rates the product line offers. So, it’s significant, but we will be deliberate in the rollout, which requires significant training and education as we go.

Thanks everyone for those great questions. On behalf of our entire management team, thank you again for your continued support and interest in Medtronic. We look forward to updating you on our progress in our Q1 call, which we anticipate holding on September 3rd. Thank you and have a great day.