Medtronic Plc (MDT) — Q4 2016 Earnings Call Transcript

Thank you, Jacky. 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 2016, which ended 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 our revenue by division summary. We also issued an earnings presentation that provides additional details on our performance and outlook. Next, you should also note that some of the statements made during this call may be considered forward-looking statements and that actual results might differ materially from those projected in any forward-looking statement. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports filed with the SEC, and we do not undertake to update any forward-looking statement. In addition, the reconciliations of any non-GAAP financial measures are available on our website investorrelations.medtronic.com. Unless we say otherwise, references to quarterly or annual results increasing or decreasing are in comparison to the fourth quarter and full fiscal year 2015 respectively and all quarterly year-over-year growth rates are given on a constant currency basis. Our 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, 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. Important 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 would like to recap fiscal 2016. FY’16 was a transformative year for our organization, our first full year after closing the largest ever Medtronic 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 goals 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 FY’16 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 in the Covidien integration synergies, delivering approximately $355 million in the fiscal year, which contributed approximately 440 basis points to our FY’16 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 diluted impact through 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 long-term growth and market leadership. In FY’16, 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 FY’16, non-GAAP diluted EPS only grew 4%, after including the 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, the risk of currency fluctuations is largely outside our control and we feel that over the long-term, we will adjust for this. Now moving to our Q4 performance, 6% revenue growth was very strong especially when considering this was built upon 7% growth in Q4 FY 2015. 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 U.S., 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 sectors: New Therapies, Emerging Markets, and Services and Solutions. In New Therapies, we delivered above-goal performance in Q4, contributing 390 basis points to our total company growth. In our Cardiac and Vascular Group, which grew 8%, new therapies are driving strong market outperformance. We are helping to create rapidly growing markets such as transcatheter aortic valve replacements, MRI-safe implantable technology, AF Cryoablation therapy, predictive diagnostics, and drug-coated balloons. In CRHF, we continue to see strong share gains in high-power from the ongoing launch of Evera MRI ICD as well as the recent launches of the Amplia MRI and Compia MRI, Quad CRT-D. We also saw exceptional growth of over 50% from our TYRX infection control products. In Q4, we received FDA approval for our Micra Transcatheter Pacing System, the world’s smallest pacemaker, one-tenth the size of the 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 ventricles using proprietary detection algorithms. First developed for our highly successful legacy insertable loop recorder. In CHS, our Resolute Onyx DES drove sequential share gains in Europe and our Resolute catheter gained potential share in the rapidly growing TAVR market. Over the past two years, our CVG organization has demonstrated industry-leading levels of R&D and 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 meeting 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 LigaSure Maryland, Endo GIA Reinforced Reload with Tri-Staple Technology, and Valleylab FT10 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 U.S. and Europe. We received FDA clearance in Q4 for expanded indications for our PillCam Colon 2 capsule to potentially reach more patients in need for colon cancer screening. Revenue in Renal Care Solutions doubled largely as a result of the acquisition of Bellco, a pioneer in hemodialysis 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 FY’17. 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 would complement our existing global product lines. We expect this acquisition to close this summer, and we also recently signed an agreement to take 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 enhance 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. Our flow diversion products for the treatment of intracranial aneurysm Pipelines Flex in the U.S. 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, our business is annualizing at over $250 million. Our Aqua Metals 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 overlook procedures as well as from the recent SOLERA, VOYAGER, Elevate, and PTC interbody launches for key lift and mid-lift procedures. We are also realizing some early benefits from the speed to scale initiative, which accelerates innovation and enables rapid deployment of these products and procedures to the entire market. Looking ahead, we are expecting FDA approval for our differentiated two-level Prestige LP cervical disc in FY’17. Strong seven-year clinical outcome data in the two-level Prestige LP were presented earlier this month at ACC. 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 are facing increased competition, but as we look ahead, we are optimistic about the drivers that have expanded early onset DBS reputation in the U.S. that we received earlier this year, new strategies that focus our pain efforts on the growing opioid epidemic, and improve our neuromodulation results. On balance, however, Pain Stim and DBS could be under some pressure for the next several quarters. As we enter FY’17, 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 are now calling brain modulation, neurovascular, and neurosurgery businesses; Pain Therapies, which includes our drug delivery, spinal cord stimulation, and interventional spine business, and Pelvic Health, which includes our ENT. Advanced Energy and ENT will be reported externally as a specialty therapies division. As part of these changes, RTG is adopting the general manager structure that has proven very successful in driving a steady cadence with 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. Jeff Martha will discuss these changes as well as additional details of its 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 systems 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 sensors to the FDA before the end of the fiscal year. Once launched, this would be the world's first hybrid closed-loop system. Also this quarter, we were pleased to reach an agreement with United Healthcare to be their preferred insulin pump provider. United Healthcare recognized what others, including UK's NICE, have seen; that we are the only company with evidence clearly demonstrating the clinical and economic value of our integrated pump and sensor platform for both patients and 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 FY’17, and in the U.S. with the next generation sensor in the second half of FY’17. Guardian Connect allows us to provide both Type-1 and Type-2 patients on multiple daily injections with a standalone real-time glucose monitoring solution. When you combine our standalone professional CGM products with the application 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 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 factors in the upper half of the 150 to 350 basis point 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 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 in emerging markets represents the single largest opportunity in Medtronic over the long term. In Q4, our businesses in the 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, we will share more details from the leaders of our global regions. Turning now to the economic value growth strategy, our Services and Solutions growth factor contributed approximately 25 basis points to Medtronic's growth. While this overall result was below our goal of 40 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-20s in Q4 driven by strong growth within the U.S. Veterans Administration Healthcare System. Care Management Services represents an important platform for us especially as post-acute care services become increasingly critical and bundle payment models for different interventions. In our Hospital Solutions business, for 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. Most 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 we have a full pipeline of potential contracts. We continue to progress in expanding the hospital solutions model from cath labs into operating rooms, utilizing the breadth of our MITG products and associated expertise. We have already signed 10 Operating Room Managed Services deals, representing approximately $250 million in cumulative revenue with an average lifespan of seven years. We are also expanding our solutions offering 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 moderately 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 programs, bariatric surgery, post-surgery programs, and long-term follow-up. Their approach is highly successful, and we plan to gain critical insights to expand NOK’s clinics to more countries, providing broader patient access to multidisciplinary teams of specialists, thereby improving patient outcomes. Through initiatives like Diabeter and NOK, as well as the ones I mentioned earlier, we are uniquely positioning our business to focus not just on devices, but providing services and solutions across the 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 1210 basis points, both on a constant currency basis. Covidien cost synergies were over $100 million in the quarter, were in line with our expectations, and helped drive a 180 basis points improvement in SG&A and were a major contributor to our strong EPS leverage. In addition, our business delivered strong underlying operating leverage in Q4. The combination of Covidien synergies and underlying leverage resulted in a 260 basis points improvement to our operating margin after adjusting for unplanned items. Our non-GAAP operating margin, including the impact of proceeds, was 40.3%, 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 on inventory that is based solely on intra-quarter currency fluctuations. Second, 20 basis point impacts from one-time items such as 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 the unexpected items to our 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 returning value 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 year, we increased our dividend by 25%, and we expect to grow our dividend 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 FY’16, 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 FY’16. 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 outcome, allow 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 would like to note that in a transformative year with a significant number of complicated moving parts, our team delivered. Our strong results would not have been possible without the dedication, teamwork, and passion that our 85,000 employees around the world demonstrated every day. We have undertaken the 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 Medtronic's mission of alleviating pain, restoring health, and extending life. We are building on a track record of delivering consistent mid single-digit revenue growth, and with every quarter, we are 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 look 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.

Thanks, Omar. Fourth quarter revenue of $7.567 billion increased 4% as reported or 6% on a comparable constant currency basis, which excludes the $179 million of 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 now started U.S. 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 aortic planning advances following the compelling FIRE AND 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 endpoints from the FIRE AND ICE trial and rates of rehospitalization and repeat ablation procedures will be highlighted in the late-breaking clinical trials at the Cardio Sym Congress. In Coronary, we are holding global drug-eluting stent share in the face of major competitor launches due to our customers’ increasing preference for Resolute Onyx in Europe and many emerging markets and continued enthusiasm for the delivery characteristics of Integrity in the U.S. and our expanding use of CVG multiline contracts in many geographies around the world. In Transcatheter Valves, we are seeing strong growth and we expect this market to grow $4 billion to $4.5 billion by 2020. Our U.S. share stabilized after the drop we saw in Q3, but we are not having a large-size Evolut R. We started our Evolut R XL clinical trial, 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 studies for intermediate risk patients at 60 U.S. SURTAVI centers. In Q4, we also saw strong acceptance of Core Valve 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 impact labeling, removing the requirement for pre-dilatation and replacing it with simple appropriate vessel preparation. These labeling changes now position Medtronic as the only company in the U.S. 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 U.S., 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 U.S. outpatient surgery market, while inpatient surgeries are going in the low single digits. In PMR, quality issues related to the Puritan Bennett 980 ventilator and 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 U.S. Core Spine business declined 1%, a large improvement over the past two quarters. We estimate the U.S. Core Spine market is growing 2% to 3%, so while the last year-over-year we did gain over a 100 basis points per 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 our 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 FY’17. In neuromodulation, it is worth noting that our Q4 growth was affected by the divestiture of the drug business, 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's double-digit growth came in the face of the competitive U.S. environment. We attribute this performance to our focus on building diverse revenue streams through geographic expansion and growth in our new business. Products like the MiniMed 640G system with Enhanced Enlite sensor and SmartGuard technology helped drive growth outside the U.S., while our non-intensive diabetes therapy and diabetes services and solutions divisions also contributed to overall performance. And while we expect the tough U.S. competitive environment to continue until we get FDA approval for the MiniMed 670G hybrid closed-loop system, we believe our sufficient drivers will 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 and after tax basis were $118 million charge relating to the retirement of $2.7 billion debt, a $97 million net restructuring charge, and 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 a negative 20 basis points for the unplanned scrap and obsolescence, the operating margin would have shown a 260 basis points 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 hedge the majority of our operating results in developed market currencies during this volatility in our earnings from foreign exchange, a growing portion of our profits are unhedged, especially in 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 entrapped in a transaction last September. Our non-GAAP normal tax rate on a cash basis in Q4 was 14.6%; this was an improvement to our forecast and included an approximately $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 we continue to target an any 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 a remaining authorization to repurchase approximately 72 million shares. Fourth quarter average daily shares outstanding on a diluted basis were 1.416 billion shares. Before turning the call back over to Omar, let me conclude by commenting on our initial fiscal year 2017 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 FY’17, 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. Our FY’17 revenue would be negatively affected by approximately $25 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 six percentage points impact of approximately $450 million from the extra selling week we had in Q1 FY’16, as well as negative $25 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 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 our increased expectations for the 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 FY’17 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 FY’16. For the first quarter of FY’17, we would expect earnings per share growth on a 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 to be relatively 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 from 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.

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 in what is his last earnings call as Medtronic's CFO. Gary has served in this role for the past 11 years, since May of 2005, and has been with Medtronic since 1989. Gary has been a constant counsel to me during the time that I have been here, and his experience, knowledge, and overall guidance have been critical and invaluable to both me and our overall team as we have navigated 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 will still have the benefit of his strong counsel. More on that in the Investor Day. And we will now open the phone lines for Q&A and in addition to Gary, I’ll ask Mike Coyle, President for Cardiac Investor Group; Bryan Hanson, President for Minimally Invasive Therapies Group; Geoff Martha, President, Restorative Therapies Group; and Hooman Hakami, President of 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 contact Ryan and our Investor Relations team after the call.

Good morning, guys. Thanks for taking the questions. Let me just try and clarify a few items. So one, could you just maybe make a little bit clear for the FY’17 guidance, what does that assume in terms of your margins? Second, I think I understood the commentary on the first quarter. Basically, you are saying downside on a quarter basis, so let’s call it as 102, 103. Just want to clarify that? Thanks.

Okay. I’ll let Gary take this one. Go ahead.

Yes. I mean as far as FY’17 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. But the operating margins would obviously continue to improve similar to what you saw in the current year. Obviously, the synergies in 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 FY’17 period. So operating margin improvement, we are not getting into specifics on that, but basically the assumption would be, Mike, that assuming a 12% to 16% constant currency earnings per share growth, you are going to see a similar kind of growth in operating margins similar to probably what you saw in the current year. As far as the Q1 guidance, what we are trying to indicate in the call is that yes, we are kind of in the upper end of the range, taking into account the extra week, etc. I think you are probably - the 102, 103 you mentioned is probably right, and it's well within that range is what people could probably be assuming.

Okay. Gary, I was asking about the FY’17 margins due to the incremental inventory impact from foreign exchange. I'm trying to understand the actual effects on reported margins for the year. I would assume that is within that range.

Yes, I agree, it will be. I mean you are right. On a constant currency basis, we will continue to see 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 based on our guidance at this point. Obviously, 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 have mitigated, I should say, some of the operating leverage we are getting on a constant currency basis as we saw during the current year. But we would expect to see, again on a constant currency basis, that would continue, but as reported you are right, it might be a less significant impact in Q1. Thanks, Mike.

Okay. Just a few words, and then I’ll let both Bryan and Hooman give you some more details. First, I think we saw 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 take on diabetes? Go ahead.

Yes. I don’t know that I would give specificity in the quarter, but I would say the same thing across the quarter: 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 we are out in the operating room and we see the number of cases. And there is definitely a feeling that there was an increase in volumes during the quarter. Until I see it for another couple of quarters, I’m not calling it a trend, it’s one quarter, but certainly felt nice in the quarter.

And with diabetes, I’ll let Hooman comment; obviously, we are very excited about the potential of the hybrid closed-loop system. But I also pay attention to much of the commentary around our broader-based efforts; that is one aspect of growth in diabetes. I think we are very excited about what we can do about overall patient management and in our agreements we can make with major stakeholders, such as payers, that materialized this last quarter. Hooman, do you want to say a few words?

Yes, 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 OUS revenues and 640G, and I think it just shows you what kind of uptake we can get with new product launches. The U.S. continues to be competitive, and here we have a product that was launched in September of 2013. So we don’t have the benefit in the U.S. of a new product like we do in Europe. But I think it underscores a couple of things; one is what Omar said, our revenue base is becoming more and more diverse and we are seeing more traction from OUS revenues, from emerging market revenues, and from, call it, non-Type-1 revenues with Type-2 and Services & 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 are seeing in Europe and the feedback that we are receiving on our new pump platform is great, and we expect to see that here in the United States once it’s launched. So as we get the 670G, we think there is going to be a really strong uptick there, and as you heard from the commentary, things are on track with respect to that. Finally, the last point I would make is that between now and when the next generation pump comes out, Mike, we have got a lot of assets that we can leverage within the diabetes business in the U.S. The size of our sales force is the largest, the size of our clinical team is the largest in the U.S., and we have got the largest sale and service infrastructure for patients. We have got deep and broad payer relationships, and on top of that, we have 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 U.S., we feel good about our overall global performance, and then once things come together with the new product, we feel very, very good.

Thanks Omar. Okay.

We will go to the next question.

Good morning. Just a few pieces of questions here? Hi guys, first question, Gary, just to rectify the fiscal 2017 guidance of 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 the potential tax rate for fiscal 2017? And I have a couple of quick follow-ups.

Okay. Go ahead, Gary.

Well, as far as the free cash flow, the guidance that we are giving of $6.5 billion to $7 billion for next year is in line with kind of what we are expecting from our operating earnings growth and continued focus on working capital. So that expectation, we do expect, as we have indicated previously, and we will 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 are feeling confident about that. We are not getting specific obviously about what we are 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 are going to be more front-end loaded on that. And so I think you could assume the same thing as we go into FY’17 and it’s more front-end loaded than towards the back half of the year. But we are not giving specifics about how much we are going to be including in that piece of it. So as far as the tax rate goes, I mean there is obviously the benefit of R&D tax credits 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 basically we are saying that your tax rate is going to be relatively flat with where we were currently at. So I wouldn't expect any significant uptick or reduction.

Okay. That's very helpful, Gary, thank you. And then maybe just a follow-up or two here. Omar or Gary, I guess there has been a lot of focus, as you know, on quarterly margin performance for the net until we've got the senior management; is that there’s a long-term margin opportunity here. Can you talk a little bit about your confidence and sort of long-term margin assumptions? Why you believe at double-digit earnings? How it can sustain for a few years? I think about the Covidien synergy number you gave today, you know, 225 to 250 certainly gets you to an 850 number in a few years, but it may not get you above that 850 number. So what is giving you the confidence that you can deliver this sort of maybe double-digit earnings for longer?

Well, a number of things, you know, at the Investor Day this will be our core subject, because we want to explain this to you in detail. But look, it starts with our revenue growth, so you should kind of get to our mid single-digit revenue on a consistent basis otherwise, you’ve got a big hill to climb here. So revenue growth has to be sustainable and has to be consistent, and that is something that we are 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 is coming from 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 have 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 we 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, but 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 will walk you through a lot of those in Investor Day, but that’s essentially how we are thinking.

Okay. Thanks so much, and Omar. I'll get back in queue.

We will go to the next question, please.

Thank you, and good morning everybody. I wanted just to go over to the CVG business for a second. And maybe you could talk 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 U.S. and maybe what you are seeing specifically from an end-market growth perspective and how that's evolved since ACC and highlight your relative competitive positioning.

Go ahead, Mike.

Yes, so first the overall growth of the market is at the high-end of the ranges that we had been speaking about in prior quarters. So 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. If we do get that product, we would expect to be able to have its share of performance and perform like the other three sizes do and provide us with the share growth opportunity. So that would be the primary for the current dynamics. In terms of overall market growth, both international and U.S. growth is well above as I said the high-end of where we have been thinking that 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 sub-analysis of our high-risk data will certainly drive that growth. 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 have now started clinical trial activity in that low-risk segment. So I think that would be our picture of the market there currently.

Okay, and maybe as a follow-up on the P&L. I mean clearly you have elected not to give segment margin - P&L margin guidance or modeling help, whatever you want to call it for 2017 versus what you have given in the prior year. And given the investor focus on those metrics, it’s going to be very clear about how to think about this for FY’17 that the context should be essentially stable-ish to maybe slightly down gross margin, leverage on the SG&A line. You have this dynamic with other expenses giving you modest reported operating margin expansion, a flat tax rate, and down share count is what gets you to the $4.60 or $4.70. Are those the right moving parts to think about in the model for FY’17?

That’s pretty good.

Yes, without giving any model view, you know, I think you have summarized it well. Again, we are 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 are right, to achieve the constant currency earnings growth that we highlighted in here, we are going to have to continue getting operating margin improvement, which we expect with not only the Covidien integration synergies but clearly with what other operating leverage components we are driving. The gross margin, the only comment I would make to our comments is, I’m not sure that the gross margin will be down. It’s possible that it will be on an as-recorded basis because of FX, but the reality is we are expecting some of the - assuming some of our synergies will be coming in manufacturing lines. So it’s possible you could see the gross margin being flat to maybe slightly improving. But that’s probably the biggest fluctuation we saw here in Q4. So I think your assumptions for next year – the way to lay 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.

And just to be clear, I was laying that out on an as-reported basis just to reflect the numbers that could end up in consensus because that’s where we also myopically focused right now. So that’s why I was saying down on a reported basis, but operating margin slightly better on a reported basis year-over-year?

That’s right.

Hi, thanks and good morning. Can you hear me okay?

Yes.

Great, good morning. So two questions: one looking backwards and one looking forwards. First looking backwards, Omar, I would 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 want to get your take on that. I mean, is this the case where you are 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. I mean look, our main area of focus is our overall EPS, and we felt that we are always moving partially with the balance to get to an EPS number. That tight of a guidance that we have talked about before was really directional in building 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. I mean the sorts of things that happened were no way we predicted them, and with things like the Bellco acquisition and its mapping; we didn’t really do that accurately because we just closed the acquisition like a week before we did our earnings call. And when we laid it out, some of these elements became obvious and there were pressures, and it’s absolutely the right thing to do for the long-term, and it’s an extremely accretive kind of 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 toward 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 it has been good mid single digits delivering EPS leverage to the extent that gives us double-digit EPS growth, returning 50% of free cash flow to our shareholders on a consistent basis. I mean that’s a pretty good deal if we can do that at a constant currency level. Gary, do you want to say a few words?

Yes, Bob, I think you said it well. I mean, in hindsight, if we would have realized how much focus was going to be on the operating margin line, we probably clearly would have given a broader range when we were talking about that at the end of our Q3 earnings call. You know, a 30 basis point range that we gave on an as-reported number; with FX, anything else, moving 30 basis points is $27 million. And in a $7 billion company with FX and all these moving parts, that was my mistake; we should not have done that, but we didn’t realize the focus everyone was going to have on it. And the reason I think we were trying to address that and get it out for the modeling was exactly that: it’s not that we are not getting synergies. In fact, if anything, the Covidien synergies and other operating leverage we are getting across the organization, we feel very good about, and we are tracking that on a very tight basis. It’s the other moving parts that you just get from a large organization like this that get specific uncertain-line item is creating an issue. So what we are trying to do, as Omar said, is focus on driving the top line; we have plenty of levers, including all the cost synergies that we are achieving, to drive the bottom line. But in general, there is 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.

And you know, 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.

Okay. Thanks so much, and Omar. I'll get back again in queue.

We will go to the next question please.

Hey, thanks for taking my question. Just wanted to go back to your earlier comments about surgical volumes. I was curious if you had any thoughts around sort of what is driving the incremental improvement? Is it economy or coverage or products? What do you attribute some of that improvement to?

Well, give that it is consistent with what all the hospitals are reporting, I have got to say that the overall healthcare demand, if you like, in the U.S. 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 are 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. 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’s easy to predict, to be fair, and we look at all kinds of different factors and do the best, we have leading indicators, we talk to people, and we get a sense for it, but everything that I just said was close to conjecture on my part.

I would state the same, I mean it's very difficult even to get - you got to go to the different data points and triangulate just to get a sense of what is happening to the volumes, to go deeper level than that and understand why it's difficult to make assumptions, but it’s very difficult to pinpoint specific reasons. The other thing I would reference beyond just the increase in overall volumes, the other thing that we are seeing is a mix shift, a much greater growth in the MIS procedures versus traditional surgeries, 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 is a smaller uptick in surgical volumes in the U.S. versus a real change in the make shift MIS. And that’s pretty consistent again with what we have seen and what the rest are telling us and what we are seeing from other companies that are playing in the same space. That’s to me is really the story.

Thanks, and just one final, you did a little bit better; this quarter you were flat. Can you talk about your overall strategy there? You recently announced the deal with Meso. Can you talk about some products flow and other improvements that could help?

Sure. We detailed some of this in the commentary, but I’ll let Geoff comment on that directly. So go ahead, Geoff.

Yes, sure. So heading the Meso deal, I mean we are very excited about that. That is, I'll call it, one way of multi-pronged strategy around what we call surgical synergies and we feel as we move out into the future, this surgical synergies will be in spine our calling card. We have got very strong enabling technology platforms in navigation and imaging, we are excited about the partnerships in robotics with Meso, and then integrating these platforms as we move forward to provide to differentiate spine procedures both economically and surgical experience. Low radiation, just an easier surgical procedure, etc. We think it is going to differentiate our spine business. And so as you move forward, and 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 are 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 are Elevate Cage for example, VOYAGER is another one, and this quarter launching our OLED procedures, I’m calling them our second-generation OLED procedures. We are getting 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 are hitting our maximum with sets, and if we had more sets, you would see more growth. So that’s something that we are factoring into our planning going forward to be a little bit more aggressive. Both from a product standpoint and then from what we call surgical synergy standpoint, things are looking very good for our spine business right now, and as you pointed out, every quarter we have improved over the last five quarters, and it’s a big shift; it takes a little bit of time to change directions, and we should see continued improvement quarter-over-quarter.

Hi, thanks everybody. Hope you all had a happy Memorial Day weekend. I had a couple of questions. I just wanted to go back to the RTG and the new reporting divisions. Is there anything, I guess, to be said for kind of the four different businesses? Is it more just aligning with the underlying surgeons, or is it just to kind of facilitate maybe better structure to improve performance? How should we think about that? I’m just kind of curious, does it have anything to do with isolating spine and perhaps thinking about it as maybe less core?

No, actually it is not isolating; it’s the other way around actually. But Kristen there are a couple of changes going on, and we will get into this next week, but just to summarize, one moving into these different reporting divisions is really putting the businesses, organizing them by disease state or condition versus technology. The example I’ll give is neuromodulation. I mean that was the business largely held together based on technology—implantable stimulator and from whether it be gastro or euro, which we are now calling Pelvic Health, or whether it be DBS or pain stim, they are all calling on different physicians/specialties, 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 are innovating, we are looking across the disease state and across the care continuum. So that’s the one change, and the other change that Omar mentioned in the commentary was moving into this general manager structure. So that gets to more execution, and this is something that CVG has done over the last four or five years where you have General Managers that are 100% focused on the individual therapy segment that they serve, and these products within that therapy segment. So making your businesses smaller, more focused and granular. So that’s another component of that, and along with this, we have fairly sweeping leadership changes across RTG, and many of the leaders that are now running a group have top performers from other parts of Medtronic. And so combined with the different structure, the disease state organization with this GM structure, we feel very good as we hit FY’17.

Hi, thanks for taking my question. I saw today the announcement or if I guess it was maybe last week with Qualcomm with the Type-2 diabetes. Maybe if you could just expand a little bit more on that. It seems like more of the emphasis on Type-2 is coming from a very early stage. When might a product like this come out, or how should we think about what to look for next week? Yes, sure. 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 will talk to about the product roadmap next week at the Investor Day session, so you will get more insight there. But suffice 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. And 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 are seeing with iPro 2 and our new Pattern Snapshot capabilities are really our efforts to bring more and more advanced monitoring solutions to this Type-2 patients. 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 insight that can give these patients actionable information so that they can better manage their disease. And also do the same thing for the physicians managing those patients. So we are really excited about the opportunity. As you said, we are just getting started, but we think there is tremendous runway in this business.

Thanks for the questions. We plan to host our Investor Day next Monday, June 6th in New York City. We look forward to providing more detailed discussions with you on our plans that we outlined today. Also, we anticipate holding our Q1 earnings call on Thursday, August 25th. In conclusion, as we have 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. FY’16 was indeed a successful and transformative year for our company, and looking ahead, we feel we are 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, on behalf of our entire management team, I would like to thank you again for your continued support and interest in Medtronic. Thank you, and all of you please have a great day.