At this time, I would like to welcome everyone to the Medtronic second quarter earnings conference call. [Operator instructions.] Mr. Jeff Warren, VP of investor relations, you may begin your conference, sir.

Thank you, operator. Good morning, and welcome to Medtronic’s second quarter conference call and webcast. During the next hour, Omar Ishrak, Medtronic chairman and chief executive officer; and Gary Ellis, Medtronic’s chief financial officer; will provide comments on the results of our fiscal year 2014 second quarter, which ended October 25, 2013. 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 a revenue by business summary. You should also note that some of the statements made during this call maybe considered forward-looking statements and that actual results might differ materially from those projected in any forward-looking statement. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports filed with the SEC. 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 results increasing or decreasing are in comparison to the second quarter and full year 2013, and all year-over-year revenue growth rates are given on a constant currency basis. With that, I am now pleased to turn the call over to Medtronic chairman and chief executive officer, Omar Ishrak.

Good morning, and thank you, Jeff. And thank you to everyone for joining us today. This morning we reported second quarter revenue of $4.2 billion and non-GAAP diluted earnings per share of $0.91, both representing growth of 3%. Our Q2 revenue growth was in line with our outlook for the year, and we are performing at or better than the market in almost every one of our business lines. Q2 also represents another quarter where our overall organization delivered balanced growth with strong performances in some areas offsetting challenges in other parts of our business. Looking ahead, we are confident that our three primary strategies: therapy, innovation, and globalization in economic value will position us well to thrive in the transforming healthcare environment. This quarter, we made significant progress on a number of new therapy growth drivers that we intend to launch over the coming quarters. These, combined with our continued focus on globalization and economic value, will not only help us improve our competitive position and overall growth profile but will also further strengthen and geographically diversify our business, allowing us to reliably deliver consistent growth. As you will recall, in Q1 I discussed the three specific challenges that negatively affected our growth and that we believed would improve going forward: U.S. diabetes, U.S. PAINSTIM, and U.S. ICDs. I am pleased to report that we have made significant progress in all three businesses. First, in the U.S. diabetes, we received FDA approval in late September for our MiniMed 530G system, several months earlier than we estimated in August. Our diabetes team executed well, ramping up manufacturing in a short period of time to start shipping in mid-October. While we are still somewhat supply constrained as we transition our full manufacturing to Puerto Rico, early signs are that the 530G…

Thanks, Omar. Second quarter revenue of $4.194 billion increased 2.4%, as reported, or 3.3% on a constant currency basis, after adjusting for a $38 million unfavorable impact of foreign currency. Q2 revenue results by region were as follows. Growth rate in the Middle East and Africa was 21%. Central and Eastern Europe grew 14%. Growth in Greater China was 11%. Latin America grew 10%. Growth in Japan was 8%. South Asia grew 6%, and the growth in other Asia Pacific was 4%. The U.S. grew 2%, and growth in Western Europe and Canada was 1%. Emerging markets grew a combined 13% in Q2 and represented 12% of our total sales mix. Q2 diluted earnings per share on a non-GAAP basis were $0.91, an increase of 3.4%. Q2 GAAP diluted earnings per share were $0.89, an increase of 41%. This quarter’s non-GAAP pretax adjustments included a $24 million certain litigation charge related to two previously disclosed government investigations in our CRDM and diabetes business, as well as patent litigation in our coronary business. In our cardiac ambassador group, revenue of $2.199 billion grew 4%, with all businesses contributing to growth. CRDM revenue of $1.273 billion grew 5%, which included $11 million from our recent acquisition of Cardiocom that was recognized in our AF and Other revenue line. Worldwide ICD revenue of $713 million grew 4%. We estimate that both the global and U.S. ICD markets grew 3%. If you look at the first half of our fiscal year, we estimate both the global and U.S. ICD markets grew 1%, which is encouraging and reflects continued stability. In addition, we estimate we gained a point of ICD share in international markets and we held share in the U.S. in this time period. Our top technology tiers are now significantly differentiated in the…

Thanks, Gary. Before opening the lines for Q&A, let me briefly conclude by noting that over time we are striving to reliably deliver on our baseline expectations, which are consistent mid single digit revenue growth, consistent EPS growth 200 to 400 basis points faster than the revenue, and returning 50% of our free cash flow to shareholders. As I mentioned earlier, over the coming quarters, we are on the verge of bringing a number of new therapies to market, and we are setting ourselves up to deliver what is arguably one of the strongest launch cadences of innovative therapies in our industry. We believe that crisp execution of both our baseline and long term growth strategies, combined with strong and disciplined capital allocation, will enable us to create long term, dependable value in healthcare. With that, we would now like to open the phone lines for Q&A. In addition to Gary, I’ve asked Mike Coyle, president of our cardiac and vascular group, and Chris O’Connell, president of our restorative therapies group, to join us again for the Q&A session. We are rarely able to get to everyone’s questions, so we respectfully request that you limit yourself to only one question, and if necessary one followup, so that we can get to as many people as possible. If you have additional questions, please contact our investor relations team after the call. Operator, first question please?

[Operator instructions.] The first question comes from the line of Mike Weinstein of JPMorgan. Your line is open.

If we look at the ICD market growing 3% this quarter, I don’t think any of us really think the ICD market is going to sustain that type of pace, so help us back out, if you would, the stocking impact for you guys that was a negative last quarter that was a positive this quarter, and maybe help us get to what the underlying market is doing. And second, just on the buildout of the field specialists ahead of the U.S. CoreValve launch, are you assuming in the fourth quarter that you’ll have CoreValve revenues to start to leverage that? It seemed like you were suggesting that you would get some leverage in the fourth quarter. And does that imply that there will be some revenues there?

Let me start with the ICD market. As you’ll remember, last quarter we talked about the challenge being the new product launches that we had, and trying to get those on contract when we were looking for an ASP increase. And so that led to some destocking of hospital inventories as we worked through the process in hospitals that have obviously put up some larger barriers to agreement to ASP increases. That worked itself out during the course of the second quarter, and I think you can reasonably assume that basically they’re back to where they are comfortable stocking. So that now makes it a pretty reasonable picture to just look at the full first half of the year and say, what does the overall growth profile look like? And that’s where we get to this roughly 1% global market growth. So that, I think, should give you a picture of what we think is happening with the overall market. On the second question, regarding CoreValve, we are not counting on any meaningful revenues coming in the fiscal year, from CoreValve. And we are going to be obviously ramping our field representation in advance of the launch. So that’s in our current set of assumptions. Obviously what FDA decides to do in terms of the approval is up to them.

Just to add to what Mike said, the leverage we’re talking about in Q4 is not necessarily coming from CoreValve. It’s just our natural leverage. If you go back over history, historically in our fourth quarter, because we have more selling days and it’s our strongest quarter, there’s more leverage in that fourth quarter, and that’s what we were referring to.

I think this quarter we just happened to have a bunch of different regions slow down. Just by coincidence everything happened together. We expect this to rapidly start to reaccelerate, because everywhere I go, the fundamental growth drivers are clearly there. There are patients everywhere who need attention from existing therapies. In addition, we’ve got several very concrete plans in place that will start to sort of deliver real revenue growth over the next few quarters, and we’ll share that with you as they mature. In terms of China itself, I mentioned a few very specific items in terms of distributor conversions and some new products. And the overall environment there, there’s some noise out there, because of different regulatory type concerns, but in general we don’t have any hard data to support anything. Our teams are still calling for good growth going into the back half of the year.

Our next question comes from the line of Matthew Dodd with Citigroup. Your line is open.

Question either for Omar or Chris. The core spine, it looks like it declined again. The comps weren’t that tough. Your next biggest competitor is having integration issues. You put a lot of money into it, especially focusing on MIS. What parts of the business are underperforming, and why is the big picture thesis you had not coming together quicker?

Let me make one brief comment, and then I’ll let Chris talk to that. You know, we look at all our businesses. We look at an overall period of time. And if you’ll recall, last quarter we actually had a pretty strong spine performance. This quarter there were some dynamics, which Chris will talk to, but we’ve got every confidence that, like I mentioned in the commentary, that the cadence of product launches we have in spine actually will deliver over the next few quarters. But I think Chris can answer the question a little more specifically. Chris O’Connell : I think the spine market, as we’ve talked about in the past, is really bouncing around flat. And our performance has been flat to slightly up in the core spine business and really separating our core spine from the BKP and the BNP business. I think a lot of the same fundamentals are in place. Maybe the biggest difference this quarter is we had a little less benefit from positive mix, given that we’re in the later stage of our launch cycle on some of the big platforms like Solera. But overall procedural growth rate is quite flat, and our pricing has been stable, down in the low to mid-single digits. And so this quarter was a little bit softer, particularly in the U.S., and then a couple of countries outside the U.S., namely Germany, Japan, and Latin America. But the fundamental drivers are still very much there. It is about the product refresh, first of all. Second of all, it’s about the procedural innovation. We’re getting good uplift from our [unintelligible] program, and our new OLIF procedure. And then as Gary pointed out, the tailwind from our enabling technologies like surgical navigation, we continue to perform much better in accounts that have O-arm, and continue to see uptake in technologies like PowerEase and the nerve monitoring. So there are a couple of holes in the product line, particularly in the interbody space, and there are a couple of small categories like peek rods and IPDs that remain under pressure. But overall I think our perspective is it’s a relatively stable situation and we expect that core spine business to be stable into the back half of the year. As pointed out, the BMP and the BKP businesses are both hurting us right now, although the kyphoplasty business does seem to be showing signs of stabilization in the U.S. and we watch the BMP part closely. So that’s the way I’d characterize it, Matt.

And then just a quick one for Gary. I know you don’t give quarterly guidance. When you look at the back half of the year, the gross margin in the third quarter is a little lower than the consensus. You’ve got a tough tax comp in the third quarter. Should we be thinking more about back end loading the second half to the fourth quarter versus the third quarter, since the guidance is unchanged?

Obviously we’re not going to give necessarily quarterly guidance, but I think you’ve highlighted a couple of issues that the market should take into consideration. Our Q3 last year did include some significant tax benefits. If you factor those out, you’re probably more like at an earnings per share of $0.88, which is kind of similar to where we were last year in Q2. And our Q2 and Q3 tend to be somewhat similar. We’re pretty close. And so where the consensus is right now on Q3, based on the gross margin issues we highlighted, we think we’ll improve in Q3 and as we go into Q4, but it will be a little bit more in Q3 here, with these quality costs we’ve talked about and the launch of the CoreValve product line. I wouldn’t be surprised to see people moving a penny or two from the Q3 to our Q4. We’re not changing our full year guidance, and we wouldn’t expect the [unintelligible] to change, but seeing some shift occur from Q3 to Q4 would not be unexpected.

Our next question comes from the line of Kristen Stewart from Deutsche Bank. Your line is open.

Just a quick one, Gary, just kind of following up on the gross margin. You did, it sounds like, moderate the full year gross margin expectations. Can you just walk through what the change is for that? Is it just the higher product [unintelligible], or just maybe some of the warning letter charges perhaps coming in a little bit higher?

I think it’s a little bit of all of those factors. First of all, clearly the FX impact on cost of sales has been greater than we probably expected even a quarter ago. And we just don’t know exactly how that will play out, but it clearly has been a little bit more negative. But the big surprises really were in the situation that as we’ve ramped up all these new product lines, which the good news is we’re getting additional revenue from that. So those, we actually think are a little bit more one-time, and will start to work themselves off after Q2 here with the launches of a lot of these new products. But the quality issues, as you highlighted, we do expect will continue for at least the next quarter or two as we make significant investments in shifting resources from really the R&D efforts up into addressing our quality compliance issues, both in neuro and diabetes. And so that’s why we pulled things back a little bit. The good news is pricing is actually, if anything, kind of in line with what we expected, maybe even slightly better, and we are offsetting that with the cost reductions we have across our various product lines. But these one-time other product type costs clearly impacted us more than we expected in Q2, and we’re assuming that that will play a little bit into Q3, and that’s why for the full year we’re down. As we go forward, we would expect those obviously would not be as significant going into next year.

And then just for you, you had commented in your prepared remarks just around the medium-term outlook of getting back into the mid-single digits. And you talked about the number of new products coming. I guess what is your confidence that - I know you’re not giving guidance for FY15 - but that as we’re exiting out of ’14, you’re well-positioned to kind of get back to that mid single digit growth rate in ’15. Or do you think that maybe some acquisitions might be needed to help get you there?

First, the main comment here is that like I pointed out in the commentary, the number of new products coming out is really unprecedented, at least for the time being and for several years probably before that. And not only Medtronic, but if you look across the industry, that number of products coming out, with that regularity, across the breadth of our businesses, whether you talk about the different businesses in [TVG] or some of the stuff that we do in spine that we think will accelerate growth there. Or you talk about the [IBT] piece. So if you look across the entirety of our businesses, this is quite a change. And it’s got to have some impact. And right now, we’re close to mid-single digits. If you recall, last year we were there, and we’ve had a few quarters here where we’ve had some pressures, but we’re borderline. So I would expect that these launches will help us. They have to. In addition to that, we’ve got a series of other activities that we’re doing, particularly around globalization, which we expect will also help us. Having said that, we live in a place where surprises are not uncommon, and markets are still volatile across the world. Healthcare is a big issue in terms of government focus and spending. And you know, we always have to be a little cautious about where surprises can come from. But on balance, I think our position at this stage is about as good as it’s been since I’ve been here, in terms of future outlook.

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

Just a few followups here. Gary, I know you’ve had a lot of commentary on gross margins, but if you could go from the second quarter here to the fourth quarter, at the upper end of the range there’s about a 150 basis point improvement. Just specifically on FX and quality, how much of a contribution are those two factors in that 100-150 basis point improvement heading into the fourth quarter?

Well, the reality is your FX in the fourth quarter is much less than right now. [If the rates] stay where they’re at, and that’s what that’s all based on, the FX impact in the fourth quarter would be relatively minor, and so you pick up almost 40 basis points right there, just through the FX. The other piece would be the [equality] items that we’re talking about, there will also be some costs occurring in the fourth quarter as we continue to focus on addressing the warning letters. But you’re also having that cost on a much higher revenue number. And so that’s what also drives your gross margins in the fourth quarter. If you look back historically, the gross margins in the fourth quarter also tend to be at a higher level, as I mentioned, even with the SG&A, because you have a fixed cost that’s on a much higher revenue number. And so, in general, part of it is just your historical trends. The gross margin is probably 40-50 basis points higher in the fourth quarter. Part of it is related to FX and part of it is related to the quality cost. Should start to minimize as we go through the fourth quarter itself.

And then Mike, maybe just two broader cardio questions for you. The first, the outlook for your coronary business, considering you do next-generation stent systems in the market, is that a concern for us on volume, or price, or neither? And then just another question on CoreValve. Should we assume next quarter we see normalized market growth given the inventories? And if there are any pricing concessions given in Germany, should we assume you can get back to your prior pricing?

We would expect normalization in the German market to take place over the next two quarters, just because of the big volatility that took place over the last two quarters. So I wouldn’t say it will all be back to normal next quarter, but certainly when we get into the fourth quarter I would expect normalization to have occurred. On the U.S. side, what I’d point out is we’re now six to seven questions into the launch of Resolute Integrity. We’ve lapped its launch in every major market around the world, and we continue to show share capture. And I think what that’s about is a couple of things. One is just the performance of the product. The handling of the product, the diabetes labeling, the recent data on [DAPT]. I mean, it’s a great product, and I think the more use it gets, the more physicians are coming to appreciate that. But it also fits very nicely into our broader CVG strategy in that we have moved increasingly toward having Resolute Integrity involved in multi product line bundles across our businesses, which include services and programs in those bundles. And that product line has been the biggest beneficiary of it. So if you look historically, it used to be when you brought out a new stent product your share would move in the first two or three quarters, and then that would be it. What we’re seeing is just a continued growth in our share position in DES, and we think it’s because it’s a great product and it’s fitting into a great broader strategy for CVG.

Our next question comes from the line of Bob Hopkins from Bank of America. Your line is open.

First just a couple of quick questions on the pipeline and the visibility of the pipeline. Just wanted to confirm that the American College of Cardiology meeting will be the place that we’ll probably see the data from your renal denervation trial, the U.S. trial, as well as the next edition of the CoreValve data. And then also wanted to confirm just that the drug coated balloon data is still on track for showing it in early April at [unintelligible]. Just wanted to confirm those dates.

Those continue to be our operating expectations.

And then I was wondering if you could talk just a little bit more about the ICD market and why it’s improving. Understanding there’s some stocking issues, and you made some comments earlier, but I was just wondering, is this uptick in the market purely a function of a lot of new products in the market for the first time in a while and maybe seeing better pricing? Or do you actually think there’s been a unit uptick in the ICD market?

We’ve certainly seen stabilization in the initial implants for ICDs, which is a good sign, obviously. Something we’ve been looking for, and have now seen. On the pricing side, basically it’s flat overall pricing, and we are seeing price increases tied to the new product launches in our high tier, but we continue to see pricing pressure in the mid tier technologies. You net it all out, it’s relatively flat ASPs, which of course is a nice improvement over the 4% to 5% ASP declines we were seeing at this time a year ago. So generally speaking, it’s market stabilization that we’re seeing.

Our next question comes from the line of Josh Jennings from Cowen & Company. Your line is open. Josh Jennings - Cowen & Company : Omar, I just wanted to ask you quickly about the Cardiocom business, your venture into the disease management space. How should we be looking at that in terms of is it a growth driver? Is it a service that Medtronic is going to be providing to try and ensure deeper partnerships with hospitals and hospital systems? And how much investment do you need to develop or acquire new technology platforms to really optimize your offering? And then specifically for the important avenue of heart failure rehospitalization prevention, there’s a potential pulmonary monitoring device going to be approved by the FDA. Can you speak to Medtronic’s views on pulmonary pressure or intracardiac pressure monitoring? What role will it play in the important market opportunity and how can Medtronic tap into this, and any internal plans to leverage the Cardiocom platform?

Let me give you some perspective. First of all, Cardiocom is an operating business with strong results and strong growth prospects with what it has. It has some unique capabilities and we’re excited about what they’re doing, and they have strong momentum and growth by themselves. Now, when we take Cardiocom and latch that onto our distribution team, which is far bigger than what Cardiocom had on their own, we obviously open up a lot more opportunities for that business to grow and increase their sales of their existing products. But in addition to that, the combination of our devices now, going after a more selected patient pool, together with Cardicom’s support services, offer up a future opportunity that is unprecedented, that no other device company and a cardiac monitoring company has ever really got together in this way. And we expect real improvement in growth going forward as a result of that. Now, with respect to other things that we’re to do, as you know, studies have shown that to move the needle and think like heart failure requires a broad set of services, a broad set of solutions, that have to be executed through multiple stakeholders. We’re in the process of creating that holistic solutions business and leading that effort, and we think Cardiocom is a big asset in that journey. Other things will certainly be required, but on its own, Cardiocom is an extremely good platform for us to base this journey on. It’s really a long term method. I’m going to say as well that in terms of the heart failure rehospitalization, we’ve got evidence already that using the Cardiocom capabilities we can have a measurable impact on the reduction of heart failure in specific hospitals, and we think it’s a very cost effective method through which we can achieve that goal. Sensors will be developed over time that will enhance that capability, but in our experience, just doing one thing in an area of that type is usually not enough, but a broad solution is required. I’ll let Mike comment on specifically the product and technology and his views on that, and maybe our plans.

I think it’s important to look at heart failure as both a short term issue and a long term issue. The short term issue is the 30-day rehospitalization challenge, which all hospitals in the U.S. agree is something that is a big challenge for them to manage. And that’s where the Cardiocom solution, with this basically very fixed window of time in which to impact, has proven to be very effective. The alternatives that are being looked at are permanent implants that are very expensive solutions, which really are not the right answer for the short term challenge, but the question would be are they the right solution for the long term challenge of heart failure management. And in that case, clearly as Omar just mentioned, there are a lot of variables involved here. It’s not just the availability of the measurement from the device, but also the tracking of that data, the specificity and sensitivity of those data, and the cost of managing that information. And we think that’s a very expensive solution that’s being looked at for the long term. We are really focused on trying to focus in that near term window, not only with Cardiocom, but also with some of the predictive diagnostics that are coming out of our CRDM organization. So you know about Reveal. We talked about the Reveal Linq, which is the next-generation loop recorder that we have, and there are other predictive diagnostics you’re going to see us talk about over the course of the next six months that we think can be very helpful in managing heart failure patients in that window where there’s a very clear economic need. So that’s how I would characterize our approach to the strategy.

Our next question comes from the line of Bruce Nudell from Credit Suisse. Your line is open.

Mike, several questions for you. Firstly, common wisdom is that the [Partner One] indication in the U.S. is kind of flattening out. As you enter that market, do you see much opportunity for growth prior to indication expansion? Secondly, I know you guys have had a little sluggishness in enrollings for TAVI, and there’s been talk about extending it to [STS2]. Any progress on that front? And thirdly, given the joint FDA CMS approval track for renal denervation, how should we be thinking of that uptake in the States now that you have definitive evidence relative to what we’ve seen in Europe?

On the second one, let me just ask Jeff. Do you want to comment?

On [unintelligible] TAVI, we’re talking to the FDA, but there’s really no update on looking more on the enrollment criteria.

First, I think it’s important to point out that what we are seeking approval for in terms of the range of sizes and alternative access routes for CoreValve should significantly expand the number of patients who are going to be candidates for TAVI, because currently the current approved competitive devices are certainly limited in terms of their size and also the invasiveness of a transapical approach. So we think that there is still plenty of opportunity to both take share in the existing segment as well as to expand the number of patients who are getting treated within the extreme risk. So we’re confident that what we do in terms of our overall expectation for market size continues to be what we would expect to see. On the third question, obviously this is one of the first that’s on the joint track of CMS approval as well as FDA approval. Our goal would be to have essentially a three month window between those two, the FDA approval and the follow on reimbursement, but again, this is fairly uncharted territory, so we’re going to have to see where that leads, but that’s certainly where we are managing our strategy toward.

And we would expect that obviously, having had data, we’ve always said you have in the data the proven information in the U.S., we think will actually help accelerate the marketplace, and having reimbursement at the same time or close to it would obviously help. So we expect the uptake in the U.S. would be much faster than what we’ve said outside the U.S.

Our next question comes from the line of Rick Weiss from Stifel. Your line is open.

On CoreValve, can you give us a little more perspective? Mike, do you think you’ve lost share in Germany as a result of the injunction, given what seemed to be some heavy selling into the market in advance of this? And can we assume that you’re shipping normally now? And just remind me, I think you said you have strong growth in TAVI in Europe. Can you quantify that more specifically, with a more specific number?

On Germany, obviously if you just look at total revenues that we just reported in the quarter, we lost share on a reported basis, because we had no product that we were able to sell other than for the compassionate use side. But as you may recall from the first quarter, when customers learned that they were going to lose access to this product, there was a lot of demand that basically accelerated purchases. So in terms of overall share of implants, it’s hard to say, but I don’t think there probably was a lot of share loss in the quarter. And obviously now that we’ll be able to go back into the market with the full offering, I don’t expect there will be going forward. But it’s going to take a couple of quarters for that to normalize overall.

And on the [unintelligible] side, just as a follow up, is there any way to size to opportunity for the 530G and any sense, of the patients who are getting the devices, are these patients already on a Medtronic pump and upgrading? Are MDI patients converting, or competitor pumps? Any perspective there would be welcome.

Well, it’s a little early to get too much data on this, because we just started shipping it, but I’ll tell you that the principal response has been outstanding, both from patients who receive the device and just in anticipation of what the product can do. So we’re really confident about the outlook and the general acceptance of this product as we see it. I think in general most of our Medtronic patients were upgrading at this stage, but we expect some conversions as well. I doubt if there’s going to be too many MDI patients going to this technology first. But again, it’s very early. We just started shipping this product just about a month or so ago. So let’s wait and see. But like I said, the anticipation from our patients is very high, and a lot of excitement around it. Okay, so with that, it’s time to conclude. Thank you all very much for your questions. And I’d like to briefly note that as you work on filling your 2014 calendars, we plan to host our institutional investor analyst meeting on June 5, which will be held again in New York City. With that, and on behalf of our entire management team, I’d like to thank you again for your continued support and interest in Medtronic. And for those of you in the U.S., I want to wish you and your family all a very happy Thanksgiving. We look forward to updating you on our progress on our Q3 call, which we anticipate holding on February 18. Thank you.