Good morning. My name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Medtronic’s Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Jeff Warren, Vice President of Investor Relations. Please go ahead.

Thank you, Jackie. 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 Chief Financial Officer, will provide comments on the results of our fiscal year 2015 second quarter which ended October 24, 2014. After our prepared remarks, we’ll be happy to take your questions. First, a few logistical comments. Earlier this morning, we issued a press release containing our financial statements and our revenue by business summary. You should also note that some of the statements made during this call may be considered forward-looking statements and that actual results might differ materially from those projected in any forward-looking statement. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports filed with the SEC. Therefore, we do not undertake to update any forward-looking statement. In addition, the reconciliations of any non-GAAP financial measures are available on the Investors portion of our website at medtronic.com. Also, unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the second quarter of fiscal year 2014 and all year-over-year revenue growth rates are given on a constant currency basis. And finally, today’s earnings call does not constitute an offer to sell or solicitation of an offer to buy any securities or solicitation of any vote or approval. In connection with the proposed Covidien transaction, Medtronic Holdings Limited has filed with the SEC a registration statement on Form S-4 that includes a preliminary joint proxy statement of Medtronic Inc. and Covidien plc that also constitutes preliminary perspectives of new Medtronic. The registration statement is not complete and will be further amended. After the registration statement has been declared effective by the SEC, the final joint proxy statement perspectives will be mailed to Medtronic shareholders and Covidien shareholders. You should review materials filed with the SEC carefully as they will include important information regarding the proposed transaction, including information about Medtronic and Covidien, the respective directors, executive officers and certain other members of management and employees who may be deemed to be participants in the solicitation of proxy in favor of the proposed transaction. Please also review the Disclaimer Page at globalmedtechleader.com for additional information on forward-looking statements and other important information on the proposed transaction. With that, I’m now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Omar Ishrak.

Good morning. And thank you, Jeff, and thank you to everyone for joining us today. This morning we reported second quarter revenue of $4.4 billion, which represents growth of 5% and Q2 non-GAAP diluted earnings per share of $0.96, growing 5%. Q2 was a strong balanced quarter, where revenue growth was at the upper end of our outlook range for the fiscal year and within our mid-single-digit base line goal. Our performance was well-balanced across our three groups, with our two largest groups CVG and RTG, both delivering mid-single-digit revenue growth, and diabetes achieving double-digit growth. Our Q2 results were also balanced from a geographic perspective, with 5% growth in both the U.S. and in International markets. Looking ahead, we expect that our three primary strategies; therapy innovation, globalization, and economic value, coupled with our increasing market diversification will enable us to consistently deliver dependable growth in healthcare. In addition, we believe our pending acquisition of Covidien will further strengthen and balance our growth profile. As we have done previously, we are quantifying, communicating, and executing in each of our independent growth vectors. Our new therapies growth vector contributed 310 basis points to our overall growth in Q2. This is over 100 basis points higher than last quarter and at the upper half of our previously stated 150 to 350 basis point expected range. Our organization continues to bring forward new products and services, which are being received enthusiastically by our customers around the world. Let me now discuss some of the innovations that have boosted our overall revenue growth by delivering meaningful clinical and economic value to the market. Starting with our Cardiac and Vascular Group, we launched our Attain Performa quadripolar lead system in the U.S. in September. This next-generation system coupled with our Adaptive CRT response improvement…

Thanks, Omar. Second quarter revenue of $4.366 billion increased 4% as reported, or 5% on a constant currency basis after adjusting for a $38 million unfavorable impact from foreign currency. Q2 revenue results on a geographic basis were as follows. Growth in the emerging markets was 12%, and represented 13% of our overall sales. The U.S. grew 5% and represented 56% of our overall sales, and growth in non-U.S. developed markets was 2% and represented 31% of our overall sales. Q2 diluted earnings per share on a non-GAAP basis were $0.96, an increase of 5%. Q2 GAAP diluted earnings per share were $0.83, a decrease of 7%. This quarter’s GAAP to non-GAAP adjustments on an after-tax basis included a $64 million multi-year donation to the Medtronic Foundation and a $60 million charge for acquisition-related items, primarily associated with transaction costs in connection with the pending Covidien acquisition. It is worth noting that on a cash basis, Q2 diluted earnings per share were $1.02, an increase of 5%. In our Cardiac and Vascular Group, revenue of $2.286 billion grew 5%. Results were driven by growth in Low Power, Structural Heart and AF & Other, partially offset by declines in Coronary and High Power. In Cardiac Rhythm & Heart Failure, revenue of $1.320 billion grew 5% and included $18 million of combined revenue from our acquisitions of NGC Medical, Corventis and TYRX. High Power revenue of $670 million declined 5% after difficult prior year comparison but sequentially grew 7%, as reported on the strength of the U.S. mid-quarter launch of our Attain Performa quadripolar CRT-D system. Our daily CRT-D implant volumes were flat prior to the launch but jumped to mid-teens growth post launch. In fact despite having Attain Performa available for only part of the quarter, our Q2 in total represented…

Thanks, Gary. Before opening the lines for Q&A, let me briefly conclude by stating that Q2 was a strong balanced quarter. We continue to strive to reliably deliver on our baseline expectations. And looking ahead, we believe our three primary strategies, therapy innovation, globalization and economic value, coupled with our increased market diversification will enable us to consistently deliver dependable growth in healthcare. And we believe our pending acquisition of Covidien will further strengthened and balance our growth profile. With that we will now open the phone lines for Q&A. In addition to Gary, I will ask Mike Coyle, President of our Cardiac & Vascular Group, Chris O'Connell, President of our Restorative Therapies Group; and Hooman Hakami, President of our Diabetes Group to join us. We are really able to get to everyone’s questions, so please limit yourself to only one question and if needed one related follow-up. If you have additional questions, please contact our Investor Relations team after the call. Operator, first question please?

[Operator Instructions] Our first question comes from the line of Mike Weinstein with JP Morgan.

Good morning. Thanks for taking the questions. So Gary, I would hope we could -- I’m hoping I could get you to talk about a couple of item. First, as we think ahead to the Covidien closing, can you just talk a little bit about how you view your debt load post the closing given the borrowing in the U.S.? And what your comp levels are going to be with your debt ratios going forward? And then second, really where I’m headed is also I want you to talk about your capital allocation strategy post closing given your access to Covidien’s cash flows and how that shifts with much greater cash flow opportunity post close?

Okay. Well, with respect to the debt levels, I think everyone’s well aware to finance the transaction at this point. We’ve changed instead of using our o-US cash and bringing that we’re using that as part of the transaction, we will finance the entire cash component of the transaction, which is basically about $16 billion that we’re going to need to finance now. That will be both through some bank debt and obviously going to the capital markets. We’ve thoroughly had the discussions with the rating agencies around that. We’ve taken a look at the finance and that’s well within our ability to do. We don’t think that should be any issue. Obviously, it will result in slightly lower ratings from the agencies but still well inline with our expectations. We expect over time that we’ve kind of committed to the fact that we want to maintain, get it done kind of a three times leverage, which I think will occur over the first few years as we get the synergies and as we drive the growth in the business. We think the leverage levels will be -- probably we can maintain kind of with those levels and be very, very comfortable going forward and give us the financial flexibility we need as an organization. So obviously, as much as we prefer to be using our own cash with the transaction, the ability to go and use outside debt to finance this transaction fits very well into the financials and our expectations moving ahead. So that -- we don’t think that’s going to have much of an impact on our overall cash flexibility. As far as the capital allocation goes, as we indicated, when we did the transaction, we still are committed to return the 50% free cash flow to shareholders, that’s where our commitment still remains. But as we indicated, when we talk about the transaction, just getting access to the Covidien of both U.S. and o-U.S. cash improves our cash availability in the U.S. dramatically from around 35% to 40% that we have right now to above 60% as we go forward. And so that clearly improves our flexibility and gives us the ability as we take a look at the combined companies going forward on what we might do with capital allocation or reinvesting back in United States. And as we indicated, that was one of the key factors for the transaction and the structure we came up with is to improve that overall flexibility as we move ahead. So, we have not changed our capital allocation, but obviously we’ll have increased flexibility as we move forward after the transaction closes, and we’ll have to evaluate that as we get together as a combined company.

Let me ask one to Omar then I’ll jump. So Omar this has -- it grew 5% this quarter, which makes your first quarter in four and a half years since the company has done so. And it’s really on the back of new products and new therapies in the U.S. market. The emerging markets business grew 12% this quarter, and it’s still growing I think below which your targets are internally? So can you talk a little bit about that incremental engine, how do you get emerging markets to go from 12% to 15% plus? I know it’s really where you are targeting?

Well frankly I am targeting even higher than that Mike, but it’s true that we’ve said that mid-teens is our baseline expectations. And I think we’ve had a little bit of a tough couple of quarters in emerging markets in relative terms because of some changes we made in distribution and also some difficult comparisons as well. We expect to get to mid-teens in the emerging markets quite shortly because there is a balance here. Some of the emerging markets are doing very well, others are under pressure, and it so happened that Central and Eastern Europe, which was a big driver of growth had a lot of pressure in the past three or four quarters that’s coming back. China had to return to double digit this quarter, and we expect China to continue in that range. India has been a problem, and it’s going to take a little while to sort out. It’s primarily around our distribution channels, but that has a fairly small impact right now on our overall numbers. And Latin America is coming pretty strong, growing well over 15% in fact so. This is a balance of different countries here, which have different profiles. I think it’s fair to look at this in a yearly basis as opposed to a quarterly basis. And I think that’s the way we are looking at it, and we are pretty confident that on an annual basis getting around the mid-teens is a realistic objective. But as I have mentioned earlier in all seriousness, I’ll challenge the team that the opportunity there in terms of the under penetrated market amongst people who can afford the care really deserves growth higher than that. So, it’s not quite that simple though to get all those different constituents together, and it’s going to take a little while. But the opportunity is clearly there. I think mid-teens is still a very realistic and achievable annual goal. We’ll have quarter-over-quarter fluctuations simply given the breadth of geographies we’re dealing with.

Yeah. Thank you, Omar. Congratulations on the quarter.

Good. Thanks. Mike.

Thanks Mike.

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

Good morning. Just a couple of quick questions, I guess the first question just talking about consistency of growth, Omar, has been a huge focus of the business and as you head into Covidien and you reiterated, you want to be a more consistent business, and certainly on the topline that looks like the case here in the quarter. Maybe for both of you, just thinking about gross margins, this is sort of in a third straight quarter where GMs have been a little soft and there has been one-time issues. But I think investors, I think are looking for sort of conviction around whether you really can deliver to 200 to 400 basis points of leverage to a much stronger topline number? I think based on the last three quarters, Gary or Omar, there is a view that maybe there are some structural forces weighing on gross margin. So can you talk about why you are still confident that you can deliver from a Medtronic individual perspective better leverage on that topline, which is obviously improving here in the last few years and then I have a quick follow-up?

Yeah. First, you are right to point out that the gross margin has been under pressure for a variety of reasons over the past several quarters. And although the range that we talked about is still the range that is realistic and we think achievable. I’d like to point out that given the mix of products and the mix of businesses that we are now -- that’s now in our current planning, the operating margin number on which the leverage is build is a more reasonable metric to look at as opposed to the gross margin. The gross margin is really only a portion what contributes to the overall operating margin. And now given our services and solutions business scale that we are getting in NGC, the lower SG&A that will result from that with a lower gross margin, will result in positively growing operating margins. So that’s the number that we are more increasingly focused on looking at. We are not losing side of the gross margin from a pricing perspective in our products, which we will absolutely still monitor. But the operating margin itself is probably some more meaningful indicator for us. And going forward, Covidien, we’ll have to take a look at the combined company, which we are beginning to do. I think clearly as our growth rate goes higher, significantly higher then the leverage is something we’ll have to look at as to what’s reasonable amount. I think the absolute EPS leverage is the number perhaps to look at that stage, but right now we are still sticking to our commitment, which we still have to prove that we can deliver, that grow consistently at mid single-digits, deliver the leverage that we’ve talked about and only after we’ve reliably established that and are confident that the growth rate can reliably be higher than that, can we talk about different kinds of leverage. So those are the two points. First, let’s focus on operating margin on an overall basis. Second, let’s deliver a few more quarters of what we’ve talked about as our baseline expectations and then we’ll think of change profile potentially and then the Covidien adds more mix of that. Yeah. Go ahead.

Okay. Omar, very helpful. And then execution obviously is the second thing. I think you’ve been very focused on here in the last several quarters. Maybe just talk about two points of execution in the U.S. market in this quarter, one, high powered market’s been softer for several quarters, how much of that is product mix for you guys? And how much you think can really be improved through better execution, better management? And then just secondarily, TAVR roll out, obviously still a strong number but flattish sequentially based in your commentary. What do you think you share with TAVR market share and how happy where you with the results there this quarter? Thank you.

I am going to let, Mike Coyle talk about the dynamics. What I will say that from my perspective, when I look at the overall execution of our businesses in terms of this new product launches. I really, I'm encouraged and quite pleased. I think the team has by and large met their commitments, not only in terms of dates but in terms of the traction that these products have achieved. Their inter quarter dynamics, there are other factors here which relate to the exact share position or the growth numbers on a short-term basis. But the real meaningful indicators that I looked at and the team has clearly executed so. But, Mike, may be you can give some more color to the market.

Just specifically on the two markets that you mentioned on the High Power side, obviously despite the fact that we have a year-over-year decline of 5% in the High Power number, that really has more to do with the prior year than it does in the current quarter from the standpoint that there were some unusual dynamics in the prior year second quarter. Because of the fact that we had this meaningful destocking in the first quarter a year ago, as we brought on the new what we call the Blackwell platform or the Evera Viva/Brava product lines. So if you look at the prior year number, it was an unusually high because of the quarter end dynamics in the second quarter. But when you now look at the actual performance on a run rate basis, especially since the second half introduction into the U.S. of the new quadripolar Attain® Performa system, we are actually seeing very nice growth dynamics and I think in the text, you heard mid-teens kind of growth in implants for the second half of the quarter, which obviously reflects very good execution and matches frankly what we saw in other geographies like Japan for the differential performance of the product life. So we think there is very good execution going on there. In the TAVI product line, obviously from a performance perspective, the rollout is going just as we had envisioned it would in terms of new centers being opened and revenues generated. Obviously, what was a little different in the quarter was the fact that there were some positive competitive dynamics going on with new product introductions. And we have to remember this is the market that is in its infancy is going to respond to new technology introductions. So one of our competitor…

Okay. Thank you very much. Nice quarter.

Thank you.

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

Wondering if you could just focus on with the Covidien transaction, just with respect to accretion that you’re talking about, FX definitely has an impact on Covidien’s results. So I was wondering if you could just weigh in on how you guys are thinking about FX moving ahead as you bring that company into the Medtronic fold and how will hedging I guess look like?

I will clearly let Gary take this one.

All right. Well, as we indicated, obviously, as far as the transaction goes, the combination of Medtronic and Covidien, our expectations as we look at this have been as we indicated and it will be basically cash earnings per share neutral to accretive in the first year and obviously GAAP accretive by the third year going forward, and we still -- that's assuming the synergies and everything else that we played out. So we still have that expectation. To be honest with you, as far as beginning and exactly what the impact of foreign exchange is on the combined entities, we’re just starting to get into the details that really put together our detailed FY '16 types of plans and trying to assess what that will be mean as we go forward, obviously fine tuning the synergies and all those details. So to have -- to indicate what the FX impact is, I don’t have an answer for that at this point in time as we move ahead. But you’re absolutely right, I mean, clearly FX and where it’s at right now both for Medtronic and for Covidien, for any company obviously that’s operating internationally, it’s a headwind that we’re going to be have to be facing and dealing with. We obviously have had a hedging program in place which is more than what they’ve done, they have done some, but not as much as we’ve done. And we’ll have to evaluate that and determine what the impact is as we get into, but I don’t have any detailed answers at this point in time to give any specifics on what that impact could be for FY '15 or obviously FY '16.

Okay.

One comment that I can make on this is that look with Covidien, given the breadth of manufacturing facilities, again we don’t want to kind of just create one just for FX. But if it makes sense, given the diversity of manufacturing locations and the spread of cost globally, I think over the long-term, this is not a short-term, I mean over the long-term, we can plot, not a hedging, but a more balanced strategy on FX that will give us some protection. So I think the addition of Covidien actually gives us that added flexibility, which over the long-term if you plan it carefully might help us.

More of a natural hedge.

It provides more of a natural hedge.

Great. And then, just a clarification on the tax rate given the change in finance, you’ve talked about 2% lower, I guess, off the blended tax rate? Is that the blended tax rate as we see it from a non-GAAP basis today or should we be thinking about that as a blended tax rate, if we adjust both your tax rate and Covidien’s tax rate onto like more of cash earnings, so it would be certainly lower than what the non-GAAP number is today?

No. It should be on non-GAAP number, is what you should base on. What we have done is, we’ve assumed that, based on what our non-GAAP normal tax rate is in there, if you blend those together and then assume, as we indicated approximately 2% benefit from the financing, that’s kind of a roughly where we expect. But, obviously, there is a lot of moving parts there that are outside even our control. I mean, what happens if the R&D tax credit, all these different things will have impact on where their rate is. But generally just take our two rates blend them together and it’s a 2 percentage point improvement on the top of that.

And that’s going to be on a new cash basis tax rate?

That’s on the non-GAAP rates.

Okay. All right. Thank you.

Thanks, Kristen. Next question.

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

Great. Thank you and good morning.

Hi.

So two questions, some product question for a Mike, but first for Omar or Gary. Now that we are closer to the close of the Covidien deal, I was wondering if you could just give us a little bit more of a detail update on this synergy target as you guys have expressed, the minimum of $850 million, just as your closer and getting started with the planning, your confidence in that $850 million? If there is a potential for upsides where might that come, just want to get some comments for you -- as you close to the close?

I think, first of all, the planning is going very well. We’ve got detail list now of when the -- when we are going to expect to get some of these savings. We’ve risk assessed difference levels of savings and we feel pretty comfortable with the $800 million number. I think it’s premature for us to talk about upsides at this stage to that number. We do have a good funnel of opportunities. But our basic priorities around preserving the two businesses and their growth profiles, their R&D expenditure, the commercial presence, I think that remains and that’s important for us to protect. As you go further and further away from the customer and non-customer facing areas. Clearly there are opportunities and we are building a list, some of this will take a little longer to translate, they’ve got more risk associated with it. We don’t want to do anything that creates any supply disruption of our products, so we should be a little careful. So, again, I’m sorry, it just a little premature to talk about upside specifics. Only to say that we feel pretty good about the baseline number that we’ve committed and we’re looking further areas. Gary go ahead.

Great.

No. I mean, I think you said it well, I mean, the teams are clearly are down in the detail, so versus something that was kind of high level estimate when we put together. Obviously, we have much more detail plans around that number at this point in time as Omar indicated. We feel comfortable still about getting to the $850 million, there is upside, we will communicate on that when we get to that point. But we -- there is nothing gives us any pause on $850 million at this point.

Okay. Great. And then on the product side for Mike. Mike, I was wondering if you could comment on two things. First on, LINQ and then on your U.S. quad pole CRT-D lead launch and on LINQ, is that again over $100 million this quarter and could you give us any revised thoughts on how big you think that opportunity might be beside sort of the obvious comment that it could be bigger than you originally thought? And then just some qualitative comments on the quad pole launch would be great?

Sure. I think, the diagnostic area is one that we are particularly focused on as a potential growth driver, not only for the product revenue that come with LINQ and with the SEEQ patch that we have, but also because its sort of the door for improving diagnosis of patients and then also getting actively involve in patient management. And so, we see service revenue opportunity associated with those products, as well as obviously, the product revenue. So, I’m not prepared to give you a quantification of how fast update the numbers that we talked about at the Analyst Meeting here earlier in the spring, but it clearly is going to -- have the potentially to be a $1 billion market, we will talk about at what time period that that’s going to play out. I think the thing that is very interesting about it is, well, it’s not only, obviously, the revenues that we are getting off of this particular product, but the fact that by essentially more than doubling the number of patients who are getting diagnosed for syncope. We typically get 8% or 9% pull-through on devices, pacemakers that get diagnosed, because these patients are getting effectively diagnosed with the LINQ product. So it’s helping us in multiple ways creating service revenue, creating product revenue and then actually driving devices revenue of which we get a differential share. And now on the quadripolar lead system, I think it’s important to sort of understand that this is a lead, but a device system that offers significant advantages over what was available in the market prior to its approvals from the standpoint that the Adaptive CRT algorithm, which minimizes biventricular pacing has been demonstrated to provide better outcomes in heart failure and now physicians no longer have to choose between having a quadripolar lead being able to select that algorithm. Secondly, the design of the lead itself, where we have this narrow dipole that some have been referring to as a tripole system, actually that narrowed dipole, is limiting the dispersion of current which is lowering the amount of phrenic nerve stimulation, which has been a problem with prior generation quadripolar lead. In addition, the fact that we have steroid on H1 gives us much better patient threshold for improving of longevity of the overall product. And then our 16 vector selection process using the VectorExpress program, basically allows high degree of efficiency to be brought into the procedure by in two minutes being able to tell what optimal vector is across 16 different options. So it really is a better product and that’s why we have seen share movement that we have seen in Japan and why we expect to see share capture here in the United States.

Great. Thank you.

Thanks. Thanks, Bob. Next question.

Our next question comes from line of Ben Andrew with William Blair.

Good morning. If you could talk a little bit more about the diabetes space, that’s exceptional growth. I was hoping you could maybe talk about what you think the market is doing and then what the persistency is of patients on CGM as you start them up on the products here in the U.S.?

Sure. I’m going to ask Hooman to take this question. Hooman, why don’t you go ahead?

Sure. Look, the overall market for pumps is growing in the mid-to-high single digit range. Our performance there in the U.S. internationally continues to be very, very good. So we’re encouraged by what we saw in Q2. In the U.S., we grew 12% overall versus prior year. And from an emerging market standpoint, we’re growing exceptionally fast as well, 27% growth. So we feel good about what we see and it’s really driven by the strength of our 530G System in the U.S. And that obviously drives the pump revenue but also the sensor sales as well because this is a system. And I think we can continue to see that kind of strength as we think about the second half of the year.

And what about that kind of continued usage of CGM as patients go out over time. Do you see a high persistence and consistent use of the sensors, once patient start on it?

We do, actually, yeah. The fact that if the system helps, it’s not a standalone sensor. But the fact that if the system and the system is regulating based on the sensor values, helps with that. So we really have here what is the therapy versus just a standalone component. And I think that helps drive the adoption of the CGM sensor.

Okay. And last question, you keep talking about share gains in the U.S. but your competitor is growing over 60%. Is that consistent with the sensor growth you are seeing? How do you calculate that?

Yeah. Our sensor growth in the United States, actually, if you take a look at our overall sensor performance, just in the U.S., our sensors grew about 59% in Q2 and higher than that actually in Q1. So for the second consecutive quarter, we’ve been calculating share gain in the United States for sensors.

Okay. Thank you.

Thanks Ben. Hey, we’re past the top of the hour too. We’ll take our two last questions.

Our next question comes in line of Glenn Novarro with RBC Capital Markets.

Hi. Good morning. Can you guys hear me okay?

Yes, we can.

Okay. Thanks. First, for Omar, it looks like the Covidien deal is on track. And in the past quarter, Covidien announced divestiture of their drug-coated balloon. Do we anticipate any more divestitures going forward? And I had two follow-ups.

I don’t want to go into specifics on their regulatory process here other than to say that as far as we are concerned, they are all on track. We haven’t got an approval yet. So there are still steps to kind of go through. But the fact that we called the shareholders meeting, we’ve got a date for it says that we’ve got some confidence that this will flow according to our original projections but it isn’t done yet. So we will have to kind of see how it progresses.

Okay. And then two quickies on the legislature front. It seems like there is some growing momentum in Congress to repeal the med dev tax, so your thoughts there and then any thoughts on the R&D tax credit? Thanks.

We clearly welcome the repeal of the medical device tax. We have been close to this before and there is several compounding factors that haven’t allowed that to happen. Although I agree that right now, at least from what we hear, there is a fair amount of momentum and consensus to get this one through. I mean, I really cannot comment any further than that on that aspect. As far as the R&D tax credit is concerned, we expect an extension but it has to happen. I mean, I think we are hearing all the noises that that should happen shortly. But again, I mean, these things until they are absolutely done you cannot really guarantee it. So that’s where we stand. And in both cases, we are optimistic, perhaps more confident on the R&D tax credit because that’s happened before. With the medical device tax, it looks better than before but we will see. There are still many variables left here.

Okay. Thank you.

Time for one last question.

Our final question comes from line of Brooks West with Piper Jaffray.

Hi. Good morning guys. Thanks for taking the question. Gary, a quick one for you, just on the quality spend that’s hitting the gross margin line, that just seems like it’s dragging out a little bit further than you had anticipated. Can you talk about a resolution timeline there and how we should think about that going forward, then I have a follow-up for Omar on diabetes? Thanks.

Yeah. As we indicated, obviously the biggest impact on the quality and it is basically obviously converting resources into the quality area to focus on it, from both in neuro and diabetes. We continue to make sure that we are making all the investment necessary to get that accomplish this. It’s a high priority across the organization and so it’s top of mind. And as a result of that, my expectation right now is I would say diabetes, I think is probably getting closer to having theirs kind of resolved and completed. And so I think that will probably start to lessen, as we get in here probably even in Q3 and Q4. I think neuro will continue probably for the rest of the year as our expectation because then as we get into FY ’16, I think you will start to see that dropping as they continue to implement their various programs. But I think, Neuro will continue for a period of time at least for the rest of fiscal year until we get into next year but they’re making progress. I think the teams feel good about where they’re at but it has been costly and something that we give a high priority to as we move ahead. So I think you’ll see some improvement as you go in the back half of the year. But I think that headwind still need to be part of this year and then obviously improvement as you get into FY ‘15.

Thanks. And then Jeff, can I ask a question, a follow-up on the diabetes there?

Okay. Go ahead.

Yeah. Okay. For Hooman, I thought the structural comments on the diabetes franchise were interesting. And I’m wondering how much of this is reorganization? How much of this might you need to build or acquire? And then specifically on the service and solutions, data management is interesting, is that Cardiocom? About how deep might you get into supplies and some of the other tertiary products that especially, type II diabetics might use? Thanks.

Yeah. The genesis of the structure is really for us to become a much more holistic diabetes company, not just a type 1 pump and sensor company but a true global diabetes care organization. And that's really the impetus behind the organizational changes that Omar talked about in the text. If you take a look at the three business units that we’ve created, the first one the intensive insulin management, this is really our core business where we’re going after the type 1 patient and the intensive type 2 with product and solutions. The second one, the non-intensive diabetes therapy business is really our step into type 2 in a broad way. And this starts with the Sanofi partnership but I think you'll see from us that it’s going to extend. And with Sanofi, I think, we’ve got some really innovative thing on the horizon that we’re both excited about. And then service and solution, this I think, absolutely can leverage Cardiocom. There is asset both within diabetes, with CareLink and across Medtronic with Cardiocom that can be leveraged as we think about patient management and data management. And you’ll see some additional activity from us along these lines later this year. But I think you can even extend beyond those types of things. So I think its going to be a mixture of both organic and inorganic activity as we look to build out particularly non-intensive and also service and solution.

Great. Thanks so much.

Yes.

Okay. Well, thanks everyone for your questions. And with that and on behalf of our entire management team, I’d like to thank you again for your continued support and interest in Medtronic. And for those of you in the U.S., I want to wish you and your families a very happy Thanksgiving. We look forward to updating you on our progress in our Q3 call, which we anticipate holding on February the 17. Thank you and have a great day.

Thank you. This concludes today’s conference call. You may now disconnect.