Medtronic plc (MDT) Q4 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to Medtronic’s Fourth Quarter Earnings Call. At this time, all participant lines have been placed in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] It is now my pleasure to turn the call over to Jeff Warren, Vice President of Investor Relations. Sir?

Thank you, Maria. Good morning. And welcome to Medtronic's fourth quarter conference call and webcast. During the next hour, Omar Ishrak, Medtronic Chairman and Chief Executive Officer; and Gary Ellis, Medtronic's Chief Financial Officer, will provide comments on the results of our fourth quarter and fiscal year 2015, which ended April 24, 2015. After our prepared remarks, we’ll be happy to take your questions. First, a few logistical comments, earlier this morning, we issued a press release containing our financial statements and our revenue by business summary, which finalizes the preliminary revenue we issued on May 19, 2015. We also updated our combined historical Covidien-Medtronic financial statement presentation to include FY15 comparable revenue, as well as combined P&L for the past eight quarters. You should also note that some of the statements made during this call 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 or annual results increasing or decreasing are in comparison to the fourth quarter and full year 2014, respectively, and all year-over-year revenue growth rates are given on a comparable constant currency basis, which includes Covidien Plc and the prior year comparison and aligns Covidien’s prior year monthly revenue to Medtronic’s fiscal quarters. With that, I’m now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Omar Ishrak.

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

Thanks, Omar. Fourth quarter revenue of $7.34 billion increased 60%, as reported or 7% on a comparable, constant currency basis after adjusting for a $483 million unfavorable impact of foreign currency. Legacy acquisitions and divestitures from both Medtronic and Covidien contributed 80 basis points to growth. Q4 revenue results on a geographic basis were as follows. Growth in the U.S. was 8% and represented 55% of our overall sales. The non-U.S. developed markets grew 5% and represented 32% of our overall sales and growth in the emerging markets was 11% and represented 13% of our overall sales. Q4 diluted earnings per share on a non-GAAP basis were $1.16, a decrease of 2%. We will breakeven on a Q4 GAAP earnings basis after several significant charges primarily related to the Covidien acquisition. In addition to the $362 million adjustment for amortization expense, the Covidien related non-GAAP adjustments on an after-tax basis included a $455 million charge related to the inventory purchase price step-up, a $286 million charge for acquisition-related items and a $157 million net restructuring charge. We also had a $349 million charge related to certain tax adjustments, the majority of which related to the proposed agreement reached with the IRS, resolving all proposed adjustments associated with the Kyphon acquisition, a $61 million CVG product technology upgrade commitment charge and a $27 million net litigation charge, primarily related to provision for additional INFUSE clients. In our Cardiac and Vascular Group, revenue of $2,596 billion grew 10%. This was a result of strong performance in all three divisions -- Cardiac Rhythm & Heart Failure, Coronary & Structural Heart, and Aortic & Peripheral Vascular. In Cardiac Rhythm & Heart Failure or CRHF, revenue of $1,398 billion grew 11%. This performance was driven by low-teens growth in Low Power, mid-single digit growth in High Power, strong growth of over a 30% in AF Solutions, as well as nearly doubling our revenue in services and solutions, which includes Cardiocom and Cath Lab Managed Service revenue. We estimate the global CRHF market is growing in the low to mid-single digits and the strength of our new product introductions is resulting in share gains and generally improved pricing dynamics. Low Power growth continues to be driven by the global adoption of Reveal LINQ, which resulted in diagnostics revenue growth of over 40% sequentially as well as solid pacemaker implant growth in U.S. LINQ is resulting in not only increased diagnostic sales but also pacemaker pull-through, as LINQ is resulting in more re-cardiac diagnosis in syncope patients. Looking forward -- looking ahead, we look forward to the launch of the Micra Transcatheter Pacing System in international markets this summer, followed by a U.S. launch in FY’17. In High Power, we continue to see strong market adoption of our Attain Performa, CRT-D system with its differentiated next-generation Quadripolar technology, AdaptivCRT algorithm and time-saving Vector Express programming. High Power also had a strong quarter in Japan, where we have now gained over 20 points of ICD share since the launch of our Evera MRI SureScan ICD in Q3. We expect to launch the Evera MRI ICD in the U.S. in this fiscal year. Our AF Solutions business continues to take share in the AF market and the continued strong growth of our Arctic Front Advance Cryoablation System, which is growing at more than double of the overall market growth rate. Turning to Coronary & Structural Heart or CSH, revenue of $792 million grew 9%. Our coronary business grew in the low single-digits driven by solid mid-single growth in drug-eluting stents. In Europe, our launch of the Resolute Onyx resulted in a 400 basis points of DES share gains sequentially and a sequential slowing of pricing declines. Resolute Onyx feature enhanced visibility and thinner struts to improve deliverability. We began the U.S. pivotal trial for Resolute Onyx in March and are currently forecasting an FY’18 FDA approval. In our broader coronary product offering, we are also seeing increased strengths, particularly in balloons where we gained 400 basis points of share on the successful rollout of our differentiated Euphora PTCA balloon family. In renal denervation, we announced in April, the initiation of the SPYRAL HTN global clinical trial program, which includes two global, prospective, randomized, sham-controlled trials studying uncontrolled hypertension patients both on and off medication. Based on the outcome of these two initial studies, we will then evaluate next steps for our pivotal study. Our Structural Heart business grew in the upper teens, driven by another strong quarter in transcatheter valves, which grew nearly 50%. In the U.S., our continued rollout of CoreValve is driving growth and resulting in both sequential and year-over-year share gains. We added approximately 40 additional new centers in the quarter and now have more than 275 U.S. centers trained since launch. In late March, we received the FDA approval for the use of CoreValve in a failed bioprosthetic also known as valve-in-valve implantation and these further contributed to our U.S. growth. As CoreValve is the only TAVI product approved for this indication, it makes CoreValve an indispensable offering for every practicing TAVI center. In international markets, our business took share sequentially due to the strong adoption of our CoreValve Evolut R. We are seeing strong customer enthusiasm for this next-generation self-expanding platform with its options to recapture and reposition the valve during the procedure. It’s differentiated 14 French equivalent delivery catheter, allowing access to smaller amenities and as we design inflow and skirt to help promote annular sealing. Evolut R is receiving tremendous feedback on its clinical outcomes, overall ease-of-use and procedural efficiencies. The FDA submission of Evolut R is complete and we are targeting the first half FY’16 approval in U.S. launch. The FDA also recently allowed us to begin implanting Evolut R in a SURTAVI Trial and to reduce the enrollment of requirement for the trial to 1,400 patients, which we believe brings in the timeline for the U.S. Intermediate Risk approval by at least a year. We have already enrolled approximately 1,250 patients from SURTAVI and we expect to complete enrollment over the next several months. In Japan, we received PMDA approval for CoreValve in March and plans are underway for a full launch this fall, following anticipated reimbursement approval in October. In our Aortic & Peripheral Vascular division or APV, revenue of $406 million grew 9%. The Aortic business grew in low-single digits and the peripheral vascular business grew the mid-teens, driven by the successful U.S. launch of our IN.PACT Admiral drug-coated balloon. We estimate that the IN.PACT Admiral is the leading DCB in the U.S. market in just its first quarter of launch. This leadership position was attained without the benefit of having a full quarter of a combined Medtronic and legacy Covidien peripheral sales force. We expect this DCB to drive growth in our APV division over the coming quarters through both its individual revenue contribution, as well as its ability to drive share across our broader peripheral vascular product line through the use of multi-line contracting. Looking on our DCB pipeline, we expect to obtain FDA approval for our 150 millimeter IN.PACT Admiral balloon in Q4 FY’16, or early Q1 FY’17. In addition, we expect to file for expanded indications for IN.PACT Admiral with a PMAs U.S. filing in the second half of FY’16 for in-stent restenosis indication, as well as the CE Mark filing by the end of FY16 for AV [indiscernible] indication. We are also finalizing bench testing now on our redesigned DCB for use below the knee, which we expect to submit for CE Mark in FY’16. Now turning to our Minimally Invasive Therapies Group, which consist of the majority of legacy Covidien businesses, revenue of $2.387 billion grew 6%, which included a net 140 basis point contribution from acquisitions and divestitures. MITG’s revenue performance was driven by double-digit growth in Surgical Solutions and lower single-digit growth in Patient Monitoring & Recovery. Surgical Solutions revenue of $1.293 billion grew 10%, with high single-digit growth in Advanced Surgical, low single-digit growth in General Surgical and growth of over 40% in Early Technologies. Advanced Surgical had a strong quarter with balanced low double-digit growth in both Stapling and Energy. Stapling results benefited from the continued rollout of new products, including the Endo GIA Reinforced Reload. In Energy, we are seeing strong procedural growth, particularly in Vessel Sealing. Our Early Technologies business also had solid growth across all three product lines: GI Solutions, Advanced Ablation, and Interventional Lung Solutions. Geographically, in Surgical Solutions, both the U.S. and China had strong quarters, delivering double-digit growth. Surgical solutions continues to focus on driving minimally invasive surgery adoption globally. Patient Monitoring & Recovery revenue of $1,094 billion grew 2%. The division was led by strength in the patient monitoring business, which grew in the mid-single digits as well as both Nursing Care and Airway & Ventilation, which grew in the low-single digits. This offset low single-digit declines in patient care. Growth in the patient monitoring business resulted from our strong U.S. flu season, which drove pulse oximetry sales. Now moving to our Restorative Therapies Group. Revenue of $1,854 billion grew 5%. Results were driven by growth in Surgical Technologies, Neuromodulation and Neurovascular, partially offset by modest declines in Spine. Spine revenue of $743 million declined 2%. Low single-digit growth in BMP was offset by low single-digit earnings in Core Spine and interventional. Both the global and the U.S. Core Spine markets grew in the low single-digits, consistent with last quarter. In our Core Spine business, both TL and cervical declined. But both of these businesses are expected to improve as we continue to launch innovative technologies into the market and these new products become a larger part of our sales mix. In PL, we are expecting FY’16 rollouts of new technologies for our OLIF25 and the 51 procedures, our new alleviate expendable cage and Solera Voyager, our new minimally invasive lumbar pedicle screw system. In cervical, we continued to see adoption of our PRESTIGE LP Cervical Disc and innovative ANATOMIC PTC interbody spacer. We are also now beginning the launch of our Divergence Stand-Alone Interbody Cage and ZEVO Anterior Cervical Plate System. Our spine division also continues to develop and deploy our differentiated surgical synergy program, which integrates our enabling technologies, surgical tools, spinal implants and expertise to improve surgical outcomes and efficiencies. This includes utilizing O-arm imaging and StealthStation navigation in spine procedures. And a strong growth from these two enabling technologies is recognized in our Surgical Technologies division. In Neuromodulation, revenue of $518 million increased 6%, driven by double-digit growth in DBS and mid-teens growth in Gastro/Uro. In DBS, our global growth focused on neurologist referral programs and the strength of the EARLYSTIM data in international markets continues to drive solid growth. In Gastro/Uro, we continue to see strong growth in sales of the InterStim system. Our Pain stim business was flat this quarter, reflecting a continued decline in the U.S. market, resulting from a negative reimbursement change that affected trialing activity and new implant growth. However, we grew our global pain stim share sequentially on the strength of our RestoreSensor SureScan MRI, spinal cord stimulation system, with its proprietary AdaptiveStim automatic simulation adjustment feature and access to MRI scans anywhere in the body. Turning to our Surgical Technologies division, revenue of $461 million grew 9%, driven by solid, balanced growth across all three businesses. Neurosurgery grew in the mid-single-digits, reflecting record worldwide O-arm surgical imaging unit sales, continued strength in StealthStation navigation service revenue, and the contribution of Visualase MRI-guided laser ablation. ENT low-double digit growth was a result of continued strong customer adoption of our StraightShot M5 Microdebrider and NuVent sinus balloon, partially offset by the MicroFrance divestiture, which occurred in Q3. In Advanced Energy, strong adoption of our proprietary Aquamantys tissue sealing and PEAK PlasmaBlade technologies drove upper-teens growth. In Neurovascular, revenue of $132 million grew 23%. The division, formerly part of legacy Covidien, had strong double-digit growth across coils, stents, flow diversion and access. In stents, we saw strong adoptions of our SOLITAIRE FR revascularization device following the presentation of four meaningful clinical trials at the International Stroke Conference in February and subsequent publication of three of these studies in the New England Journal of Medicine. These studies provided evidence that the standard of care for the treatment of stroke should be changed to include stent thrombectomy as primary treatment in addition to IV-tPA. In our flow diversion portfolio, we also saw a strong growth as a result of continued U.S. launch of the Pipeline Flex embolization device. In our Diabetes Group, revenue of $467 million grew 8%, with solid upper single-digit growth from the continued adoption of our CGM sensor augmented insulin pump systems in both the U.S. and non-US developed markets. In U.S., we continued to see strong adoption of our MiniMed 530G with the Enlite CGM sensor. In non-U.S. developed markets, growth was driven by the launch of our next-generation MiniMed 640G system with the enhanced Enlite CGM sensor in Australia and Europe. In addition to incorporating a brand new insulin pump design and user interface, the MiniMed 640G System features SmartGuard technology, which can automatically suspend insulin delivery when sensor glucose levels are predicted to approach a low limit and then resume insulin delivery once levels recover. We continue to make progress in bringing this technology to the U.S. and plan to submit the PMA for this system later this calendar year. In Q4, we continue to advance the development of artificial pancreas technology through a minority investment in DreaMed Diabetes, which included licensing their MD-Logic artificial pancreas algorithm. We also continue to make progress in our Diabetes Services and Solutions division with three business development announcements in Q4. First, we made a minority investment in Glooko, a developer of unified platform for diabetes management. Second, we announced a partnership with IBM Watson Health to develop a new generation of personalized diabetes management solutions. And third, we acquired Diabeter, the Netherlands-based diabetes clinic and research center, which has developed a truly unique, integrated care model for people with diabetes that we intend to expand globally over time. Taken together, these announcements signify that we're focused on transforming our diabetes group from a market-leading pump and sensor company into a holistic diabetes management company focused on making a real difference in outcomes and costs. Turning to the rest of the income statement. After adjusting for certain non-GAAP items mentioned earlier as well as the 10 basis point negative impact from foreign exchange, our Q4 operating margin was 29.6%, which included non-GAAP operational gross margin, SG&A and R&D of 70.8%, 32.6%, and 6.9%, respectively demonstrating the leverage we normally see in the fourth quarter in SG&A and R&D. Also included in the operating margin was net other income of $20 million, including net gains from our hedging program of $139 million. We hedged the majority of our operating results in developed market currencies to reduce volatility in our earnings from foreign exchange. In addition, a growing portion of our profits are unhedged, especially emerging market currencies, which can create some modest volatility in our earnings. Based on current exchange rates, we expect FY16 net other expense to be in the range of $215 million to $275 million, which includes an expected impact from the U.S. medical device tax of approximately $205 million. For Q1 FY16, we expect net other expense to be in the range of $65 million to $75 million based on current exchange rates. It is worth noting that in Q4 we hedged the majority of the expected FY16 legacy Covidien operating results in developed market currencies, consistent with Medtronic’s practice at recent market rates. Overall, we expect FY16 operating margins to be in the range of 28% to 29% on an as reported basis, which includes over 100 basis points of improvement or approximately 400 basis points of operating leverage related to cost synergies offset by an expected FX impact of approximately 70 basis points. The majority of the operating margin improvement will come in SG&A as a result of the realization of cost synergies from our Covidien acquisition as well as continued execution on legacy leverage initiatives of both Covidien and Medtronic. We would expect operating margins in the first half of the year to be below this range improving in the back half of the year as the foreign exchange headwinds lessen and cost synergies accelerate. Below the operating profit line, Q4 net interest expense was $186 million, a significant increase from prior quarters as we are now including the incremental interest expense from our December 2014 $17 billion bond offering used in Covidien acquisition. At the end of Q4, we had approximately $19.5 billion in cash and investments and $36.2 billion in debt. In Q1, we expect to retire $1 billion of maturing debt using existing cash. Based on current rates, we would expect FY16 net interest expense to be approximately $750 million, including approximately $210 million in Q1. Our non-GAAP nominal tax rate on a cash basis in Q4 was 15.4%. This was lower than expected due primarily to the finalization of profit mix by jurisdiction, which resulted in a favorable catch up as we reduced our annual tax rate. We would expect our FY16 non-GAAP nominal tax rate on the cash basis to be in the range of 16% to 18% as we expect to be at the higher end of the range until the presently expired U.S. R&D tax credit is reinstated. In Q4, we generated $1.7 billion in free cash flow. We remain committed to returning 50% of our free cash flow, excluding one-time items, to shareholders. In Q4, we repurchased $300 million of our common stock and paid $435 million in dividends. While a portion of our dividend paid in April was treated for U.S. tax purposes as a return of capital, our expectation is that we will increasingly accumulate profits at the Medtronic plc level and move over time toward a dividend that is treated completely as a return of their earnings. As of the end of Q4, we had remaining authorization to repurchase approximately 30 million shares. Fourth quarter average daily shares outstanding on a diluted basis were 1.441 billion shares. It is important to note that the cash we received from stock option redemptions, which was $172 million in Q4, will also continue to be used to repurchase shares on the open market to partially offset the dilutive impact. These share repurchases are incremental to our commitment to return 50% of our free cash flow to shareholders. For FY16, we would expect diluted weighted average shares outstanding to be in the range of approximately 1.433 billion to 1.437 billion shares, including approximately 1.439 million shares in Q1. Let me conclude by commenting on our initial fiscal year 2016 revenue outlook and earnings per share guidance. We believe that underlying operational revenue growth in the range 4% to 6%, plus incremental expected revenue from our Q1 extra selling week of a 100 to 150 basis points all on a comparable constant currency basis is reasonable for FY16. This operational revenue growth expectation is consistent with our stated baseline financial goal of consistently delivering mid-single-digit revenue growth. Our revenue outlook assumes that CVG, MITG, and RTG grow in the mid-single digits and diabetes grows in the upper-single to low-double digit range all on a comparable constant currency basis and including the expected benefit of the extra week. While we cannot predict the impact of currency movements to give you sense of the FX impact of the exchange rates were to remain similar to yesterday for the remainder of the fiscal year, then our FY16 revenue would be negatively affected by approximately $1.3 billion to $1.5 billion, including the negative $540 million to $600 million impact in Q1. Turning to guidance on the bottomline, we believe it is reasonable to model cash earnings per share in the range of $4.30 to $4.40, which includes an expected $0.40 to $0.50 negative foreign currency impact based on current exchange rates and approximately $300 million to $350 million of targeted value capture synergies from the Covidien acquisition. As you think about your FY16 models and quarterly gating, it is worth noting that this FX impact to earnings per share is $0.10 more negative than we estimate given on our Q3 earnings call as well as the fact that a higher percentage of the negative FX impact is in the first half of the year while more of the value capture synergies occurred later in the fiscal year. As in the past, my comments on guidance do not include any unusual charges or gains that might occur during the fiscal year. I will now turn it back over to Omar.

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

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

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

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

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

Yes, Mike, back to the -- on the foreign exchange, yes the majority of the $0.10 change from what we have previously estimated on the FX is primarily related to the fact that as we hedged Covidien in the fourth quarter, the rates were even lower than where we provide guidance originally on the $0.30 to $0.40. So yes, I mean, the fact is we did -- as get hit Covidien with our hedging program, but unfortunately by the time we got them in our hedging program, we were at probably -- the rates were similar to where we are at currently and that generated an additional loss from the standpoint of foreign exchange overall. So that’s the majority of the $0.10. So the rest of it is, there is some slight impact just from the standpoint that we don't hedge up to 100% of our even the Medtronic earnings, it’s more like 80%. And so there were still some impact on the foreign exchange getting bit worse since their earnings call previously even on the Medtronic and their hedge component, but the majority of it was locking in Covidien under contracts that basically increased the potential negative hit going forward. Now the good news is they are locked in. So we need further change as we go forward obviously which should be minimized as a result of that. As you indicated, as we look forward I think right now from what I have seen out there for some of the models, I think people have it probably little bit too much front-end loaded. There is going to be more based on the results as we go forward here. Foreign exchange is pretty much heavier hit in the first half of the year and assuming the rates stay the same will be less in the back half year. As you said the tax rate, they will be a little higher in the first until we get the R&D credit approved. And the value capture is going to occur as we go through the year. So that’s clearly going to be escalating and we will have more benefit on value capture in the back half of the year. So I think some of the models are need to be shifting probably a little bit more from the first half to the second half on earnings per share guidance.

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

Thanks, Mike.

Thanks, Mike.

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

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

Well, first, yes, we clearly are more flexibility as we have talked about several times with the increased access to overseas cash. And I think also our increased operating productivity that we will get from synergies is the factor that we have to consider. And so based on that, we are examining our overall capital allocation strategy and we are going to update you shortly on this in a pretty short timeframe. That’s I think all I can share at this point.

Okay. And then maybe just a follow-up on spine. I mean, this is a business that has ebbed and flowed over the past several quarters, but it does look like the overall end market has shown some signs of improvement at least over the past call it 12 months, so that’s not something in which Medtronic has necessarily participated. Can you maybe go into a little bit more detail on exactly what the turnaround plan is for spine? And at what point you start to think about more significant changes in that business either the senior management or sales level?

Well, number of points, first of all, from an overall perspective you are right the business itself, spine taking in isolation, hasn’t quite kept up with the way the markets have trended at least in the last 12 months I would say. But there is a short-term strategy to this, which is probably related to the timing of some of the new products which we will see it play through in the coming quarters here in the short-term. Then the longer-term aspect of this and that we have always said that our strategy in that space is really an integrated strategy that uses our overall capabilities in capital equipment and in surgical tools together with spine to give us the competitive advantage. And to that effect, we’ve reorganized our commercial teams at the regional management level, that’s already in placed. We’ve done that both in the U.S. and in Europe, and we are going to -- we have to see how that plays out. I think that’s really our strategy and we’re going to monitor how we deliver on these two aspects in the coming quarters very closely.

Okay. Thank you, David.

Thanks.

Thanks. Thanks, David.

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

Hi. Thanks for taking the question. Gary, as maybe if you could just go into a little bit more on the tax rate, you’d mentioned that during the quarter you had settled some related to Kyphon, I am not sure if that’s all of the IRS settlement that you were referring to at the Investor Day last year? And then also just on the guidance for the full year of 16% to 18%. Maybe just walk us through how you get there just given the fact that at least I was expecting the tax rate to be a little bit lower given some of the commentary that you had with Covidien post close with the rate dropping by about 200 basis points, not sure if it’s related to those settlement there with the IRS.

Yeah. Okay. With respect to, first of all, the Kyphon aspect and the charge we took in the quarter related to Kyphon. This relates to an issue we’ve had that was raised by the IRS related to our acquisition of Kyphon several years ago and which we used a combination of basically OUS cash and U.S. cash, the comparison there. There was a dispute on how much of that was taxable, et cetera. So as you recall, we used about $3.3 billion of OUS cash to do that transaction. What we’ve ended up agreeing with preliminary decision, the Board still has to approve this, but we agreed basically the settlement with the IRS where we ended up paying about $275 million to settle that and then interest on top of that gets you to the charge we took for the quarter overall. This is not the transfer pricing, put it for transfer pricing issue that we’ve talked about in some of the other previous meetings where which we’ll have a significant impact on the cash flow going forward, this is kind of more of a one-off item related to the acquisition. But it was a major outstanding issue we had with the IRS and we’re happy to get this when settled and move beyond it. As far as the tax rate going forward, 16% to 18%, that is basically in-line with what we’ve expected. If you went back and looked at Medtronic previously and remember this is all now on cash earning and so it’s actually a lower rate that you put in the amortization impact. So it -- you got to make sure you're looking at apples-to-apples when you look at this, Kristen. But, overall, I mean, Medtronic previously was kind of in -- we’ve been in that kind of 18% to 20% range, Covidien had been kind of in that 16% to 17% range. And then as we basically pull this all together, you leverage those and as we indicated is we’re going to get about 200 basis point drop as we come forward related to that. So as a result, we end up on that 16% to 18% range, I mean, is it 15.5% to 17.5%, I mean, that’s kind of how we get to the overall number. So it’s in line with what we've expected and been guiding towards overall. Obviously, there is still lot of moving parts with respect to the tax planning and strategies as we go forward, but we think that range is right in line with kind of what we saw here in Q4 as we went forward. It’s all depends on R&D tax credit, getting renewed, all those types of things. So as we go forward, we feel confident that that’s we are kind of in that range than we’ll have to see where that ultimately ends up, but that’s kind of our current expectation. It is in line with what we’ve been saying previously.

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

Well, the R&D tax credit, probably, has an impact of 50 basis points or so to the overall rate as far as where that is. So it’s not huge but it does have an impact on it. And it all depends obviously when they comes in and how much -- how it plays out as far as how much catch up you have when it occurs. On the transfer pricing issue at Puerto Rico, the cohort is the case. We’re waiting for the judge’s decision on that and that will be whenever the judge decides. I mean, it’s probably going to be towards -- closer towards end of FY or a fiscal year before we hear anything on that, but it’s all based on their timing.

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

So it’s all based on the timing.

Okay. Thanks very much.

Thanks, Kristen.

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

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

Yeah. I appreciate the question. Yeah. I feel pretty confident, you have got a first kind of reconcile though the fourth quarter, it was very strong for surgical solutions, but we did have some portfolio moves in that. If you pull that out, we’re more in the 7% growth range organically, which is still very strong versus market? And we have noticed a little extra effort by our chief competitor, but we have a lot of confidence in our plan as well. So I feel that we can continue with that above market growth. We’ve got strong momentum as you’ve already referenced. We have what I believe to be very differentiated technologies both in advance stapling, as well as advanced energy and we continue to launch products in both of those areas. Matter of fact if I look across the surgical business, somewhere in the neighborhood of 30 products that we’re going to launch in FY16 and that will drive somewhere in the neighborhood of $60 million to $70 million of revenue, just in those products launched in FY16. So the momentum is there. We’re not getting extra days on our approach there, just because we've been winning we’re very intense in launching products that matter and executing policy when we do.

Okay. And then, Omar, I guess, for you. You’ve been very focused on in this three-prong strategy. And I guess, as I think about certain business lines within patient monitoring and recovery, they seem little less strategic or perhaps not fitting with every piece of your strategy? Do you see these businesses as it kind of important to Medtronic strategy and can you comment on sort of the likelihood of targeted divestitures now that you’ve got the deal at least to close?

Look, the way we look at these businesses is, first, are they in line with our mission or not. And second, if they are and in this situation the way we define that is that these businesses collectively impact patient outcomes through elevating pain restoring health to extending life. Second thing we look at is there room to improve that further, is there technology capability there that can help us drive the outcomes and better outcomes in a more meaningful way, then we look at, is the market space is attractive, can we grow it and is our key capable of delivering. And then finally, we look at that in combination with everything else that we have from a broad value-based healthcare perspective. So within that we led this thing play out, I mean, this is we just beginning to put this new structure together with that kind of thinking in the business groups and then overtime we’ll evaluate what fits and we are constantly looking at our overall portfolio and we do divestitures of certain items that we feel does not fit into that overall strategy. So we’ll look at these businesses just like any other business in that context. But certainly, the main question are they in line with our mission or not, can they make a difference for technology, we think, yes.

Thanks, David.

Thank you very much.

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

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

Good morning, Bob.

Good morning.

So, first question for, Gary, just on 2016 guidance as it relates to free cash flow? Can you give us a sense as to what you expect for 2016 global free cash flow? And then maybe also an update on the percentage of that free cash flow that you think you’ll have access to? I think from some of your slides recently suggested between $7 billion and $7.5 billion of free cash flow in ’16, but just wanted to confirm that?

No, I mean, I think the free cash flow, if you just take and even use our fourth quarter free cash flow here of a $1.7 billion and kind of talk, is that is going to annualize that. Your time more in that $6.8 billion to $7 billion range is kind of what we’ve been talking about overall. Now the reality is however foreign exchange has a big impact in that free cash flow also. And so just like the kind of our annual rate overall that’s kind of where we’d be at and you’d have as back to Omar’s point earlier, you have some synergies coming into play, the cost of value capture synergies are benefited. But FX is going to be a headwind on cash flow also. So my guess is right now our numbers are probably clearly was based on FX rates, are clearly below $7 billion, probably closer to between $6.5 billion and $7 billion with all the moving parts are going on just because the foreign exchange. And as we indicated, we do think right now that based on those rates, we’re probably going to be closer to somewhere around 60% of that cash is accessible in the FY16 timeframe would be our current assumption based on the numbers that we see rolling in. And that’s why our 50% commitment to return cash to shareholders, obviously we have much more flexibility around that with that 60% kind of mix that we’re expecting at this point. The other thing that’s one on Bob, that’s all based in kind of what I’d call on operating basis, including the FX piece. There obviously are still some one-time items that do affect cash flow and that free cash flow I just talked about is really coming from our operating results and that’s where we based all of our assumptions on. But I do have to think about the fact that there are going to be -- so there will be some additional restructuring and things like that and capital investments we’re going to have to make as we go forward with Covidien acquisition. So that’s all taken into account as we kind of think through our overall free cash flow here for the current year. But in general, I would use right now -- I think it’s less than $7 billion that we’ve previously kind of been talking about. You’re probably down more in the $6.5 billion to $7 billion just based on what’s going on with foreign exchange.

Great. That's very helpful. Thank you. And then one also for Omar, now that you’ve had Covidien for obviously just a few months, but we’d love to hear your updated thoughts on where that you think you can leverage that acquisition beyond just the cost synergies. And I'm thinking specifically about M&A and leveraging your access to your global cash flow and leveraging your low tax rate. And so just wanted to kind of get an update on where that you think you can really leverages as Covidien transaction and the degree to which that helps you with an M&A strategy going forward?

Well, the first thing is that beyond the cost synergies, I just want to remind you that there are two very specific areas that we’ve called out, in drug coated balloon and in neurovascular where we’re getting immediate benefit and we expect some growth acceleration as a result of that. Beyond that, we've begun to explore at a pretty much grassroots levels of engineers, sort of other opportunities where we can leverage each other's technologies. Now from an M&A perspective, which is using that access to that extra -- using extra access we have to that cash, we stated that we’re going to look at early technologies in the U.S. primarily where there maybe opportunities which we haven't been able to participate into the degree that we’d like to, to create a long-term technology pipeline of early stage technologies that we think can make a difference. We’ve begun to look at it. We’ve actually already -- in the interior for example, we’re already kind of executed on some of these and we’ve got a good pipeline of other activities that we’re looking at closely. But beyond that, the Covidien or the MITG business has had a history of doing acquisitions to supplement their business with regularity and we’ll certainly continue to encourage that process and in fact focus it even more according to the way in which we’ve organized overall business. So the M&A activity from us, certainly from a technology perspective is very sort of close to what we’re focusing on. Bigger deals, obviously opportunistically, we’ll look at it, but that’s a matter of our overall financial bandwidth and our management bandwidth. So that’s the way in which we’re approaching this.

Great. Thank you.

Thanks.

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

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

Well, number of points. First of all, our confidence and our belief and really share it if you like, in the long-term opportunity in emerging markets is completely unchanged and we’re not tolerating on that. That’s just matter of fact. The way in which we approach that market to tap into that opportunity, particularly in the short-term, actually it’s been more complex and more difficult than we first envisaged. And so the growth rate has been slower than what certainly we had originally thought. I think having said that there is certainly, fairly respectable double-digit growth that we can expect reliably, but we want that to be higher. And we’re looking at methods which we continually actually looking at methods which we can do that sooner rather than later. And as we’re learning, channel optimization is a key factor, partnerships with government is a key factor. And finally, referral chain development is something that we need to approach with far greater scale than we’re had before. These are all important factors. As far as Covidien goes, there are number of things that make us optimistic that this combination will help us. One, there is a complementary strength in certain markets. In the Middle East and Latin America, where between Covidien and Medtronic, we were complementary strength. As a result, we now have our emerging market profile diversify between China, Middle East, and Africa, and Latin America as a big three kind of centers within the emerging markets while previously on a standalone Medtronic basis it was dramatic China. So that gives us a little bit diversity in this markets that we didn’t have. And finally as we’ve talked about before, simply the scale that we now will allow us to penetrate more geographies much more efficiently than we could before and just adding more sales team around the world either in underpenetrated regions within countries or in brand new countries will have to contribute. So we haven’t pieced all of that stuff together yet, then we are in the process of prioritizing some of those investments. And again, we are trying to accelerate the growth profile in emerging markets with actually pretty great sense of urgency.

Thanks for that. And I guess on your synergies you talked about at least 850 million, again in the past you referenced some opportunities to further that number through some network consolidation in your plans. When you think you will be in a position to give us quantifiable update on what you think the synergies could be between the two companies in combination?

I think number of things. First of all, as we go forward, this is going to reflect in our overall productivity. I think that’s the best way to do it, although we will keep track of our value capture efforts with very detailed and granular programs. I think at some point new efforts that are results of the combination versus efforts that were already in place that get accelerated gets very kind of mixed up. And since we’re trying to divide those things up, we’re going to sort of commit to certain levels of productivity that we get out of different line items in our P&L. And that’s the way to do it. We feel good about a long-term productivity that we can get out of this that the value capture, the synergy sort of effort is going to eventually morph into a long-term productivity benefit, extending way beyond the three years that we projected. I think that’s the correct way to look at it, that this becomes a productivity engine of significant magnitude that we didn’t have before and to some extent, we are pretty excited about.

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

Our next question comes from the line of Larry Biegelsen of Wells Fargo.

Good morning. Thanks for taking the question and congrats on the strong quarter. Hey Gary, one clarification. It’s still not clear to me, is the R&D tax credit assumed in the guidance or not assumed?

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

Okay. That’s helpful.

It’s basically assumed in there, yes.

All right. And then for my real questions. First to Gary, the guidance, just bear with me on some numbers here. The guidance implies constant currency EPS growth of about 5.6% to 10% and your sales guidance is about 5% to 7.5%, if you include the extra week. So therefore, the EPS guidance at the low end of the range doesn’t imply any leverage. Another way of looking at is the EPS guidance is implying the 4% to 6% underlying sales growth, adding the benefit of the extra week and then adding the 200 to 400 basis points of EPS leverage, that gets you to 7% and 11.5% constant currency EPS growth. And as I said you are guiding constant currency EPS growth of 5.6% to 10%. So, sorry for the long-winded questions, but just curious to know why the EPS guidance appears conservative and I just have one product question? Thanks.

Well. I can’t go through all the number you just laid out, Larry, because I don’t have those in my mind. Let me look at it from the way. You are right. Our revenue growth overall as we indicated is expected to grow, plus the 1% to 1.5% related to the extra week. So just taking the midpoint of the range of 5%, you are seeing somewhere around 6%, 6.5% revenue growth. What do we indicated on the comments overall? From the operating margin perspective as we looked at it, we know from the standpoint of what we are driving there as far as the 100 basis point of improvement on the operating margin as we go forward, we are driving about 400 basis points of leverage and the operating income line on a operational basis before foreign exchange. And so the point is yes. We are getting that 400 basis points of leverage that we talked about in the calculation. That’s offset, that’s measurably impacted by foreign exchange and so it’s all going to get back. The foreign exchange is offsetting the majority of the overall operating leverage that we’ve talked about and that we are trying to drive towards. So the rest of numbers get a little bit more difficult as we think about the number of shares that had been issued and in the various tax rates are going on between various years as we go forward. But the guidance is kind of in line with what we were expecting from the overall standpoint of earnings per share growing. Again, as we talked about that 200 to 400 basis points faster than the revenue but unfortunately with $0.40 to $0.50 of FX hit, you take the 430 to 440 and add $0.40 to $0.50 to that, I think you are going to get to the point that it is on a constant currency basis is significant leverage over and above the revenue growth.

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

So on LINQ overall, you have to think about it in terms of its three indications for use of syncope, cryptogenic stroke and atrial fibrillation. On the syncope side, we are probably in the low to mid 20s, penetrated 0.22%. Again, I’m just talking about the U.S. and Europe because that really is the place, currently where it is generating the very significant revenues and we’re still building up reimbursement in other places around the world. In cryptogenic stroke, it's more like 5% penetrated. And then when you look at atrial fibrillation, it’s more like 1% to 2% penetrated. So there's still plenty of growth opportunity left obviously in the product. Now, we don’t expect competitors who are looking, who have basic capabilities in electronics, are going to looking at this and ignore it. So, we expect that at some point, we are going to see competitors but frankly, we haven't seen anything yet. I think we're now at a point, as we look at our five-year plans where we think this will be a billion dollar contributor to the overall product company in terms of just its diagnostic sales. And as Omar pointed out, when you look at the syncope patients, you put one of these devices and roughly 8% to 9% of those patients will end up with the pacemaker within a year and by the time you get out to year three, it's more like 20%. So it is really the source of the Low Power growth that we have seen in the United States in terms of growth in units. So, we think it is an important product line in terms of what it does for us on product sales but it also provide us now with service revenue opportunity longer term to monitor patients. And so we will be updating that as our plans develop.

Thank you.

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

Our final question will comes from the line of Bruce Nudell of Credit Suisse.

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

Just to be clear, the 30% number is the heart valve therapies numbers. So it’s a combination of our transcatheter valves and surgical valves. So actually the TAVI growth in the United States is faster than the international growth.

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

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

Okay. That’s helpful. And then just one follow-up on the [indiscernible] spacer launch you talked about this summer. Can you talk about when you will have reimbursement in place? It’s sort of when you expect that product to be fully launched and do you see that more of a source of unit share gains, or is the opportunity therefore a more premium pricing?

So, I just didn’t want to finish up with the -- we don't do any meaningful stocking of transcatheter out in the U.S. just to finish your first question. On the trans continuous pacing product line, obviously, we are talking about O-U.S. now and Europe with the CE Mark that we now have. And there is no separate reimbursement in the sense of this product line obtaining different reimbursement in Europe. So it basically is being targeted at a specific set of patients who might be at risk for infection and single chamber of patient population. Although, you do see opportunities this year, a makeshift towards more single chamber pacing because of the benefit this product line offers in terms of a lower expected complication rates. So, we think it’s an important breakthrough but you will see us to be deliberate in the rollout of this product. It requires very different implant technique than what the standard pacemaker has and so you will see us doing very significant training and education as we roll this out and that will gage some of the speed with which its grows.

Okay. Thank you.

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

Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.