Summary of Medtronic (MDT) May 22, 2012 Earnings Conference Call Transcript (Q4/2012)

Overview of company's operations

3/4 of Medtronic's business grew a combined 8% The remainder, the U.S. Implantable Cardiac Device (ICD) and U.S. Spine businesses, declined 10%. Both of these business have shown signs of stabilization at the end of the fiscal year.

Medtronic grew operating margins faster than revenue by obtaining some SG&A and R&D leverage while holding gross margins relatively flat.

Medtronic's CEO sees 3 main areas of focus:

1. Acclerating globalization. The company's fiscal year 2012 international revenue grew 7 percent and it had 20 percent growth in emerging markets. It implemented a global reorganization last fall and the international team is working well. There is a lot of opportunity in emerging markets to expand the use of the company's existing products. It is entering the value segment more aggressively and it is reducing product costs through its COGS reduction program. It intends to grow its emerging markets revenue from 10 percent of total revenue to 20 percent in the coming years. It expects to have different tiered product lines so that it can generate growth in developing markets.
   

2. Optimizing innovation. Medtronic is working toward improving its R&D productivity and saw some early progress getting more growth with the same levels of R&D and M&A activity. It is reallocating resources to drive growth in emerging markets. It also eliminated programs that were not consistent with its business strategy. It evaluated all programs to determine whether they bring economic value to the customer and is discussing programs with major payors that will translate clinical value into economic value. For instance, it is partnering with the government of Lombardy in Italy on outcomes research and MedTech efficiency. It is also discussing a chronic disease management partnership with Aetna on diabetes and heart failure. Both partners have a lot of patient outcome data.
   
3. Improving execution. Medtronic has made changes to its business units to ensure focus and efficiency. Management is addressing issues more proactively and decisively. The improvement in execution are showing in the 3 percent revenue growth for fiscal year 2012. In most businesses, it maintained or grew market share throughout the year.

Business segments

In the ICD business, total high power replacement share was flat, as growth in high-power replacement share offset modest declines in its Cardiac Resynchronization Therapy (CRT-D) initial implant share. In the CRT-D market, a competitor is trialing a product, which has caused a loss of some market share. Medtronic expects to improve or maintain market share going forward, and once the competitor trial is over, the market share should return to normal. The Protecta ICD and Sprint Quattro are still performing well in terms of both market share and pricing. The U.S market is stabilizing as inventory levels decline and Medtronic expects to see some improvement in the fiscal year 2013.

In Pacing, Medtronic is continuing to gain significant market share in the U.S. and internationally due to the strength of its MRI devices. Its global Pacing share is at its highest point in 4 years. The AF solutions business had 20 percent growth and it is gaining market share in this market.

In Coronary, the results from the U.S. launch of Resolute Integrity have been impressive and it is in only 50 percent of the accounts it would like to be in. The results have sequentially doubled Medtronic's U.S. drug-eluting stent (DES) revenue and market share, and 150 basis points of DES market share internationally. Medtronic is using field personnel from across its Cardiac and Vascular Group (CVG) organization to accelerate and expand the Resolute Integrity launch. Because of its deliverability, unique diabetes indication and long-term clinical performance, Resolute Intergrity was strongly received during Medtronic's recent U.S. launch. With the launch of Resolute Integrity, it can now offer a comprehensive set of leading technologies across the Cardiac and Vascular space. Medtronic plans to continue to expand its Resolute Integrity in the United States and will be launching it in Japan. It expects to become the global market share leader in coronary stents in fiscal year 2013.

In renal denervation, Medronic is making major investments in product pipeline, clinical evidence and market development. In Q4, its SYMPLICITY system was approved in Canada, allowing it to expand this therapy beyond Western Europe. It expects U.S. approval in fiscal year 2015. It expects renal denervation revenue to nearly double in fiscal year 2013. It agrees a lot of companies are trying to enter this market, but that highlights the potential in the market, and it feels good about its competitive position.

This quarter, data from an advanced study showed positive clinical outcomes and low complication rates with its CoreValve system. It is gaining share in international markets, and it is the market leader in transfemoral, the largest Transcatheter Aortic Valve Implantation (TAVI) segment. The larger 31-millimeter CoreValve is performing well, and it brings TAVI technology to a previously untreatable patient population. It will be introducing the next generation TAVI system later this year. The U.S. pivotal trial is progressing well and the high-risk arm should be fully enrolled this summer.

In endovascular and peripheral, the Endurant Abdominal Stent Graft was launched in Japan in Q4 is doing well. The next-generation stent graft, the Endurant II, is performing well in Europe, and Medtronic recently received FDA approval for U.S. launch. The drug-eluting balloons have double digit growth in international markets. It intends to entroll 1,500 patients in a global DEB study that will eventually include more than 80 sites in over 30 countries. It began enrollment in its IN.PACT SFA II pivotal study in late April.

In the radioisotope thermal generator (RTG) business, the RestoreSensor spinal stimulator gained more than 6 points of sequential U.S. share gain. It contributed to a doubling of Medtronic's neuromodulation business growth rate in Q4 versus Q3.

Medtronic's Surgical Technologies business grew 25 percent for the quarter. The new Advanced Energy business strongly contributed to that growth. But excluding Advanced Energy, the surgical technoloies business still grew 14 percent. Capital equipment sales from ENT and navigation together grew 17 percent.

The U.S. Spine business has three parts: balloon kyphoplasty procedure (BKP), INFUSE and core. BKP business was flat, which was an improvement from the 10 quarters of decline. U.S. INFUSE declined 26%, but was relatively stable sequentially. There will be uncertainty as to INFUSE results until the Yale study results are known. Those results are expected in Q2. TheYale study should address any controversies concerning the safety and efficacy of INFUSE. U.S. Department of Justice closed its investigation of INFUSE. Finally, the U.S. core business, including Other Biologics, declined 7% and constituted 40% of the decline in U.S. Spine. The U.S. core market has flat procedural growth and single-digit pricing declines. Medtronic is changing its strategy on its core business by investing in local product development in locations all over the world, using its technologies more efficiently in the neuroscience space and exhibiting economic value in its commercial messaging of existing products and new product selection. It expects the spine market to decline slightly in fiscal year 2013.

Financials

For the full year, constant currency revenue growth was 3 percent versus 1 percent in 2011. For Q4, revenue increased by 3 percent, or 4 percent on a constant currency basis. When U.S. Spine is excluded, the remaining business (87%) grew 7% versus 4% last quarter. In fiscal year 2013, it expects 2 to 4 percent revenue growth.

International revenue for the quarter increased 7% and finished strong for the year. There was growth in excess of 20% in Central and Eastern Europe, Greater China and India for the quarter. Emergency markets constitutes 11 percent of the company's total sales mix. Growth in Western Europe and Canada was 4 percent, while growth in the United States was 2 percent.


Gross margins were 75.6%, or 75.9 after a negative foreign exchange impact. In fiscal year 2013, Medtronic is starting a new product cost-reduction program with a goal of reducing cost of goods sold by more than $1 billion over the next 5 years. It expects gross margins in the range of 75.5% to 76% on an operational basis in fiscal year 2013. The pull out of Physio-Control only gave Medtronic a slight boost on margin.


R&D spending was 9.1 percent of revenue, and Medtronic expects it to be 9 percent of revenue in fiscal year 2013.

SG&E was 34 percent of sales, and was higher than projected because Medtronic took advantage of some compelling opportunities. It could see that, through the quarter, new products were improving revenue and market share growth. At the same time, it had a reduction in tax expense as a result of a financing strategy. Accordingly, it accelerated some planned spending from fiscal year 2013.

Medtronic expects the MedTech tax to have a 12-month impact of about $120 million to $150 million

Earnings increased by 7 percent and diluted earnings per share of $.99 increased by 10 percent. It expects earnings per share in fiscal year 2013 to be between $3.62 to $3.70, which be a growth rate of implies FY '13 earnings per share growth of 5% to 7%. The current Q1 consensus of earnings per share growth of 10%, is outside of its issued guidance. The 2013 guidance assumes Europe will stay the same and the United States will be flat or slightly higher.

Medtronic generated $4 billion in free cash flow in fiscal year 2012, 60 to 65% of which was generated outside of the United States. It spent $2.5 billion in share buybacks and dividends. It intends to return 50% of free cash flow to shareholders, which will still give it the flexibility to spend money to achieve sustainable growth. Since the money has to come from the United States, it must maintain some debt. At the moment, the debt is at relatively low levels. It is working on shifting expenses outside of the United States, so some of non-United States cash flow can pay for the expenses.

The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:

http://seekingalpha.com/article/609101-medtronic-management-discusses-q4-2012-results-earnings-call-transcript