Medtronic, Inc. (MDT)
Q1 2009 Earnings Conference Call Transcript
August 19, 2008 7:00 AM CT

Executives

Jeff Warren - Vice President, Investor Relations
William A. Hawkins - President and Chief Executive Officer
Gary Ellis – Senior Vice President and Chief Financial Officer

Analysts

Tao Levy – Deutsche Bank
Matthew Dodds – Citigroup
Rick Wise – Leerink Swann
Mike Weinstein – JP Morgan
Larry Keusch – Goldman Sachs
Larry Biegelsen – Wachovia Capital Markets LLC
Michael Jungling - Merrill Lynch & Co.
Tim Lee – Piper Jaffray & Co.

Presentation

Operator

Good morning. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Medtronic first 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. If you would like to ask a question during this time simply press “*” then the number “1” on your telephone keypad. If you would like to withdraw your question press the “#” key. I will now turn the call over to Mr. Jeff Warren, Vice President, Investor Relations. Please go ahead, sir.

Jeff Warren

Thanks Dennis. Good morning and welcome to Medtronic’s first quarter conference call and webcast. During the next hour, Bill Hawkins, Medtronic’s President and Chief Executive Officer, and Gary Ellis, Chief Financial Officer, will provide comments on the results of our first quarter which ended July 25, 2008. After our prepared remarks, we will be happy to take your questions.

A few logistical comments; this call is being webcast via our website www.medtronic.com. Our press release, earnings statement, balance sheet, cash flow, revenue by business summaries, non-GAAP to GAAP reconciliations, as well as a transcript of the prepared remarks will be posted on our website. The transcript will remain available on our website until our next earnings call.

Today''s commentary should be considered and evaluated in light of the important disclosures and reconciliations contained within our press release as filed with the Securities and Exchange Commission. Please telephone Medtronic Investor Relations or Corporate Communications if you''re unable to access the press release or the transcript.

Today’s webcast includes statements regarding Medtronic’s anticipated financial results, market growth, acquisitions, divestitures, product acceptance, and regulatory approvals, as well as other forward looking statements based on management’s current expectations. It’s important to note that our actual results may differ materially from those anticipated.

Information on factors that could cause actual results to differ materially from these forward looking statements is contained in Medtronic’s Form 10-K for the year ended April 25, 2008, filed with the Securities and Exchange Commission. We encourage you to review this carefully. All statements are made as of today’s date and we undertake no duty to update the information provided in this call.

Unless we say otherwise, the comparisons we make today will be on an as reported basis, not on a constant currency basis, and references to quarterly results increasing or decreasing are in comparison to the first quarter of fiscal year 2008. With that, I’m now pleased to turn the call over to Medtronic President and Chief Executive Officer, Bill Hawkins.

William A. Hawkins

Good morning and thank you Jeff. Q1 was another strong quarter, further demonstrating our commitment to deliver market leading performance. Revenue of $3,706,000,000 increased 19%. First quarter earnings and diluted earnings per share on a non-GAAP basis were $813 million and $0.72 respectively.

Significant accomplishments for the quarter included the following; a double digit revenue growth in six of our seven businesses including Spine at 33%, Cardiovascular at 30%, Neuromodulation at 20%, Surgical Technologies at 17% and Diabetes at 12%. We made over $760 million in ICD revenue, $175 million in DES revenue, revenue growth outside the US of 24% and, on a non-GAAP basis, operating income growth of 29%, which reflected improved margins from our initiatives to drive operating leverage.

In evaluating our results this quarter there are several important factors to keep in mind. First, the diversity of our businesses was once again key to driving market leading performance. Second, given the number of different markets we operate in, at any given time there will be variability around their underlying performance with some markets showing relative strength and others showing relative weakness. However, on the whole, the broad med tech market continues to show solid growth particularly when compared to other segments of the economy that are not as insulated from current macroeconomic pressures. Finally, our results this quarter clearly demonstrate execution on the four initiatives we outlined at our investor meeting in June. Collectively, these initiatives form the ONE Medtronic approach. First, driving sustainable long term growth of 9% to 11% through innovation, second, applying a strong focus on improving operating margins by 300 to 400 basis points, third, delivering earnings per share growth of 11% to14% and ensuring disciplined capital allocation by returning a minimum of 40% to 50% of our free cash flow to shareholders each year, and fourth, aligning the organization for relentless and consistent execution.

We will expand on our performance this quarter against each of these broad initiatives during the remainder of the call, beginning with revenue growth. There were two primary drivers for overall revenue growth during the quarter. The first driver was our overall product performance.