Ladies and gentlemen, thank you for standing by and welcome to the Medtronic’s Second Quarter Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the conference over to Mr. Weispfenning. Please go ahead..

Great. Thank you, Crystal. 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 Karen Parkhill, Medtronic Chief Financial Officer will provide comments on the results of our fiscal year 2017 second quarter, which ended on October 28, 2016. After our prepared remarks, we will be happy to take your questions. First, a few logistical comments.

Earlier this morning, we issued a press release containing our financial statements and the revenue by division summary. We also issued an earnings presentation that provides additional details on our performance and outlook.

You should note that many 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 and other filings that we make with the SEC and we do not undertake to update any forward-looking statements.

In addition, the reconciliations of any non-GAAP financial measures are available on our website investorrelations.medtronics.com.

Unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the second quarter of fiscal year 2016 and all year-over-year growth rates and ranges are given on a constant currency basis, which adjusts for the effective foreign currency.

Other than is noted, our EPS growth and guidance does not include any charges or gains that would be recorded as non-GAAP adjustments to earnings during the fiscal year. These adjustment details can be found in the reconciliation tables included with our earnings press release.

With that, I am now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Omar Ishrak.

Omar?.

Good morning and thank you, Ryan and thank you to everyone for joining us. This morning, we reported second quarter revenue of $7.3 billion, representing growth of 3%. Q2 non-GAAP operating profit grew 9% and non-GAAP diluted earnings per share were $1.12 growing at 15% and representing EPS leverage of 1,120 basis points.

Q2 revenue was disappointing and did not meet our expectations. We faced issues that affected our growth, including slower than expected revenue as we await new product introductions. Despite this revenue shortfall, we produced strong improvement in operating margins and double-digit earnings per share growth.

While some of the challenges that had an impact on revenue in Q2 could persist over the coming quarters, we remain confident in our ability to deliver mid single-digit revenue growth and double-digit EPS growth not only in our current fiscal year, but on a sustained basis into the future.

Now normally, the diversity of our revenue base overcomes any quarterly challenges. However, there were enough unexpected and unrelated issues in Q2 to collectively affect our revenue and each of our growth factors.

Our new therapies growth vector, which contributed approximately 195 basis points to our total company growth, not only just fell below our goal of 200 to 250 basis points, but was well below our trend and expectations with the largest impacts from CVG and diabetes.

In CVG, revenue growth was 3%, below our targeted high-end of the mid single-digit range and meaningfully below what we believe this business should be able to sustain.

In our CRHF division, strong growth contributions from diagnostics, atrial fibrillation and our recently acquired HeartWare LVAD business were offset by weakness in our core cardiac rhythm implantables business, which declined in the low single-digits. While we continue to take share in the U.S.

ICD market, the market itself declined in the mid single-digits driven by high single-digit market declines in high-power device replacements.

In the UK, our implantables revenue declined in the mid-teens as the National Health Service is changing its procurement model to limit bulk purchases causing a temporary disruption to normal buying patterns of the local products. We expect these pressures in CRHF to continue through the fiscal year.

Our CSH division was affected by transient market share losses due to the timing of new product cycles. For example, in the fast growing TAVR market, we lacked until recently, a large sized version of our Evolut R platform. And in drug eluting stents, our new Resolute Onyx DES is not yet available in the U.S.

and Japan driving declines in those markets to competitive DES products. However, at the end of this quarter, we did receive FDA approval for Evolut R XL, which we expect to drive U.S. growth in the back half of our fiscal year. In addition, we expect the introduction of Evolut Pro and Resolute Onyx in the U.S.

around fiscal year end and Resolute Onyx in Japan in FY ‘18. In our APV division, solid mid single-digit growth was driven by our IN.PACT Admiral drug-coated balloons, which continues to lead the market and drive mid-20s growth. We expect this momentum to continue in the second half of our fiscal year.

Within our Diabetes Group, we were pleased with the earlier than expected FDA approval of the MiniMed 670G, which not only represents revolutionary technology toward a long-awaited closed loop insulin pump system, but also has been received with strong enthusiasm amongst the diabetes community.

However, the earlier than expected approval has created a bigger than expected gap between product approval and shipment. As a result, we created a priority access program for the 630G, which offers upgrade priority to the 670G when launched. We are seeing strong demand for this program primarily from early adopters.

We do expect the majority of customers to wait to purchase the 670G once it launches in the spring of 2017. In addition to this dynamic which is driving lower than expected pump and consumable sales, a portion of our 630G revenue is now deferred until receipt of the upgrade.

Going forward, we expect some improved revenue growth for the remainder of this fiscal year and we expect diabetes to ultimately return to double-digit growth once the 670G is fully on the market next fiscal year.

Our minimally invasive therapies group grew 4% in Q2, consistent with our goal of mid single-digit revenue growth primarily driven by our Open-to-MIS growth driver, including strong product sales of our recently launched Valleylab FT10 energy platform and continued performance of our endostapling specialty reloads.

Surgical solutions came in slightly below our expectations primarily driven by the impact of competitive reprocessing of our advanced energy vessel sealing disposables in the U.S. We are confident in our ongoing strategies and new product launches that are designed to address this headwind.

Looking ahead, MITG expects to launch more than 15 new products in the second half of the fiscal year to drive growth, including a new powered stapling platform called Signia and new vessel sealing enhancements. This pipeline gives us confidence that MITG can continue to grow in the mid single-digits in the back half of the fiscal year.

Next, our Restorative Therapies Group grew 3% this quarter and our spine division continued to show improvement. Overall, spine growth was 1%, our strongest growth seven quarters as we gained global spine share. Our U.S.

spine business grew 3% driven by continued adoption of infuse and strong adoption of our speed to scale launches and surgical synergy strategy, resulting in share gains along with sales of our navigation and imaging equipment in neurosurgery. RTG did suffer from a voluntary recall of certain neurovascular products which affected revenue.

Some of these products will remain off the market in certain geographies for a period of time, but the most substantial impact of the recall is behind this as we bought back existing distributor inventory in Q2. Across all of our groups, our product pipeline remains robust.

We have important new growth catalysts that we expect to lead to improved second half growth. Some of these products have already been launched and others are coming to the market in the coming months.

We are confident we can drive sustainable growth of our new therapies growth vector and expect to be well within our 200 to 350 basis point goal in the back half of the year and over the longer term.

Next, let’s turn to emerging markets, which grew 10% and contributed approximately 120 basis points to our total company growth slightly below our goal of 150 to 200 basis points.

The primary driver was a shortfall in the Middle East, where our revenue declined in the mid single-digits as governments are dealing with an increased deficit, affected by declining oil prices.

In Saudi Arabia, the largest market in the region and where we have a strong market leadership position, our overall business declined by approximately 40%, mostly impacting our CRHF, surgical solutions and spine divisions.

We expect continued pressure in the Middle East for the remainder of the year, but we also believe that the basic demand for our critical life saving therapies will eventually rebound strongly. On the positive side, our businesses in South Asia, ASEAN, Eastern Europe and Latin America all grew in the mid teens or higher.

China, our largest emerging market, grew 11%, with a double digit growth in MITG and diabetes and high single-digit growth in CVG and RTG. In South Asia, of which India is the largest market, we grew again in the low-20s, with strong growth coming from key tender wins in MITG.

In ASEAN, growth was broad based, with double digit growth in Thailand, Singapore, Vietnam, Indonesia and the Philippines. In Eastern Europe, we grew over 20% in Russia as a result of strong momentum in CVG and MITG.

Latin America also had strong double-digit growth in Brazil, Columbia, Mexico, Chile and Argentina, driven in part by a new tender wins and continued channel optimization efforts.

We expect current emerging market performance levels to be sustained in the back half of the year and continued to believe strongly as the penetration of existing therapies into emerging markets represents the single largest opportunity in med tech over the long-term.

Turning now to our third growth factor, services and solutions, which contributed 20 basis points to Medtronic growth. While this overall result was below our goal of 40 basis points to 60 basis points, services and solutions continues to achieve solid revenue growth, mostly from CVG-related offerings.

We expect to further improve our growth contribution as new models are created and expanded across all our regions. We continued to see success in our hospital solutions business, through which we provide expertise in creating operational efficiency in both cath labs and operating rooms.

We are also continuing to grow our chronic care models, including Diabeter for type 1 diabetes and NOK for morbid obesity, by pursuing global expansion opportunities. And finally, we formally launched our orthopedic solutions business earlier this month, a comprehensive program to help providers meet their CGR requirements in the U.S.

Before I turn the call over to Karen, let me reiterate that we are disappointed with our Q2 performance. That said, we also believe that these headwind events were largely temper in nature and we remain confident in our ability to deliver mid single-digit revenue growth and double digit EPS growth for the full year.

What should not be lost in the discussion is that, despite revenue challenges this quarter, our organization delivered strong improvements in operating margins, including improvements in our gross margin and SG&A and met our goal of delivering double digit EPS growth.

Karen will now take you through a more detailed look at our second quarter financial results.

Karen?.

Thank you, Omar. Our second quarter revenue of $7.345 billion increased 4% as reported or 3% on a constant currency basis. Foreign currency had a positive $50 million impact on second quarter revenue. And acquisitions and divestitures contributed approximately 120 basis points net to revenue growth.

GAAP diluted earnings per share were $0.80, non-GAAP was $1.12. After adjusting for the $0.06 impact from foreign currency, non-GAAP diluted EPS grew 15%. Strong operating performance helped to offset the revenue shortfall in the quarter.

And the majority of the tax benefit during the quarter was offset by a worse than expected impact of foreign exchange on earnings.

In addition to the $385 million adjustment for amortization expense, non-GAAP adjustments to earnings on an after tax basis were a $24 million charge for the HeartWare acquisition fair market value inventory step-up and a $35 million restructuring charge, and a $2 million charge for acquisition related items, both stemming mostly from our continued integration of Covidien, along with expenses related to our acquisition of, HeartWare offset by a net gain from the adjustments of our contingent consideration on prior acquisitions.

Our operating margin for the quarter was 28.9% on a constant currency basis, representing a strong 150 basis point year-over-year improvement. Efficiencies in both the gross margin and SG&A largely a result of execution on our Covidien synergies drove the increase.

We remain on track to deliver $225 million to $250 million of synergy savings in the fiscal year and expect to deliver on our commitment of $850 million of savings by the end of the fiscal year ‘18.

Our efforts to realize the Covidien synergies are also serving as enablers to other leverage programs designed to deliver additional long-term margin expansion.

Net other expense was $89 million compared to $57 million in the prior year, reflecting about $90 million in reduced foreign exchange gains versus the prior year, primarily due to our hedging program, partially offset by a $48 million reduction in the U.S. medical device tax.

While we hedge the majority of our operating results in developed market currencies to reduce earnings volatility from foreign exchange, FX can create modest volatility to the P&L above the operating margin line.

[Technical Difficulty], a growing portion of our profits are un-hedged, especially from emerging market currencies, which can create modest volatility throughout the P&L. Looking ahead, we remain committed to our plan to generate 130 basis points to 210 basis points of improvement in our operating margins this fiscal year.

Below the operating profit line, net interest expense was $173 million. At the end of the second quarter, we had $32.4 billion in debt and $11.3 billion in cash and investments, of which approximately $6 billion was trapped. Our non-GAAP nominal tax rate on a cash basis was 14.7%.

This was an improvement to our forecast and included $42 million of operational net tax benefit, primarily related to the write-off of a deferred tax liability associated with the prior impairment of an investment in a foreign subsidiary.

While we have had tax benefits in both Q1 and Q2, we continue to forecast a tax rate of approximately 17% for the second half of the fiscal year. Free cash flow was $1.2 billion. We are deploying our capital strategically, consistently and with discipline, with the focus on reinvestment, debt reduction and return to our shareholders.

We paid $593 million in dividends and repurchased a net $985 million of our ordinary shares in the second quarter. This represented a total payout ratio of 101% on non-GAAP net income and 142% on GAAP net income.

Keep in mind our payout ratio is elevated as we not only returned 50% of our annual free cash flow to shareholders, but also execute on our commitment to return $5 billion through incremental share repurchases by the end of fiscal year ‘18. At quarter end, we had remaining authorization to repurchase approximately 39 million shares.

Second quarter average daily shares outstanding on a diluted basis were 1.393 billion shares. Before turning the call back to Omar, let me conclude with our outlook.

As Omar mentioned, we continued to expect to deliver mid single-digit revenue and double digit EPS growth this fiscal year and we expect our revenue growth to improve from the disappointing growth this past quarter.

However, given the issues we outlined in the second quarter, some of which could persist in the near-term, we now expect our full year revenue growth to be within the mid single-digit range on a constant currency constant weeks basis as opposed to the upper half of that range signaled previously.

Moving to the back half of the fiscal year, we expect revenue growth to also be in the mid single-digit range on a constant currency basis. With regard to our business groups, we continued to expect MITG grow in the mid single-digits. And we expect RTG to grow in the low end of the mid single-digit range, ramping in the back half of the year.

While we expect improvement from the headwinds faced in CVG and diabetes in the second quarter, we recognized that until some of our important new products officially launched, revenue growth is likely to continue to be affected.

For that reason, in the back half of this fiscal year, we expect CVG to deliver mid single-digit and diabetes to deliver mid to high single-digit revenue growth. Keep in mind that CVG had a strong finish to last fiscal year. So, on an annual comparison basis, we expect slightly slower growth in the fourth quarter.

And because we do not expect the 670G to be on the market until the end of this fiscal year, we expect growth in diabetes to ramp through the back half, with stronger growth in the fourth quarter than the third.

We continue to expect diabetes to ultimately reach double-digit revenue growth as signaled in the past once the 670G is fully on the market next fiscal year.

While the impacts from currency is fluid and therefore not something we predict, if current exchange rates, which included €1.6 [ph] and ¥110 remained stable for the remainder of the fiscal year, we expect our full year revenue to be negatively affected by approximately $20 million to $60 million, including an approximate $10 million to $30 million negative impact in the third quarter.

With respect to earnings, we continue to expect double-digit EPS growth on a constant currency constant week basis for the full fiscal year.

For the back half of the fiscal year, we expect non-GAAP diluted EPS growth to be in the 8% to 10% range on a constant currency basis given slightly less than previously expected revenue, a more normal 17% expected tax rate and the loss of the year-over-year benefit from a lower medical device tax starting in December.

Taking into account the estimated $0.08 to $0.10 impact from the extra week in the first quarter last fiscal year as well as an estimated negative foreign currency impact to our full year EPS of $0.20 to $0.22 if current exchange rates remain stable, this EPS growth implies full year non-GAAP diluted EPS of $4.55 to $4.60.

Lastly, we are modifying our free cash flow outlook methodology. Recall that last quarter, we were forecasting an adjusted free cash flow of $6.5 billion to $7 billion for fiscal year ‘17, a range that would exclude cash payments related to non-GAAP items that might occur during the year.

Going forward, we will include these items to more closely align our free cash flow projection with the results we report each quarter. However, in light of the unpredictability of the precise amount and timing of cash payments, we are expanding the range.

Given this, along with the revenue and net income expectations already discussed, we expect our free cash flow for the fiscal year to be in the range of $5 billion to $6 billion. Now, I will return the call back to Omar..

Thanks, Karen. And we will open the lines for Q&A. But before we do, I wanted to reiterate what for me are the three key points about our Q2 performance. First, we are disappointed in our revenue performance this quarter. The issues that caused the shortfall are identifiable, and in many cases, temporary.

As I mentioned, we have several new product introductions in the back half of the year that we expect to drive our revenue growth back to our normal range.

Second, despite our revenue challenges, our organization delivered an operational discipline, including driving the expected Covidian synergies, which led to strong operating margin improvement and double-digit EPS growth.

And third, looking ahead, we remain confident in our ability to deliver mid single-digit revenue growth and double-digit EPS growth, not only in our current fiscal year, but on a sustained basis in the future. And as always, we remain focused in creating long-term dependable value for our shareholders. We will now open the phone lines for Q&A.

In addition to Karen, I have asked Mike Coyle, President of our Cardiac and Vascular Group; Bryan Hanson, President of our Minimally Invasive Therapies Group; Geoff Martha, President of our Restorative Therapies Group; and Hooman Hakami, President of our Diabetes Group, to join us.

We want to try to get to as many people as possible, so please help us by limiting yourself to only one question and if necessary, a related follow-up. If you have additional questions, please contact Ryan and our Investor Relations team after the call.

Operator, first question, please?.

The first question comes from the line of Mike Weinstein with JPMorgan..

Good morning, guys and thanks for taking the questions. So, Omar, I think there is pieces of it I think that people understand the comments ranging from the diabetes business and just the impact on demand because of the timing of 670G or Saudi Arabia having a significant drop off obviously in demand.

I think probably the best way to think about kind of one question investors are going to have today is on the U.S. business. And so if we looked at the U.S. growth corporate-wide on an organic basis, it’s basically flat this quarter. So, I would love to hear just kind of the group’s thoughts on the health of the U.S.

device market and what appears to be some slowdown at least reflected in your results and some other company’s results over the last quarter?.

Yes. Thanks Mike. I think the primary driver for us though is the fact that the U.S. is more sensitive to new product cadence and we are big enough in the market it reflects the market up and down a little bit ourselves. And as we launch new products in the U.S., I think we will benefit accordingly.

Like I mentioned earlier, in CVG, we just launched the Evolut R XL, which will contribute to U.S. growth in the second half and also the introduction of the Evolut Pro and Resolute Onyx in the U.S. around the end of the fiscal year. You mentioned diabetes, that’s primarily a U.S.

launch on the 670G, so that we think again will have a big impact in the market and the slowdown in diabetes was mostly in the U.S. again, which again impacted the overall market. In MITG, we are launching over 15 new products in the second half to drive growth.

And in RTG, our continued drive on our speed to scale launches and so on in addition to our sales in navigation and imaging should all help the U.S. So, we think this is a lot in our own control and through successful execution of new product introductions I think will make an impact..

And Omar, if I looked at it, just – with respect just a little bit, so it’s always harder to tell just on a quarter-to-quarter basis in some of the implantables businesses such as CRM, but if I look at surgical solutions, the U.S. growth in surgical solutions, which is pretty good barometer for device market growth was lighter this quarter.

So, maybe just – if you just want to kind of comment on that? And then just the follow-up unrelated to the actual quarters, I know there are lot of questions coming out of the outcome of the U.S. election and the potential for corporate tax reforms.

So Karen, I don’t know if you have any preliminary thoughts on the potential implications of tax reform in the U.S. on the company both from a change in how tax rates are ultimately calculated and to the access to cash? Thanks..

Well, there was number of points there, Mike. First, from a surgical solutions perspective, while it is a barometer in the overall market, there were greater activities than we usually have on reprocessing, which – and for which we are addressing that through some new launches in the second half, so we think that will impact the market.

And again, like I said before, because we are so big in the market, it does move the overall market up and down depending on what we do. I really don’t have any hard data to comment on the overall procedures that would really worry me as a big factor. I think our own performance is the bigger thing here.

With respect to the other points, Mike, it’s too early for me to comment on any changes and so on. I mean in the end, we go back to our universal healthcare needs, improving clinical outcomes, driving value-based healthcare, increasing access.

Irrespective of the government and irrespective of the country for that matter, those are the priorities and that’s what we stay focused on. I think as long as any reform focuses on that, I think it will be accepted and it will be successful. It’s not easy, but it’s one that we must collectively address.

With respect to the tax situation, again, I don’t want to speculate on what may or may not happen here. But I just want to reiterate that the reason we did the Covidian acquisition was operational. It was primarily driven by market synergies and broadening of our business and the way in which we can drive healthcare.

At that time, that was the best structure and we continue to believe that, that is the right way for us in getting access to our cash, which we have deployed effectively. I am just going to leave it at that. We will see how things rollout and we will kind of go from there.

But like I have said many times before, we like to control the things if we can control and execute those well. The rest will happen around us and it’s tough for me to speculate. Thanks..

Understood. Thank you, Omar..

Thanks. Next question please..

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

Good morning David..

I am sorry, can you hear me..

Sure, we can David. Go ahead..

Thank you. Sorry about that. So I appreciate your comments about sort of the growth being in your own control and then I think investors want to hear that, but I think it’s sort of undeniable in this last quarter that U.S. implanters saw 2 points of comp adjusted deceleration, so something happened in the U.S.

and I think people want to just understand how much visibility you have on sort of this back half improving of about 100 basis points, so I guess the question once again is, you have a different pacing of months relative to your peers, I mean have you seen enough stability or improvement in the last couple of months to believe that whatever happen in the U.S.

market here in this quarter, at least it’s stable now and that’s something you can sort of build upon with your new products, so I do still think there has to be some market effect here with these new products to get investors comfortable that at least the market in your mind is stable to improving?.

Yes. That’s a fair point, David. The only thing that we pointed out was the device replacements where we are certainly slower.

But I will let Mike Coyle comment on the CRM market and I will also let Bryan comment briefly on the surgical market, because I think that’s an important question you are asking, so Mike, go ahead and just answer the question directly..

David, the bigger impact was in the high power segment. In fact, the pacing market was pretty much in line with what we were expecting.

So the high power side of the equation, we saw a slightly lower growth in initial implants, but we are now looking at high single-digit declines in replacements for the market and that’s something different than we have seen historically.

As we go forward, we think that we are in a particularly impacted area for CRT and that that will get better going forward, but we also expect on the high power side for standardized CDs that there will be this replacement headwind.

But it’s principally coming from the fact that there was lower device implants here 5 years 7 years ago when these devices were deep within in terms of initial trajectory.

But even more important impact is the lengthening life of these devices because of the improvements that we have made to the technology to extend their battery life and that will be a bit of a headwind for us going forward. But what’s going to work in our favor is the pipeline.

If you remember from TCT, in the first half of the year, I think across all of our businesses within CVG, I think we probably had four or five new product introductions in major geographies.

That’s going to be up to about 25 in the back half, with some very important ones in the device implantables area, including extending the 3T MRI, bringing the Visia AF to Japan and a large number of other ones that I mentioned at TCT and identified as being catalyst for us going forward.

So I think those are going to be things that we can count on to help our share position and hopefully also help with market growth..

Bryan, a brief comment on the U.S.

market?.

Yes. Obviously, we are pretty focused on the same thing. We look at a number of different data points and hearing comments from folks like yourself and other businesses. And I hear some people say that things are stable and some people say it’s down. I look internally first to try to get a sense and I kind of hear mix the same way.

So until I see something definitive, I feel like the procedures have stayed stable from quarter-to-quarter. And even if I saw something in the quarter, unless I see a couple of quarters in a row, there is not really a solid data point there. So I haven’t seen anything or feel we should redirect on volume..

Okay.

And just maybe two quick follow-ups, Omar, maybe one for Hooman and one for Karen, so Hooman just I think we all understand the disruption in light the 670G, but I think earlier on, a few months ago, there was more enthusiasm around 630G and the reward program just sort of bridge that gap and I guess the question is, did something changed in sort of your view about the receptivity of 630G and the transition of reward program, that’s first question.

And for Karen, can you just update us where we are on the buyback program, I think the commentary was most of that was going to get completed in the earlier part of the year, have we basically exhausted that buyback or what’s remaining for the remainder of the year? Thanks so much..

Okay. David, with the 630G, your question specifically look, what I would say is, once we have this product in the hands of our sales team and in front of physicians and patients, we actually saw a good momentum with the product. Maybe just to provide a reminder, this was approved in early August.

And it takes a few weeks to demo it, to get it in front of the sales team, to get it in front of physicians and that makes August for us a tough comparison. Then when we get the 670 approved, which was much earlier than expected, we implemented the priority access program.

And we saw, as the commentary suggested, some good up-tick with respect to that, but primarily from early adopters. So I think if you take a look at it on balance, I think the 630, once it was in the marketplace, it performed well. I think our dynamic, which was surely U.S.

based, was the fact that in less than two months, we had two major product approvals in the same geography. And there is operational transition that comes with this and there is a degree of, I would say, perhaps confusion and disruption to demand because of that and that was really the biggest catalyst.

Now going forward, we still remain very excited that the enthusiasm around the 670 is great, so we think that, as the commentary suggested, we are going to ramp, but once this thing is full scale, we will return to double digit growth..

And David on the buyback comment, we have purchased 2.5 billion so far this year. We continue to remain committed to repurchasing a minimum of 50% of our free cash flow, along with that incremental $5 billion repurchase that we expect to complete over a 3-year timeframe for fiscal ‘16 to ‘18.

As you do know, we typically do front end load our share buybacks not only in the fiscal year, but even this $5 billion incremental share buyback, we have tended to upload – to front load in that 3-year timeframe. We still do have some incremental buybacks to go in the second half.

Some of that related to our free cash flow and some of that related to continuing to repurchase the $5 billion, but we typically do front-end load..

Great. Thank you very much..

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

Good morning Kristen..

Can you guys hear me?.

Yes Kristen, go ahead.

Kristen can’t hear you any more?.

Can you hear me now?.

Yes..

Sorry.

In light of these results, does this change your thoughts on maybe smaller incremental tuck-in acquisitions, I know you seemed pretty confident that these are more transient issues, but how are you just thinking from an M&A perspective in the market?.

No, I think to some degree, we have executed well on the M&A, both small, as well as midsized tuck-in acquisitions. And they helped us actually this quarter in diversifying our revenue base and giving us a much needed boost. I think our ability to execute those is pretty good and I am thinking about those the right way.

As I have said before, we are disciplined about our cash allocation and we have done a lot this year, so we are watching it very carefully. And the bar is a little high. But that’s purely to do with our capital allocation, not to do with our execution or any of these market dynamics.

I think in many ways, we continue to look at different opportunities..

Okay.

And then is there any – I don’t know how large the deferral is right now, is there anything to quantify, maybe on a diabetes side, how large the deferrals are impacting that growth rate right now?.

I think it’s tough to quantify that. That’s a portion of the drop in our growth rates in diabetes. I think the delay in actual shipment is the bigger portion, but the delay is – the deferral is only a limited amount..

Okay, perfect. Thanks very much..

Thanks, Kristen. Take the next question please..

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

Thanks and good morning.

Can you hear me, okay?.

Yes, we can. Thanks Bob. Go ahead..

Good morning. So, thanks for taking the questions.

I want to start out just – I think it would be helpful if you guys could try to quantify the things that you are saying were temporary or kind of one-time in nature for this fiscal second quarter, so either in aggregate or broken down by the various things that you kind of called out like the neuro recall, diabetes, the tenders, is there a way to kind of quantify that and the impact on revenue growth for Q2?.

In general, I would say Bob that the headwinds that we faced in the quarter caused us to move from our typical mid single-digit growth range to the 3%. And again, we don’t think that, that is something that will continue. We haave guided in the back half to go back to the mid single-digit range..

Okay. So, just as a broad comment, but no specific quantification.

Okay, so the other things I wanted to just ask about real quickly was, Karen, one for you, can you just give us a sense as to the free cash flow guidance you are giving for ‘17 on an apples-to-apples basis, because I know you are changed in the way you are talking about it? So, what was it at the beginning of the year, what is it now? And then for Mike or Omar, I was wondering if you could just comment on the TAVR business, now both you and Edwards have reported numbers that were a little bit below what the Street was forecasting.

Can you just comment on the state of the TAVR market? And also on the state of the U.S. ICD market like what’s – I mean, things have really slowed down there. What’s the sustainable growth rate in your mind at this point? Thank you..

Karen, go ahead..

Yes. On free cash flow, yes, we are changing our guidance to match what our actual free cash flow is as opposed to before the one-time items that can impact the cash flow. So, our former guidance was $6.5 billion to $7 billion adjusted, not including those one-time items.

And going forward as I said, we will be doing the – trying to match what our actual free cash flow is with $5 billion to $6 billion. I don’t have an actual apples-to-apples because it’s very difficult to predict those one-time items.

But I would say that, in general, the cash flow guidance has not changed substantially, it’s just that going forward we will be focused on trying to focus on the actual and that’s based on feedback that we have gotten from several investors..

Mike, do you want to take the market question from cardiology?.

In terms of TAVR, the overall market grew around 30%. We obviously were in the high-teens sort of the story of international versus U.S. right? In the U.S., we are waiting for the 34 millimeter to impact the market. We expect to be able to then participate in the market growth that we are seeing, which we think is actually quite strong for the U.S.

In terms of high power, during the quarter, it looked like market growth was on the order of down mid single-digits. We actually did a bit better than that, because of share capture. And as I mentioned, we have a pretty robust set of new products at TBT – at TCT that we expect to help us grow faster than the market.

Our models would tell us things should moderate a bit relative to the replacement cycle, but a bit I mean I think we are still looking at down market in the low to mid single-digits..

Thanks Bob.

Can we take the next question?.

Thank you..

Your next question comes from the line of Matt Miksic with UBS..

Hey, thanks for taking the questions. So, I think we have covered a lot of the sort of top line issues in the quarter. I wanted to, Omar, ask you about something that came out of the Wheat Symposium in your presentation with the aortic and peripheral group there.

Just on contracting, something you have not commented on before, the amount of sort of multi-line contracting that you have seen taken up in the U.S. and something that was presented there took that maybe a step further into introducing this idea of a warranty offer just in exchange for commitments from clients.

And love if you could elaborate a little bit on that and maybe where you see if you see the application of that in other areas? And I have one follow-up..

Well, I am going to make a brief comment on this and then I will let Mike kind of comment a little further on the specifics of the example that you state. But the main overriding comment I want to make is that the example that you state is truly an example of value-based healthcare.

And value-based healthcare means that we become a company who are paid for outcomes as opposed to the product itself and that’s a long-term journey, but eventually, we think that that’s the right thing for healthcare, that’s the right thing for us.

It will make us more efficient team in our R&D and we will get rewarded for what we innovate and healthcare will get the right value and in the long-term improve outcomes and lower cost. So, that model you will see us replicate in many other areas.

And like I have described in the chronic care world, with the diabetes and with the NOK and we have talked a lot about our antibacterial sleeve, which also is the same kind of model. So, you will see a lot of these things from us, these value-based healthcare models and that one example that you state is only the beginning.

I think our size helps us with a seat at the table to do these contracts. And so I think it will give us a differentiated advantage not only because of our size, but because of our ability to innovate and link them to outcomes.

Mike, any quick specifics on the particular example at the beginning?.

Yes. As you mentioned, we have been attempting to drive more of our revenue into multi-line contracts and create stickiness of share versus new products coming into the market and we are now up to 38% of CVG revenue in the U.S. is tied up in multi-line contracts.

So, what you have specifically identified is the trend that we are trying to basically take products where we have clearly demonstrated superior outcomes and then create performance guarantees that allow us to then do what Omar said, become a value-based healthcare company.

We have done that extensively with the anti-infective envelope TYRX in the CRM business and what was being outlined by the APV team there at Wheat was really using the strong clinical evidence around Endurant, Endurant 2S to basically create performance guarantees to drive market share in that segment..

That’s helpful. And to follow-up just understanding the disappointing growth on the quarter for a variety of the reasons that you have talked about and has been discussed on the call.

If you could maybe revisit the long-term growth this mid single-digit growth objective that you have put out there? And what the components of that are, understanding expecting an improvement in the back half, should this include – should we expect this to include, obviously, in the contribution of hardware this year, incremental other acquisitions going forward? Any thoughts on just geography and where you are with the growth rate as you have talked about? Just how do you get there and what are the components of that? That would be very helpful..

First, let me point out that we haven’t come off the mid single-digit estimate for the year. We are still saying that. And this quarter is not one that we are happy with like I have said and it’s not one that we are going to repeat.

And so we are completely confident in our ability to drive sustained mid single-digit growth and all our strategies are aimed towards that and those strategies cover our ability to produce new products across a variety of market segments. Typically, that diversity would protect us.

It just so happened this quarter that a collection of them all happened together.

In addition to that, we have got geographic diversity which we are building and that’s our drive towards emerging markets where we have actually even with the enormous impact in Saudi, still delivered close to – at 10% emerging market growth, short of our overall set of basis point target of 150 to 200, but one that we think will pickup over time and we want to get more to the middle of that target rather than the low end.

And the services and solutions is a longer term effort, but again another one which will give us sustained growth in the long-term.

So, we are deploying multiple strategies for a sustained and consistent mid single-digit growth, which employs addressing new therapies, cadence of product innovation, different market segments within that, geographic diversification, the real focus in emerging markets, and creating this new services and solutions growth vector, along the lines that you described earlier based on our value-based healthcare initiatives..

And strategic investment – I am sorry to interrupt, Omar, but – and strategic investment also part of that in not one of your vectors per se, but I guess how would you think about that in terms of your growth target?.

No, strategic investments would be – well, let’s put it in two ways. First of all, tuck-in acquisitions, is part of our overall mid single-digit sort of targeting. And you recall that we are driving these tuck-in acquisitions where we are balancing internal costs.

So, we are not changing our EPS guidance – double-digit EPS growth guidance stays the same while we do these acquisitions. So, we consider them, although acquisitions, we make internal trade-offs to fund them. So, that’s the way think about those.

Bigger strategic acquisitions, they are always possible like we have done in the past, but they have to drive our strategies, that actually was strategic fit that we can satisfy and quantify for ourselves before we go into that. So, that’s the way we look at it..

Very helpful color. Thank you..

Thanks, Matt. Take the next question..

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

Good morning, guys. Thanks for taking the question.

It’s just starting off with the fiscal 2017 guidance I think it will be helpful if you can talk a little bit about where you would expect things to get better in the third and fourth quarters versus the second quarter, so you grew 3% constant currency this quarter, it sounds like you expect that to improve in the third quarter, is that correct and can you talk a little bit about specifically what gets better.

And then on the EPS guidance, I know you don’t provide quarterly guidance, but typically I think the third quarter is about $0.03 higher than the second quarter, do you expect that to be the case this year?.

Let me take the revenue question. We were pretty clear in the sense that there is a whole series of new product launches that will come in the back half, all the way from TAVR to the – towards the end of the fiscal year, the Resolute Onyx. We have got 15 new product introductions in surgical solutions. We will address the reprocessing.

And most importantly, we have got the 670G, which we will launch towards the end of the fiscal year and we expect a ramp up in growth as the next two quarters go by. So we do think that a significant shift in our new product cadence will give us enough growth to take us well in the single digit range in the back half.

And also we haven’t talked much about it, but the improvement in spine and the RTG growth starts to move up the mid single-digit range, which it wasn’t before, so all of these are the main factors. To be clear look, we stated that the device replacement market in ICDs will continue to slow. We are not expecting that to turnaround.

We expect the NHS and the buying patterns in the UK to remain slow for the remainder of the year. We expect the Middle East to remain where it is. So we are going to say that those market trends will continue. The rest are all new product related and our cadence will address it. I think that’s the brunt of it..

And I would just add because you are asking about quarterly gating, too. For CVG in particular, we do expect a little bit stronger growth rate in the third quarter than the fourth quarter just given a very strong finish at the end of the year for that business.

And as I mentioned, in RTG, because of the product introduction, we do expect that to ramp up through the back half from the third quarter to the fourth quarter, same with diabetes, a ramp up from the third quarter to the fourth quarter.

In terms of EPS, it’s typically flat, so there is not a big difference that you had mentioned in the third quarter and fourth quarter. And we don’t particularly give guidance..

Understood. But just to be clear, do you expect to be in the mid single-digit range in fiscal Q3. And just lastly, given the results this quarter, how do you feel about the long-term operating margin goals, you provided at the Analyst Meeting this past June? Thanks for taking my questions..

First, we expect to be in the mid single-digit in the back half and in the early part of the – in Q3 as well and I think we stated that. Look, I will state it again. We don’t want to make a habit of missing the mid single-digit goal even in the quarter and I am extremely focused on that and one that we will address.

So our mid single-digit goal is one that certainly for the year is still valid and one that we expect to get back during the second half of the year. In terms of the operating margin, I mean that was one of the positives of this quarter that we did deliver a strong operating margin improvement, 150 basis points of constant currency improvement.

We are on track. Our synergies are coming up. Our value capture programs are all delivering. Our gross margins actually are in line with what we expect.

So we are certainly still think with what we presented at the Analyst Conference in terms of our operating margin enhancements and I think this quarter is a signal that we in fact can execute towards that. No, we are going to do that in future quarters, but that’s the way we see it right now..

And we have talked about that operating leverage improving throughout the year. So in the first quarter, we had 100 basis points improvement, second quarter, 150 basis points and we expect it to continue to get a little bit better from here..

Thanks for taking the questions guys..

Thanks. Next question..

Your next question comes from the line of Raj Denhoy with Jefferies..

Hi, good morning.

I wonder if I could ask a little bit about the idea of growth accelerating again towards the back half, I know it’s been covered quite a bit, but part of what potentially we are seeing though is that as some of these product cycles wane and some of your competitors launch sort of responsive products, the question is really, is what’s your bringing enough to replace what is sort of waning and is it really just a situation where perhaps, the better parts of some of these businesses may be behind you for a period of time?.

No, we don’t think so. I think you just got to look at the product case and I mean if I take that bit, for example, I mean clearly, that’s a revolutionary new product which didn’t hit the market at all and we think the benefits of that are yet to come. I mean that’s a clear example of a breakthrough product line.

And then I think in both CVG and in MITG and certainly in RTG, in all our product segments, I mean these are strong products, stuff that we are doing with in the transcatheter market are significant enhancements that due to what we had before and we expect traction on those. So we think our product pipeline is robust.

We described that in the Analyst Meeting. We haven’t come off any of that. Our feeling about their impact is no less than what it was then.

It’s just so happened that the timing of these launches, coupled with some really severe market headwinds, all at the same time, just kind of – those are concurrence of these events in one quarter and we expect that, that sort of collection of circumstances not to repeat.

And we think that the new products, the robustness of our pipeline will come through and we will get the appropriate benefits. So our excitement around new products is not – and our confidence has not been shaken at all as to their viability and what they can do to the market and to patients..

Fair enough.

And then maybe just one quick one on the new orthopedic offering, which you gave a little more detail around, perhaps you could just help us understand or frame the opportunity in terms of what you expect from that, because there are sort of two pieces to it right, there is the consulting services, but then there is also the unique aspect of bringing in orthopedic, knee line in the market and so maybe if you can give us some high level thoughts on how you think that business will start to contribute over the next couple of years?.

I think I am actually going to let Geoff is going to – why don’t you go ahead Geoff, with some color on that?.

Yes, sure. Raj, we are right now, obviously, this is new for us and we haven’t even – we don’t have a scalable amount of the need to sell quite yet. So the early interest that we are seeing is strong from surgeons that have skin in the game and we are seeing demand, that’s for the knee. And then for hospitals, there is a lot of interest around these.

We are sharing partnerships, but it’s new to them and these are complex agreements that’s taking a little bit more time, but we are feeling bullish about this. But we haven’t provided any specific guidance yet because it is so new, the concept, right. You have got these risk bearing partnerships and that’s really the centerpiece of the offering.

And it’s very difficult to forecast the speed of the ramp and so we haven’t provided any guidance.

I will just tell you that we are still feeling – we are happy with the response we are getting and we are still feeling positive about it, both the risk bearing partnership component, which is the centerpiece and then the underlying technologies, the [indiscernible] technology that we saw in our advanced energy business, as well as the new implants, the knee and down the road to hip..

Great. Thank you..

Thanks Raj. We will go to the next question please..

Your next question comes from the line of Josh Jennings with Cowen and Company..

Hi, good morning. Thanks for taking the questions. Omar, I was hoping you could help us out thinking into calendar ‘17, there has been some concerns with Trump being elected and a threat of an ACA repeal that volumes could suffer as there is either a transition or a formal repeal of the Affordable Care Act, can you help us think about that.

And in the setting of the fiscal Q2 performance, the organic growth in the first half has been challenged and was just – one of the leverage you guys haven’t pulled is pruning post the Covidien acquisition, any thoughts there in terms of accelerating that process or that initiative?.

Well, let me take those questions one at a time.

First of all, with respect to the healthcare policy again, I don’t want to speculate as to what’s going to happen here, but what I do know, which I have stated consistently in the past, is that a move towards value based healthcare, a move towards a regime where the entire healthcare market gets rewarded for producing better outcomes will not only lower costs, but that’s the only way forward.

And it doesn’t really matter which administration is in place or in which country you are in. That is a basic fact garnered in logic. And I think focus around that will prevail and I think that will be important in any future policies that are made and there is an alignment of stakeholders pushing in that direction.

With respect to the pruning, look – we look at divestitures and acquisitions with the same lens.

Does it fit our strategy? Can we win in that marketplace? Can we – do our financial metrics of returning 50% back to the shareholders and then growing mid single-digits and double-digit EPS growth? I mean, do those financial metrics, are they in line with that acquisition or not or divestiture or not? And based on those factors, we make decisions.

And certainly, we are looking at different areas of our business all the time and you should expect to get periodic updates from us on that score.

Did I miss any point?.

No. Thanks for that. If I could just ask one for Karen, just on looking out into next year, I know it’s impossible to predict currency moves.

But if the currency rates would remain constant here, can you help us understand whether there would be a headwind or tailwind in terms of hedging gains or losses in fiscal ‘18? And just the reason I am asking is because we do have the medical device tax benefit rolling off next year starting in fiscal 2Q.

So, I just wanted to get a sense of when the reported operating margin would more closely mirror the constant currency operating margin performance? Thanks a lot..

Yes, no, happy to take that. So what I mentioned is, we certainly can’t predict exchange rates, but if they do remain stable where they are today and two of the biggest rates that we are exposed to are the euro and the yen.

So if they remain stable to about €1.06 [ph] and ¥110 for the remainder of the fiscal year, I mentioned we would expect our revenue to be negatively impacted by approximately $20 million to $60 million. And on an EPS basis and this takes into account our hedging program too, it’s not just our natural exposure.

And on an EPS basis, we would expect full year EPS to be $0.20 to $0.22 impacted and we will give guidance for FY ‘18 when we typically do at a later date..

Great. Thanks, Josh. Let’s take one more question. Got time for one more..

Your final question comes from the line of Chris Pasquale with Guggenheim..

Thanks. Thanks, guys for squeezing me in. One for Mike and then a quick one for Karen. Mike, your U.S. TAVR share is down about 10 points by our math over the past year. That’s a pretty big shift.

How much of that do you think was the lack of a large Annulus product? And are you seeing in just the couple of weeks here since the approval a noticeable pickup in those cases?.

The vast majority of that share decline is in that segment. We would estimate it represents about 25% to 30% of the overall market and our shares there were substantially lower than in the other three sides. So, as we bring that in we would expect it to normalize those shares and grow above the market as we do..

Okay. And then Karen, tax has been a pretty meaningful source of upside over the past couple of quarters. You mentioned you expect it to go back up to about 17% in the back half of the year.

Just walk through why that is? Why that shouldn’t stay at the rates we have seen the last couple of quarters?.

Yes. It’s very difficult to predict the one-time benefits that we would get in tax. They are spotty. They tend to be large. They impacted us positively this quarter. But we can’t count on them all the time and so that’s why we focus on our more normal 17% tax rate going forward..

Okay, thanks..

Thanks, Chris. Okay. So with that, it’s time to end the call. But before I finish, I have to repeat the three main points about this call and about our performance and outlook.

Like I have said several times, we are not happy about the revenue performance this quarter, but we do think that the shortfall, the reasons of the shortfall are identifiable and in most cases temporary and we expect our new product introductions primarily to drive a recovery in the back half of the year and in longer term.

Second, look, please acknowledge – we acknowledge the fact that our organization delivered an operational discipline and delivered strong operating margin and double-digit EPS growth this quarter.

And finally, we remain confident in our overall strategy that we laid out in our Analyst Meeting, double-digit – mid single-digit revenue growth and double-digit EPS growth on a constant currency basis, not only this fiscal year, but sustained into the future, and that is something that we are certainly not coming off. Okay.

So with that, I would like to thank you all for your interest and your questions. And on behalf of our entire management team, also thank you 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.

And we look forward to updating you on our progress in our Q3 call, which we currently anticipate holding on Tuesday, February 21. Thank you..

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