Medtronic plc (MDT) Q3 2015 Earnings Report, Transcript and Summary

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

Thank you, Vanessa. Good morning. And welcome to Medtronic's third 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 Medtronic Inc.'s fiscal year 2015 third quarter which ended January 23, 2015. The acquisition of Covidien closed at the beginning of Q4 on January 26 and did not affect the Q3 operational results. Thus our comments today on Q3 results cover legacy Medtronic only. After our prepared remarks, we’ll be happy to take your questions. First, a few comments. Earlier this morning, we issued a press release containing our financial statements and our revenue by business summary. We also updated our combined historical Covidien-Medtronic financial statement presentation to include combine financials for Medtronic’s third quarter. You should note that some of the statements made during this call may be considered forward-looking statements and that actual results might differ materially from those projected in any forward-looking statement. Additional information concerning factors that could cause actual results to differ is contained in Medtronic’s 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 results increasing or decreasing are in comparison to the third quarter of fiscal year 2015 and all year-over-year revenue growth rates are given on a constant currency basis. 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 third quarter revenue of $4.3 billion, which represents growth of 8% and Q3 non-GAAP diluted earnings per share of $1.01, growing 11%. EPS on a cash basis which we will be officially transitioning to in Q4 was a $1.07 and grew 10%. Q3 was a very strong quarter with revenue growth well above our outlook range for the fiscal year and exceeding our mid-single digit baseline goal. All three of our groups contributed to our robust performance with our largest group Cardiac and Vascular delivering impressive double-digit growth. Restricted therapies and diabetes also had solid quarters, both growing in the mid-single-digits. Our Q3 results were balanced from a geographic perspective with 8% growth in the U.S. and 7% growth in international markets. Our teams are executing on important product launches around the world and our customers are responding to our differentiated healthcare solutions that seek to demonstrate both clinical and economic value. Looking ahead, while our results were especially strong this quarter, I want to emphasize that our goal remains to deliver strong and consistent mid-single digit revenue growth. We believe therapy, innovation, globalization and economic value are not only the right strategy to achieve growth but that are our diversification, differentiated approach and competitive advantages will enable us to deliver dependable growth in healthcare. Importantly, following the close of Q3 we completed the acquisition of Covidien, a significant milestone in Medtronic's history. We believe that the combination of our two company's meaningfully accelerates our strategies, diversifies our growth profile and increases our financial flexibility. Over the long term we feel that our collective organization can become the leading integrated health technology and solutions partner to healthcare systems around the world. Looking now at our Q3 results we continue to quantify communicate and execute on each of our independent growth factors. Our new therapies growth vector contributed 550 basis points to our overall growth in Q3. This is over 240 basis points higher than last quarter and well above our previously stated expected range of 150 to 300 basis points. Our organization continues to develop and launched fundamental new therapies innovative new products and the related referral programs which are being received enthusiastically by our customers around the world. Gary will highlight these when he discusses our detailed business results later, but it is worth noting that CVG, RTG and diabetes all have significant ongoing product launches that are contributing to our results today as well as strong innovation pipelines to fuel our future growth. Our new therapy growth vector will be further bolstered with the addition of Covidien which has the best in new complimentary clinically and also provides two key strategic [subjects] Peripheral Vascular and Neurovascular which are expected to accelerate growth in our CVG and RTG portfolios. Our next growth vector emerging markets contributed 150 basis points to our overall growth just within our expected range. Greater China, Middle East and Africa, Central and Eastern Europe and Latin America all delivered double digit growth. The Middle East and Africa region in particular had another impressive quarter with 22% growth. This region's performance is driven in part by execution in our channel optimization strategy as we continue to connect directly with customers and align our priorities to the origin challenges of the local healthcare systems. In Turkey and Saudi Arabia we're serving more patients as these countries rapidly develop and fund healthcare infrastructure, other countries in the region are also taking large steps to improve their healthcare system and are looking for partners like Medtronic to help to achieve better quality and value. Overall we remain confident and enthusiastic in the long term outlook of emerging market we are focused in developing new public and partnerships as well as executing our channel optimization strategies. We also expect Covidien to further strengthen our presence in emerging market as we leverage or combine infrastructure customer relationships and breadth to products and services. This should enhance our ability to consistently contributed 150 to 200 basis points the Medtronic's overall growth from emerging markets. Finally services and solutions are third growth factor contributed 50 basis points to our overall growth within the 40 to 60 basis points annual range that we have targeted. We have more than doubled our services and solutions revenue over the past year. But strong growths in Cardiocom and cath lab manage service. Cardiocom grew over 20% as we've continue to develop and offer solutions to manage the broad population of heart failure patients resulting in clinical and economic benefits for the healthcare system. Cardiocom has multi-year customer agreements that produce and attractive stream of high quality recurring revenue. In cath lab managed services we continue to generate rapid growth in Europe as we are fast becoming an ideal partner for hospitals that seek to drive operational efficiency. In addition we are actively expanding our cath lab managed services business model globally with several new accounts in Middle East and Africa, Latin America and Canada. As of the end of Q3 we had over 50 long term agreements with hospital systems representing a billion dollars in revenue over the life of the contracts which have an average span of five to six years. As we look ahead we're working and converting a full pipeline of cath lab managed services contracts with hospital providers around the world. Turning to the P&L Q3 non-GAAP diluted EPS grew 11% or 13% on a constant currency basis which was above our baseline expectation to grow EPS 200 to 400 basis points faster than revenue growth. Year to date we are broad EPS by 9% on a constant currency basis, 400 basis points above our constant currency revenue growth. Our organization delivered a strong operational quarter and our bottom line was further enhanced by the tax rate benefit from the extension of the U.S R&D tax credit for 2014. Gary will walk through some of these dynamics in greater details shortly. Our growth continues to feel strong free cash flow generation delivering $1.7 billion in Q3. The acquisition of Covedian gives us increased financial flexibility providing an opportunity to assess our mix of dividends and share buybacks going forward which our Board typically valuate in June. In addition it's solidifies our ability to deliver in our commitment to return 50% of our free cash flow to shareholders. We have a strong balance sheet and disciplined capital allocation remains extremely important we will prioritize potential M&A investments that are aligned with and strengthen one or more of our three growth strategies while at the same time offer high return metrics minimizing near term shareholder dilution. Before turning the call over to Gary I would like to discuss the integration of Covedian. We decided to complete the acquisition in early Q4 and immediately began executing the comprehensive integration plans that our two companies have developed over the past seven months. Throughout the planning process and now into the integration we’ve had four clear priorities that are guiding our two organizations. These priorities are, preserve, optimize, accelerate and transform. Our first and highest priority is to preserve. Both Medtronic and Covidien have been consistently executing and meeting our individual growth commitments. It must preserve the ability to both companies to continue to deliver reliable mid-single digit constant currency revenue growth as well as EPS leverage. Medtronic and Covidien are highly complementary in terms of the customers we call on the products we sell and the markets we serve. Our customer facing commercial and R&D organizations was therefore largely affected by the integration. We will be focused in minimizing our necessary disruption and delivering in our commitments has become together as company. Our second priority is to optimize to optimize our non-customer facing functions cost structures specifically we will target facility duplications, administrative redundancies, indirect cost and other back office functions. We structured detailed cost savings plans which we have already started implementing and Gary will provide more details later in the call. Our third priority is to accelerate. While there are numerous potential revenue synergies we are currently assessing and prioritizing we are focused in realizing two immediate opportunities. First, we intent to leverage Covidien’s Peripheral Vascular sales force to drive sales of the recently approved IN.PACT Admiral drug-coated balloon in addition to the entire breadth of our collective CVG Peripheral Vascular platform including Directional Atherectomy. This throughput will also continue to develop clinical evidence to support this growing area of medicine, building upon the Medtronic IN.PACT SFA and Covidien’s DEFINITIVE AR studies. Second, we expect that mining Covidien’s Neurovascular with our Vascular Therapies group will significantly enhance our neuroscience strategy within a comprehensive product portfolio for neurosurgeons, interventional neurologists and interventional neural-radiologists. One of Covidien’s Neurovascular products worth noting is the Solitaire Revascularization Device during the International Stroke Conference last week four significant stroke products were presented that Solitaire the trials MR CLEAN, EXTEND-IA, ESCAPE and SWIFT PRIME confirmed effectiveness of stent thrombectomy and were noted some to be the most significant advancement in this space in over two decades. The findings of three of these studies have been published in the New England Journal of Medicine providing evidence to the standard of care for the treatment of stroke should be changed to stent thrombectomy as primary treatment in addition to IV-tPA. Finally, our fourth priority in combining Medtronic and Covidien is to ultimately transform healthcare. This applies to both how we innovate and develop new value based offerings to the market as well as how we partner with key stakeholders throughout the global healthcare industry to drive new transformative business models and solutions. We believe we have an opportunity to truly meet the universal needs of healthcare, improving sales outcomes, expanding access and optimizing cost and efficiency in no way -- in a way that no other company can. Our industry leading products clinical and economic expertise global footprint and financial strength position us to be the preferred partner for physician's hospital systems patient's payers and governments around the world. I have confidence in our team’s ability to executive in these priorities and I am truly excited about the potential to the collective talent and expertise of our new organization to live and fulfil the Medtronic mission. Together with our partners we can alleviate pain, restore health and extend life for millions of people around the world. Gary will now take you through a more detailed look at our third quarter results. Gary?

Thanks Omar. Third quarter revenue of $4.318 million increased 3.7% as reported or 7.5% on a constant currency basis after adjusting for our $158 million unfavorable impact from foreign currency. On an organic basis, revenue growth was 7% after adjusting for the impact of acquisitions and divestitures. Q3 revenue results on a geographic basis were as follows; growth in the U.S. was 8% and represented 57% of our overall sales; non-U.S. developed markets grew 5% and represented 30% of our overall sales. And growth in emerging markets was 12% and represented 13% of our overall sales. Q3 diluted earnings per share on a non-GAAP basis were $1.01, an increase of 11%. Q3 GAAP diluted earnings per share were $0.98, an increase of 31%. This quarter’s GAAP to non-GAAP adjustments on an after tax basis included; a $66 million charge for acquisition related items, primarily associated with transaction cost in connection with the Covidien acquisition; a $25 million gain on the micro divestiture within our Surgical Technologies Division; a $62 million gain on the sale of our remaining equity investment in Weigao which is earmarked to fund the Medtronic foundation and a payment that occurred back in Q2 and a $49 million in interest expense related to debt issued in advance to finance the Covidien transaction. It is worth noting that on a non-GAAP cash basis, Q3 dilutive earnings per share were $1.07, an increase of 10%. In our Cardiac and Vascular group revenue of $2.224 billion, grew 10%. Results were driven by strong double-digit growth on Low Power, Structural Heart, and AF & Other, along with mid-single digit growth in High Power and Aortic & Peripheral Vascular, partially offset by a modest decline in Coronary. In the Cardiac Rhythm & Heart Failure division revenue of $1.269 billion grew 12%, High Power revenue of $650 million, grew 4%. We estimate the global High Power market is growing modestly with low single-digit growth in international market offsetting low single digit declines in the U.S. In the U.S., we estimate we have several percentage points of High Power share since launching our Attain Performa quadripolar CRTD system. Our CRTD implant volumes which were flat prior to this launch grew nearly 20% in Q3 as the U.S. market continued to show strong preference with a combination of our AdaptivCRT algorithm and next generation quadripolar technology, which includes steroid on every electrode to reduce capture thresholds, short middle electrode spacing to reduce peripheral nerve simulation and fast vector express programming. In the quarter, the FDA approved two additional versions of our quadripolar leads the Straight and S-shape giving even more options to electro physiologists. U.S. High Power growth also benefitted from accelerating adoption of the TYRX anti-envelop technology for use in high risk implant procedures. We assigned our first TYRX risks sharing agreement and have a strong pipeline of U.S. hospitals interested in partnering in this innovative business model. In January, we started enrolment in our 7,000 patient rapid trial which is assessing the clinical and economic defectiveness of TYRX. We expect results from this trial in FY18. In Japan, we launched Evera MRI SureScan ICD in the quarter. Evera MRI, which allows the full body MRI scan is garnering strong adoption of the Japanese market resulting an 13 percentage points of ICD share gain in Japan this quarter. Low Power revenue of $489 million grew 17%, driven by continued strong global launch of Reveal LINQ. We continue to see strong adoption of this innovative diagnostic with daily implant growth up in the high single-digit sequentially. Looking at the U.S. pacing market, we were pleased to see improvements in both initial implant volumes and our overall market-share driven by the continued mix shift toward Advisa MRI and growing pay sneaker pull through from the expanded use of Reveal LINQ in patients with unexplained sympathy. In Japan, we continue to see good traction of our Advisa MRI pace maker, while our share remains over 250 basis points above prelaunch levels despite competitive entrance. Looking ahead, we have completed the enrolment basis of our U.S. and CE Mark clinical trials for our micro transcatheter patient system and expect CE Mark by the end of this quarter with U.S. approval to follow in FY17. AF Solutions grew over 30%, globally driven by continued robust growth of our Arctic Front Advance CryoAblation System. Leveraging the increasing body of clinical and economic evidence on safety, efficacy and procedural efficiency of Arctic Front, we continue to take AF ablation share growing nearly twice as fast as the overall AF market, despite new competitor product introductions. Turning to our Coronary & Structural Heart division, revenue of $737 million grew 8%, our Coronary business declined 2% with our global drug-eluting stent revenue share declining slightly as we began to enter our next new product introduction cycle. The international launch of our Resolute Onyx DES occurred late in Q3 and is off to a good start. Resolute Onyx builds on a superior deliverability and proven clinical performance of Resolute integrity, with finished drugs to improve deliverability even further. It is the first stent to feature our core wire technology, which markedly enhances visibility. In our broader Coronary product portfolio, Q3 saw the continued rollout of our new NC Euphora Noncompliant PTCA Balloon family, as well as strong sequential growth in U.S. revenues from our FFR co-promotion alliance with Acist Medical Systems. In renal denervation, we remain confident in our leadership in this field. Since the results of HTN-3 we have analysed compounding factors of that trial performed, ground rating preclinical research and engaged numerous expert physicians to stakeholders. In the coming days, we plan to formerly submit the U.S. IDE to our global clinical program and we look forward to providing further details in the future. Our Structural Heart business grew 22% driven by another strong quarter in transcatheter valves which grew over 60%. Our U.S. launch of CoreValve continues to drives growth and we estimate this resulted in U.S. sequential share gains. In addition, hospital customers are reacting positively to the new TAVR DRGs which were established in October and in general resulted in improved reimbursement and hospital economics for institutions looking to establish TAVR programs. Enrolment in our CoreValve Evolut R U.S study is well underway and we continue to plan for U.S launch in mid FY16. Evolut R is our next-generation recapturable system, with a differentiated 14 French equivalent delivery system. In international markets we receive CE Mark for the Evolut R 26 and 29 millimetre valves broadening our size offerings for this innovative platform into the largest segments of the market. Looking ahead we expect the global TAVR market to grow on the 20% or 25% range over the next year. In our aortic and peripheral vascular division revenue of $218 million grew 5% aortic revenue grew 3% led by strong growth and in thoracic. In AAA the launch of the Endurant IIs a unique three piece version of our market leading Endurant platform is off to a good start. Revenue for our Peripheral business grew 16% in Q3. During the quarter we received U.S FDA approval for our IN.PACT Admiral drug-coated balloon for use in the upper lay. While this did not contribute revenue in Q3 as first commercial U.S implants occurred earlier this month. In addition 12 months results of the landmark IN.PACT Admiral DCB study were published online in the journal circulation in December showing the highest rate of primary patency and lowest rate of clinically driven TLR ever reported from a study of interventional treatments for peripheral artery disease in the upper lay. We expect our IN.PACT Admiral DCB to drive growth in peripheral in the coming quarters and we plan to broaden the launch and have our Covidien peripheral sales force start selling the product later this month. Now turning to our Restorative Therapies Group, revenue of $1.645 billion grew 5% with all three divisions contributing to growth. Results were driven by double digit growth in Surgical Technologies, mid-single growth in Neuromodulation and low single digit in Spine. Spine revenue of 740 million grew 2% both the global and U.S Spine markets grew at the low single digits, the third quarter in a row of modest sequential improvement. Our core Spine business grew 1% in Q3. We are seeing good option of our recently launched Pure Titanium Coating inter body fusion devices, the PRESTIGE LP artificial cervical disc, and our new Divergence Anterior Cervical Fusion System. We recently received have FDA approval for our divergence standalone system and [Zibo] anterior fixation system. FY15 is an important for product and launches in our core spine business and as we have noted all year we expect this to support a return to modest growth for our overall spine business in FY15. In addition to working with surgeons to develop leading differentiated technologies in spine our business continues to focus on procedural innovation. Sales and product to perform our OLF25 procedure grew nearly 30%, this innovative minimally invasive procedure utilizes an oblique trajectory to avoid nerve bundles psoas muscle providing an alternative to lateral approaches that are depended on nerve monitoring. We also continue to evolve and deploy our differentiated surgical synergy program which integrates our enabling technologies, surgical tools spinal implants and expertise to improve surgical outcomes and efficiencies, we now estimate that 16% of our thoracolumbar procedures use our proprietary PowerEase system, of power surgical instruments and over 20% use our StealthStation surgical and navigation technology. Interventional Spine, which primarily consists of our balloon kyphoplasty product line, had stable sales in Q3. The business had low single digit growth in U.S and mid-teens growth in Japan offset by declines in Europe where the business experienced pricing pressure in Germany. BMP sales of $122 million grew 9% with stable underlying demand we do believe we have turn the corner end but expect BMP sales growth to be slightly positive going forward. Turning to Surgical Technologies, revenue of $418 million grew 11% Surgical Technologies had solid balanced growth contribution from all three of its businesses Neurosurgery, ENT and Advanced Energy. Neurosurgery had double digit growth with strong sales of Midas Rex power equipment and O-arm Surgical Imaging System. ENT grew in the upper single digits driven by the recent launches of a StraightShot M5 Microdebrider in the NuVent sinus balloon. In Advance Energy strong adaption of our proprietary Aquamantys tissue sealing, and PEAK PlasmaBlade technologies drove solid mid-teens growth. In Neuromodulation revenue of $487 million increased 5% led by upper single digit growth in our Gastro to Uro and DBS businesses. Gatro or Uro had a strong quarter InterStim sales worldwide. In DBS our global focus on neurologist referral programs and the strength of the early stim data in international markets continues to drive solid growth. In Pain stim we estimate the U.S market is declining in the mid-single digits as slower travelling activity is effecting new implant growth. However we estimate we gained modest U.S market share and maintained our global share on the strength of our RestoreSensor SureScan MRI spinal cord stimulation system with its proprietary AdaptiveStim automatic stimulation adjustment feature and access to MRI scans anywhere in the body. In our diabetes group revenue of $449 million grew 6%. However, after adjusting for the $23 million in deferred revenue that was recognized in Q3 last year, the group grew 12%. Diabetes had a strong quarter in international growing 12% including growth of 36% in emerging markets. In the U.S. we continued to see strong adoption of our MiniMed 530G System with Enlite CGM sensor. We recently announced the results of a retrospective analysis from over 20,000 MiniMed 530G users in the Journal of Diabetes Technology and Therapeutics which found that the pump's Threshold Suspend feature reduced hypoglycemia by 69% with even greater benefit at night without significantly increasing hypoglycemia. We were also pleased that the U.S. FDA lifted the warning letter on our diabetes business in late December. In international, we began the limited launch in select markets of our next generation MiniMed 640G System with the Enhanced Enlite CGM sensor. In addition to incorporating a brand new insulin pump design and user interface, the MiniMed 640G System features SmartGuard technology, which automatically suspends insulin delivery when sensor glucose levels are predicted to approach a low limit and then resumes insulin delivery once levels recover. We continue to make progress in bringing this technology to the U.S. and plan to submit the PMA to the system later this calendar year. The predictive low glucose management clinical study associated with this PMA is underway which is studying our next generation insulin pump and fourth generation CGM sensor. This sensor has new intelligent diagnostics that are expected to result in enhanced accuracy and it is 80% smaller than the Enlite sensor currently sold in the U.S. Turning to the rest of the income statement, in addition to commenting on our Q3 results I will also make some forward-looking comments which are based upon the combination of both Medtronic and Covidien P&Ls and also reflect a number of reclassifications that we have made to the Covidien P&L in order to be consistent. Information on each re-classes is available on the footnote section of the combined historical Covidien Medtronic financial statement presentation on our investor Web site. The Q3 gross margin was 73.9% and included 20 basis points of negative impact from foreign currency. The gross margin continues to include significant spending related to resources diverted to address quality issues in neuromodulation. The Q3 gross margin was also negative impacted by product mix shift toward diagnostic and AF products in CRHF and the acquisition of NGC Medical. NGC Medical which was acquired in Q2 has a gross margin which is similar to our existing cath lab managing services business and is significantly below our corporate average. However, NGC and cath lab managing service have operating margins that are closer to corporate average due to the lower spending on SG&A and R&D. Looking ahead for the newly combined company after taking into account the Covidien reclassifications I mentioned earlier we would expect gross margins to be more in the 69% to 71% range on an operational basis. This outlook does not include the impact of the Covidien inventory step up arising from the purchase accounting rules. Third quarter R&D spending of $373 million was 8.6% of revenue. We are pleased that are past R&D investments are resulting in faster organic revenue growth and we continue to invest in new technologies as well generating clinical and economic evidence to drive future growth. When you combine Medtronic and Covidien we would expect R&D expense to be more in the range of 7% and 7.5%. Third quarter SG&A expenditures of $1.487 million represented 34.4% of sales. Q3 SG&A on a constant currency basis was 34.3%. Looking ahead in addition to the reclassifications this is the line item that will reflect most of the benefits from our cost synergy initiatives. Taking this into account as well as the pre-existing leverage initiatives of both Medtronic and Covidien combined SG&A in the range of 32% to 33% on an operational basis seems reasonable in Q4. Amortization expense for the quarter was $89 million. For Q4 we would expect the combined company amortization expense to be in the range of $450 million to $600 million reflecting the impact of the Covidien acquisition. This is a wide range as the preliminary purchase accounting and related amortization of intangibles have not yet been determined and likely won’t be until the end of the quarter. It is worth noting that we will be shifting in Q4 to cash earnings per share and thus will exclude this expense from our non-GAAP earnings. Net other expense for the quarter was $24 million including net gains from our hedging programs of $54 million. We hedged the majority of our operating results in developed market currencies to reduce volatility in our earnings from foreign exchange. However a growing portion of our profits are un-hedged especially emerging market currencies which can create some modest volatility in our earnings. As I will talk about in a moment the mix of our earnings that are un-hedged will increase further with the addition of Covidien. Based on the current exchange rates as well as the reclassifications of the combined company net other expense in the fourth quarter for the combined company is expected to be in the range of 35 to 60. Q3 net interest expense on a non-GAAP basis was $4 million, after adjusting for the $77 million incremental net interest expense related to our December 2014, $17 billion bond offering used to fund the Covidien acquisition. While we excluded this incremental interest expense from our non-GAAP earnings this quarter because of the difference in timing between the debt issuance and the closing on the acquisition, we will include the incremental interest expense on our non-GAAP earnings going forward. At the end of Q3, we had approximately $31.1 billion in cash investments and $28.8 billion in debt, subsequent to Q3 there are number of items that will affect our year-end cash and debt balances including revision of our $3 billion term loan, the approximately $16 billion cash consideration paid for Covidien, the addition of approximately $5.5 billion in previously held Covidien debt at fair value and $2 billion in cash and the $1.2 billion in debt maturing in March which will entire using existing cash. Based on current rates, we would expect Q4 net interest expense for the combined company to be in the range of $195 million to $250 million. Our non-GAAP, our tax rate in Q3 was 17.1%, included in our -- this quarter tax rate is a $29 million benefit associated with the extension of the U.S. R&D tax credit. It is worth noting that on a combined company basis, the non-GAAP normal tax rate excluding amortization has been running in the range of 18% to 19%. And as we have noted in the past, the combined tax rate going forward could be approximately 2 percentage points better. In Q3, we generated $1.7 billion in free cash flow. We remain committed to returning 50% of our free cash flow to shareholders. In Q3, we paid $300 million in dividends and there were no share repurchases giving restrictions related to the Covidien acquisition. As of the end of Q3, we had remaining authorization to repurchase approximately 34 million shares and we intent to restart our share repurchase program later in Q4 pending Irish core administrative approval which we expected in early March. Third quarter average shares outstanding on our dilutive basis were 996 million shares. It is important to note that we expect the cash where you see from stock option redemptions which was a $165 million from Q3 will also continue to be use 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 Q4 we would expect diluted weighted average shares outstanding to be approximately 1.440 billion shares reflecting the shares issued in the Covidien acquisition. Next I would like to comment on our revenue outlook for the fourth quarter, which will be our first quarter reporting combine Medtronic-Covidien results. For the fourth quarter, we believe constant currency revenue growth of 46% on a combined pro forma basis is reasonable and we expect to be in the upper part of the range. While we cannot predict the impact of currency movements to give you a sense of the FX impact if the exchange rates were to remain similar to yesterday for the remainder of the fiscal year, our Q4 revenue will be negatively affected by approximately $420 million to $480 million which will result in reported revenue on an actual FX basis of approximately $7 billion to $7.1 billion. Taking into account our revenue and P&L comments that I have already covered, it would not be surprising to see models from our Q4 cash earnings per share somewhere in the broad range of a $1.08 to $1.13. Next I would like to provide some high level framing comments on fiscal year 2016. While we intent to give our revenue outlook and earnings per share guidance for our normal practise in our Q4 call, given the changes result in from the addition of Covidien here are some items to keep in mind as we think about our next fiscal year. First on revenue growth, while we are not formerly providing our FY16 revenue outlook, we believe it is reasonable to think about our revenue growth in the mid-single-digit range on a constant currency basis consistent with our baseline expectations. Next keep in mind that we will have an extra selling week from the first quarter of FY6, which we would estimate to have an impact of approximately 100 basis points to 150 basis points of incremental revenue growth for the full fiscal year or approximately 400 basis points to 600 basis points in Q1. This gives us increase confidence that we could be in the upper half of the mid-single-digit revenue growth baseline expectation in FY16. Regarding foreign exchange, the significant strengthening of U.S. dollar represents a strong potential headwind in FY16, even though our legacy Medtronic businesses continue to realize the benefit of our hedging program on major developed market currencies, it is not possible to completely hedge FY16 and FY15 rates given to-date exchange rates. This would result in our legacy Medtronic businesses to experience a negative impact from foreign currency albeit somewhat mitigated by the benefit of our hedging program. At the same time the legacy Covidien business does not have the same benefit today. Taken together if exchange rates were to remain similar to yesterday's broad FY16, our combined FY16 revenue will be negatively affected by approximately $1.2 billion to $1.4 billion. On a bottom-line based on today’s rates, this could translate into our $0.30 to $0.40 negative impact to earnings per share. Turning to our focus on cost synergies as Omar had mentioned cost synergy activities are underway and we are in the process of finalizing our FY '16 targets. We are targeting over $850 million in cost synergies to FY '18, in terms of timing it is reasonable to straight line these statements over the three years and our organization will be working hard to exceed this goal. Also looking ahead I will like to note that we anticipate holding our Q4 earnings call before market opens on June 2nd. This is two weeks later than our normal timing as this will the first quarter where Covidien results will be combined in our financial reports. However we do believe we will have an earlier view on our revenue results and we will plan to pre-release revenue on May 19. I will now turn the call back over to Omar.

Thanks Gary and before opening the lines for Q&A let me briefly conclude by reiterating that Q3 was a strong quarter for Medtronic. And as we look ahead we're excited to welcome Covidien in to our organization the operational momentum of both organizations is moving in the right direction giving us increased confidence in the future. This does not happen without a lot of hard work and discipline. I want to take a moment to express my appreciation to both the Medtronic and Covidien teams for staying focused, avoiding any distractions and delivering on their commitments during this transition period. While there are a number of moving parts in the financials as we combine the two companies and we are facing increased headwinds in the near term for foreign currency. Our priorities to sustain the operational performance of the company striving to reliably deliver in our baseline financial model mid-single digit constant currency revenue growth constant currency EPS growth 200 basis points to 400 basis points faster and returning 50% of our free cash flow to shareholders. To achieve these goals we continue to execute in our pre-primary growth strategies therapy innovation, globalization and economic value. We believe our acquisition of Covidien were meaningfully compliment and accelerate all three of these strategies strengthening our long term market competiveness as well as driving further sustainability and consistency in our long term financial performance. With that we will now open the phone lines for Q&A in addition to Gary I've asked Mike Coyle President for Cardiac & Vascular Group, Chris O'Connell President for Restorative Therapies Group and Hooman Hakami President of our Diabetes Group top join us. In the future we intend to have Bryan Hanson the new leader of the Covidien Group and in earnings call. We are rarely able to get to everyone's questions so please limit yourself to only one question and if needed only one related follow up. If you have additional questions please contact our Investor Relations team after the call. Operator, first question please? Operator [Operator Instructions] Your first question comes from the line of Mike Weinstein.

Good morning, Omar, and obviously congratulations on a very strong quarter for the Company. Let me start with a couple of items now that the transaction has closed. One, was hoping you could give us an update on your thoughts on capital allocation. You talked about the 50% return commitment and that is still in place. Can you give us updated thoughts on the split between dividend and buyback? And second, there is a number of drivers this quarter really over the last couple of quarters that have been from new products but also in some cases your market is getting better and you are gaining share in those markets. Can you just talk about the sustainability as we think about FY16 and start to think about our pro forma models? Thanks.

Let's take both your points, first of all in terms of the recurring to shareholders like we mentioned earlier our commitment remains first to sort of firm up our commitment and almost guarantee the fact that we can return 50% of our cash flow to shareholders. So that’s an important element of the Covidien transaction it enables us to do that. Now within that as you point out the mix between dividend and share buyback and something we've been considering we will think about changing that ratio. We think we have the capacity to do that. However, lots of moving parts right now and we need to kind of settle on exactly what we have, we've got we need board approval, the board meeting happen in June. So really until then we cannot make any firm pronouncement, what I will say is that our intention is to make a commitments that we can stick to that we will say something in a balanced fashion that you can rely on in the future and we're certainly looking at changing the mix to increase amount of dividend. Gary do you want to add to that.

No I think that’s right, as we've indicated there is a process we need to go through, we needed to kind of see over the next couple of quarters how things play out in the normal process as the Board will look at this split in the June timeframe and that’s when we would intent to discuss with them.

With respect to your second point Mike I agree that there were lots of new products that helped us and so we had revenue growth actually overall mid-single digit targets fuelled by lot of the new products and improving markets like you point out. Now we have a pretty rich pipeline if you think about it the drug coated balloons going to come out, in diabetes we have the 640 G in Europe which has just launched we've got a series of new products that are coming out. So we have some level of sustainability in terms of the product releases. But let me just say that the more important point here is the mid-single digit growth. There will be quarters where you go hopefully only up rather than down but our real goal here is to sustain this mid-single digit trajectory through diversification of our product lines and businesses diversification of our geographies where we get the growth from particularly from emerging markets and diversifying within emerging markets as well and finally diversifying as to the nature of the revenue more service revenues. And so if you do all of that we think we can get a business that can deliver consistently in the mid-single digits. And I think that’s what we’re reviewing on rather than swings one way or the other that may happen from quarter to quarter.

Gary, from your FY16 commentary, there was a number of puts and takes there and the challenge with the Street as you have seen with other companies over the last several weeks has been to stay on top of FX and the impact that has on each companies' earnings. Right now the Street seems to be aggregating around roughly 445 for FY16. Any preliminary thoughts on whether that is roughly the right range? Whether FX is appropriately reflected in that type of number?

Obviously we’re not giving guidance yet for FY16 and so I don’t want to comment unnecessarily on whether the 445 is right or now. But I do think back to your point Mike I think what I have seen is many people are updating their models for foreign exchange and challenging that. I mean that’s the biggest thing as we go through -- we’re going right to our planning process as we speak and so we’re trying to get a handle on this and understand as we go forward. I think most models seems to have a pretty good sense on it and kind of that as I indicated in my comments now that the $0.35 to $0.40 range is kind of where I think most people are landing somewhere little bit lower than that. I mean the issue that we have to understand is based on today’s rates and the reality is that foreign exchange rates I mean they have weakened another 5% versus additionally impact on that especially until we can get Covidien into our hedging program as we move forward because Covidien in effect for all intents and purposes is not hedged and that’s going to increase our volatility until we can get that into our own program here. So I think right now many models have an updated for foreign exchange which I think is appropriate and that’s reflected in the models and as a result of that I think in all the other parameters assuming that they put in the right interest expense and assume the kind of the operational growth and synergies that we’ve talked about I think you’re probably getting the range here discussing but again we’re not giving any guidance right now for FY16.

Your next question comes from the line of David Lewis.

Gary, I wonder if we could come back to margins for a second here. Your gross margins have been under pressure the last couple of quarters but actually this quarter they reversed that slide. I wonder if you could shift focus from gross margins to operating margins and specifically on two points. If you think about your organic growth rate, that is the highlight of this quarter, organic growth has doubled for Medtronic the last four quarters but EBITDA is still flat to down. I wonder if you could walk us through kind of EBIT commentary in your mind the last four quarters as you have for gross margin the last couple of quarters. And secondarily, as I think about your pro forma guidance with Covidien for the fourth quarter, SG&A is actually stronger or there is more leverage than what we would expect so maybe talk to us about that $850 million synergy number what we can imply about that $850 million number and how conservative it may be based on your stronger than expected fourth-quarter SG&A guidance?

Yes, well overall I mean first of all you have to understand as we go forward on lot of these things there is going to be re-classes between how Covidien has been classifying their numbers and so to be consistent with Medtronic and so it’s even harder to take a look at some of the percentages and versus where Medtronic historically has been and to make some sense out of that so I would just encourage all of you to go their investor Web site where the IR team has tried to laid out on a pro forma basis give you kind of perspective on what it looks like when you get the re-classes in there and look at the combined companies. As you indicated I mean gross margin overall which has been under a little bit of pressure especially within Medtronic itself we’re starting to see some improvement in that area overall we still expect there is more there we’re getting some favorable manufacturing variances being generated we’re getting -- and we’re seeing some of the quality cost for example that’s declining now in diabetes where we’ll expect that to occur over time here in nueromodulation. So from a Medtronic legacy perspective the gross margin as we expected we would expect to see a kind of improving with the exception of the mix issue that I mentioned also in my comments which is the fact that as NGC and some of these service businesses become more and more prevalent those are going to have a negative impact on the gross margin but not necessarily the operating margin. Back to your exact point what we really think we need to do is start focusing more as a company on the operating margin of the organization because that’s where really where the profits are going to be generated and Covidien has lower margins in some of their businesses clearly their service model has a different or gross margin I should say but the operating margins of all these organizations are basically consistent with where Medtronic is at. And back to your point that’s where our focus is, is to increase and drive operating margin improvements in performance. That is going to come from the standpoint primarily of the SG&A leverage as we discussed. Fourth quarter is always a lower percentage just on the standpoint that we have as our highest revenue month and just as a percentage of revenue the spending tends to be better in that quarter naturally, as you look historically that’s normally what you would see. You put that on top of the fact that we go forward we will start to see some of the synergies industry starting to play out some in Q4 although not as much as we get into FY16 as we initiated right now we kind of straight-line those that $850 million kind of in for the FY16 we're still detail finding exactly how that will play out but that's a good assumption right now and obviously we can accelerate and drive the $850 million more we will do that. I mean that’s the commitment we have at this point in time but we will -- and that’s on top of the synergy of the organization both Covidien and Medtronic already had as far as synergies we’re going to try to focus on. So the operating margins of the organization especially on a combined basis going forward with those initiatives that both companies had plus the synergies will continue to improve as you go forward into the next several years. You have to be little careful taking a look and saying what’s happened to operating margins or EBIT margins right now, that currency has an impact on this because the gains and losses are -- those dollar are non-operating expense or other income and expense line items the gains are back down there, so you just -- you have to pull although into consideration and taking a look at this what's really happening with our even operating margins. But in general we’re happy earnings per share is growing very nicely and currently exceeding our leverage targets that we’ve indicated as we go forward. So, we’re achieving the overall objectives and we’re managing the business on bottom line growth.

And Gary the other area that helps to offset some of the currency pressure, next year obviously could be taxed, could you just give us an update on where Medtronic or core Medtronic sits with the IRS tax settlement and timing there? And secondarily can we assume the fourth quarter tax number is a good predictor of 2016 or not necessarily? Thank you.

Yes, as far as the tax case, we're really in the past right now the case is being heard, this is the Puerto Rico transfer price dispute that we have with the IRS, heard as we speak. We expect that will continue over the next several weeks before the trial will be concluded. And then it will depend on how much time after that it takes for the court to reach a decision and make a decision where we’re at, but we would expect that could be anywhere, I mean that could be several six to 12 months, I mean that could be a while out before we actually get a response from the decision on that one. So, we’re not necessary expecting anything in FY16 at this point in time, obviously that will be a positive if that happens, but we’re not expecting anything currently in FY16. The tax rate for the Q4 and kind of general direction that we gave you, that’s probably directionally still what we would say is where we're expecting that as we go forward, the combine rates of the two companies on a cash tax rate basis have been kind of in that 18% to 19%. We expect -- still expect that there is at least 200 basis point improvement on that just releases the financing cost as we get a better sense of that -- as we go into FY16 we’ll give more updates, but right now that’s still a good assumption to use.

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

Congratulations on the quarter and closing Covidien. Just wanted to return to some of the comments that you had made earlier just on the growth profile of being mid-single digits and driving 200 to 400 basis points of leverage. I am just curious given some of the tax advantages that you will see next year as well as the cost synergies, why can't Medtronic be more of a mid-single digit, double-digit EPS growth profile company at least more in the medium term?

Well a number of things, first of all we want to stick to mid-single digits and we did say there's 200 basis points to 400 basis points of EPS leverage on top of that. To deliver that in a sustained basis is you got lots of variables you're going to take into account, you’ve got market surprises and other things that could absorb, so we just want to be a little cautious as to what we put out there. We also think that the total shareholder return it includes the return that you get from the dividend actually takes into double digit total return, so that’s what we’re looking at, anything beyond that at this point is premature for us, I realize that there is synergies which we will get -- which will give us some enhancement of our operating leverage, but at the same time we’ve got variables to do with increasing our dividend versus what we do in terms of share buyback which we will look at. So there is lots of moving parts Kristen that we’re going to look at before we make a pronouncement and we think that overall double-digit total shareholder return is a pretty attractive proposition for company of this size especially if you can rely on that consistently. So again we think that that’s a reasonable sort of goal that we can have again reliability, consistency, sustainability comes first in mind before we get too eager about trying to bug these numbers up too high.

And then just I guess a more micro question, just on the CRM market I was wondering if we could just kind of walk through and balance some of your commentary around the success that you have been having on the high-powered side and yet it looks like your US growth rate was just about 1%. So maybe just share your view on the overall market. And then also just on the low power side, what you think the pacemaker market is doing? Obviously LINQ has been a big driver to the performance there. Maybe some comments just around that underlying business as well.

On a high power side we think globally it's still fairly flat in terms of the overall growth of the market our growth at 4% obviously represents some market share capture and the three primary drivers that will were kind of highlighted in the script the adaptive CRT and the Quadripolar lead release that we've had in the U.S has been driving market share. We think on an initials basis we're up roughly 10 points in initial market share in the CRT-D segment of the market here since the launch of those products and those have been having a nice effect on our overall growth, in addition in international in Japan the MRI safe ICD market entry has been driving significant initial market share as well. And then the TYRX product line, the anti-effective coating, it actually impacts pacing and ICD has a bigger impact on ICDs in terms of our ability to use it to both drive ASP and to drive share in replacement. So those have been the primary drivers on a high power side. On the lower power side the overall market using our kind of two quarter averaging convention is up roughly 5% inclusive of diagnostics but frankly diagnostics is the driver there and if you looked in just core pacing, the therapeutic pacing you'd see a low single digit decline on a constant currency basis for the overall market. We're obviously driving that diagnostics revenue growth and even within the pacing side we are taking market share on a mix shift towards the advice MRI pacing products in the U.S and it basically is also helping us drive growth in that area. So those are primary drivers on the implantable size.

Okay. Just as a follow-up, I guess, if you've take nearly 10 percentage points of share in CRT just in the US, I guess I would have thought that the high power business would have been up more than 1% this quarter. Is there a comp issue or is there something else moving the numbers within there? And how big should we expect diagnostics to really be? It seems like you are going to far exceed the number that you put out at the investor day back in June.

On the question prior quarter comps we have been for the last several quarters deliberately trying to take down the number of products solid in quarter end bundles, because obviously there is discounting associated with those that we would rather not be doing. And so we have seen in each of the last couple of quarters a fairly significant destocking of hospital inventories that’s included in the numbers that was particularly pronounced last quarter which is why you saw 5% growth even that we were really on an underlying basis closer to 7% growth for CBG. So that continued in this quarter not as dramatically as it was last quarter and we think we're coming to the end of that where the comparables will be fairly flat year over year going forward. The other question was diagnostics, so we said we believe this is sort of the next billion product segment for us we obviously see three patient populations driving the penetration rates we've seen. We have seen syncope, atrial fibrillation, cryptogenic stroke all of those are very under penetrated and in fact most of the revenue growth we've seen in that product segment has been concentrated to U.S and Germany and UK. So we think that there is plenty of opportunity to continue penetrating into those patient populations as well as to continue to growth of that its other geographies. So again we're going start to run into tougher comps going forward the linked product which we released mid quarter fourth quarter last year as well as frankly CoreValve with the U.S. So those are going to become tougher comps but on the other hand we have obviously numerous new product drivers that Omar mentioned including the DCB in the U.S the ability to use that to drive share of Covidien products in the Peripheral space. The Onyx product and DES in Europe the 26 and 29 CoreValve products in Europe and as I said the continued penetration of things like LINQ and TYRX into other geographies beyond the U.S.

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

Good morning, everybody. I wanted just to start, Gary, if you could go into a little bit more detail around cash access. I know what you have disclosed so far is that you should be able to get about 60% of your annual free cash flow in an unencumbered manner post the Covidien transaction. But I also think you've talked about that number potentially raising over time. Can you maybe just help us understand the mechanics of what drives that number higher and where that could ultimately go directionally speaking over time?

Yes as we've indicated before the transaction now being completed. What we basically have is the -- where we about 35% of Medtronic legacy cash flow was in effect available and 65% was in effect unavailable for use in the U.S that now with Covidien we pull all Covidien in effect is available. So just normal numbers to open 35% of Medtronic to basically about 60% of the combined company will have cash that is un-trapped and available going forward. This as a result of combining the two organizations and the two companies. And that’s the legacy Medtronic trap fees continues to be that way going forward based on how the tax rules work. And as a result of that what occurs over time however will be as over time as you have more and more the cash flow being generated from in effect un-trapped subsidiaries or un-trapped parts of the organization then your cash flow will start to improve from that 60% to whether it 65%, 70%, 75% over time. But that occurs as that basically product shift and you get cash coming from basically un-trapped locations. You can’t just make changes without making basically product shifts and making some decisions that really organizationally and operationally shift where the cash is being generated. And that’s what’s going to take time as you’ve heard as the organizations -- both organizations continue to grow and as we make investments in new product innovation going forward.

Okay, that is helpful. Then maybe just a follow-up on the more strategic side. Omar, I know you have talked a lot about the opportunity that exists to sell products like the drug coated balloon through the Covidien peripheral salesforce. But as I think about other product categories that you haven't highlighted as much, maybe you could talk about the opportunities in neurovascular for example given your presence with the neurosurgeon whether it is through neuromodulation or spine? And then also the potential to pull through some of the general surgery technologies that are used any way in the vast majority of the procedures that Medtronic is performing across the entire suite?

We just wanted to take this whole thing a step at a time and like I mentioned we’ve had two clear businesses which are separable which we are integrating into the RTG and CVG group so you -- obviously we understand the drug coated balloon but also the Neurovascular business is being integrated into our RTG group which will enable us to have a more comprehensive offering into the neuroscience departments. And I’ll let Chris comment on that in a minute. With respect to the other areas sure in concept there is lots of pieces where we can sell together. But right now if the two businesses simply preserve their growth trajectories and we get the benefits from these two kind of tuck-ins so to speak we’ll create a pretty good business which is reliable which can deliver consistently and we don’t want to risk any distractions through any complicated cross selling methods and sales teams incentives getting even different from what it was before in the short term because the risk of distraction and losing momentum in those areas can be very high. So therefore we think that a step at a time, over time some of those technologies show that there are opportunities for one sales force to have a broader basket of products depending on who the customers are. What I will point out is that our philosophy here starts with the customer and the physician and then works back to the technology we don’t start with the technology. So if customers require us, require products that come from some other group or division, that makes sense for the usage we will put it through that channel. We don’t want to force that technologies into places where customers aren’t necessarily using them. And if you really look at this slew of surgical technology products although in principal there is a lot of shared technology their usage amongst customers is actually quite separated. And we want to understand that carefully before we start doing any sorts of integration. But I’ll let Chris actually comment on the neuroscience strategy which I think is shorter term and quite exciting. Chris go ahead.

Sure, thank you. Yes, the Neurovascular opportunity is really exciting for Medtronic really the first priority as we get into that though is to help the Neurovascular organization get off the ground with the mechanical thrombectomy market growth and therapy penetration given the new clinical evidence that’s come out into the market that Omar referenced earlier. And obviously we have a lot to contribute to that given our depths of expertise in market development. So that’s really priority number one. But clearly the opportunities to leverage that therapy in our broader neuroscience strategy is there just a reminder of three main users of mechanical thrombectomy number one is the interventional neuroradiologist, number two is the neurosurgeon who is trained in endovascular techniques and the third just smaller one is interventional neurology. The market particularly in the U.S. is trending towards the neurosurgeon and as you know we have seven major product categories serving the neurosurgeon today across RTG of which we’re number one in every segment. This is the one category we’re not -- we’ve not been present in and so the opportunity to cross sell and partner with neuroscience centers is obviously very strong and we’re just in the early phases of that and we look forward to providing more information on that opportunity going forward.

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

Congrats on a very strong revenue quarter. A question for Gary. It looked like it was also a really good free cash flow quarter for you. I'm just wondering if you could give us a sense as to as you close the transaction, what is the free cash flow generation of the combined entity as you sit here today? I know it obviously improves over time but just right out of the chute, what is the free cash flow coming out of this combined entity in your view?

Well, we did have a very strong free cash flow of this quarter now that’s historical our Q3 tends to be one of the highest free cash flow quarter generations for us. And so Q1 starts out little slower and Q3 tends to be the strongest and so we saw that again this quarter and was very strong. There are some other things in the quarter, I mean obviously for example I would tell you one thing that helped our free cash flow is the hedging contract that we do have, we get hedge accounting from the P&L perspective, but basically those hedge contracts are collateralized and so actually we’re receiving cash on those as we have gains obviously on some of the contracts going forward and that was a couple of hundred million dollars of impact in the quarter which was a positive obviously from a cash flow perspective but it really relates to gains that will be recognized in future quarters as we go forward, but in general your come as right Bob that it was a very strong free cash flow and we’re comfortable that both Covidien and ourselves continue to generate a very strong cash flow. I mean I think the number that we’re looking at right now on a kind of a combined basis just kind of starting off to shoot if you look to both companies is you are somewhere in the ballpark of $7 billion of kind of a free cash flow going ahead. Now that’s obviously going to be impacted a little bit by this FX issue I mentioned that we have to understand exactly the impact of the foreign exchange on the cash flow, but in general if you just look at the two companies in the cash flow generation and the increase you would normally expect from that, I would say you are somewhere in that kind of around that $7 billion…

And then as a follow-up real quickly, why wouldn't the tax shield kick in right away relative to that 18% and 19%? Omar, I was wondering if you could just comment on which markets in the US do you think are improving? A lot of your growth is Medtronic product driven but it does feel like especially in the US certain markets are improving and getting better here. Thank you.

I think you're right look in general the overall sense that we get in the U.S. is improving across the board actually, but clearly given where the CRM market has been, I think there is clear improvement in some of those areas, on top of that you got to remember we’re a fairly big player here or the biggest player in certainly the CRM market and as our products are successful it actually grows the market up with us and things like the LINQ product, we don’t know for sure, but we’re pretty confident that it's bringing in increased sales of other implantable devices along with it and that will reflect on a stronger market. So because of our share position and I think if we succeed to pull that market with us, so I’ve got to say that from an overall market perspective if I were to buy in any way in the U.S. it's got to be in the CRM that we probably see an uptick in the market growth. But overall you can read the provider earnings just like we can and they appear to be strong that means the overall procedure of volumes are stabilizing to improving in the U.S., so that gives us confidence for the future and I think just general confidence the economy is helping us with any electric procedures as well.

Yes, just quickly on the tax rate Bob to clarify, I mean what we are saying is the combined company if you took our combined tax rates on a cash earnings per share basis, it's kind of in that 18% to 19% range what we've historically been at and we would expect that 2 points of improvement just in the financing of the transaction would be kind of immediately. So I mean basically going forward, we would assume kind of for Q4 and on that will be more in the 16% to 17% range just based on those parameters at this point. Again we’ll get more guidance as we get in to FY16, but those numbers right now are still what we would expect and back to your point -- that should start happening right away here in Q4.

Your next question comes from the line of Derrick Sung from Bernstein.

Omar, I wanted to go back to the top line growth profile here and I think you have been very clear about what the growth drivers will be kind of from a product category perspective on the Medtronic side to get you to that mid-single or even above mid-single digit growth in the near future, DCB in the high-powered new launches, etc. Could you spend some time talking about your view of the Covidien business now and what do you see as kind of the key product category growth drivers on the top line that will drive kind of that mid-single to high single-digit growth going forward on that side of the business?

Yes, look the question is based on next quarter we’ll have Brian on the call as well and he can give you a little more specifics, but our initial understanding is the following; obviously the two key strategic tuck-ins are important although in the neurovascular side it's more for product, Covidien products related growth driver that we will see. Now aside from that we see continued strength in surgical solutions within Covidien, the operating room tools, Covidien has a strong position and we see continued growth with actually very modest pricing pressure which is like less than we normally see in our other businesses. We also think that sort of their newer technologies in -- the early stage technologies also which are just being created will also have some traction the emerging markets in Covidien especially with their value products that I think the emerging markets will want before the legacy Medtronic products will have traction little longer term because those products are just being developed but those are important. And finally there is a big strategic push which I'll really let Bryan comment on next time or in future calls around an acceleration of moving to minimally invasive technologies and I think this movement open to MIS is a pretty big push that will be a focus for the Covidien group. Finally the procedural growth that we see over all in the U.S the sorts of products that Covidien has will benefit most from that much earlier than the Medtronic products because they're hospital base and the value proposition like I mentioned several times this hospital base. So that’s my attempt kind of describing some of the areas that we particularly excited about. But if you can just hold off till next quarter and you'll hear Bryan and I'm sure you'll get a lot more detail and be more specific about some of these growth items.

Sure, that is great. Thanks, Omar. As a follow-up if I could just follow-up on one of the points that you mentioned there which is emerging markets both Medtronic individually and Covidien together. So this quarter your emerging markets growth improved to 12% from I believe it was 10% for so last quarter. Can you talk about the pathway to get to mid-single-digit EM growth if not higher? And then in the context of Covidien, does Covidien give you synergies that could lead to one plus one equals three type of benefit on the emerging market side or do you also view the emerging market side of Covidien as separate similar to your prior comments on Covidien where you talked about just sort of trying to preserve growth rather than initially rather than look at the synergies? How do you see that playing out? Thanks.

First of all just get the numbers straight, I think our emerging market growth in the last quarter was also around this 12% number. But the point is that we're below at least the 15% benchmark that we set ourselves and a lot of that and Covidien is actually in the same range. We'd like to get this thing up to at least 15% if not higher that’s our goal, I think we have every expectation that we can get there and we should have every expectation as we've get there given the opportunities that exist. However and we've laid our strategies though which we'll achieve it which is channel optimization, public and private partnerships, some government deal. So there are things that we're doing that will make this growth sustainable in that range. The other thing that we're doing which I think with Covidien will help us enormously is it diversification within the emerging markets. Right now in a legacy Medtronic basis China represents about 50% of our total emerging markets. So the whole rate just depends on China going up and down in China although we've grown in the double digits in the sustain fashion is a market where the distribution channels have to be optimized overtime and there will be pluses and minuses and if we can diversify more that will help stabilize our emerging market growth to the mid-teens if you like. With Covidien China will give our 30% we'll have Middle East and Africa and Latin America in particular which will be big contributors a bigger proportion than where it was at legacy Medtronic. So the diversification with Covidien will help us. To your point about -- how do we -- are there any real synergy type things with Covidien from a revenue perspective, we haven’t built anything concrete into our thinking today but clearly the scale that Covidien will give us in emerging markets our joint sales will give us, will allow us to penetrate into new geographies much more rapidly than we could if we were alone and that means to countries that otherwise we wouldn’t go to because it will cost the same to set up an office and all that whether you are Covidien and Medtronic together that size or just Medtronic alone. And so that scale helps us fund going into new geographies. This also includes going into new regions of existing geographies like China. So I think that’s where you'll see the maximum benefit. The other area that I have also mentioned in the past that we expect to see fairly rapid traction is that through Covidien we have an entrée into hospitals because the nature of the products that we sell. And moving those hospitals building on those relationships and taking them to our chronic disease management therapies because of our relationship and credibility with them we expect that that will accelerate. So we've have lots of directional reasons why we expect emerging markets to be enhanced fairly soon with this merger as opposed to some of the other areas that we've talked about

Your next question comes from the line of Joanne Wuench from BMO.

It is Joanne Wuensch from BMO. Quickly, the LINQ starts to annualize in the fourth quarter somewhat tougher comps. But this thing seems to have a ton of momentum behind it. Should we think of it as the gift that keeps on giving as you push further and further into patients and grab more and more cardiac rhythm management market share with it?

Certainly I can think of it as a gift that keeps on giving and I mean to be fair if you look at the patient populations that Mike described they are still highly underpenetrated in those disease state, so there is a growth. But obviously the nature of that growth would be different from the comps that we had last year. But an expectation that this is a market that is still highly underpenetrated I think that’s just actually true and we need to execute to capture that. But Mike I'm sure you'll have any more comments on that Mike?

No I think as you say there is plenty of momentum in terms of the penetration rates going forward they’re low in every one of the three categories that I talked about again we’re going to be looking at 300% year-over-year growth but we will be looking at meaningful especially dollar growth associated with this. But I think the other point that Omar referenced earlier that’s important to keep in mind is this is really helping us with our device revenue as well from the standpoint that if you look at think of these patients with review LINQ we are now treating about two and half times as many this past quarter as we did a year ago in the third quarter and roughly 8% of those patients will wind up getting a pacemaker or ICD in the first year and over three 3.5 year life of a review LINQ roughly 20% of those patients will be identified as being appropriate candidates for device therapy. So, this is not only helping us within its own revenue it’s also helping us in terms of getting patients who need these therapies identified and appropriately treated and obviously if we get differential market share of those patients because we are the ones who found them.

And then my second question has to do with renal denervation. You sort of gave us a teaser at the beginning of this call starting your IDE shortly or filing the IDE shortly. What will be different this time than the last time you worked through the FDA process on the product? Thank you.

So actually a lot will be different obviously we’d be using a different device from the standpoint that the spiral device of choice we will be actually ablating a different location and with a different protocol, a lot of work went into the study design itself obviously to see if we could increase the treatment effect in the treatment arm which I’ve just referenced on how we plan to do that lower the effect in the control arm which basically we’ve been working with numerous experts in the field to identify what drug regimens and comparators should be used and they will be meaningfully different in this proposed study than what we used before. And obviously we’re going to be trying to really tighten the variability that we saw on both the treatment and control arms and we have a number of ideas and protocol to be able to deal with that. So we are meeting with FDA on a specific proposal on how we would restart this study obviously it’s going to be up to them to accept that protocol so we still have work to do but I think we know what we want to do with the next IDE study and we will see if we can come to agreement with the agency on moving forward on.

Thanks to all of you for your questions. And with that on behalf of the entire management team I’d like to thank you again for your continued support and interest in Medtronic. We’re obviously very excited about the future and we look forward to updating you on our progress in our Q4 call which as Gary mentioned earlier will be on June the 2nd. And with that I’d like to say my final words of thanks and have a great day.

This does conclude today’s conference call. You may now disconnect.