Medtronic plc
Q4 2010 Earnings Call Transcript

Published: 25 May 2010

[Operator:]

Good morning. My name is Celeste and I will be your conference operator today. At this time, I would like to welcome everyone to the Medtronic Fourth Quarter Year End Earnings Conference Call. [Operator Instructions] I would now like to turn today's call over to Mr. Jeff Warren. Please go ahead, sir.

[Jeff Warren:]

Thanks, Celeste. So good morning and welcome to Medtronic's fourth quarter conference call and webcast. During the next hour, Bill Hawkins, Medtronic Chairman and Chief Executive Officer; and Gary Ellis, Chief Financial Officer; will provide comments on the results of our fourth quarter and fiscal year 2010, which ended April 30, 2010. After our prepared remarks, we'll be happy to take your questions. A few logistical comments. Earlier this morning, we issued a press release containing our financial statements and a revenue-by-business summary. You should also 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 the forward-looking statement. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports filed with the SEC, and 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 the Medtronic website. Finally, unless we say otherwise, references to quarterly results, increasing or decreasing, are in comparison to the third quarter of fiscal year 2009, references to annual figures increasing or decreasing are in comparison to fiscal year 2009 and all growth rates are given on a constant-currency basis. And with that, I'm now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Bill Hawkins.

[William Hawkins:]

Good morning and thank you, Jeff. Q4 was another solid quarter and caps off a very strong year. This morning we reported fourth quarter revenue of $4.2 billion, which represents growth of 10% as reported or 6% on a constant-currency basis. Total fiscal year revenue of $15.8 billion grew 8% both as reported and on a constant-currency basis. Q4 non-GAAP earnings of $986 million and a diluted earnings per share of $0.89 increased 8% and 9% respectively. Total year non-GAAP earnings and earnings per share of $3.6 billion and $3.22 grew 9% and 10% respectively. Our Q4 results reflect another solid quarter of delivering balanced growth across our businesses and geographies. We continue to execute on our One Medtronic strategy and it's clearly having an impact. Looking back at the year, we came in at the high end of our revenue expectations and exceeded the high end of our original EPS guidance range. We delivered on and exceeded our FY '10 operating commitments driven by the initiatives we started several years ago. In FY '10, we maintained our gross margins in a challenging environment by taking out over $250 million in product costs. We also delivered meaningful SG&A leverage based in part on our early efforts to de-layer, restructure and right-size the organization. Overall, we have delivered over 100 basis points of operating margin improvement in FY '10 on top of delivering over 100 basis points of improvement in FY '09. Our results continue to reflect the strength and the stability of our globally diversified portfolio. Our broad and unique portfolio of businesses positions us well to provide innovative solutions for the most prevalent chronic diseases, serving patients by building markets around the globe. Our balanced performance was evident again in Q4. Our international operations continued to deliver exceptional results, with 11% growth in Q4 and 13% growth for the year. The strong international growth in the quarter was broad-based with Western Europe, Greater China, other Asia, Middle East and Africa and Latin America as well as five of our seven segments delivering double-digit results. These strong Q4 international results were driven by multiple product lines. Our AF Solutions and Structural Heart business performed well in Europe. Our CRDM Implantables business had an exceptional quarter in China and other Asia. In Europe, our two drug-eluting stents Endeavor and RESOLUTE continued to take share. Our Endovascular business had another quarter of solid double-digit international growth, driven by the continued adoption of Endurant ,AAA and Valiant thoracic. I was encouraged to see Balloon Kyphoplasty grow in Western Europe, where our turnaround efforts are beginning to have an impact. In our Neuromodulation segment, Pain Stim, DBS and Uro/Gastro experienced double-digit growth in Europe and Central Asia. Diabetes saw strong pump growth in the quarter in Western Europe and other Asia, driven by the expanded launch of Veo. Market-leading performance continues to be our goal, with growth as the primary driver. Our growth strategy is focused in three areas

[Gary Ellis:]

Thanks, Bill. Fourth quarter revenue up $4,196,000,000 grew 6% after adjusting for a $131 million favorable impact of foreign currency. Breaking this out geographically, revenue in the U.S. was $2,442,000,000, up 3%; while sales outside the U.S. were $1,754,000,000, increasing 11%. Q4 international revenue growth by region was as follows

[Operator:]

[Operator Instructions]. Your first question comes from the line of Matthew Dodds with Citigroup.

[Matthew Dodds:]

I just want to hit the U.S. pacing numbers. I know you have compatible coming. But Bill, what's going on with the market, you said that you lost share, it looks like with your number the market was down. How strong is that pricing pressure getting versus volume growth?

[William Hawkins:]

I don’t think that the pricing is changing any more that what we've seen in the last year or so. I think there are couple things going on in the pacing market. First; notwithstanding the pricing issue that we just talked about, two; we do see some modest sort of mix shift from pacing to CRTD. I can't quantify that for you, Matt, but that’s what we believe, that there's a dimension of that happening. Clearly, with the impending launch of Advisa MRI SureScan and the REVO, we’re optimistic that we're going to be able to see growth through share gains going forward and we'll see improvement in pricing because of the, just the technology uplift that we're going to have. So that's kind of how we're going to address the overall market.

[Matthew Dodds:]

When you look at the extra selling week, the $200 million, should we assume the acquisitions, Invatec and ATSI, roughly offset that $200 million, so that real growth is 5% to 8%?

[Gary Ellis:]

Matt, I think that's a good way to look at it. Obviously we have the impact of the extra week. The acquisitions, depending obviously when ATS closes, which that has not closed yet, so that will, we expect sometime this summer. But with Invatec and ATS, yes that would be approximately offsetting that extra week impact. And so if we take those two things into consideration, the other business is in the 5% to 8% range, yes.

[Operator:]

Your next question comes from the line of Mike Weinstein with JPMorgan.

[Michael Weinstein:]

On the Spine business, you made the comment that prices were flat to down low single digits and suggestion is the disconnect between what you guys are seeing and what some of your competitors are seeing. Maybe you could just elaborate on that?

[William Hawkins:]

The only thing I can say, Mike, is just when we look at our average pricing, again, it is in that very low single-digit. And again, I think its offset by the introduction of new products, the Solera, the TSRH 3Dx, the VERTEX, so if we bring in new products, we’ve been able to get a modest, if you will, increase and that's been offsetting the pressure that you may have on older products. So for us, we've managed pricing across all of our businesses through the introduction of new technology. And when we bring in a new product, we really work hard to get us a modest premium.

[Michael Weinstein:]

Bill, can we talk about Europe? That’s probably topic number one on most investor’s minds right now. Can you talk broadly about two areas? One, the risk that the issues that a lot of the countries in Europe are facing right now which leads to a downturn in healthcare budgets of your fiscal '11 and that having an impact on your business. And then two, the risk that we see, any measure similar to what we've seen announced on pharmaceutical pricing, impact the device industry going forward. Obviously we've seen announcement’s in a number of countries in the last couple of months that’s simply targeting pharmaceutical pricing. Do you have any expectations of similar announcements or proposals relative to these devices?

[William Hawkins:]

To answer the second question first, we have not, I have not heard of anything of that sort in any of the countries as it relates to pacing or defibrillation or any of our major product lines. I have not heard of any kind of a national pricing being set for those products. If you look at again, Western Europe for us, we had a good year. In fact, this last quarter, we grew 13%. And its again, it’s a large part driven by the launch of many new products in the CRDM space with Protecta, and with the SureScan MRI technologies, with CryoCath , with the valve technology, transcatheter valve, the Neuro business with the Restore Sensor, the Veo and Diabetes. And so we've managed through it pretty well because of just the introduction of so many new products. Now, having said that, clearly there is some major economic challenges particularly in southern Europe and Greece and Portugal and Spain. We're monitoring it very closely. But we remain cautiously optimistic given just the breadth of our product portfolio.

[Michael Weinstein:]

Gary, can you just elaborate on your hedging? You obviously saw some benefit this quarter on the other income line from your hedging despite having a top line benefit. It looks like you're guiding to, for the first quarter, $50 million to $60 million of hedging gains on the other income line which would seem to more than offset the top line impact from currency. So just talk about your hedging, it seems like you've probably hedged at some pretty attractive rates over the course of the last couple quarters.

[Gary Ellis:]

Yes, Mike. As we’ve indicated before, in our hedging program, we tend to hedge about a year to a year and a half out. It’ll vary by currency and obviously it depends on how the orders are hitting. But we tend to try to go into a year, as we did this FY '11, about 80% hedged, 75% to 80% hedged. And that will vary by currency and what we expect to kind of see based on the forecast of some of the currency rates, some of the years it can be higher than that, some of the years a little bit lower, depending on what we see happening. So you're right, as we went through FY '10 and as we go through FY '11, we were able to lock in at some relatively favorable rates, even versus where some of the historical levels have been at. That was positive for us, as we went through FY '10, making sure that we could get our commitments on the bottom line. We obviously believe it's going to help minimize the exposure that potentially is out there right now as we go into FY '11. Back to your question in Europe, the bigger issue that we're probably experiencing overall is just the impact that some of the crisis in Europe is having on the foreign exchange rates, with the dollar strengthening as much as it has against the euro. And as I mentioned, that’s had a very, if that continued, that would have a large impact on everyone in the industry, basically with a significant reduction in the overall revenue. We've minimized that with our hedging strategy. And so as a result, we end up having some very large gains, as I mentioned, as we go through next year, in our hedging program. So we think it helps us ensure that we can protect that bottom line.

[Operator:]

[Operator Instructions] Your next question comes from the line of Bob Hopkins with Bank of America.

[Robert Hopkins:]

First question is, getting a little bit better understanding on some of the top line guidance that you're providing. First, a follow-up on Europe, in your guidance, are you suggesting that Europe will also be growing in that 5% to 8% range? And then also on the top line, in terms of U.S. market share in ICDs, you made some comments about where you are right now by our master at roughly 51% or 52% share. Are you forecasting a couple points of share gains in that top line guidance as well.

[Gary Ellis:]

On the Europe question, we are forecasting, again, solid growth in that 5% to 8%, if not a little bit more going forward, given just the breadth of our product portfolio, which I already talked about. So we think the new products will enable us to drive meaningful growth outside the U.S., but an important part of that is Western Europe.

[William Hawkins:]

I would add, Western Europe could be a bit higher because Invatec, which obviously has a lot of their operations are outside and actually in Western Europe. The Western Europe numbers could be actually, I don't have it in front of me as far as what tour numbers are for next year. But Bob, they could be a little bit higher than the 5% to 8%. As Bill mentioned earlier, that's where all the new products are hitting first. And then with the Invatec acquisition, they’ll probably have a little bit more of an impact in Europe. So they’ll probably be at the higher end of that 5% to 8% range.

[Robert Hopkins:]

On the ICD side, we’re very encouraged by what we did last quarter and the amount business we picked up in response to a competitor's issue. And going forward, we're going to work hard to maintain as much of that as we can. We’re realistic and obviously a lot of that’s gone back to the competitor, or some of that’s gone back to the competitor, but we’ve held on to what we believe, a disproportionate amount of that in the first few weeks. This is when it’s always hard to predict but we’re feeling pretty optimistic about the outlook for this year.

[Robert Hopkins:]

Gary, just to follow-up on the bottom line guidance, you gave some specific, I wonder if you could just highlight, of the operating leverage and leverage generally that falls through to the bottom line, that 10% to 13% excluding the deal dilution. Could you just talk about how much core operating leverage you’re anticipating in 2011 versus leverage from buy backs?

[Gary Ellis:]

Yes, as we indicated in the comments, the operating leverage we obviously had received over the last two years has been 100 to 110 basis points on operating margins. So it's been very, very significant, [indiscernible] coming through both the gross margins and the SG&A reductions we've talked about. As we look ahead, as we indicate in our comments, we think the gross margin will stay relatively consistent where we’re at, at this point in time, although it depends on what happens with FX rates, FX could pull it down a little bit. And that's why we gave the 75.5% to 76% range. SG&A itself, basically we are indicating that the 34% plus or minus kind of a 25 basis points, which would be just to 20 to 40 basis points improvement over kind of where we're at in the current year. But what I have to highlight is there, as I mentioned in my comments, we are continued to focus on driving operating leverage throughout the organization and we will see benefits from that. But we have two headwinds we're going to have as we go into FY '11. One is the Invatec acquisition actually adds about 40 to 50 basis points to the SG&A line itself. So that will hurt the operating margins a little bit. So that's a headwind we're fighting against. And the second thing is with all these product launches that we have expected for FY '11 across all of our businesses, we are going to be upping the investment obviously in marketing and driving those product launches to make sure they’re successful. So as a result, this is a little bit of a year in investment on the marketing and sales side to drive some of those product launches themselves. So to cut through all of that, Bob, we're expecting to see some continued improvement in the operating margins for next year. But they will be muted from what we had this year just because some of those investments in the Invatec acquisition.

[William Hawkins:]

And the other area were going to invest in is R&D. This year, I think it was around 9.2%. Next, we're in the 9.5%. So there's going to be a modest increased investment in R&D, given just what we have in our pipeline. We feel very good about the long-term and we're going to do what we can to make sure we can invest to drive growth internally through our product pipeline.

[Robert Hopkins:]

And what would the tax rate be, assuming the R&D credit does get implemented?

[William Hawkins:]

The R&D credit itself is worth about 50 basis points. So I mean if we got that reinstated, it could be closer down to the 21% range.

[Operator:]

Your next question comes from the line of Kristen Stewart with Credit Suisse.

[Kristen Stewart:]

On the Kyphon business, I was just wondering if you could comment or give us an update on the Japan launch as well as just kind of the U.S. business, if you think the current run rate is what we should expect going forward, maybe in light of some of the recent competitive entries?

[William Hawkins:]

In Japan, we still maintain this is a big opportunity but it’s going to take time to develop. As we’ve commented before, in Japan they really don't do much for kyphoplasty. So there’s a big market development opportunity that needs to take place and we're investing to be able to realize that. I don't think you should click a lot of big numbers into your model for this year because we estimate it going to take some time to develop. But we again, remain very optimistic for what could be a big opportunity in Japan. Here in the U.S., with the introduction of two new competitors, we feel like we have a very highly differentiated product line, we will be very competitive in maintaining and growing our position in the marketplace. I'm not going to get into it but there are a number of differences in our products versus the care fusion or the striker products and our people are well prepared to market and sell those differences. And then the other thing is, we are making some changes in how we manage the Kyphon business, we're going to put more focus on the BKP. We're going to leverage the broader spying sales force to drive the X-Stop which has been a challenge for us. So there are a couple of things that we're going to do differently going into FY '11 from an organization point of view. The things that we’re going to be doing in the U.S. are something we did actually in Europe six months ago and we've seen good results come out of the European moves and so we’re cautiously optimistic that's going to be something that will be helpful to us here in the U.S.

[Kristen Stewart:]

And then, Gary, just in terms of thinking about the FX impact on the operating margins, I know you just touched on it. But just in terms of the gross margin impact embedded within your 75.5% to 76%, what should we think about in terms of the impact on a go-forward basis, assuming rates stay where they were yesterday? And can you maybe give us a ballpark on where the FX benefit was to gross margin since fiscal 2010?

[Gary Ellis:]

If you assume the rates stayed where they're at yesterday, basically you’d be closer to the lower end of that gross margin range that I mentioned, the 75.5% to 76%. It will obviously vary depending on what the products are and exactly in what area where FX impact's at, as far as how much benefit. But you can tend to look that we probably are getting about 50 to 60 basis point benefit right now, based on what the previous FX rate were where we’re currently at. So you'd be at the lower end of that range if you assume the FX rate stays the same for the rest of the year.

[Operator:]

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

[David Lewis:]

Gary, just a quick question on ATS and Invatec, I guess the dilution of $0.05 seems a little heavier than we would expect just on financing cost. So I would’ve expected a significant amount of distribution leverage with both of those assets. Is there something we're missing there?

[William Hawkins:]

No. I think we've always said for the Invatec, for example, I think we were very clear when we did that, that we thought that was kind of in that $0.03 range. With ATS, it's kind of in the $0.02 range. There's things you have to deal with obviously from the acquisition side, both on the intangible assets and the amortization related to that. You have write-up on the inventory that we have to do, from an acquisition accounting perspective that comes through. So that's why you get to about $0.05 overall. As we've indicated, on both of them, even with ATS in the fiscal year, we would expect their earnings neutral. But initially the first couple of quarters, there clearly will be an acquisition impact related to the acquisitions themselves. And then there's integration costs. The reality is yes, over the long term, there will be complete, very significant synergies, especially with ATS. But there's obviously also integration cost and costs we're going to have to incur to make those integration, that synergies work. So it's not going to all occur right away in day one. And with ATS, we're assuming we only probably have it for six to nine months for the year. So that's why you're getting most of the costs in the current year, with the benefit obviously in FY '12.

[David Lewis:]

Gary, is it safe to assume that for fiscal '11, those acquisitions would be accretive on cash basis?

[William Hawkins:]

Yes.

[David Lewis:]

Bill, just a question on capital deployment. You mentioned some minority write-downs obviously this quarter. We haven't seen you make necessarily more minority investments. We have seen a couple of large $40 to $70 million investments in sort of minority or venture investments. We're also seeing you sort of take up the R&D spend, then we're seeing kind of multiple small tuck-in acquisitions. Just kind of get a sense of, is this signally sort of a change in how you view kind of go-forward investments, sort of more diversified and about where you’re going to spend to grow and sort of less focused on larger transactions?

[William Hawkins:]

I don't think it represents a significant change, David. This is what we've been saying for some time now, in terms of our model for growth is going to be a combination of organic, which is where the primary drivers of growth is going to come from in both the business unit level as well as some of the things we're doing internally with our ventures group and we do have a minority investment portfolio that we continue to use when we see interesting early-stage technologies, we’ll periodically invest in those technologies and then the tuck-in’s, I mean we’ve been pretty consistent now for the last few years in how we've managed our growth through the combination of organic, plus tuck-in’s, plus venture and then some of the minority investments. So this is a model that is working for us and this is what I think you can expect to see going forward.

[David Lewis:]

Obviously it’s incremental but 9.5% is sort of the highest level of R&D in several years. Are you kind of prepared to say if 9.5% can be a cap for Medtronic or could we see that number inch higher to the 10% range.

[William Hawkins:]

I would love to be able to inch it higher, I mean at the same time deliver on the bottom line and it’s the engine for growth for Medtronic. We've got a lot in the pipeline this year and so that’s why we are incrementally investing from 9.2% to 9.5% because of our confidence in what we think can help deliver top line growth and bottom line growth.

[Operator:]

Your next question comes from the line of Ben Andrew with William Blair.

[Ben Andrew:]

Just wanted to talk a little bit more about the spine market, Bill, you are more bullish on kind of the overall trends here and in Europe than we've been hearing recently. Can you talk a little bit about what's going on with volume and pricing differently and has it changed or is this a product cycle issue that lead to the comments?

[William Hawkins:]

On the overall Spine business or Kyphon, in particular?

[Ben Andrew:]

On the constructs side specifically.

[William Hawkins:]

Well constructs for us, in total, we were in that mid single digits for the year. If you look at our overall Spine performance for FY '10, it was roughly 2% with Biologics being roughly flat, Kyphon was down and our core constructs, actually on a year-to-year comparison we’re in that mid single digit range, so we’re not back at market growth with the core constructs but we're moving in that direction. And it's been driven by the launch of a number of new products, as I said Solera is doing well, the TSRH 3DX is doing very well, the SOVEREIGN technology is doing very well. Some of the cervical products we’ve launched, the VERTEX and VERTEX SELECT and the DLIF, we feel like we’ve got a very competitive portfolio with the CLYDESDALE implant and our NIM technology. So it's all about having a balanced portfolio of products and we're using that to drive growth.

[Ben Andrew:]

And Bill, when you look at DLIF specifically, do you feel like that’s helping to expand the market into lateral or are you converting some of your historical customers to DLIF from other product?

[William Hawkins:]

I think it's probably more cannibalization. Although I think it's hard to put a real number on it. But my sense is that it’s not really expanding the market so much, it's a combination of really more cannibalization.

[Ben Andrew:]

So the recent comments we’ve been hearing out of the competitors, that pricing is intensifying, you’re not echoing those comments at this point on the core traditional constructs, is that right?

[William Hawkins:]

That's right.

[Operator:]

Your next question comes from the line of Rick Wise with Leerink Swann.

[Frederick Wise:]

It’s Danielle in for Rick. Just two quick questions on Physio. Can you provide an update on any strategic alternatives there? Are we still thinking of a spin-off, probably not this year but maybe fiscal ’12 or beyond? And then on the Diabetes side, you know we’re seeing a tougher FDA, the new regulations around the infusion pumps, how do you expect that to impact your Diabetes pump sales? And also, at the upcoming ADA meeting, do you see anything groundbreaking coming out on the CGM side and/or new products coming from you guys?

[William Hawkins:]

First on the Physio, our long-term plans have not changed. As we announced a couple years ago, at some point, we will spend this business off. Right now, we are getting, we are just back on the market. We’re investing to resume our market-leading position and we had a very good quarter and we have a good outlook in FY '11. Our plans all along were to get back to the market, work through the issues that we had and we've done that. And now, we're really driving the business and we’ll evaluate what's the right time to take the next strategic move. On the Diabetes business, Diabetes is being driven by the strong portfolio of new products that we have, the VEO outside the U.S., which is as I mentioned, the first step in closing the loop with Glucose Suspend technology and here in the U.S. with the Revel and some of the things we’re doing to improve our overall sensor technology. We have worked very closely with the FDA on some of their concerns around infusion pumps. And we believe that the investments we've made in the quality and durability will ensure that we stay very vibrant on the marketplace. In terms of ADA, what's coming on ADA, again, we have a lot to talk about with all the products which I just mentioned. And obviously we're all waiting for the results of Star 3, I think that will an important trial to really highlight the importance of continuous glucose monitoring with pump therapy.

[Operator:]

Your next question comes from the line of Tao Levy with Deutsche Bank.

[Tao Levy:]

Bill, you made a comment earlier on about hitting your bottom line commitments. I just want to make sure longer-term, you still think of Medtronic as a company that can grow earnings at that 10% or greater.

[William Hawkins:]

Yes. That’s our goal, is to deliver, I mean, 5% to 8% top line and two to three percentage points faster on the bottom. The goal is in that low double-digit earnings per share growth. And we'll do that as a combination of operational strength and financial strength.

[Tao Levy:]

I understand you tuck-in acquisitions, the good for the long term of the company but they always do add a little bit of dilution. And at the same time, you're talking about raising your internal R&D investment. I figured that might be a little bit of give and take where you maybe make some of the external acquisitions. But at the same time, your internal R&D slips down a little bit.

[William Hawkins:]

Well I mean, look at this last year. We did the CoreValve and the CryoCaths and we delivered 8% top line growth and we delivered 10% earnings per share growth. So we've been -- that's the aspiration. That's the financial guidance that we've given. We're going to work hard to deliver on that.

[Matthew Dodds:]

On the MRI pacemaker market opportunity, one of the criticisms that you guys get often is in Europe, your first generation didn't do that well but now you're talking about Advisa starting to do better in Europe. Can you just comment a little bit more what you're seeing with this new MRI pacemaker uptake within certain markets?

[William Hawkins:]

The REVO, which was launched first, with the old EnRhythm, was a product that we really never launched in Europe. So it was kind of a niche product, the Advisa platform was a much more substantial platform and that’s what we have just now brought forth with the MRI Safe technology. That's different from what we had in the U.S., in the U.S. actually the REVO platform, which is based off EnRhythm was a product that was more than just a niche year in the U.S. So that's why we're confident that REVO will be a good start here in the U.S. and Advisa is the right product platform for us in Europe.

[Gary Ellis:]

Again as we indicated in the comments, it’s obviously been very early with Advisa launch. But the initial information data we’re seeing has been positive. It's still too early to be really give any kind of firm data on it but right now it’s been an early, good, quick adoption what we have seen initially.

[Operator:]

Your next question comes from the line of Adam Feinstein with Barclays Capital.

[Adam Feinstein:]

This is Nat for Adam. I just wanted to ask a question first about Neuromodulation, there was a little bit of a slowdown and you mentioned some issues in SCS. I just wondered if you could elaborate on that a little bit.

[William Hawkins:]

If you look at Neuromodulation, it's really a compilation of the urinary incontinence and fecal incontinence products, the InterStim, Deep Brain Stimulation, then you have the spinal cord stimulation. So starting with the good news, the good news is that InterStim continues to do well. I think we've got 16 quarters now where we've had over 20% growth previous. DBS, we're making a major investment in expanding indications, things like epilepsy, the obsessive-compulsive disorder and things of that sort. So DBS is doing well. Yes, we have had some challenges with spinal cord stimulation. We're addressing those. The Restore Sensor outside the U.S. when we get that here in the U.S., that technology is going to be very well received. But we're not waiting for that. I mean, there's a blocking and tackling issues here, and we've made some changes. And I'm confident that you're going to see our results improve.

[Bruce Nudell:]

Questions about market growth, you mentioned some gross number for this quarter and I wanted to ask about what you think your outlook is for the Spine market and for the CRM market, are you still seeing those as high single-digit and mid single-digit growers or has that changed?

[William Hawkins:]

On the Spine market, we still see the market being healthy and that upper single digits growth, which is down from what we saw a few years ago. But it's still, on a relative basis, a good solid market. On the CRM, the CRDM business, looking at ICD's, ICD’s we see in that mid single digits, with growth outside the U.S. being more mid to high single digits, in the U.S. in that low to mid single digits on a worldwide basis we see a good solid mid single digits. And on the pacing market, again we're looking at flat to low single digits.

[Gary Ellis:]

And then obviously with CRDM, we’ll have the AF businesses, which obviously that market is growing quite substantially and that's by the fastest growing market in the CRDM.

[Bruce Nudell:]

Any risk of product launch delays due to your discussions with the FDA?

[William Hawkins:]

That's a hard question to answer. Clearly, the environment is changing, and the bar has been raised and we take quality extraordinary seriously. We are investing a tremendous amount to make sure that we continue to bring forth market-leading but quality advantage technology but if you just look at what’s happened across the industry, I think you’d have to make the assumption that there is more risk now with the FDA. So will that translate into longer times to complete warning letters, it very well could. And that's why we called that out in our commentary.

[Operator:]

Your final question comes from the line of Derrick Sung, Sandford Bernstein. THIS SEGMENT EDITED BY KellyAccu

[Derrick Sung:]

I wanted to go back to the U.S. ICD market, where you said you saw a $60 million to $70 million benefit this quarter from the Boston stop shipment. So if we back that number out of your sales this quarter, then that implies kind of a flat, maybe even slightly down growth rate -- organic growth rate for your U.S. ICD sales x the Boston impact. And I was wondering, does that imply that you were growing below market and losing share organically or do you feel that the market actually slowed down and is more at that level versus the low single-digit numbers that you provided?

[William Hawkins:]

I think it's the latter. I think what we did see was a bit of a tempering of the market. We don't believe we lost share. We believe we actually maintained if not gained a little bit of share and clearly the Boston situation helped us and we think we gained about 2/3 of what was available there. But clearly, the market in the U.S., we see it bounce around a little bit. This was one quarter where we saw it more on that very low single digits.

[Gary Ellis:]

I think the other thing to highlight is the Boston situation obviously impacts the market too and I think it's almost impossible in this quarter that we just went through to really determine what was going on in market. So because how that was infecting the market, were they holding off on replacements for example on the Boston side, as we went through this whole process and we're meeting the demand, what did that do to even our ability to be out there and even for the physicians for example to be out there, actually getting new patients on board. It's just a different situation. It's hard to evaluate the market. We do not believe that we lost share. The other thing is it's hard to tell right now but the question is we do think the inventory levels might be a little bit lower also in some of the hospitals as a result of this, as they work down the inventory as they go through the Boston situation. So we feel good about the quarter and as we indicated, we picked up about 2/3 of what we believe Boston lost during that period of time. But I wouldn't read a lot into what's going on in the market for this quarter itself.

[Derrick Sung:]

How much of that $60 million to $70 million was the one time from the actual period of the stop shipment versus post-stop shipments sort of permanent share gain on your end?

[Gary Ellis:]

That number is basically our assumption for that 24, 25 days that they were out. That's the assumption for that period of time. After that, again, it's hard to say exactly what the impact is. But that is the assumption for that period of time.

[Derrick Sung:]

Going back to your comments on Spine, if your feeling is that pricing has held up somewhat more than say, other comments from competitors in the Spine market. Then, are you attributing the slowdown in the growth of market that we've seen over the last few quarters to volume? And if so, what is causing that?

[William Hawkins:]

No, I mean it's partly price. If you look back a year or two years ago, we were actually seeing price increases in the Spine market. And what we're now seeing is modest price decreases. So I think you have seen in part a change in the price in the marketplace. But we're seeing it more in that low single digit decline versus what we understand some other competitors have put forth.

[Gary Ellis:]

And our comment was also based on the fact, we've seen this slowdown in the market for the last two or three quarters. So it wasn't like this occurred just recently. That's why we made the statement. The pricing has, as Bill mentioned, used to see price increases. But over the last probably three quarters, we've seen pricing relatively flat to down to 1% that we talked about. So that's what clearly brought the market from being more like a 10%, 10% to 11% growing down to more the high single digits recently, the last year.

[William Hawkins:]

Let me conclude. First of all, thank you. I'd like to just close by noting that FY '10 was a very strong year and continued our track record of delivering consistent results to meet our financial commitments. The strength of our globally diversified portfolio was evident again, with broad-based growth across our businesses and geographies. Our recent acquisitions remain on track. And we're delivering one of the best product pipelines in our company's history. Our innovative technologies position us well to continue delivering market-leading performance as we enter FY '11. In FY '11, we intend to continue to execute on our margin expansion programs, investing for growth and generating a sustainable return for our shareholders. And finally, I'd like to remind you that we will host our Annual Investor and Analyst Meeting on June 7 in New York. So on behalf of the entire management team, thanks again for your interest in Medtronic and your continued support. Have a good day.

[Operator:]

Ladies and gentlemen, this concludes today's Medtronic Fourth Quarter Year End Earnings Release Conference Call. You may now disconnect.