Q3 2017 Real-Time Call Brief

Highlights

This morning, we reported third quarter revenue of $7.3 billion, representing growth of 6%.

Q3 non-GAAP operating profit grew 10% and non-GAAP diluted earnings per share were $1.12 growing at 10% and representing EPS leverage of 480 basis points.

In Q3, we achieved solid results across all of our groups with mid-single-digit growth in CVG, MITG and RTG and high-single-digit growth in diabetes.

Geographically, we also demonstrated solid performance with mid-single-digit growth in the US, high-single-digit growth in the Non-US developed markets including Western Europe and Japan and double-digit growth in Emerging Markets.

We remained confident in our ability to deliver mid single-digits constant currency revenue growth and double-digit constant currency EPS growth not only in our current fiscal year but also into the future.

In our Cardiac and Vascular Group, which grew 6%, our New Therapies are helping to create important rapidly growing Medtech markets such as LVAD, ChEVAR, drug-coated balloons, AF Ablation, and insertable diagnostics.

In Coronary, we're anticipating FDA approval of the Resolute Onyx Drug-Eluting Stent around fiscal year end which we expect to return mid-20s USD DES sales declines into meaningful growth for FY18.

In our Minimally Invasive Therapies Group, which also grew 6% with strong high single-digit growth in Surgical Solutions as we focus on moving surgical procedures from open to minimally invasive, driven by ongoing new product launches in Advanced Synergy and Advanced Stapling.

Our Restorative Therapies Group grew 4% this quarter with strong contributions from our spine, brain and specialty therapies division.

Our spine division again showed improvement growing 3% the strongest rate in over seven years as we continue to gain share.

Neurovascular also had a solid Q3 growing 13%, driven by strong performance in flow division in Cardiac.

Turning to our Diabetes Group which grew 7%, we have strong sequential improvement in our US business with highest consumables and pump growth in 10 quarters.

As mentioned last quarter, we do expect diabetes to deliver double-digit growth next fiscal year once the 670G is fully launched.

Let's turn to globalization, Emerging Markets grew 11%.

The Middle East, macroeconomic environment challenges persisted in Q3 and our revenue declined in the low single-digits.

China, Latin America, and Eastern Europe showed sustain strength growing in the mid-teens or higher.

In China, our largest Emerging Market, we grew in the mid-teens with MITG in the low 20s on the strength of Advanced Stapling platform and CVG in the double-digits as we capitalized in our market development efforts and private hospitals and Tier-2 and Tier-3 cities.

Latin America had mid-20s growth driven by key tender wins channel optimization programs specifically in Brazil, Mexico and Argentina.

Eastern Europe also grew in the mid-teens with strength in Russia, where we started shipping our coronary stents and balloons as part of the public partnership agreement we reached last year.

We continue to see success in our Hospital solutions business, which grew in the high-teens.

We continue to expand our Hospital Solutions offerings globally beyond Europe with 38 accounts in the Middle East, Africa, Latin America and Canada.

Our third quarter revenue of $7.283 billion increased 5% as reported or 6% on a constant currency basis.

Foreign currency exchange had a negative $40 million impact on third quarter revenue, and acquisitions and divestitures contributed approximately 150 basis points net to revenue growth.

GAAP diluted earnings per share were $0.59.

Non-GAAP was $1.12.

After adjusting for the $0.05 impacts from foreign currency, non-GAAP diluted EPS grew 10%.

Our operating margin for the quarter was 29.1% on a constant currency basis, representing a strong 130 basis point year-over-year improvement.

With the impact of currency included, our third quarter operating margin also improved, increasing by 40 basis points year-over-year.

Taking into account acquisitions that we have done in that past year, our operating margin improvement on an organic basis would have been approximately 170 basis points in the quarter.

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

Net other expense was $46 million compared to $9 million in the prior year, due in large part to lower net gains from our foreign exchange hedging program.

Below the operating profit line, net interest expense was $180 million.

At the end of third quarter, we have $32.1 billion in debt and $11.5 billion in cash and investment of which approximately $6 billion was trapped.

Our non-GAAP nominal tax rate on a cash basis was 17%.

Free cash flow was $1.8 billion.

We paid $590 million in dividends and repurchased a net $566 million of our ordinary shares in the third quarter.

This represented a total payout of 74% on non-GAAP net income, and 141% on GAAP net income.

Our payout ratio is elevated, as we have been continuing to not only return 50% of our annual free cash flow to shareholders, but also execute the $5 billion incremental share repurchase commitment we met through fiscal year ‘18.

Third quarter average daily shares outstanding on a diluted basis were 1.383 billion shares.

Under the terms of the decision, we would experience an increase to our annual accessible cash generation of approximately $225 million as well as the movement of approximately $3 billion of cash on our balance sheet from trapped to accessible.

Consistent with our long range expectations, we continue to expect full year revenue growth to be in the mid single-digit range and EPS growth to be in double-digit both on a constant currency, constant weeks basis.

For the final quarter of the year, we expect revenue growth to be in the lower half of the mid single-digit range on a constant currency basis.

This is solid growth especially when you consider the strong 6% constant currency growth we delivered in the fourth quarter last year.

We expect both CVG and MITG to grow in a mid single-digits.

We expect RTG to grow in the low end of the mid single-digit range consistent with the third quarter, and we expect diabetes to grow in the mid-to-high single-digits, with the potential proposed stent purchases.

While the impacts from currency is fluid and therefore not