INVESTOR DAY JUNE 6, 2016 NEW YORK CITY

Transcription

1 INVESTOR DAY JUNE 6, 2016 NEW YORK CITY

2 GARY ELLIS EVP & CFO

3 FORWARD LOOKING STATEMENT This presentation contains forward-looking statements which provide current expectations or forecasts, including those relating to market and sales growth, growth strategies, financial results, use of free cash flow, product development and introduction, partnerships, regulatory matters, restructuring initiatives, mergers/acquisitions/divestitures and related effects, accounting estimates, financing activities, working capital adequacy, competitive strengths and sales efforts. They are based on current assumptions and expectations that involve uncertainties or risks. These uncertainties and risks include, but are not limited to, those described in our periodic reports on file with the U.S. Securities and Exchange Commission (SEC). Actual results may differ materially from anticipated results. Forward-looking statements are made as of today's date, and we undertake no duty to update them or any of the information contained in this presentation. Financial Data Certain information in this presentation includes calculations or figures that have been prepared internally and have not been reviewed or audited by our independent registered public accounting firm. Use of different methods for preparing, calculating or presenting information may lead to differences and such differences may be material. This presentation also contains non- GAAP financial measures such as free cash flow and historical revenue on a comparable constant currency basis, which sums historical data of Medtronic and Covidien, aligns Covidien s prior year monthly revenue to Medtronic s fiscal quarters and adjusts for the impact of foreign currency translation. We believe these measures provide a useful way to evaluate our underlying performance. Detail concerning how all non-gaap measures are calculated, including all non-gaap to GAAP reconciliations, are posted to our website Investor Day 3

4 FREE CASH FLOW & CAPITAL DEPLOYMENT

5 2016 INVESTOR DAY: KEY MESSAGES 1 A GLOBAL HEALTHCARE LEADER WITH DIFFERENTIATED PLATFORMS TO DELIVER ATTRACTIVE SHAREHOLDER VALUE REVENUE GROWTH Unmatched pipeline and attractive, diversified markets lead to consistent, sustainable mid-single digit constant currency revenue growth 2 MARGIN EXPANSION Utilizing systems and structure at scale across the enterprise to drive margin expansion 3 FREE CASH FLOW Strong revenue growth and high profitability generates significant and increasingly accessible free cash flow 4 CAPITAL DEPLOYMENT Deploying massive amounts of capital strategically, consistently, and with discipline 5 EPS GROWTH EPS GROWTH Committed to consistently delivering strong double Committed digit constant to delivering currency consistent EPS growth double digit constant currency EPS growth 6 TOTAL SHAREHOLDER RETURN Overall performance results in low-double digit to mid-teens total shareholder return 2016 Investor Day 5

6 FREE CASH FLOW Revenue Growth 1 Mid-Single Digits Operating Leverage 1 Low- to Mid- Single Digits +/- Working Capital, CapEx, Inventory, Tax, FX FCF Growth High-Single Digits Strong revenue growth and high profitability generates significant and increasingly accessible free cash flow 1 On a constant currency basis

7 GENERATING SIGNIFICANT FREE CASH FLOW FY17-FY21 FORECAST ~$40B FCF High-single digit CAGR Mid-teens accessible FCF CAGR FY17E FY18E FY19E FY20E FY21E Trapped FCF Accessible FCF Assumes accessible FCF ratio increases from ~55% in FY16 to >75% in FY21 Working capital improvements to generate ~$1.5B in incremental FCF over next 5 years Free cash flow (FCF) defined as operating cash flow, less capital expenditures 2016 Investor Day 7

8 INITIATIVES TO IMPROVE FREE CASH FLOW FY16-FY21 Working Capital Growth: in line to slightly slower vs. EBITDA growth Working Capital Improvement Inventory Improved Turns 3-4% annually since FY12; targeting 5% Turn improvement every year Improvement in Turns will come from supplier management, manufacturing lead time reduction, and field inventory transformations DSOs Targeting 1-2% improvement every year Emphasis on reducing EM DSOs A/P: working to extend all suppliers to 60 days Billions ($) Capital Expenditure Disciplined capital spending remains a key focus 1 0 FY16 FY17E FY18E FY19E FY20E FY21E Average of ~$1B per year FY16-FY18: Modestly higher level to account for integration costs (primarily IT investments) FY19-FY21: Normalizes; remain flat / grow low-single digits Leverage infrastructure footprint 2016 Investor Day 8

9 NET INTEREST EXPENSE $2,000 Net Interest Expense Assumptions 4% Millions ($) $1,500 $1,000 $500 3% 2% 1% % of Revenue % of Revenue Net Interest Expense $0 FY16 FY17E FY18E FY19E FY20E FY21E 0% Net interest expense provides financial leverage after FY Investor Day 9

10 TAX STRATEGY 24% 22% 20% Legacy MDT Adjusted for one time U.S. R&D tax credit catch-up and valuation allowance reversal ~75 bps impact Assume Stable Tax Rate Going Forward Potential Tailwinds: Reduced hedging gains Potential Headwinds: 18% Renegotiating tax holidays in certain jurisdictions 16% 14% Legacy COV 16.5% to 17.5% Mid Term Debt reduction Other Considerations: IRS and transfer pricing litigation Tax reform 12% FY12 FY13 FY14 FY15 FY16 Change in earnings mix by geography Tax rate on a non-gaap nominal rate 2016 Investor Day 10

11 INITIATIVES TO IMPROVE ACCESS TO FREE CASH FLOW Significant Improvement in FCF Accessible Mix FY12-FY15 FY16 FY21 Improving Accessible FCF ~65% ~35% ~45% ~55% >75% Legal entity reorganizations Future cash flows from OUS registered IP M&A: targeting international opportunities with U.S. cash flow Trapped FCF Accessible FCF 2016 Investor Day 11

12 2016 INVESTOR DAY: KEY MESSAGES REVENUE GROWTH Unmatched pipeline and attractive, diversified markets lead to consistent, sustainable mid-single digit constant currency revenue growth A GLOBAL HEALTHCARE LEADER WITH DIFFERENTIATED PLATFORMS TO DELIVER ATTRACTIVE SHAREHOLDER VALUE FREE CASH FLOW Strong revenue growth and high profitability generates significant and increasingly accessible free cash flow EPS GROWTH EPS GROWTH Committed to consistently delivering strong double Committed digit constant to delivering currency consistent EPS growth double digit constant currency EPS growth MARGIN EXPANSION Utilizing systems and structure at scale across the enterprise to drive margin expansion CAPITAL DEPLOYMENT Deploying massive amounts of capital strategically, consistently, and with discipline TOTAL SHAREHOLDER RETURN Overall performance results in low-double digit to mid-teens total shareholder return 2016 Investor Day 12

13 CAPITAL DEPLOYMENT Share Repurchases Free Cash Flow Balance Sheet Cash Dividends Debt Paydown M&A Financial Flexibility Deploying massive amounts of capital strategically, consistently, and with discipline

14 STRONG CASH POSITION ~$2B Trapped B/S Cash ~$12B Trapped FCF $3B Puerto Rico Resolution ~$8B Accessible B/S Cash FY17-FY21E Sources of Cash Free cash flow (FCF) defined as operating cash flow, less capital expenditures ~$28B Accessible FCF ~$13B of cash and investments currently on the balance sheet Untrapped ~10B in FY16 as a result of an internal reorganization Announced $5B in incremental share repurchases by FY18, with bias towards repurchasing shares earlier Targeted commitments to debt investors by the end of FY18; ~$3B of debt prepaid (Q4 FY16) Maintain financial flexibility: potential to accelerate dividend payout ratio faster than previously communicated Ongoing IRS Puerto Rico litigation assuming ~$3B opportunity 2016 Investor Day 14

15 ONGOING IRS LITIGATION PUERTO RICO POTENTIAL FOR LARGE INCREASE IN ACCESSIBLE CASH Potential Outcomes P&L Impact Accessible Cash Impact 1 MDT Filing Position MDT Booking Today 1 2 Medtronic s Royalty Rate as Filed Royalty Rate IRS Established in FY02-FY04 Ongoing Tax Rate -200 bps No Change One-time Increase to Accessible Cash +$0.5B +$3.0B Annual Increase to Accessible Cash $0 +$225M Final trial briefs filed with the Tax Court in October 2015 Expecting decision by Fall CY16 Driver to increase accessible cash in the near-term IRS Position 3 Royalty Rate Currently Determined by IRS +100 bps +$5.2B +$420M 1 Net of tax and interest, based on year-end FY Investor Day 15

16 CURRENT CAPITAL DEPLOYMENT PLAN FY17-FY21 FORECAST ~$2B Trapped B/S Cash ~$12B Trapped FCF 1 $3B Puerto Rico Resolution FY17-FY21E ~$28B Accessible FCF 1 Current Assumptions ~$24B return to shareholders Includes incremental share repurchases Includes minimum 50% of FCF commitment Debt paydown: ~$5-$6B Targeting A- credit profile Financial flexibility increases as we free-up cash ~$8B Accessible B/S Cash 1 - Free cash flow (FCF) defined as operating cash flow, less capital expenditures Outer rings represent sources of cash. Inner rings represent uses of cash Investor Day 16

17 DIVIDEND GROWTH STRONG, CONSISTENT TRACK RECORD Dividend per Share $3.00 $2.75 $2.50 $2.25 $2.00 $1.75 $1.50 $1.25 $1.00 $0.75 $0.50 $0.25 $0.00 FY00 Payout Ratio 1 Dividend per Share Dividend per Share Range FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E 50% 45% 40% 35% 30% 25% 20% 15% Member of S&P 500 Dividend Aristocrats 38 Years of Increasing Dividend per Share 1 On a non-gaap basis. Calculated as annual dividend per share divided by prior year non-gaap earnings per share Payout Ratio Dividend up +25% in FY16 Targeting increase to 40% payout ratio in the nearterm Orange arrow represents base assumption Upside Potential: Increased access to cash provides flexibility to increase payout ratio 2016 Investor Day 17

18 SHARE REPURCHASES: BASE ASSUMPTION HELPS DRIVE FINANCIAL LEVERAGE Share Repurchase: Base Assumptions 4.00 Billions ($) ,400 1,200 Shares (Millions) Base Share Repurchases Incremental Share Repurchases Diluted Weighted Shares Outstanding 0.00 FY16 FY17E FY18E FY19E FY20E FY21E 1,000 Assumes minimum 50% return of FCF $5B of incremental share repurchases in FY16-FY18 (result of ~$10B FY16 internal reorganization) Robust ongoing base share repurchases; however, lower percentage of FCF in light of dividend payout increase 2016 Investor Day 18

19 SHARE REPURCHASES: ILLUSTRATION OF UPSIDE POTENTIAL UNTRAPPING CASH ON BALANCE SHEET Billions ($) Share Repurchases 1,400 1,200 Shares (Millions) Hypothetical Case Untrap $5B of trapped cash in early FY19 Execute $5B incremental share repurchase in Early FY19 0 FY16 FY17E FY18E FY19E Base Share Repurchases Incremental Share Repurchases Diluted Weighted Shares Outstanding 1,000 Reduces shares by ~5% Results in ~210 bps of incremental EPS leverage Increases FY19 EPS by ~$ Investor Day 19

20 DEBT PAYDOWN Gross Debt to EBITDA 3.8 ~2.5 FY16 FY17E FY18E FY19-FY21E ~2.5X Assumes ~$9B of gross debt repayment, FY16-FY18E Reflects ~$3B of debt prepaid in Q4 FY16 Assumes an additional $5-$6B in FY17-FY18E Continue to target A-credit profile 2016 Investor Day 20

21 FINANCIAL FLEXIBILITY ENABLES CONTINUED M&A INVESTMENTS PORTFOLIO CRITERIA STRENGTHENS STRATEGIC PRIORITIES MEETS FINANCIAL GUIDELINES Line of Sight to Improving Outcomes Therapy Innovation Minimal to No Net EPS Dilution Medtronic Adds Value Medtronic is Positioned to Win Globalization Clear Financial Value Proposition Mid-Teens Risk Adjusted Hurdle Economic Value 2016 Investor Day 21

22 IMPROVED PLATFORM FOR STRATEGIC M&A $1.9B OF STRATEGIC M&A SINCE CLOSING COVIDIEN Transformational Acquisition Improved Capital Sustainability Period of Tuck-In Acquisitions & Investments INCREASED FREE CASH FLOW 3-5 YEAR INTEGRATION EVENT INCREASED ACCESSIBLE CASH FY15 FY16 FY17 OsteoCool TM Target $1.5B M&A / Year Revenue Growth Adds ~ bps EPS Neutral / Accretive Increased Confidence Double-Digit EPS Growth 2016 Investor Day 22

23 ACQUISITION CONTRIBUTION TO GROWTH TRACK RECORD SINCE FY11 $4 Revenue EBITA M&A Adds Upside Potential Billions ($) $3 $2 $1 28% acquisition revenue CAGR from FY16 to FY21 Acquisitions expected to add over $1.5B in EBITA by FY21 Current assumptions: ~$1.5B in M&A / year going forward, in line with historical average Potential to add 50 to 100 bps to revenue growth rate $0 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E Axon Osteotech ATS Ardian Peak/ Salient Kanghui AMT Cardiocom Tyrx Diabeter Sophono NGC Advanced Uro Sapiens Visualase Corventis Bellco Baylis Aircraft Medical Lazarus Effect Medina Medical Twelve RF Surgical Aptus CardioInsight Excludes Covidien acquisitions completed by Covidien prior to Medtronic acquisition. For deals completed prior to FY16, includes actual results through FY15. FY16 deal list excludes certain small acquisitions. FY14 EBITA excludes the one-time $236M impairment charge related to Ardian not achieving the primary efficacy endpoint in the HTN-3 trial Investor Day 23

24 STRONG FOCUS ON IMPROVING ROIC LINKED TO MANAGEMENT COMPENSATION 20% 15% 10% 5% 0% Strong Focus on ROIC (net debt basis) Covidien Acquisition FY15 FY16 FY17E FY18E FY19E FY20E FY21E WACC ~8% ROIC increases to mid-teens over next several years Improved earnings profile following the COV acquisition Strong operational performance, COV synergies, and underlying leverage Management Annual Incentives: 1/3 Revenue Growth; 1/3 Non-GAAP Diluted EPS; 1/3 Cash Flow Indicator Management Long-Term Cash Incentive: 1/2 3-Year Revenue Growth; 1/2 ROIC ROIC Calculation: (Non-GAAP Net Earnings + After-Tax Interest Expense, Net) / (Equity + Debt Cash + Cash Equivalents) 2016 Investor Day 24

25 2016 INVESTOR DAY: KEY MESSAGES REVENUE GROWTH Unmatched pipeline and attractive, diversified markets lead to consistent, sustainable mid-single digit constant currency revenue growth A GLOBAL HEALTHCARE LEADER WITH DIFFERENTIATED PLATFORMS TO DELIVER ATTRACTIVE SHAREHOLDER VALUE FREE CASH FLOW Strong revenue growth and high profitability generates significant and increasingly accessible free cash flow EPS GROWTH EPS GROWTH Committed to consistently delivering strong double Committed digit constant to delivering currency consistent EPS growth double digit constant currency EPS growth MARGIN EXPANSION Utilizing systems and structure at scale across the enterprise to drive margin expansion CAPITAL DEPLOYMENT Deploying massive amounts of capital strategically, consistently, and with discipline TOTAL SHAREHOLDER RETURN Overall performance results in low-double digit to mid-teens total shareholder return 2016 Investor Day 25

26 EPS GROWTH Revenue Growth Mid-Single Digits 1 Operating Leverage 1 Low- to Mid- Single Digits Financial Leverage Low-Single Digits EPS Growth 1 Double Digits Committed to delivering consistent double digit constant currency EPS growth 1 On a constant currency basis

27 EPS WALK / FY17 GUIDANCE FY16-FY17 ~750-1,000 bps EPS Leverage ~12-16% CC EPS growth ~$0.20 $0.25 $4.37 ~($0.08) ($0.10) $4.70 $4.60 FY16 EPS Extra Week Impact CC Rev. Growth OP. Lev. FIN Lev. FY17E EPS CC FX FY17E EPS EPS growth of 12%-16% CC, excluding the impact of the extra week Despite significant FX pressure, EPS growing 7%-10% on reported basis (excl. impact of the extra week) 2016 Investor Day 27

28 FOREIGN EXCHANGE AND HEDGING FX Impact FY17E Revenue Δ Rates Y/Y Flow through EBIT + EPS ($0.20)-($0.25) Illustrative, ranges can vary depending on mix ~($25M)-($75M) ~50-60% Hedged: Yes / No Hedg. Gains FY17E ~60% ~$25M ~40% Hedg. Gains FY16 ~$315M Δ Gains Y/Y (~$290M) Flow through ~40% Unhedged B/S Reval. + FX on Inventory Why we hedge Reduces short-term volatility of earnings and cash flows Current year guidance does not need to be changed due to FX Company incentives = investor priority: reported non-gaap EPS What is hedged / how P&L: hedges of forecasted EBIT exposures up to 18 months in the future are layered in over time Hedge several developed market currencies, including the EUR and JPY B/S: exposures hedged in all except a few EM currencies Currency impact on EPS: 1. Flow through of unhedged EBIT 2. Y/Y change in hedging gains & losses (difference between FX rates on the contracts and the rates at expiration) 3. Net balance sheet remeasurement ~often not hedgeable / difficult to predict (+/-$0.02 impact) 4. FX on inventory: not easily predictable (+/- $0.02 impact) #1 & 2: Translations of earnings; #3: Transaction gain / loss 2016 Investor Day 28

29 ROADMAP TO DOUBLE DIGIT EPS GROWTH FY17-FY21 EPS CAGR 10%-12% ~ bps EPS Lev. ~ bps EPS Lev. ~ bps EPS Lev. ~ bps EPS Lev. Operating Leverage Financial Leverage $4.70 $4.60 FY17E EPS Rev. Growth Lev. FY18E EPS Rev. Growth Lev. FY19E EPS Rev. Growth Lev. FY20E EPS Rev. Growth Lev. FY21E EPS Balanced drivers of EPS growth: revenue, operating leverage, and financial leverage Multiple levers to achieve low double-digit EPS growth commitment EPS leverage on a constant currency basis 2016 Investor Day 29

30 2016 INVESTOR DAY: KEY MESSAGES REVENUE GROWTH Unmatched pipeline and attractive, diversified markets lead to consistent, sustainable mid-single digit constant currency revenue growth A GLOBAL HEALTHCARE LEADER WITH DIFFERENTIATED PLATFORMS TO DELIVER ATTRACTIVE SHAREHOLDER VALUE FREE CASH FLOW Strong revenue growth and high profitability generates significant and increasingly accessible free cash flow EPS GROWTH EPS GROWTH Committed to consistently delivering strong double Committed digit constant to delivering currency consistent EPS growth double digit constant currency EPS growth MARGIN EXPANSION Utilizing systems and structure at scale across the enterprise to drive margin expansion CAPITAL DEPLOYMENT Deploying massive amounts of capital strategically, consistently, and with discipline TOTAL SHAREHOLDER RETURN Overall performance results in low-double digit to mid-teens total shareholder return 2016 Investor Day 30

31 TOTAL SHAREHOLDER RETURN EPS Growth 1 Double Digits Dividend Yield Low-Single Digits Total Shareholder Return Low-Double Digits to Mid-Teens Overall performance results in low-double digit to mid-teens total shareholder return 1 On a constant currency basis

32 2016 INVESTOR DAY: KEY MESSAGES REVENUE GROWTH Unmatched pipeline and attractive, diversified markets lead to consistent, sustainable mid-single digit constant currency revenue growth A GLOBAL HEALTHCARE LEADER WITH DIFFERENTIATED PLATFORMS TO DELIVER ATTRACTIVE SHAREHOLDER VALUE FREE CASH FLOW Strong revenue growth and high profitability generates significant and increasingly accessible free cash flow EPS GROWTH EPS GROWTH Committed to consistently delivering strong double Committed digit constant to delivering currency consistent EPS growth double digit constant currency EPS growth MARGIN EXPANSION Utilizing systems and structure at scale across the enterprise to drive margin expansion CAPITAL DEPLOYMENT Deploying massive amounts of capital strategically, consistently, and with discipline TOTAL SHAREHOLDER RETURN Overall performance results in low-double digit to mid-teens total shareholder return 2016 Investor Day 32

33 Q&A 2016 Investor Day 33