Medtronic's CEO Presents at Goldman Sachs Healthcare Conference (Transcript)

Seeking Alpha

Medtronic Inc. (MDT)

Goldman Sachs 34th Annual Global Healthcare Conference Call

June 11, 2013 18:20 ET

Executives

Omar Ishrak – Chairman and CEO

Gary Ellis – CFO and SVP

Analyst

Presentation

Unidentified Analyst

So, we'll go ahead and get started. But before I introduce our next management team, I just need to read these comments regarding public appearances.

We're required to make certain disclosures in public appearances about Goldman Sachs' relationships with companies that we discuss. The disclosures relate to investment banking relationships, compensation received or 1% or more ownership. I'm prepared to read disclosures for any issuer now or at the end of this presentation, if anyone would like me to. However, these disclosures are available in our most recent reports available to you as clients on our firm portals.

In addition, updates to those disclosures are available by ticker on the firm's public website at www.GS.com. In addition to disclosures applicable to research with respect to issuers, if any mentioned herein are available through your investment representatives.

So with that, I want to welcome the management team from Medtronic. We have Omar Ishrak, Chairman and Chief Executive Officer; and Gary Ellis, Chief Financial Officer.

I, obviously, want to keep this as interactive as possible, but I might stop saying that because no one's asking any questions thus far.

But maybe a good place to start is that you reported earnings pretty recently. It's only been a few weeks since your fourth fiscal quarter. And even was – I think if we look at your results and sort of stack them up against the industry, they looked really very good, and it was after what was maybe a tougher third fiscal quarter, a nice bounce-back, ending of the year.

Could you maybe just sort of talk about what you're seeing in the overall environment? How Medtronic's performance is stacking up from your vantage point and then maybe anything that you think is worth highlighting specifically about the quarter?

Omar Ishrak

Sure. You know, first of all, against competitors let's recognize up front that the calendars are somewhat different. We've had January in the third quarter, while they have January in their fiscal first quarter, we have in April. So, there's some differences there and I just want to make sure that we all realize that.

But aside from that, from our own projection, we've been on a journey to establish a reliable and consistent growth of – in the mid-single digits, which is anything from 3.5% to 6.5%. I'd say, strictly speaking that's what the mid single digits would be. And in return about an operating leverage through earnings of around 200 to 400 basis points, and return of 50% of the cash flow that we generate back to our shareholders. That's been a strategy that we established 12 months ago. And that's what we've been trying to do.

Now, we've done that over the course of the last four – actually five quarters. And that in itself, I think, is something that we're very pleased about but at the same time we recognize that this is supposed to be a trend that we establish over several years to earn the credibility both for ourselves, in terms of execution, and for our external stakeholders as well.

So, while it's a good start, it only is a start. But it is consistent and it's the right kind of range at this stage that we expect to be.

I think equally important is the fact that we are and intend to be transparent with what the drivers are, and be clear about why we get growth. And if we don't in certain areas, kind of talk about it. And then, what the reasons are and what kind of prospects do we see in that area. So, we've been fairly transparent.

The key drivers for our performance in the last year have primarily been the stabilization of the ICD and spine markets in the US. Core spine, I'd say, that is exclusive of kyphoplasty and BMB, which is infused. It's also been a strong share growth in the Resolute Integrity launch in the US, which is a drug-eluting stent. That helped in the first three quarters. In the fourth quarter, that was somewhat less of a factor because we anniversaried it.

And finally, continued emerging markets growth, which was a little short of our original target but still contributed heavily to our overall performance. That, in addition to disciplined spending, which gave us some operating margin productivity holding our gross margins roughly flat, all of that put together gave us the earnings leverage, which actually was like 800 basis points. And on top of that, we had good free cash flow performance, where we improved our inventory weeks by 7%, good working capital management.

So all in all, some good operating rigor and discipline, focused on what we wanted to do, and some of our growth drivers that we planned on coming through.

Unidentified Analyst

And Gary, sort of I have to ask this question because I get it a lot, which is, was there any inventory impact in the fourth quarter traditionally? There is some bulking that could occur at the end of the year. Anything that's worth pointing out here?

Gary Ellis

No, it was basically a normal year from that perspective. Overall, our what we call the purchases that are in bulk across the world were basically consistent with the prior year, so there was no change or even relative consistent with the prior quarter, so it's pretty consistent on that side. Inventory levels remain – in the hospitals remain relatively stable.

Unidentified Analyst

So maybe, just if you take the calendar comment into effect and the fact that your businesses have some ebbs and flows to it, is it a better way really to look at this on a six-month basis that if you take Q3 and Q4, it was right in the middle where you ended up for the full year? Is it – ?

Omar Ishrak

I think the full year is an appropriate way...

Unidentified Analyst

Right.

Omar Ishrak

To look at it because that's the way we've planned it.

Now, we aspire to be consistent and durable enough to make sure we kind of do it every quarter because there's every reason to build consistency around this. And you don't want to kind of fall behind and try and catch up all in the last quarter. I mean, that's not healthy.

So, you want to build in as much consistency as you can. That's a sign of a good, solid, reliable business.

But at the stage that we're in today, in our journey towards achieving that, I think a full-year look is probably the most appropriate judgment.

Unidentified Analyst

And I think – just taking a step back. When you took over the CEO seat two years ago, there's sort of three things that you had laid out.

Omar Ishrak

Sure.

Unidentified Analyst

One was execution, globalization, and new innovations/R&D, R&D productivity.

Omar Ishrak

Yes.

Unidentified Analyst

Execution, I think, the numbers for some intent speak for themselves, that consistency has improved. I know that earlier at breakfast you said, we're making progress.

Omar Ishrak

I think I'd still say that.

Unidentified Analyst

Yes.

Omar Ishrak

That four quarters...

Unidentified Analyst

Hasn't changed in the past six hours?

(Laughter)

Omar Ishrak

Yes. I know. (Laughs) Quite.

Unidentified Analyst

So, if you take sort of that, you're making very good progress, so maybe talk about the other two for a second?

Omar Ishrak

Sure, yes.

Unidentified Analyst

Globalization and then maybe innovation? Why don't we start with globalization because...

(Crosstalking)

Omar Ishrak

Yes.

Unidentified Analyst

Because emerging markets is clearly a major focus for you.

Omar Ishrak

Yes, yes. And I think globalization has come along nicely. I think we've, again, delivered, there, as I said, a little bit short of our regional target of 20%, but we hit 17%, 18%, so it's not that far off in the scheme of things. It's within $30 million of $1.6 billion, so I think that's close.

On the other hand, I've commented to several of you that I'd prefer that to have been 23% instead of 17%. So, you know, it's a little lower than I really want.

But let me describe to you the kind of evolution of our strategy in globalization. And the first thing that is important is when I first started, I think the biggest single difference that I made immediately was to get the team on board in signing up and believing that this was a priority and not an option. I think that's very important to realize, because there's a million reasons why you don't want to go to China. There's IP risk, there's uncertainty of government, there's low-cost competitors, there's a million reasons.

The reason you want to go there is that I know for a fact almost certainly, because of its population and where it's going, that ten, or if not ten, 20 years, China will be the biggest healthcare market. And if you're not a leader in the biggest healthcare market, we won't be leaders in healthcare. So, there's no choice around this.

And so, just having that clarity of purpose around emerging markets – and I use China as an example, you can make the same story about several other markets – that clarity of purpose was the initial starting point.

Following that, as we started to do the analysis, we, in fact found, that one of the biggest opportunities that we had, which essentially was at our doorstep, was the fact that a large majority of the market, of the present market, for therapies that we – that already existed for people who could afford them, was, in fact, under-penetrated.

So, this meant that our existing products, where the cost was not an issue and where the science was proven, because it could be afforded by people, it was targeted to people who could afford them, already represented a tremendous market. And to go after that opportunity first, we felt gave us a road map to deliver sort of 20% plus and minus growth out of emerging markets on a consistent basis for a fairly long period of time, which gave us some time to build up a value product portfolio that can address the other 85% of the population, who, today, cannot afford our products.

So, that's how the strategies evolve. We refocused in on the existing therapies and the barriers of adoption of those existing therapies, which, primarily, are awareness, infrastructure, and physician training, and focused on those areas because people can afford them. Cost has not been an issue. Margin has not been an issue.

And that opportunity in itself, if equalized with what's available in the developed markets in the $5 billion a year opportunity, so we felt there's plenty of runway there.

And at the same time, we're already working on programs with organically and inorganically to build value product platforms, which have lower-cost products, which are differentiated in features and services, from other products – from the premium products, that can then service the population, who cannot afford the care today.

But when you look at both of these strategies, and you look at the overall populations, the end markets and the emerging markets are massive. They're massive, they're highly underpenetrated and they offer as much opportunity as any new product pipeline has that we're developing.

And that's completely independently – an independent source of revenue from a new product. So, that realization and that strategic approach to emerging markets and investments is what's transpired.

Unidentified Analyst

And I think you've said in the past, you've set some targets for emerging markets as a percentage of revenue.

Omar Ishrak

Yes, yes. It's like 20% over the next few years. I mean, it partly depends on how the developed markets do.

So – but roughly that say in five years, if we're likely to do quite well. But we've made some progress and two years ago we were at 10%, we're at 12% today.

So, seeing progress in that score helps and actually it's been a year where the developed markets have performed. So in that context, it's – we were more or less on track with that trajectory.

Unidentified Analyst

And then, you've – in the past year, you've, obviously, made a pretty big acquisition in China.

Omar Ishrak

Yes.

Unidentified Analyst

Maybe sort of talk about how the Kanghui integration is going so far, and how you see that business evolving and really becoming part of Medtronic over time?

Omar Ishrak

Sure. So, by way of perspective, Kanghui is a Chinese company dealing, primarily, in trauma and in orthopedics, right? Trauma and orthopedics. And a little bit in the spine, and it's primarily a value product company with the second tier of products, if you like.

It's a – and we acquired it I think six months ago, with a goal of doing, essentially, three things.

First, establish a leadership position in the value products segment of orthopedics in China. We're already a player, but accelerate that process. And we do that by helping Kanghui with the training of their physicians, by potentially incorporating some unique technology, but using their expertise which was in the Chinese market and for the Chinese patient in achieving that.

The second priority, then, was to use that same product line in other emerging markets and address the growing value segment or create a value segment, where needed, in other emerging markets. And then, finally, in hips and knees, specifically, but also the spine, see if there are value product opportunities in developed markets and approach those, if you can tier them appropriately against the premium segment and separate out the value proposition.

Those are the three big objectives. Now, in addition to that, the Kanghui acquisition gave us a platform of engineering talent, which was much larger than anything we'd had in China, so that it'd give us an entry and an expertise in the Chinese market. It'd give us a manufacturing base with fairly high capacity, where we could take some of our spinal products and move to China and lower the overall cost of even our premium products. So, it had some added capability as well.

In that integration process, I'd say that the growth in the Chinese market is growing extremely well; we're growing at 25% so far in the last two quarters and looking very good. We retain most of the dealers, we retained the distribution channels, so all that's working well.

We've retained the engineers, so we're rapidly into product development and essentially the entire management team. I think we're working through the other emerging markets, because there there's been some disruption because we had dealers, and they had dealers, and so we're working through that.

And in terms of new product development, and so on, that's still early, into developed markets, but that's still very early at this stage, I think. And in terms of using the manufacturing capability, we're developing that pretty rapidly. So, that's where we stand today on that.

Unidentified Analyst

Okay.

Omar Ishrak

I don't know, Gary, do you want to add quickly to that?

Gary Ellis

No, I mean, I think you've summarized it well. In general, the strategy is playing out well. It's only been six months but the first six months, we've been very pleased with the results, and the integration has went relatively well at this point.

Unidentified Analyst


And maybe just moving to the third pillar.

Gary Ellis

Sure.

Unidentified Analyst

Maybe R&D...

Gary Ellis

Yes, yes, yes.

Unidentified Analyst

Productivity/innovation?

Gary Ellis

Innovation

Omar Ishrak

And I think that one, probably, has morphed the most. And then, we've learned about it the most. And it has really spawned into a, we think, is a meaningful new area for us, which will be vital to our future.

And starting with where we were coming from, as you said, R&D productivity. And the first thing that we start to look at is if the R&D productivity isn't there then are we working on the right things? And almost, immediately, we started a process, where the economic value, as well as the clinical value became a criteria for the choice of new products.

So, early in the concept stage, our teams were already engaged in defining the clinical value of some technology. That's what Medtronic has always been all about.

Now, in addition to that clinical value, which we laid on, is that not only must they prove the clinical value of that technology, they must then show the corresponding economic value to the institution that's going to eventually buy the product and essentially to the entire healthcare ecosystem.

We felt that that was important because to commercialize a product today, that information was needed. Otherwise those would be the questions that administrators was asking, you weren't right on those. Those products wouldn't succeed in this marketplace.

So, that process was put in place fairly early, and then we're beginning to make those choices. And I'd say that in the last year's roll-up of budget, it was used pretty comprehensively in that process.

Now, in addition to that, as we went through that process, we, obviously, realized that our existing products, which have clinical value also have economic value, and there are varying degrees of credibility and impact of their economic value propositions.

So, we went through, and we are and are still going through an analysis of our existing products and seeing, which have the greatest economic value and where, and what kind of customer, and how do you realize them? And by doing so, we're translating into commercial success through the incorporation of economic value principles, our existing product lines. So, we're not only depending on new products but our existing products.

The fields we went to next is that once we realized that we could actually show some financial benefit in a certain area, we realized that by adding incremental programs, efficiency programs, to provide operational effectiveness in that therapy area, we found that you could further enhance the economic value. We call those wrap-around programs.

And then finally, we found that if you group these together collectively, you can in fact move the needle in a dramatic way, in any hospital system in terms of financial benefit, either through cost savings and, in some cases, through revenue enhancement.

And so, from being R&D selection methodology, we should have a long-term impact. This became eventually into a commercial strategy, which used economic value evidence to convince customers that we are the right partner, with integrated offerings.

And the phase beyond this which we're just beginning to work on is to make ourselves into a solutions provider, transforming ourselves from a device business to a healthcare solutions business around our therapies by starting to make partnerships and alliances with our hospital customers around specific disease areas or big departments, which we can manage together, some levels of risk sharing.

So, this whole concept of innovation, R&D productivity, while the basic principles are still in place and I think will show results in their own right, actually has morphed into something a lot bigger, which we're really calling our economic value programs and we'll probably be soon calling solutions.

Unidentified Analyst

And when I hear, we talk about economic value and breadth and scale.

Omar Ishrak

Yes.

Unidentified Analyst

Sometimes – and the first thing that comes to mind is that kind of as a way of saying price. How do you stop the conversation of the hospital CFO from becoming, "This is a bundle. I just want a discount."

Omar Ishrak

No, because the hospital CFO actually is interested in how they can make the entire savings. And by looking at the entire value equation, if you have the numbers on our side, we can actually show that they can save more money through using the – by leveraging the value proposition that we have inherent in the products, then saving the cost.

The cost of two readmissions, say, the cost of two readmissions within certain DRGs, can more than pay for a 5% or 10% reduction in price; more than that. And the breadth of our total integrated offerings, together, can offer savings, which are far more significant, if you add savings like that together versus the reduction of unit price here and there.

And I think that's not a very difficult conversation. I think CFOs certainly are very receptive to that conversation.

Unidentified Analyst

And what type of data are they requiring? I can see – I conceptually understand the analysis and I think people can do the math. But is this the type of thing where you need thousands of data points or registries to prove co-relevance, say...

Omar Ishrak

No.

Unidentified Analyst

That we used to – or is it more you guys are looking at helping the hospitals from a cost accounting perspective and saying, "Look. If you pay X for this device, now you could save 1.2x later," Or I mean...

Omar Ishrak

We do one better. What we do is, in situations like that, we would take a pilot. And we would say, "Here's a unit, and we'll kind of work a pilot with you and together we'll work in your financial system to show the impact on the pilot. And the deal is that if the pilot is successful, it's carried across your system." And I think that's a pretty straightforward conversation.

So, we stick to areas that are operationally, at least, in the early stages. We'd prioritize things that are operationally measureable. And so, we stick to hospital systems, where the payment system is understood, as opposed to complete disease management today, where the payment structure is not understood.

Now, it will be, when you get to ACOs and other things we'll be ready for that. But we don't focus on that. Today, we talk about those but we have enough things in our arsenal, where we can demonstrate efficiency savings or revenue enhancement almost immediately in a certain area. We throw resources at it at our cost to do that, which is not that expensive. And then beyond that, we have real credible evidence in their system that this thing actually works, and the willingness to scale across it is quite high.

Unidentified Analyst

And how – I mean, I can see very evidently why you look at the cardiovascular service line for example.

Omar Ishrak

Right.

Unidentified Analyst

It seems very obvious the ability to scale across that continuum. But what does the conversation sound like where you're saying, "Well, we're going to sell you all of our spine products and our cardiology products." How hard is it to go across therapeutic categories versus going deep within therapeutic categories?

Omar Ishrak

I think that is – we've done relatively few of those. We've done a lot of cardiovascular and we've done a lot of capital equipment and spine together, so – and then to some degree other neurology products and neuroscience products together like deep brain stimulation, because that's a common customer.

So, those two groups, independently, we've done a fair amount. We're beginning to address some where we've got both.

But, obviously, there it really is – it's putting the two together and adding the total amount of savings that you can get operationally from each area, so that's the way we're approaching it.

Unidentified Analyst

Well, I want to open up to the audience to see if there are any questions. Then, I'll give Gary a chance to answer...

Omar Ishrak

Okay.

Unidentified Analyst

Some questions. Maybe we could just talk about – switch gears and talk a little bit about the P&L for a second and maybe – well, I think maybe – we – just stepping through the major operating items, beginning with gross margin, you've been able to keep it flattish in the context of very tough price and probably negative mix headwinds, where your higher margin business is growing a little bit slower than the average. How hard are you working to keep that gross margin line flat?

Gary Ellis

Well, we're working very hard at it. I mean as I said that's been a focus across the company for several years and it continues to be a high focus. I mean as I think everyone's aware of, we had a program that ended in FY '12, a five-year program that, basically, was to take out $1 billion in product cost, 25% reduction in product cost over a five-year period of time, and we didn't stop there. I mean, obviously, Omar and the management team has challenged the organization to continue that, so we have another five-year program to take out another $1.2 billion out of the existing product cost.

And those are not easy to do because, as you indicated, I mean, we, clearly, already have, probably, the lowest cost products in the industry and we have very high margins already. But it's very important for us to continue to maintain that.

And we still see plenty of opportunity, whether it's consolidating manufacturing, leaning out the manufacturing process, consolidating suppliers, everything, and designing the products to be more manufacturable, clearly, reduces overall costs, so we see plenty of opportunity.

And back to what Omar said earlier on the value side of the equation, it's not just to maintain the gross margins that we're at in the premium segment, it's also to sort of establish ourselves, that we can establish very low cost products. But, ultimately, as we go into some of these value segments, we have the lowest cost product possible.

So, there's a lot of effort across the organization. Every business unit is focused on it. Everyone has plans in place on how to drive it. Omar and I review this quarterly with the entire management team on how we're going about it. And so, there's a very significant focus across the organization.

But we've been successful over the last five or six years doing that, and we have every intention on continuing that success over the next four to five years.

Unidentified Analyst

And if you weren't doing that $1.2 billion cost savings through the COGS line, would that, does that mean that gross margins would be down by that amount? Or how...

(Crosstalking)

Gary Ellis

Yes. I don't know. I haven't calculated exactly how much they'd be down. But they would be down during this period of time, clearly.

(Crosstalking)

Omar Ishrak

Could be time to add them up, because you will have that.

Gary Ellis

Sure. Yes, yes, yes.

Unidentified Analyst

Okay.

Gary Ellis

But it's – it has been significant and it's really been very important for us to kind of maintain and it's around the discipline of also maintaining those gross margins and focusing on it from an overall corporate perspective.

So, no. I think it's been a crucial part of our programs over the last several years and our execution.

Unidentified Analyst

And that is even pretty clear about R&D in this kind 9-ish percentage of revenue range, you fortunately have a big revenue base, so 9% gets you to a nice absolute dollars that sort of fund growth. But how about – I know SG&A's going to ebb and flow...

Omar Ishrak

Right.

Unidentified Analyst

With where there are opportunities to invest for growth versus gain leverage. Where are sort of the pressure points around that line item?

Gary Ellis

Well, the SG&A – we do still believe it's achieve leverage on the SG&A line. We've said, indicated, 30 to 50 basis points of leverage, even in FY '14. That's about what we got last year, as we go forward.

Obviously, part of this is just leveraging the basic infrastructure of what we would call the "back office support" over the revenue growth will drive a significant portion of that. But we also continue to challenge ourselves on the business model and what we have, and reducing the service burden where we can and reducing our overall infrastructure cost and sales cost as we go forward.

At the same time, making the investments, where we need to make them. I mean, we are making significant investments in some of the emerging markets and some of the new businesses we're launching as we go forward, so we, clearly, want to make those investments.

But it is leveraging – I mean, the good news is Medtronic has – already has the infrastructure and the sales structure in place, in many markets that we don't have to add to it.

I mean, just one example is when we launched the drug-eluding stent here in the US last year and took our share from 10% to 30%, we did that without adding any additional sales reps.

And so, we just basically added it to our existing infrastructure. Those are the types of things I think you'll continue to see us do.

Unidentified Analyst

And if you look at, obviously, you have different business models and different geographies, but if you look at a dollar spent on a case in the US versus a dollar spent on a case in Europe, is the mix very different meaning that in the US is a big chunk of that service supporting commission, whereas in Europe there are other factors that contributed to that dollar? And is there a reason they could harmonize?

Omar Ishrak

I don't know that they harmonize – I mean first of all, there are variations. In Germany, for example, the service burden is a lot lower but the prices are lower. And the margin's a little lower but they're close. And so, this thing varies around the world quite a bit.

I think depending on the unique models we have, this is going to kind of change over time. But whether they'll harmonize or not – the delivery mechanism harmonized, that'd be fine with us, as long as it was all rational. I think it'll only harmonize in a much more macro level.

So, when we do become true solutions providers and we change the equation from being a service provider of a device to an overall solutions provider and we get big packages like that, I think, we get fewer packages, which are bigger, I think, those things may be more easily comparable because the endpoints are kind of similar, than if you take one-off elements for the procedure. The procedures and workflows are quite different.

Unidentified Analyst

Okay.

(Crosstalking)

Omar Ishrak

I don't know, if I...

(Crosstalking)

Gary Ellis

The thing I would add to that, I think I agree with Omar. I think the thing I would add to that is each market – as we focus on each of these markets, separately, and say what is it they value, it's going to be different.

And so, there are certain markets that value that service component, that we provide right now, and are willing to pay for it. There's other markets that won't value it as much based on the way their healthcare is delivered and they're going to be more interested in other aspects.

I think the biggest change that we've made over the last few years, as Omar indicated is, we're going into these markets and asking really, "What are the barriers? What do they value? What is it that's important for them in tailoring our offerings and to really – in the business model to really address what they're looking for, versus just trying to take what we've maybe historically done?

Which was – "Here's our business model, in the US or Europe and we just try to export it around the world."

We're now going into the various markets and find out exactly what it is they need, what products do they need, what services do they need? And as you do that, I think, it focuses us, to make sure the expenses are on what they value. And I think, I don't think you'll see a real harmonization occurring between those service models because the reality is I don't think the systems are going to harmonize that much from country to country.

Unidentified Analyst


And then, maybe lastly on capital deployment. You talked about that you've had this 50% commitment in place for some time, you've exceeded it in some periods, but the average is around there. Maybe just, Gary, remind people about cash jurisdiction; how you, obviously, want a – cash is being generated outside the United, States, but opportunities to improve US cash flow and continue to fund that 50% commitment?

Gary Ellis

Well, as you indicated we have the – and Omar mentioned it earlier, one of the three factors we're driving is the 50% return on free cash flow to shareholders.

Now, we generate significant amounts of free cash flow. In fact, over the next five years, we would expect we're going to generate in excess of $25 billion of free cash flow and we are returning 50% of that to shareholders in the form of both dividends and share buyback. Right now, it's pretty well evenly split between dividends and share buyback.

And as you indicated, we have done more than 50% in certain years. But between 50% and 60% is where we – the minimum commitment was at 50%.

Now, the structure there is – the one I said, impacts on that however is our US-OUS cash spilt – we've highlighted very clearly that our US-OUS split is 35% in the US, cash generation, 65% outside the United States. And so, as a result of that 50-50 commitment, we, obviously, are in a situation in the US of having to also borrow to achieve that overall 50% return.

Now, with our debt capacity and our capabilities, we feel comfortable that for the foreseeable future we can continue that. But we know we need to improve the overall US cash flow to give ourselves more flexibility and to, basically, give ourselves more opportunities, whether it's to grow the business in the US or to, obviously, expand that return to shareholders, if appropriate.

So, we've been focused on reducing inventory, which a lot of it is in the US, so improving, overall, our working capital metrics. We've reduced CapEx. There's been a high focus on this. We're looking at other ways of potentially improving the US cash mix, as we move ahead because it is important to give ourselves that flexibility as we move ahead, and returning cash to shareholders.

But right now, we feel very, very comfortable with the 50% and have every intention on maintaining that at least for the foreseeable future.

Unidentified Analyst

And how does it – oh sorry, there's a question out here. Yes? Why don't you go ahead? I'll repeat it.

Unidentified Speaker

(Inaudible) how much of that excise tax have you got here and what's your run rate you expect for this year for that?

Gary Ellis

Well, I mean, the excise tax, the medical device excise tax in the United States, that was the question, you know. But, basically, how much has it been and what do we expect as we go forward?

I mean, for our FY '13 which is completed, as you would call it, is only for two or three months that we had that in there and it was relatively small amount in general. I think if I recall the number is like $20 million, $20 million, $25 million, for the full year.

For this coming year, that's – we assume that that's about an incremental $100 million on top of that, so we're assuming right around – right now around $120 million impact, based on the current existing revenue base that we have in the US and how that's rolling out.

So, that's our current expectations, around $120 million. It's in our guidance. It's in our assumptions we have at this point in time, and we're paying that every quarter and you can kind of annualize that during the year.

Unidentified Analyst

So with that, we are – we're actually out of time, but Omar and Gary as always, we very much so appreciate your participation. Safe travels back home.

Gary Ellis

Okay, thank you.

Omar Ishrak

Thank you very much.

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