Covidien plc. (COV)

COV 
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Covidien plc (COV)

2013 Guidance Conference

May 06, 2013 8:00 am ET

Executives

Coleman N. Lannum - Vice President of Investor Relations

Charles J. Dockendorff - Chief Financial Officer and Executive Vice President

Matthew K. Harbaugh - Chief Financial Officer of Pharmaceuticals Segment

John Moten

Analysts

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

David R. Lewis - Morgan Stanley, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

Matthew Taylor - Barclays Capital, Research Division

Joanne K. Wuensch - BMO Capital Markets U.S.

Miroslava Minkova - Leerink Swann LLC, Research Division

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Anthony Petrone - Jefferies & Company, Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Covidien announces 2013 guidance conference call. My name is Sue, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Cole Lannum, Vice President of Investor Relations. Please proceed, sir.

Coleman N. Lannum

Thanks, Sue. And good morning, everyone. With me today are Chuck Dockendorff, our Chief Financial Officer; Matt Harbaugh, CFO of our Pharmaceuticals business; and John Moten, Vice President of Investor Relations for Mallinckrodt.

During today's call, we'll make some forward-looking statements, and it's possible that actual results could differ materially from their current expectations. Please refer to the cautionary statements contained in our SEC filings, including our Form 10-K and 10-Q reports, for additional information about factors that could cause actual results to differ from those anticipated in such forward-looking statements.

We'll also discuss some non-GAAP financial measures with respect to our performance. A reconciliation of non-GAAP to GAAP measures can be found in our press release, as well as in the Investor Relations section of our website, covidien.com.

We'll be making some brief introductory comments and then spend most of the time this morning answering your questions. Please note that we'd like this call to be focused on last Friday's guidance release, the restated financials and our future outlook.

Before I turn the call over to Chuck, I want to make a brief comment relating to our second quarter sales performance. In -- on our call on April 26, there was some discussion about the geographic sales growth, particularly relating to U.S. Medical Devices. As noted in the 10-Q report we filed last Monday, there was a shifting of Vascular product sales which negatively impacted reported growth rate for U.S. sales in both the quarter and the year-to-date. Adjusting for the sales shift, U.S. Medical Devices sales would have grown 5% in the quarter and 6% for the 6 months year-to-date. As noted in the 10-Q, we expect a similar situation to occur in the third quarter, and we will provide you with an estimate of its impact on our third quarter call. If there are any other questions on this point, Todd and I offline are more than happy to take you through that discussion.

Now Chuck will go to more detail on the 2013 guidance we issued last Friday. John?

Charles J. Dockendorff

Thanks, Cole.

On Friday, we announced our 2013 guidance for both RemainCO Covidien and for Mallinckrodt. We also provided you with historical financial statements for Covidien, excluding the pharmaceutical business. Our goal was to provide you with enough information, combined with what is in the Form 10, to give you a basis for determining a value for both Covidien and Mallinckrodt. Understandably, this is somewhat more difficult for Mallinckrodt given that their 2013 results are a mix of 3/4 as part of Covidien and 1/4 as a standalone.

Before discussing our new guidance, I'd like to briefly discuss a couple of concerns that we heard on the second quarter call, the pricing environment and the decline in the sequential growth rate for the U.S. Medical Device business. Cole noted the reclass in Vascular that occurred which negatively impacted our U.S. growth rate. As we mentioned on the call, the pricing environment continues to be challenging. In the second quarter, however, our pricing was actually better than our historical average and was more than offset by favorable mix trends, which we expect to continue going forward. In our new guidance, we have included our historical assumptions on pricing for the remainder of 2013.

Our sales guidance is consistent with our year-to-date performance and today's foreign exchange rates. We estimate that foreign exchange will lower our sales growth rate by 125 to 175 basis points this year. We expect a benefit of about 50 to 100 basis points from our 2012 acquisitions.

Our operating margin guidance reflects the incremental growth-driving investments we noted on the second quarter call. We believe these investments are prudent and will help us meet our growth objectives. In addition, the operating margin guidance reflects the unfavorable foreign exchange and the impact of the medical device tax. Excluding these 2 items, the unfavorable foreign exchange and the device tax, we expect 2013 EPS would grow at a double-digit rate.

One brief comment on income taxes. On a non-GAAP basis, we expect that the total tax to synergies for the combined entities will be no more than a couple of cents per share on an annual basis.

For Covidien, there will be no change to our long-term financial goals, as a result of this spin. Our focus will be to balance short-term growth and long-term investments. We are still looking to generate mid-single-digit sales growth and use operating and financial leverage to deliver double-digit earnings growth over time. We'll continue to drive improvements in ROIC.

From a capital strategy standpoint, there will also be no change. We remain committed to return at least 50% of free cash flow to shareholders every year through dividends and share repurchases. We expect to grow our dividend payout ratio over time. And we'll continue to employ our free cash flow to make strategic acquisitions that augment our growth.

We continue to feel very good about our prospects given our robust new product pipeline, expanding product portfolio, geographic diversity and strong cash flow.

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