Covidien plc. (COV)

COV 
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Covidien (COV)

Q3 2013 Earnings Call

August 01, 2013 8:30 am ET

Executives

Coleman N. Lannum - Vice President of Investor Relations

Jose E. Almeida - Chairman of the Board, Chief Executive Officer and President

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

Analysts

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

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

Miroslava Minkova - Leerink Swann LLC, Research Division

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

David R. Lewis - Morgan Stanley, Research Division

Anthony Petrone - Jefferies LLC, Research Division

Matthew Taylor - Barclays Capital, Research Division

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

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

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

Brooks E. West - Piper Jaffray Companies, Research Division

Jason Wittes - Brean Capital LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2013 Covidien PLC Earnings Conference Call. My name is Clinton, and I'll be your operator for today. [Operator Instructions] As a reminder, the call is being recorded for replay purposes also.

During today's call, Covidien may 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 Covidien's 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.

The company may also discuss some non-GAAP financial measures with respect to our performance. A reconciliation of non-GAAP to GAAP measures can be found in Covidien's press release and its related financial tables, as well as in the Investor Relations section of covidien.com.

I'd now like to hand the call over to Cole Lannum, Vice President of Investor Relations. Please proceed, sir.

Coleman N. Lannum

Thanks, Clinton, and good morning, everyone. With me today are Joe Almeida, Covidien's Chairman, President and CEO; and Chuck Dockendorff, our Chief Financial Officer. We'll be making some brief introductory comments and then spend most of the time this morning answering your questions.

I will remind you that today's call will focus on our third quarter results. We will not be updating our 2013 guidance today, consistent with past practice. We'll be initiating our 2014 guidance at our Investor Day next month on September 12.

For the third quarter, we reported GAAP diluted earnings per share from continuing operations of $0.85. After adjusting for certain specified items, our non-GAAP earnings came in at $0.91 per share.

Now I'll turn it over to Joe, who will go into more detail of the third quarter results. Joe?

Jose E. Almeida

Thanks, Cole. And let me start by saying that we were very pleased with our third quarter results. We delivered a solid quarter. Sales were on plan, up 5% operationally, and up 3% as reported. In a number of large categories, including stapling, energy and monitoring, we continue to grow ahead of the market, benefiting from new products and investments we've made.

At the end of the quarter, we successfully spun off the Pharmaceuticals business as an independent company, Mallinckrodt. We strongly believe that Mallinckrodt has the products, management team and the capabilities to deliver value to shareholders for years to come. Their results are excluded from our reporting today, as they are now shown in discontinued operations.

In the Medical Devices segment, we had a very good quarter, with 6% operational growth with increases across the segment. For our emerging markets business, comprising Eastern Europe, Middle East and Africa, Asia and Latin America, we had another excellent quarter with operational sales growth in the mid-teens and double-digit increases in most product lines.

As we mentioned on our last call, we faced difficult comparisons in emerging markets this quarter due to customer order timing in last year's third quarter, so these results are all the more impressive. The performance was paced by continued strength in the BRIC countries. These results reflect investments we've made in the last couple of years to expand sales and marketing and to build an on-the-ground presence. We still see excellent opportunities in emerging markets and we'll be ramping up our investments to capture these opportunities.

Let me now turn to our third quarter performance in individual product categories. As in the past, I will discuss our growth on an operational basis, excluding the impact of foreign exchange. In our large Endomechanical business, stapling products had another excellent quarterly performance led by the innovative Tri-Staple reloads. We continue to grow above the market and gain incremental share in stapling. We did have a couple of one-time benefits this quarter including competitive recall and some positive customer order timing.

In Soft Tissue Repair, we registered double-digit growth in synthetic mesh, reflecting new products and investments we've made here over the last few quarters. This growth was offset by lower sales of sutures, and as expected, in biological mesh.

Our Energy business turned in another solid performance with 10% growth, led by a double-digit gain from vessel sealing for the 31st consecutive quarter. New products including Sonicision and LigaSure Small Jaw contributed to the quarterly improvement. Our pipeline of new products in Energy continues to be robust, with the recent launches of the next-generation LigaSure Impact implant tip.

Turning to Vascular. We again delivered double-digit growth in chronic venous insufficiency products. As we noted last quarter, we faced difficult comps in neurovascular on both Solitaire and Pipeline, but remain comfortable with the overall growth of the portfolio. In peripheral vascular, our year-ago results were bolstered by a competitive stent recall, which restrained our growth this quarter. In compression and dialysis, which accounts for about 1/3 of our Vascular business, sales were below a year ago, primarily due to unexpected impact from distributor order patterns in the U.S.

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