Covidien plc. (COV)

COV 
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Covidien Ltd. (COV)

F4Q10 (Qtr. End 09/30/10) Earnings Call

November 9, 2010 8:30 a.m. ET

Executives

Cole Lannum - VP of IR

Rich Meelia - Chairman, President and CEO

Chuck Dockendorff - EVP and CFO

Analysts

Matthew Dodds – Citi

Mike Weinstein – JP Morgan

Bob Hopkins - Banc of America

David Roman – Goldman Sachs

David Lewis – Morgan Stanley

Rick Wise – Leerick Swann

Christian Store – Deutsche Bank

Larry Keusch – Morgan Keegan

Adam Feinstein - Barclays Capital

Joanne Wuensch – BMO Capital

Tom Gunderson – Piper Jaffray

Josh Jennings – Jeffries & Company

Presentation

Operator

Good day, Ladies and Gentlemen, and welcome to the fourth quarter 2010 Covidien Earnings Conference Call. My name is Janada and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Cole Lannum, Vice President, Investor Relations. Please proceed.

Cole Lannum

Thanks, Janada, and good morning, everyone. With me today are Rich Meelia, 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. The press release with details of our fourth quarter results was issued earlier this morning and is available on our website and on the news wires.

During today’s call, we will make some forward-looking statements and it’s possible that actual results could differ materially from our current expectations. We ask that you please refer to the cautionary statements contained in our SEC filings for a more detailed explanation of the inherent limitations of such forward-looking statements.

We’ll also discuss some non-GAAP financial measures with respect to our performance, including in particular, operational growth, which is net sales growth excluding the effect of foreign exchange.

The reconciliation of non-GAAP to GAAP measures can be found in our press release and its related financial tables, as well as in the Investor Relations section of our website, covidien.com.

For the fourth fiscal quarter we reported GAAP diluted earnings per share of $0.77 after adjusting for certain one-time items, our non-GAAP earnings for the fourth quarter came in at $0.84 per share.

Now, I’ll turn it over to Rich, who will go into more detail in the fourth quarter results. Rich.

Rich Meelia

Thank you, Cole. Before I discuss our fourth quarter results, I’d like to spend a moment on the medical device market and pricing environments; two topics I know are of interest to many of you.

As we have said before, it’s very difficult to determine real time procedure trends for our end markets worldwide. We look at a number of factors and inputs, including data reported by our competitors, some of the service providers, and other third-party sources to get a rough estimate of product utilization.

After reviewing these data, we believe there was some small bounce back in U.S. procedures in the quarter, but they are still below normalized levels. While we won’t discuss monthly trends, there was somewhat of an improvement during the quarter. Overall, our business in the U.S. came in ahead of expectations, but we are definitely seeing more slowness in Europe where, as we said before, procedures tend to be utilization driven.

On pricing, we did not feel any significant impact this quarter in our devices or supplies businesses. As we noted in the second quarter, there has been significant pricing pressure in generic pharmaceuticals, but even this seems to moderate in the fourth quarter; although, still down year-over-year, generic pricing stabilized sequentially.

Further, as we noted at Investor Day, we have typically seen 50 to 100 basis points of pricing drag annually. Excluding generic pharmaceuticals, pricing in Fiscal 2010 came in significantly better than the negative 50 to 100 basis points normalized level.

Now, turning to the quarter, overall we had another positive quarter. Revenues were slightly ahead of our expectations. We improved our gross margin, operating margin came in right on plan. And for the fourth and second quarter, we delivered double-digit EPS growth on an adjusted basis.

We also continued our portfolio realignments, closing two strategic acquisitions, EV3 and Somanetics, and completing the divestitures of the Specialty Chemicals, and Sleep Therapy businesses. Our primarily focus in 2011 will be on integration, in looking for the smaller tuck-in opportunities.

In our large medical devices segment, we had another solid quarter with broad-based growth led by vascular, oximetry and monitoring, and energy products. Fourth quarter results were aided by a good performance for the EV3 and Aspect businesses, partially offset by the divestitures of sleep and oxygen.

In Endomechanical, we registered good growth for our Stapling Products, but smaller increases in the more competitive laparoscopic instrumentation line. In the Soft Tissue repair category, mesh sales slowed as we faced very difficult comparisons in the U.S.

That said, our Biologic products registered strong growth outside the U.S. partially offsetting slower domestic performance. Biosurgery again grew at a double-digit pace, and fixation sales grew mid-single digits after a couple of down quarters.

In our capital related businesses, which include energy hardware in imaging delivery systems, we started to see a bit of a pickup, and we registered sales gains off the lower base of a year ago. As expected however, our ventilation sales were below a year ago as a very strong h1n1 volume we received last year was not repeated.

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