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Covidien plc (COV)

Q1 2011 Earnings Call

February 1, 2011 8:30 AM ET

Executives

Cole Lannum – Vice President, Investor Relations

Rich Meelia – Chairman, President and CEO

Chuck Dockendorff – Chief Financial Officer

Analysts

David Roman – Goldman Sachs

Bob Hopkins – Bank of America

David Lewis – Morgan Stanley

Matthew Dodds – Citigroup

Kristen Stewart – Deutsche Bank

Mike Weinstein – JP Morgan

Joanne Wuensch – BMO Capital Markets

Glenn Novarro – RBC Capital Markets

Rick Wise – Leerink Swann

Paul Choi – Caris & Company

Ben Yeoh – Atlantic Equities

Adam Feinstein – Barclays Capital

Jayson Bedford – Raymond James

Presentation

Operator

Good day, ladies and gentlemen. And welcome to your First Quarter 2011 Covidien plc Earnings Conference Call. My name is Tania, and I will be your event manager today. Throughout the conference, you will remain on listen-only. (Operator Instructions)

I would like to advise all parties that this conference is being recorded for replay purposes. I’d now like to hand the conference over to Mr. Cole Lannum, Vice President of Investor Relations.

Cole Lannum

Thanks, Tania, and good morning, everyone. With me today are Rich Meelia, Covidien’s Chairman, President and CEO; and Chuck Dockendorff, our Chief Financial Officer. We will 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 first quarter results was issued earlier this morning and is available on our website and on the newswires. I’d like to highlight that starting with this quarter’s results, we’re now itemizing the impact of amortization and its effect on both cost of goods sold and SG&A in order to help you better understand the incremental non-cash effects of acquisitions made over the prior year.

During today’s call, we’ll make some forward-looking statements and it’s possible that actual results could differ materially from our current expectations. We ask 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. A reconciliation of such of this non-GAAP to GAAP measures can be found in our press release and its related financial tables, as well as the Investor Relations section of our website, Covidien.com.

For the first quarter, we reported GAAP diluted earnings per share of $0.87, after adjusting for certain specified items our non-GAAP earnings came in at $0.95 a share.

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

Rich Meelia

Thank you, Cole. To begin, I’ll talk a little bit about what we saw in the overall U.S. healthcare market in terms of utilization and demand. While we’re still collecting and analyzing the data and there is significant noise from quarter-to-quarter, recent data shows that hospital admissions were soft but procedure volume increased somewhat. While the demand trends are some much choppy, what we see suggests stabilization in 2010 versus 2009.

Third-party forecasts indicate a slow growth year in 2011, with admissions projected to hold flat and volumes and select procedures such as bariatric and general surgery expected to show some mild to modest growth.

We believe broad-based gains in utilization and demand are still more than 12 months out and these gains can only be driven by fundamental improvements in the relationship between the economy, unemployment and the uninsured.

In light of some of these challenges, we are very pleased with the first quarter. Revenues were somewhat ahead of our expectations. We significantly improved our gross margin. Operating margin came in slightly ahead of plan and for the fifth consecutive quarter, we delivered double-digit EPS growth on an adjusted basis.

These strong results came in spite of difficult comparisons with a very strong first quarter a year ago, when we had unusually high sales in our ventilator, Pulse Oximetry and supplies business related to H1N1, and good growth for generic pharmaceuticals as customers purchased for quarter management and year-end inventory stocking.

Overall, our business in the U.S. came in ahead of our expectations in the quarter. In Europe, we were sequentially better this quarter, though as we’ve said before procedures tend to be utilization driven and economic concerns especially in southern Europe persist. We expect this to continue through 2011 given significant cost containment and assuredly measures in single payer system markets.

In our large medical devices segment, broad-based growth was led by vascular, oximetry and monitoring, and energy products. First quarter results were aided by our acquisition of ev3, Aspect and Somanetics, but partially offset by the divestitures of sleep and oxygen.

In endomechanical, we registered good growth for our stapling products, paced by Duet TRS and Tri-Staple. Both these innovative products are doing very well in the marketplace and we believe we gained share in stapling this quarter.

Sales were flat in the laparoscopic instrumentation line, where we faced continued competitive pressure in trocars. In the soft tissue repair category, sales in the large suture business were above a year ago, while mesh and fixation sales growth slowed as we faced difficult comparisons in the U.S.

In Energy, our new products including LigaSure 5, Advance 2, Impact and Precise drove double-digit growth in vessel sealing for the 21st consecutive quarter. In particular, the Precise is performing very well in Europe and we are optimistic that it will be approved in the U.S. later this year.

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