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Covidien plc (COV)

Q2 2011 Earnings Call

April 21, 2011 8:30 am ET

Executives

Charles Dockendorff - Chief Financial Officer and Executive Vice President

José Almeida - Senior Vice President and President of Medical Devices

Richard Meelia - Chairman, Chief Executive Officer and President

Coleman Lannum - Vice President of Investor Relations

Analysts

Joshua Jennings - Jefferies & Company, Inc.

Matthew Dodds - Citigroup Inc

Michael Matson - Mizuho Securities USA Inc.

Steve Beuchaw - Morgan Stanley

Konstantin Tcherepachenets - Morgan Keegan & Company, Inc.

Robert Hopkins

Jayson Bedford - Raymond James & Associates, Inc.

Thomas Gunderson - Piper Jaffray Companies

Paul Choi - Caris & Company

Thomas Kouchoukos - Stifel, Nicolaus & Co., Inc.

Topher Orr - Goldman Sachs Group Inc.

Kimberly Gailun - JP Morgan Chase & Co

Unknown Analyst -

Joanne Wuensch - BMO Capital Markets U.S.

Presentation

Operator

Good day, ladies and gentlemen. Welcome to the Second Quarter 2011 Covidien plc Earnings Conference Call. My name is Latisha, and I will be your operator for today. [Operator Instructions] I would now like to turn the call over to your host for today, Mr. Cole Lannum, Vice President of Investor Relations. Please proceed, sir.

Coleman Lannum

Thanks, Latisha, and thanks, everyone, for joining us on what is a very busy morning for earnings and a very busy week I know for earnings. With me today are Rich Meelia, Covidien's Chairman, President and CEO; Chuck Dockendorff, our Chief Financial Officer; and Joe Almeida, the President of our Medical Devices business. We'll be making some brief introductory comments and then spend most of the time this morning answering your questions as we always do. The press release with details of the second quarter results was issued earlier this morning and is available on our website and on the newswires.

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 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. A 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 second quarter, we reported GAAP diluted earnings per share of $0.92. And after adjusting for certain specified items, our non-GAAP earnings came in at $0.93 per share.

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

Richard Meelia

Thank you, Cole. I'd like to begin with some brief comments on the overall healthcare marketplace. Generally speaking, we have not seen significant changes since we talked last quarter. As we noted then, third-party forecasts showed slow and choppy growth for 2011. Hospital admissions were projected to be flat while volume for select procedures such as bariatric and general surgery were expected to grow modestly.

Given that market environment, we're pleased with our second quarter results. Revenues were right on plan. We again improved our adjusted gross margin, operating margin came in ahead of our expectations and EPS growth was on track. In our large Medical Devices segment, we achieved double-digit quarterly gains that were led by Vascular and Energy products. The segment results were aided by the acquisitions of ev3 and Somanetics, but they were partially offset by the divestiture of sleep products.

In Endomechanical, we posted good growth for stapling products paced by Duet TRS and Tri-Staple. Both of these innovations are doing very well in the marketplace, enabling us to grow faster than the stapling market as a whole. The multiyear rollout of Tri-Staple continued with the curved tip and black reloads launching during the quarter. In the laparoscopic instrumentation line, sales were about even with last year as we face competitive pressure in trocars.

In Soft Tissue Repair, sales in the large suture business were above last year helped by our innovative V-Loc product. That said, sales growth in mesh and fixation slowed due to difficult comparisons in the U.S. While we made good progress in synthetic, our biologic mesh business lost market share. Obviously, it has not met our expectations, and we are in the process of addressing this underperformance.

We recently announced the interim results of 2 clinical studies that bode well for our future growth. The first study showed that using our SILS Port for gall bladder removal produced better cosmetic outcomes than the more traditional four-port laparoscopic approach. The second study showed that our Parietex Progrip mesh significantly reduced early pain following inguinal hernia repair. These studies are examples of our increased commitment to evidence-based medicine and to using clinical studies to expand our product leadership in the marketplace.

In Energy, we again delivered strong double-digit growth in vessel sealing. And when I say again delivered, I mean for our the 22nd consecutive quarter. We have an exceptional lineup of new products including the LigaSure 5, Advance too and the Impact. We recently received FDA approval for the LigaSure Curved, Small Jaw and launched it in the United States. This innovation is used in surgeries where a small jaw footprint is needed. Perhaps, the most exciting news in Energy is our Sonicision Cordless Ultrasonic Device that was FDA approved last month and will be launched later in 2011. This is our first foray into the $800 million ultrasonic market. Sonicision will target general, bariatric, colorectal, urological and gynecological procedures. The addition of Sonicision not only broadens Covidien's portfolio of energy-based devices, it also gives customers one source for their advanced energy solutions, potentially offering savings from standardization. Both our electrosurgical and hardware products led by the ForceTriad energy system posted good quarterly growth. Energy hardware sales were at their highest level since the fourth quarter of 2008 indicating a positive shift in capital equipment purchases by hospitals.

Read the rest of this transcript for free on seekingalpha.com