St. Jude Medical, Inc. (STJ)

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St. Jude Medical (STJ)

Q2 2011 Earnings Call

July 20, 2011 8:00 am ET


Eric Fain - President of Cardiac Rhythm Management Division

John Heinmiller - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Daniel Starks - Chairman of the Board, Chief Executive Officer and President


Michael Weinstein - JP Morgan Chase & Co

Robert Hopkins

Raj Denhoy - Jefferies & Company, Inc.

Kristen Stewart - Deutsche Bank AG

Frederick Wise - Leerink Swann LLC

Adam Feinstein - Barclays Capital



Welcome to St. Jude Medical's Second Quarter Earnings Conference Call. Hosting the call today is Dan Starks, Chairman, President and Chief Executive Officer of St. Jude Medical.

The remarks made during this conference call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Such forward-looking statements include the expectations, plans and prospects for the company, including potential clinical successes, anticipated regulatory approvals and future product launches and projected revenues, margins, earnings and market shares.

The statements made by the company are based upon management's current expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include market conditions and other factors beyond the company's control and the risk factors and other cautionary statements described in the company's filings with the SEC, including those described in the risk factors and cautionary statement sections of the company's annual report on Form 10-K for the fiscal year ended January 1, 2011 and the quarterly report on Form 10-Q for the fiscal quarter ended April 2, 2011. The company does not intend to update these statements and undertakes no duty to any person to provide any such update under any circumstances.

[Operator Instructions] It is now my pleasure to turn the floor over to Dan Starks.

Daniel Starks

Thank you, Sarah. Welcome to the St. Jude Medical Second Quarter 2011 Earnings Conference Call. With me on the call today are John Heinmiller, Executive Vice President and Chief Financial Officer; Eric Fain, President of our Cardiac Rhythm Management division; Mike Rousseau, Group President; and Angie Craig, Vice President of Corporate Relations and Human Resources.

Our plan this morning is for John Heinmiller to provide his normal review of our financial results for the second quarter 2011 and to give sales and earnings guidance for the third quarter and full year 2011. I will then address several topics and open it up for your questions.

Go ahead please, John.

John Heinmiller

Thank you, Dan. Sales for the quarter totaled $1,447,000,000, up approximately 10% over the $1,313,000,000 reported in the second quarter of last year. Favorable foreign currency translations versus last year second quarter increased this quarter sales by about $75 million. We will update our currency assumptions in a moment, but the actual average exchange rates during the second quarter were within our previous guidance range.

On a constant currency basis, second quarter sales increased approximately 4% versus last year. Also, as you may recall, for the first 2 selling weeks of the second quarter of 2010, a competitor had suspended all sales of their ICD products in the United states. We estimate that this dynamic benefited our second quarter 2010 U.S. ICD sales by approximately $15 million. If we adjust to reflect this onetime benefit, our second quarter 2011 sales were up approximately 11% on an as reported basis, and 6% on a constant currency basis.

During the second quarter, in connection with the AGA Medical acquisition, we continued to amortize the acquired inventory step up to cost of sales. In this quarter, we recognized the remaining after-tax charges of $10 million or $0.03 per share in cost of sales related to this item.

In addition, we recognized $32 million or $0.10 per share in other after-tax charges, primarily related to restructuring actions initiated during the second quarter to realign certain activities within our CRM business. This relates to our May 12, 2011, press release and announcement in Sweden that we are transitioning CRM manufacturing to a more cost advantaged locations.

In addition to the cost recognized this quarter, we expect future costs associated with this transition to be approximately $60 million to $80 million or $45 million to $60 million in after-tax charges, which will be recognized over the next several quarters. We estimate that when fully implemented, the transition of CRM manufacturing to more cost advantaged locations will generate approximately an additional $40 million to $50 million in annual savings.

Additional information about these charges can be found in today's press release.

Comments during this call referencing second quarter results and guidance for our full year 2011 results, including earnings per share, will be exclusive of these items. Earnings per share were $0.85 for the second quarter of 2011, an 8% increase over adjusted earnings per share of $0.79 in the second quarter of 2010.

Before we discuss our second quarter 2011 sales results by product category with guidance for the third quarter and the remainder of 2011, let me comment on foreign currency. As discussed on prior calls, the 2 main currencies influencing St. Jude Medical's operations are the euro and the yen. In preparing our sales and earnings guidance for the second quarter and full year -- the third quarter and full year 2011, we used exchange rates which assumed that each euro would translate into about $1.39 to $1.44 and that each JPY 82 to JPY 87 would translate into USD $1.

For the second quarter, the actual average exchange rates for the euro and the yen were consistent with these assumptions.

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