Covidien plc. (COV)

COV 
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Covidien plc (COV)

Q3 2011 Earnings Call

July 26, 2011 8:30 am ET

Executives

Charles Dockendorff - Chief Financial Officer and Executive Vice President

José Almeida - Chief Executive officer, President and Director

Coleman Lannum - Vice President of Investor Relations

Analysts

Matthew Dodds - Citigroup Inc

Michael Matson - Mizuho Securities USA Inc.

David Turkaly - Susquehanna Financial Group, LLLP

David Roman - Goldman Sachs Group Inc.

Michael Weinstein - JP Morgan Chase & Co

Robert Hopkins

Jayson Bedford - Raymond James & Associates, Inc.

Kristen Stewart - Deutsche Bank AG

Frederick Wise - Leerink Swann LLC

Thomas Gunderson - Piper Jaffray Companies

David Lewis - Morgan Stanley

Lawrence Keusch - Morgan Keegan & Company, Inc.

Adam Feinstein - Barclays Capital

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Covidien plc Earnings Conference Call. My name is Anita and I will be your operator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. At this time, I would now like to turn the call over to Mr. Cole Lannum, Vice President, Investor Relations. Please proceed.

Coleman Lannum

Thanks, very much, Anita, and good morning, everyone. With me today are Joe Almeida, Covidien's 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 as usual answering your questions. The press release with details of our fiscal third quarter results was issued earlier this morning and is available on our website and on the newswires.

And during today's call, we'll be making 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 third quarter, we reported GAAP diluted earnings per share of $1.06. After adjusting for certain specified items, our non-GAAP earnings came in at $1.01 per share. Now I'll turn it over to Joe who will go in to more detail on third quarter results. Joe?

José Almeida

Thanks, Cole. Overall, we had another good quarter. Sales were strong with 14% growth. We again made a significant improvement in gross margin, delivered a 14% increase in adjusted operating income and a 19% gain in adjusted EPS. This is the fourth quarter in a row that we have exceeded our internal expectations on the bottom line. In our large Medical Devices segment, we had another solid quarter, with broad based growth led by Vascular and Energy products. We saw little impacts from additional pricing pressures as a result of the austerity efforts in Europe. While we remain cautious on European markets given overall business conditions and austerity measures, we are pleasantly surprised that European results came in slightly ahead of expectations for the second quarter in a row.

In Endomechanical, we registered good growth for stapling, fueled by the success of Tri-Staple, which continues to perform very well. In the Soft Tissue Repair category, sales growth was led by sutures, aided by further success of the innovative V-Loc products. This growth more than offset lower sales of mesh and biosurgery products, but I'd like to highlight that in synthetic mesh and fixation, we showed positive growth as we likely took market share this quarter. Biologic mesh sales were well below a year ago.

Our Energy business again delivered a strong double-digit top line performance led by vessel sealing where new products such as the LigaSure 5mm and small jaw are having a positive impact. In Vascular, our traditional business was up mid-single digits, led by solid growth for Chronic Venous Insufficiency products. On an apples-to-apples basis, sales of ev3 were up more than 20%, though, as you know, we did not report ev3 in our results last year.

Turning to the Pharmaceuticals segment. We delivered a good quarter. Sales were ahead of expectations, though, somewhat below a year ago due to the initial restocking orders for EXALGO and PENNSAID that occurred in last year's third quarter, coupled with the U.S. nuclear pharmacy divestiture. The generics business registered good growth, faced by increases for the fentanyl lozenge and the launch of the fentanyl patch. Operationally, sales of Contrast Products and the active pharmaceuticals ingredients were both above even with last year.

In Medical Supplies, sales were on plan this quarter and were again up sequentially. While margins were negatively impacted by higher raw material prices, the business continues to meet our expectations and provides good cash flow and ROIC. Before I turn the call over to Chuck for his comments, I'd like to take a moment, since this is my first call as President and CEO, to discuss my philosophy on running Covidien.

I am very pleased and honored to be succeeding Rich Meelia. I admire the great job that he did in transforming the company. He was a strong leader and set the stage for us to succeed. And we are fortunate that Rich will be staying involved as a nonexecutive Chairman of the Board of Directors. Looking forward, you should expect no significant change to Covidien's strategic direction. Our 5 strategic imperatives: innovation, portfolio management, globalization, operational excellence and talent management, have not and will not change.

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