Covidien plc. (COV)

COV 
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Covidien (COV)

Q1 2013 Earnings Call

January 25, 2013 8:30 am ET

Executives

Coleman N. Lannum - Vice President of Investor Relations

Jose E. Almeida - Chairman of the Board, Chief Executive Officer and President

Charles J. Dockendorff - Chief Financial Officer and Executive Vice President

Analysts

David H. Roman - Goldman Sachs Group Inc., Research Division

David R. Lewis - Morgan Stanley, Research Division

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Sean D. Lavin - Lazard Capital Markets LLC, Research Division

Anthony Petrone - Jefferies & Company, Inc., Research Division

Raj Denhoy - Jefferies & Company, Inc., Research Division

Matthew Taylor - Barclays Capital, Research Division

Joanne K. Wuensch - BMO Capital Markets U.S.

Michael Matson - Mizuho Securities USA Inc., Research Division

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Covidien plc Earnings Conference Call. [Operator Instructions] Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the presentation over to Mr. Cole Lannum, Vice President, Investor Relations. Please proceed.

Coleman N. Lannum

Thanks, Stephanie, and good morning, everyone. With me today are Joe Almeida, 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 first quarter results was issued earlier this morning and is available on our website and the newswires. 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. Please note that under the Safe Harbor rules, we are under no obligation to update these forward-looking statements even if actual results or our future expectations change materially. 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 today. 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 quarter, we reported GAAP diluted earnings per share of $1.03, and after adjusting for certain specified items, our non-GAAP earnings came in at $1.10 per share.

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

Jose E. Almeida

Thanks, Cole. Let me begin by saying that we are very pleased with our first quarter results. Sales were above plan, up 6% operationally and up 5% as reported. In several key categories, including stapling, Energy and Vascular, we continue to grow ahead of the market, and our investments are contributing to our robust performance.

In the Medical Devices segment, we had a very strong quarter, with 9% operational growth, with broad-based increases across the segment. In the Pharmaceuticals business, sales were flat overall, but we, again, registered an outstanding performance with Specialty Pharmaceuticals paced by EXALGO. Our late December approval of generic CONCERTA should help accelerate growth even more throughout the year, and we will talk more about that in a moment. And in supplies, reported sales were above a year ago, reflecting increases in Nursing Care and SharpSafety.

Before I go into more detail on this results, I would like to spend a brief moment discussing the health care products marketplace. Overall, there has been very little change in the market environment over the last several months, though we have seen a slight rebound in the U.S. in procedures of interest to us. In Europe, austerity programs and the economic slowdown continued to pressure all of med tech, though our European business grew better than the market yet again. And despite the media attention it has received, we saw relatively little impact in the quarter from the flu. We did have a slight increase in pulse oximetry sensors, but do not believe there was any significant flu-related volume in our supplies or ventilation business.

Emerging markets are growing rapidly, and we expect this to continue, as access to health care expands and the demographic trends are favorable. In our emerging markets business, comprising Eastern Europe, Middle East and Africa, Asia and Latin America, we had one of our best quarters ever, with operational sales growth in the high teens and double-digit increases in all regions and all product lines. The performance was led by even stronger growth in the BRIC countries. These results reflect the investments we've made in the last couple of years to expand sales and marketing and to build an on-the-ground presence. One thing people don't get, don't generally realize, is that this expansion is not detrimental to our gross margin as emerging markets generate very good margins for Covidien.

We continue to see excellent opportunities in emerging markets, and we will be ramping up our investments throughout this year. The results we are now delivering from our prior investments give us confidence that this expanding ramp-up will deliver further growth in this fast-growing regions going forward.

Before moving to the product line results, I would like to briefly comment on one other area of significant opportunity for the company. As we discussed at Investor Day last September, increased penetration of minimally invasive surgical procedures will be a key driver of our growth in Energy and Endomechanical.

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