Covidien plc. (COV)

COV 
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1.19
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Exchange: NYSE
Industry: Health Care
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Covidien plc (COV)

Investor Meeting

September 12, 2013 2:20 pm ET

Executives

Coleman N. Lannum - Vice President of Investor Relations

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

Brian Douglas King - Vice President

Michael Tarnoff

Bryan C. Hanson - Senior Vice President and Group President of Surgical Solutions

Stacy Enxing Seng - President of Vascular Therapies Global Business Unit

Amy Wendell

Robert J. White

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

Joseph F. Woody - Former Director

Analysts

David R. Lewis - Morgan Stanley, Research Division

Jason Wittes - Brean Capital LLC, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

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

Brooks E. West - Piper Jaffray Companies, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

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

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

Matthew Taylor - Barclays Capital, Research Division

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

Anthony Petrone - Jefferies LLC, Research Division

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

Presentation

Coleman N. Lannum

Thank you. Thank you very much, and welcome, everyone. I'd like to also welcome the folks that are joining us live on the webcast for the rest of this afternoon's presentations and session. I know it's already been a long day. I hope that each of you has gotten something out of what we've already talked about this morning. The goal is to expand upon that in the afternoon sessions and talk about it a little bit more.

I want to start off with a couple of housekeeping items. You heard the voice say earlier, but I will also reiterate, if you would please make sure that your BlackBerries, iPads, iPods and electronic devices are on mute, that would be very, very helpful. It will keep me from having to point you out if you're the one that is the offender going forward.

A couple of other things to think about. There was a lot of information that was shared this morning. The presentations, for those of you that weren't able to join us in the breakout sessions, the presentations that were given, as well as all of this afternoon's presentations, with the exception of the financial data, I'll talk about that in a second, are currently online at covidien.com, so you can pull down that information.

The financial guidance slides, along with the press release discussing some of our -- not only our guidance for 2014, but other items that we're going to be talking about after the close of the market, will be available after 4:00. The press release will be filed. We'll hand out the slides here. They will also be posted to the website at the same time.

Now for -- again, for those of you on the webcast who weren't able to join us live, we are going to be posting videos of the breakout sessions for both technology and market development under our website. That should be available by the end of the day today or tomorrow, at the latest, to help you understand some of the things that we talked about.

So today, we've been trying to answer pretty straightforward question. We recognize the fact that health care is changing. There are a lot of uncertainties out there in the end market. And what we're looking at doing is trying to help you understand some of the things that we've been doing to address that. This is the sixth time that I've stood in front of you for one of these Annual Investor Days. And I'm proud to say that for the sixth time, I'm able to tell you we are yet again the best performing large cap med tech company on an inception to date basis from the period of time when we went public to today. And it's something I'm very proud of, quite frankly, it's something the senior management team is very proud of. And it's not only am I proud of that because that's how our shareholders get paid, but quite frankly, it's how we get paid as well, the biggest part of our compensation, and we take that very, very seriously.

Yet at the same time, I also realize this is also a statement about what are we going to do for you going forward. The fact that we performed fairly well in the past is what it is, but we need to keep on showing you that we're doing the right things to keep that performance where it is.

So this morning, you saw a little bit of a taste on the technology we have going on, some of the market development projects we have going on. This afternoon, what we're going to focus on is the strategy around the changing market environment.

So let's talk very quickly about the agenda. First of all, you know we try to keep our PowerPoint presentations short, to the point and simple. So I'm happy to say this afternoon, the majority of the time we're going to be spending is on open Q&A with our senior management team and senior leaders. We'll, we're also going to talk about a couple of key themes that I think you'll enjoy.

First of all, in a moment, I'm going to ask Joe Almeida to the stage to update you on our strategic thinking and on recent events around the company. After Joe presents, Brian King, the President of our Emerging Markets business, will give you some insight on why we're winning so specifically in this specific area of emerging markets. We're then going to invite our senior business leaders to the stage and have an open forum of Q&A until just around 4:00 or so. We'll stop for a break at that point, we'll pass out the press releases with the financial guidance. And then, after the markets close at 4:00, our Chief Financial Officer, Chuck Dockendorff, will discuss some financial dynamics, as well as introduce our 2014 financial guidance.

We''ll finish the day with another Q&A session, with Chuck and Joe talking about the themes that you've heard throughout the day, and I would ask that you hold your guidance-related questions until that time, whenever Joe and Chuck are up here on stage. After the final Q&A session, the senior leadership team will stick around to answer further questions informally over cocktails.

Now continuing our past practice, we really would like those of you listening to us in your office or at home to -- on the webcast, to submit questions for management so we can partake of those throughout the day. If you would, feel free to submit questions by e-mail at 2013covgmail.com or you can tweet your question to #Covidienir. And we've already been collecting some of those questions throughout the day and we'll include them at the appropriate time during our Q&A sessions this afternoon.

Now I'm about to do something that's never been done before in the history of corporate America. I am going to make the forward-looking statement slides interesting and engaging. No I'm not, that's impossible. But bear with me just one second because I think this information is fairly important, so let me have your attention.

One of the things that we're particularly proud of in the way the communication has been managed over the last several years is that we spend a lot of time thinking carefully about our guidance, about helping you understand what's driving the business. We put a lot of thought into the numbers that we're going to be talking about. And we really do try to make it fair and balanced. We try not to give an overly optimistic view nor an overly pessimistic view. But realistically, sometimes things change. Take a look at this slide. There are a whole bunch of disclaimers all over it. And again, a whole bunch more on this one as well. Our attorneys spend a lot of time thinking of all the different things that could change and to help you understand that they could change, but it's not an all-inclusive slide. A lot of things are out of our control. It's important you understand that even if our expectations change going forward, and even if they change materially, we're expressly under no obligation to update that guidance at any point in the future.

So let me summarize. In a moment, you'll hear from our CEO and other senior leaders about the company strategy. You've heard about some of the products from our technical experts. You've seen some of the early stage growth opportunities from our clinical team. You've seen some of the technology enhancing patient safe -- the technology that enhances patient safety from world-class key opinion leader or physicians who use our products every single day. So we've got leaders, experts, senior management, clinical team, Investor Relations, physicians. Oh yes, this is one more important constituency, I think, you need to hear from.

[Video Presentation]

[Audio Gap]

Jose E. Almeida

Our 200 most senior employees we have in Boston in about 2 weeks. As a matter of fact, a lot of these meetings is going to be also presented to them because this is part of our strategy. Before we get into the strategy

[Audio Gap]

Let me spend a moment and speak about 3 things that are very important to our company: Ethics, integrity and the quality of what we make. There's been a lot of conversation about FCPA issues in China, Russia, Brazil. You hear that a lot and read them a lot. And it was rejoined in the last 2 months. Covidien has an unparalleled effort in creating an environment where our employees are trained and they practice ethical behavior. There's no good business where there's no ethics behind the business of our products. We're very proud to have pioneered significant amount of changes in how we do business in many countries in the world. We were early adopters of the code of Avimed [ph] but not only we adopted for the U.S., we moved that code and we have it on a global basis.

Covidien provides a significant amount of training for our sales reps in every part of the world, telling them what is right and what is not right. We also have compliance committees and grants committees that absolutely filter any kind of disbursement of money that would go to a society or training of physicians. Covidien does not permit, or it does not pay, for physicians to travel from their country of origin to attend any third-party conference in a different country. We had -- we stopped doing that close to 4 years ago, because we thought that some of the practices were not aligned with our code of conduct and how Covidien wants to do business.

So we have 38,000 employees around the globe and I can tell you that we do everything we can to make sure that we're doing the right things for our customers and doing them in an ethical way. We also have patient safety at the top of our mind all the time. Quality of our products is the most important thing that we have. It's not just about the reputation of the company, it is about the patient that is receiving their treatment. And not having adherence to quality will create an issue in safety for those patients, and we feel very proud about our track record.

Once we get those things aligned and we are on the same page with our employees, we can now talk about strategy. We have set a lofty goal to double our intrinsic value in 5 to 7 years. An intrinsic value is our discount cash flow now using our cost of capital. And this is a lofty goal that to achieve it, there are 3 things that we're going to have to execute, and this is the message I want to leave with you today. We've got to grow above market. We've got to drive operational leverage and deploy the capital in a way that reward you, the investors, but also allows Covidien to invest strategically into M&A and other areas of the company.

So we're going to base our conversation and our strategy on those 3 fundamental points that we'll deliver top shareholder return, top quartile total shareholder return that Covidien is delivering today. It's one of the most difficult things to get consistent -- position the company at the top quartile of total shareholder return, but we're going to try our best and we think that by giving the company a vision where we're going to double that in 5 to 7 years, we'll have a higher probability of being the top quartile. Therefore, reward you, the shareholders of the company.

We will talk about the environment. The environment has changed significantly from 12 months ago. So how do we achieve those 3 levers of value in the current environment and what we're thinking about the future environment of health care? Therefore, what is the evolving strategy that makes us deliver on those objectives?

There is a significant difference between emerging markets and developed markets in terms of geopolitical differences and health care environment. It's a dichotomy that, at our company, we have clearly understood because projects and long-term investments have different characteristics. We could sit here today and invest every dime of the company in emerging markets because the return on investment is very quick, it's about 18 months. Well, we've got to be able to balance the growth in developed markets with the acceleration of the emerging markets.

In our developed markets today, the tailwinds are great still. And they're encouraging because we still have the demographics behind us. You have aging populations in Europe, U.S., Japan, Canada, Australia, they all have people who can pay for health care more extensively and want better outcomes from health care treatments. We have, in the U.S., the Affordable Care Act and Patient Rights Bill, that will afford more people health care. Also there, we have an Immigration Bill that if it goes through congress, we'll have another 10 million, 11 million people come into the system.

There is a significant momentum behind the economical and clinical advantages of minimally invasive procedures, from laparoscopy to endovascular procedures. And that's a great opportunity because you have the 2 major thrist of value behind them. However, the headwinds are different and they're changing very quickly, and we saw that in the last 12 months and we're going to see it in the next 2, 3 months with new patient population coming to the health care. I can tell you the price pressures are not very different than we have before. We've been speaking to you about price pressures for awhile. They're not very different, and we are comfortable dealing with those challenges in the developed markets. I'm not saying that is easy, they are not easy enough, but this is the devil that we know.

The economic austerity in Europe is the devil we know. We know how to deal with that. Chuck is going to speak a little bit more about how we are going to create leverage in Europe to be able to take advantage of the markets that are growing in Europe, as well, do it at the lowest cost possible. A lot of the changes that you're going to see in the U.S., I don't believe they will come right away from the Affordable Care Act. I believe they will come from corporate America. From the companies like Covidien, the companies that -- the large banks and the large institutions, the industrial companies that are in the U.S. Because the cost of health care and increasing health care are enormous. It is, for Covidien, one of the largest line item increases that we have in our company. It's a percentage of the total. So you're going to see a lot of changes being forced through companies, even before the Affordable Care Act can really take effect and you see the effect of the exchanges, and more groups, more consolidation of hospitals and groups, you're going to see a great deal of change coming from companies, and if you haven't seen that already coming from the companies that you work for.

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