St. Jude Medical, Inc. (STJ)

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St. Jude Medical, Inc. (STJ)

Q1 2014 Earnings Conference Call

April 16, 2014 8:00 AM ET

Executives

Daniel J. Starks – Chairman, President and Chief Executive Officer

Donald J. Zurbay – Vice President-Finance and Chief Financial Officer

Eric S. Fain – Group President

Analysts

Robert A. Hopkins – Bank of America Merrill Lynch

Mike J. Weinstein – JPMorgan Securities LLC

Larry Biegelsen – Wells Fargo Securities, LLC

Kristen M. Stewart – Deutsche Bank Securities, Inc.

David H. Roman – Goldman Sachs & Co.

Rick Wise – Stifel, Nicolaus & Co., Inc.

David R. Lewis – Morgan Stanley & Co. LLC

Matt Taylor – Barclays Capital, Inc.

Derrick Sung – Sanford C. Bernstein & Co. LLC

Presentation

Operator

Welcome to the St. Jude Medical First Quarter 2014 Earnings Conference Call. Hosting the call today is Dan Starks, Chairman, President, and Chief Executive Officer of St. Jude Medical. Before we begin, let me remind you that some of the statements made during this conference call may be considered forward-looking statements.

The Company's 10-K for fiscal year 2013 identifies certain factors that could cause the Company's actual results to differ materially from those projected in any forward-looking statements made this morning. The Company does not undertake to update any forward-looking statements as a result of new information or future events or developments.

The 10-K as well as the Company's other SEC filings are available through the Company or online. During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to most comparable GAAP measures are available in the Company's press release issued earlier this morning or on the St. Jude Medical website at www.sjm.com. At this time all participants have been placed in a listen-only mode. And the floor will be opened for your questions following Management's prepared remarks.

It is now my pleasure to turn the floor over to Mr. Dan Starks.

Daniel J. Starks

Thank you, Jonathan. Welcome to the St. Jude Medical first quarter 2014 earnings conference call. With me on the call today as usual are John Heinmiller, Executive Vice President; Mike Rousseau, Chief Operating Officer; Eric Fain, Group President; Don Zurbay, Vice President and Chief Financial Officer; and Rachel Ellingson, Vice President of Corporate Relations.

Our plan this morning is for Don Zurbay to provide a review of our financial results for the first quarter and to give sales and earnings guidance, both for the second quarter and full year 2014.

I will then address several topics and open it up for your questions. Go ahead, Don.

Donald J. Zurbay

Thank you, Dan. Sales for the quarter totaled $1,363 million, up 2% from the $1,338 million reported in the first quarter of last year. Unfavorable foreign currency translations decreased this quarter sales by approximately $25 million. On a constant currency, first quarter sales increased 4% versus last year. We will update our currency assumptions in a moment, but the actual average exchange rates during the first quarter were within our previous guidance range.

During the first quarter, we recognized $25 million or $0.09 per share in after-tax special items. For further information regarding these items, please refer to details provided in our press release. Comments during this call referencing first quarter and full year 2014 results, including EPS amounts, will be exclusive of these items. Additionally at the end of 2013, the Federal Research and Development Tax Credit expired and it has not yet been extended for 2014.

In this circumstance, GAAP requires us to estimate and record our effective income tax rate, assuming that the R&D credit is not extended. For purposes of this conference call and our calculations of adjusted net earnings, however, we are assuming that the R&D tax credit will be extended for 2014 as in past years. As a result, comments referencing our first quarter results in guidance for 2014, including EPS amounts, are presented based on an effective income tax rate that contemplates the extension of the tax credit retroactive to the beginning of 2014.

Earnings per share were $0.96 for the first quarter of 2014, a 4% increase over adjusted EPS of $0.92 in the first quarter of 2013. We estimate that on a constant currency basis, first quarter earnings per share increased 9%.

Before we discuss our first quarter 2014 sales results by product category, with guidance for the second quarter and the remainder of 2014, let me provide a few comments about currency exchange rates. As discussed on prior calls, the two main currencies influencing St. Jude Medical’s operations are the euro and the yen. In preparing our sales and earnings guidance for the first quarter and full year 2014, we used exchange rates which assumed that each euro would translate into about $1.33 to $1.38, and for the yen, each JPY102 to JPY107 would translate into $1.

For the first quarter, the actual average exchange rates for the euro and the yen were consistent with these assumptions. In preparing our sales and earnings guidance for the second quarter and remainder of 2014, we are now assuming that each euro will translate into about $1.35 to $1.40, and we now expect each JPY100 to JPY105 to translate into $1. Additionally, we have assumed changes in various other currencies that impact our results. These changes and assumptions regarding currency exchange rates increased our total forecasted sales for the remainder of 2014 by approximately $10 million, and we now estimate that there will not be a significant year-over-year currency impact to our second quarter sales.

In addition, as we have previously mentioned, due to our 52, 53 week fiscal year convention, 2014 will include an additional calendar week of sales and operations. This additional calendar week includes New Year’s Eve and New Year’s Day. Given the holiday schedule, we estimate that this additional calendar week will result in approximately three additional selling days in the fourth quarter. For the first quarter, total Cardiac Rhythm Management sales which include revenue from both our ICD and pacemaker product lines were $687 million, up 1% from last year’s first quarter, including $10 million of unfavorable foreign currency translations.

On a constant currency basis, total CRM product sales for the first quarter increased 3%. For the first quarter, ICD sales were $436 million, up 2% from last year’s first quarter. U.S. ICD sales were $267 million, up 5% from last year’s first quarter, and international ICD sales were $169 million, a 2% decrease from the first quarter of 2013, including $4 million of unfavorable foreign currency translations. On a constant currency basis, ICD sales for the first quarter increased 3%. For low voltage devices, sales for the first quarter totaled $251 million, flat with last year’s first quarter.

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