Covidien Ltd. F3Q10 (Qtr End 6/30/10 Earnings Call Transcript

Covidien Ltd. F3Q10 (Qtr End 6/30/10 Earnings Call Transcript
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Covidien Ltd. (COV)

F3Q10 (Qtr End 6/30/10) Earnings Call

July 29, 2010 8:30 am ET


Rich Meelia - Chairman, President and CEO

Chuck Dockendorff - EVP and CFO

Cole Lannum - VP of IR


Kim – JPMorgan

Mike Weinstein – JP Morgan

Bob Hopkins - Banc of America

Rick Wise – Swanson

David Lewis - Morgan Stanley

Matthew Dodds – Citigroup

Adam Feinstein - Barclays Capital

Sam Gunderson – Piper Jeffrey

David Roman - Goldman Sachs

Michael Matson – Wells Fargo Securities

Joanne Wuensch - BMO Capital Markets

Christian Store – Deutsche Bank

Josh Jennings – Jeffries & Co.

Jason Bedford - Raymond James

Larry Keusch - Morgan Keegan

Thomas Kouchoukos – Stifel Nicolaus



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Good day, Ladies and Gentlemen, and welcome to the Third Quarter 2010 Covidien Earnings Conference Call. My name is Janada and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer question. (Operator Instructions)

I would know like to turn the conference over to your host for today, Mr. Cole Lannum, Vice President, Investor Relations. Please proceed.

Cole Lannum

Thanks, Janada. And good morning, everyone. With me today are Rich Meelia, Covidien’s Chairman, President and CEO; and Chuck Dockendorff, our Chief Financial Officer.

The press release with details of our third quarter results is issued earlier this morning and is available on our website and on the news wires.

During today’s call, we’ll make some forward-looking statements and it’s possible that actual results could differ materially from our current expectations. Please refer to the precautionary 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, including in particular, operational growth, which is net sales growth, excluding the affect of foreign exchange.

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 invest relations section of our website

For the third quarter, we reported GAAP diluted earnings per share of $0.70. After adjusting for certain onetime items, our non-GAAP earnings for the second quarter came in at $0.85 per share.

Now, I’d like to turn it over to Rich, who will go to more details on the Third Quarter results, Rich.

Rich Meelia

Thank you, Cole. Before I discuss the Third Quarter, I’d like to make a few brief comments.

As you all know, it has been almost exactly three years since we’ve spun off and became an independent company. At our first investor day, immediately appreciating spin, we highlighted five key strategic initiatives. They were focused on growth, commitment to innovation leveraging structure, driving up operational excellence and enhanced portfolio management.

Three years later, these key initiatives, as well as our overall company strategy, remain unchanged. The objectives we highlighted to achieve our strategy at that time, included accelerating growth and higher margin franchises, continue improvement in gross margins, focusing R&D and business development on new technology, and managing the portfolio for growth.

We successfully delivered against all of these objectives over the last three years. We markedly accelerated the pace of new product launches, significantly increased selling marketing and R&D investments, improved gross margins, reshaped the portfolio by divesting or deemphasizing lower-growth lower-margin businesses, and inquiring new businesses that will accelerate growth, expand our product line and deliver higher margins.

Looking at operating margins for example, we committed to making the investments necessary to expand our selling organization, implement R&D investments to drive innovation and create the cooperate structure necessary for a standalone global company.

We knew these investments would put a damper on our operating margins, but I’m pleased to say that we’ve now brought our margins back to the 2007 pre-spin level.

So, our strategy is not changed. Our objectives to achieve that strategy are being met, and we are very pleased with the progress we’ve made.

However, in our conversations and meetings over the last month or so, we’ve heard that some of you believe we’ve changed our principles and modified the criteria we are using to make investments.

Let me be perfectly clear, we have not changed our principles or investment criteria. We continue our rigorous financial evaluation process before we make any investment, large or small.

Our investment criteria have not changed. Our capital allocation strategy has not changed. We continue with our disciplined approach to capital and are making investments that we expect will benefit the business over the long-term. We remain committed to maintaining our strong investment-grade rating, to use our balance sheet flexibility and significant free cash flow to make investments necessary to grow the business, and to be prudent in our allocation of capital.

Specifically addressing the EV3 acquisition, the business provides significant scale to our existing vascular platform gives us a strong position in both the peripheral vascular and neurovascular categories is consistent with our growth strategy and will benefit from our global footprint and establish capabilities.

EV3 has an outstanding product lineup and a robust pipeline of new offerings. We believe that it will accelerate our top-line growth rate, and be additive to our gross margins.

On a cash basis, the acquisition will be accretive in the first full year, post close. EV3 is an excellent addition to the Covidien portfolio, and we are highly confident it will drive increase shareholder value. While their results will not be consolidated with ours until the fourth quarter, EV3 registered strong sales growth in their Fiscal Second Quarter ending in June; again exceeding the expectations.

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