Medtronic CEO Discusses F1Q11 Results - Earnings Call Transcript

Medtronic CEO Discusses F1Q11 Results - Earnings Call Transcript
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Medtronic (MDT)

F1Q11 Earnings Call

August 24, 2010 8:00 a.m. ET

Executives

William Hawkins - Chairman and Chief Executive Officer

Gary Ellis - Chief Financial Officer

Jeff Warren - Investor Relations

Analysts

Matthew Dodds - Citigroup Inc.

Michael Weinstein - JP Morgan Chase & Co

David Lewis - Morgan Stanley

Robert Hopkins - Bank of America Merrill Lynch

David Roman - Goldman Sachs

Danielle - Leerink Swann

Kristen Stewart - Deutsche Bank

Ben Andrew - William Blair & Company

Bruce Nudell - UBS Investment Bank

Joanne Wuensch - BMO Capital Markets

Presentation

Operator

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Good day. At this time I would like to welcome everyone to the Medtronic Incorporated first quarter earnings release conference call. [Operator instructions.] I'll now turn the call over to Jeff Warren, vice president of investor relations. Please go ahead sir.

Jeff Warren

Good morning and welcome to Medtronic' first quarter conference call and webcast. During the next hour, Bill Hawkins, Medtronic chairman and chief executive officer, and Gary Ellis, chief financial officer, will provide comments on the results of our fiscal year 2011 first quarter, which ended July 30, 2010. After our prepared remarks, we will be happy to take your questions.

A few logistical comments. Earlier this morning we issued a press release containing our financial statements and a revenue by business summary. You should also note that some of the statements made during this call may be considered forward-looking statements, and that actual results might differ materially from those projected in the forward-looking statement. Additional information concerning factors that could cause actual results to differ is contained in our periodic reports filed with the SEC, and we do not undertake to update any forward-looking statement.

In addition, the reconciliations of any non-GAAP financial measures are available on the Investors portion of the Medtronic website. Finally, the extra week of sales in the first quarter of fiscal year 2010 make it difficult to compare this quarter's results. While we cannot precisely calculate the effect of last year's extra week across each of our businesses, we believe that adjusting this quarter's revenue growth rates by reducing last year's revenue by approximately $200 million better reflects the adjusted operational growth.

Thus, unless we say otherwise, all references to quarterly results increasing or decreasing are in comparison to the first quarter of fiscal year 2010, and revenue growth rates have been adjusted for the effect of the extra week last year and foreign currency. These adjustment details can be found in the reconciliation tables included with our earnings press release.

And with that, I'm now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Bill Hawkins.

William

Hawkins

Good morning, and thank you Jeff. This morning we reported first quarter revenue of $3.8 billion, which represents a decline of 4% as reported, or a 2% increase after adjusting for the effect of foreign currency and the extra week last year. Q1 non-GAAP earnings of $868 million and diluted earnings per share of $0.80 increased 5% and 8% respectively.

Q1 was a difficult quarter, in a challenging environment. It was complex for a variety of reasons, including the fact that we had an extra selling week last year and difficult sequential comparisons in the U.S. ICD market.

Let me first address the challenges and the factors we were surprised by in the quarter. The biggest surprise was the magnitude of the market slowdown in our two largest businesses, CRDM and spinal, and how the slowdown escalated in late June through July. Although Gary will walk you through the details in a moment, I would like to begin with a few broad observations.

We believe there were three primary factors contributing to our top line results. First, we saw a deceleration in volumes and procedures, driven both by decreased utilization and increased payer pushback. We believe this led to hospitals decreasing their level of bulk purchases in July across many of our businesses and geographies.

In the macroeconomic environment of high unemployment and increasing patient deductibles also affected some of our markets, most notably in spine. In Europe, although we did not see a dramatic change from recent austerity measures, we did see some impact in certain markets.

The second factor affecting our quarterly results was an increase in pricing pressure. As you know, ASP pressure is not a new issue, and we have appropriately planned for ASP declines. However, this quarter we saw pricing pressure manifest itself in a few new ways.

In our spinal business, we saw revenues per-procedure decline, driven by changes in product mix. We also saw reduced reimbursement in places like Japan, where our zone and foreign reference pricing changes resulted in significant ASP declines on some of our products in CRDM, cardiovascular, and spinal.

In other product lines, such as drug eluting stents, we have seen competitors being very aggressive with price around the globe. In addition, the influence of the economic buyer is increasing in large hospital systems.

Next, let me comment on our own performance. Although many of our product lines performed well in line with our expectations, I was disappointed by the fact that we were not able to maintain some of our recent share gains in ICDs and that we lost share in drug eluting stents. However, I was pleased by the strong performance in diabetes and surgical technologies. We also continue to see solid double-digit growth in our emerging markets and in our emerging therapies.

Given the recent trends and uncertainty of our markets, we are adjusting our expectations for the remainder of the year. At our analyst meeting in June, we based our revenue outlook of 5% to 8% on market growth in the range of 4% to 7%.

It has been very difficult to forecast market growth during this turbulent time. Based on our analysis, we estimate our markets grew in the 3% to 4% range in Q1. Given this market growth, we believe it is prudent to remain conservative. Thus, we are adjusting our FY11 revenue outlook to 2% to 5% constant currency growth, which includes the negative impact of the extra week last year. And Gary will add more perspective to this in comments.

This is a challenging time for all healthcare companies, but our one Medtronic strategy that we have been implementing over the past three years has prepared the company well for times like these. The actions that we have taken over the past few years, including driving operational efficiencies, reducing product costs, reallocating resources, and focusing on span of control and delayering the organization, have positioned us well to withstand periods of slower market growth.

Looking forward, I am confident that we have the right strategy for the long term, and when the markets turn we will emerge even stronger. We are continuing to execute on our plans to deliver superior innovation for global growth.

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