Covidien's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Covidien (COV)

Q2 2012 Earnings Call

April 27, 2012 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

Robert A. Hopkins - BofA Merrill Lynch, Research Division

David R. Lewis - Morgan Stanley, Research Division

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

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

Frederick A. Wise - Leerink Swann LLC, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

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

Matthew J. Dodds - Citigroup Inc, Research Division

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

Adam T. Feinstein - Barclays Capital, Research Division

Thomas J. Gunderson - Piper Jaffray Companies, Research Division

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

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

Jason Wittes - Caris & Company, Inc., Research Division

Michael Matson - Mizuho Securities USA Inc., Research Division

Jonathan J. Palmer - Credit Agricole Securities (USA) Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2012 Covidien plc Earnings Conference Call. My name is Brent, and I will be your operator for today. [Operator Instructions] As reminder, this call is being recorded for replay purposes. I would now like to hand the call over to Cole Lannum, Vice President of Investor Relations. Please proceed.

Coleman N. Lannum

Thanks, Brent, 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 as usual and then spend most of the time this morning answering your questions.

The press release, with details of our second quarter results, was issued earlier this morning and is available on our website and on the newswires.

Now 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 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 that you please to 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. 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 second quarter, we reported GAAP diluted earnings per share of $1.01. After adjusting for certain specified items, our non-GAAP earnings came in at $1.05 per share. For clarity, please note that the leap day had no impact whatsoever on our results and that there were no material impact on sales in the quarter from either acquisitions or divestitures.

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

Jose E. Almeida

Thanks, Cole. We're off to a very strong start in fiscal 2012. Our second quarter sales came in ahead of plan, up 5% as reported and up 6% operationally, and we again registered year-over-year improvement in gross margin. We also delivered a 13% increase in adjusted EPS.

In the Medical Devices segment, we had another solid quarter with broad-based growth led by Energy and Vascular products. In the Pharmaceuticals business, sales growth was paced by a very good performance for Specialty Pharmaceuticals, led by PENNSAID and EXALGO, coupled with higher generic sales. In Supplies, sales were even with the year ago.

As we noted in the release, our European business accelerated for the second consecutive quarter. While there are certainly some areas of concern in the region, we're cautiously optimistic that we have the right mix of products and technologies to be successful in the European marketplace.

In our emerging markets comprising Eastern Europe, Middle East and Africa, Asia and Latin America, sales again grew at a double-digit pace in the quarter with broad-based gains led by stapling and energy products. We ratched [ph] an exceptional growth in the BRIC countries, led by Russia and China where we'll continue to make incremental investments to accelerate growth and expand our product offerings.

In our large Endomechanical business, stapling products continued to perform well, led by innovative Tri-Staple Reloads. We're making good progress increasing Tri-Staple capacity, however, we are experiencing a strong demand for the product as we gain incremental market share.

During the quarter, we launched Tri-Staple in Asia, and we believe it's on track to become our most successful new product ever.

Sales in Soft Tissue Repair were up slightly from a year ago. We've made decent progress in the large suture category, but increases were partially offset by declines in mechanical fixation and BioSurgery. This was due, in part, to the impact from competitive product launches in both the U.S. and Europe. But we believe the competitive environment is stabilizing after several quarters of disruption.

Our Energy business had another robust quarter, as new products such as the LigaSure 5 and the Small Jaw, coupled with growth in electrosurgery, contribute to our performance. We'll be rolling out the innovative Sonicision Cordless Ultrasonic device next week on a limited basis. The launch will keep Energy at the forefront as a growth engine for Covidien, driven by low penetration, technology adoption and hospital patient economics and outcomes.

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