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Covidien plc (NYSE:COV)

2013 Guidance Conference

May 06, 2013 8:00 am ET

Executives

Coleman N. Lannum - Vice President of Investor Relations

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

Matthew K. Harbaugh - Chief Financial Officer of Pharmaceuticals Segment

John Moten

Analysts

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

Robert A. Hopkins - BofA Merrill Lynch, Research Division

David R. Lewis - Morgan Stanley, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

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

Matthew Taylor - Barclays Capital, Research Division

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

Miroslava Minkova - Leerink Swann LLC, Research Division

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

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

Matthew O'Brien - William Blair & Company L.L.C., Research Division

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

Operator

Good day, ladies and gentlemen, and welcome to the Covidien announces 2013 guidance conference call. My name is Sue, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Cole Lannum, Vice President of Investor Relations. Please proceed, sir.

Coleman N. Lannum

Thanks, Sue. And good morning, everyone. With me today are Chuck Dockendorff, our Chief Financial Officer; Matt Harbaugh, CFO of our Pharmaceuticals business; and John Moten, Vice President of Investor Relations for Mallinckrodt.

During today's call, we'll make some forward-looking statements, and it's possible that actual results could differ materially from their current expectations. Please refer to the cautionary statements contained in our SEC filings, including our Form 10-K and 10-Q reports, for additional information about factors that could cause actual results to differ from those anticipated in 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, as well as in the Investor Relations section of our website, covidien.com.

We'll be making some brief introductory comments and then spend most of the time this morning answering your questions. Please note that we'd like this call to be focused on last Friday's guidance release, the restated financials and our future outlook.

Before I turn the call over to Chuck, I want to make a brief comment relating to our second quarter sales performance. In -- on our call on April 26, there was some discussion about the geographic sales growth, particularly relating to U.S. Medical Devices. As noted in the 10-Q report we filed last Monday, there was a shifting of Vascular product sales which negatively impacted reported growth rate for U.S. sales in both the quarter and the year-to-date. Adjusting for the sales shift, U.S. Medical Devices sales would have grown 5% in the quarter and 6% for the 6 months year-to-date. As noted in the 10-Q, we expect a similar situation to occur in the third quarter, and we will provide you with an estimate of its impact on our third quarter call. If there are any other questions on this point, Todd and I offline are more than happy to take you through that discussion.

Now Chuck will go to more detail on the 2013 guidance we issued last Friday. John?

Charles J. Dockendorff

Thanks, Cole.

On Friday, we announced our 2013 guidance for both RemainCO Covidien and for Mallinckrodt. We also provided you with historical financial statements for Covidien, excluding the pharmaceutical business. Our goal was to provide you with enough information, combined with what is in the Form 10, to give you a basis for determining a value for both Covidien and Mallinckrodt. Understandably, this is somewhat more difficult for Mallinckrodt given that their 2013 results are a mix of 3/4 as part of Covidien and 1/4 as a standalone.

Before discussing our new guidance, I'd like to briefly discuss a couple of concerns that we heard on the second quarter call, the pricing environment and the decline in the sequential growth rate for the U.S. Medical Device business. Cole noted the reclass in Vascular that occurred which negatively impacted our U.S. growth rate. As we mentioned on the call, the pricing environment continues to be challenging. In the second quarter, however, our pricing was actually better than our historical average and was more than offset by favorable mix trends, which we expect to continue going forward. In our new guidance, we have included our historical assumptions on pricing for the remainder of 2013.

Our sales guidance is consistent with our year-to-date performance and today's foreign exchange rates. We estimate that foreign exchange will lower our sales growth rate by 125 to 175 basis points this year. We expect a benefit of about 50 to 100 basis points from our 2012 acquisitions.

Our operating margin guidance reflects the incremental growth-driving investments we noted on the second quarter call. We believe these investments are prudent and will help us meet our growth objectives. In addition, the operating margin guidance reflects the unfavorable foreign exchange and the impact of the medical device tax. Excluding these 2 items, the unfavorable foreign exchange and the device tax, we expect 2013 EPS would grow at a double-digit rate.

One brief comment on income taxes. On a non-GAAP basis, we expect that the total tax to synergies for the combined entities will be no more than a couple of cents per share on an annual basis.

For Covidien, there will be no change to our long-term financial goals, as a result of this spin. Our focus will be to balance short-term growth and long-term investments. We are still looking to generate mid-single-digit sales growth and use operating and financial leverage to deliver double-digit earnings growth over time. We'll continue to drive improvements in ROIC.

From a capital strategy standpoint, there will also be no change. We remain committed to return at least 50% of free cash flow to shareholders every year through dividends and share repurchases. We expect to grow our dividend payout ratio over time. And we'll continue to employ our free cash flow to make strategic acquisitions that augment our growth.

We continue to feel very good about our prospects given our robust new product pipeline, expanding product portfolio, geographic diversity and strong cash flow.

Now I will call -- I will pass the call over to Matt.

Matthew K. Harbaugh

Thank you, Chuck. John Moten and I are delighted to be here today to discuss Mallinckrodt's spin-off from Covidien.

We are on track for the spin to occur in late June and are very well prepared. We have a solid foundation from which to build Mallinckrodt and feel we are well positioned to unlock potential in the coming years.

We are also happy to report, as mentioned last week on Covidien's Earnings Call, in the second fiscal quarter, we successfully delivered double-digit sales growth led by our Specialty Pharmaceuticals segment, which was somewhat offset by challenges in our Global Medical Imaging segment.

John and I look forward to any questions you may have concerning the pharmaceutical business today and also look forward to meeting many of you in the coming months.

I'll now turn the call back over to Cole for Q&A. Cole?

Coleman N. Lannum

Thanks, Matt. For question-and-answers, we're going to use the same procedure that we typically do on an earnings call. We're going to limit you, please, to one question and a follow-up, if needed, so we can give everyone a chance to get their questions in. On the line right now, we have both medical device analysts and our specialty pharma analysts. We're going to try to get everyone in as quickly as possible. If you have additional questions, either put yourself back in the queue our contact us after the call.

Sue, can you please review the process one more time for signaling a question?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Mike Weinstein.

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

Chuck, can you talk for a minute about the overhead that Covidien sits with post spin? You showed up $400 million in aggregate overhead that resides with Covidien after the Mallinckrodt spin. Is there a process to rightsizing, Matt, that you can outline today? And can you also talk about the capital structure that you've set up for Mallinckrodt in the recent debt offering? And how are you positioned right now for share purchase?

Charles J. Dockendorff

Yes, Mike. A couple of things. The overhead we have, which is our corporate expenses that we do not allocate out, roughly around $400 million. Certainly, we'll be looking at options to improve the productivity there, as we always do, knowing that we have to reduce some of that as we spin out approximately 20% of our business. These kind of expenses, as you know, is pretty nearly impossible to get the same ratio as the revenue, but clearly, our corporate people are looking for opportunities for improvement as we speak. But one thing is we do have -- we will -- it's more around the timing of when we can get to these things. We will make sure that, although the spin occurs at the end of June, there will be a quarter there where we will be helping them. And we also have some back-office support around the world, which should cover -- covered in what we called temporary service agreements, primarily Europe where we will be doing some of the accounting for Mallinckrodt for some period. And it will be difficult to get to those points. But I would say that we are driving through a productivity program, clearly taking out some of the overhead related to Pharmaceuticals, and supporting that will be part of that program as well. As far as the capital structure, we are -- we -- I think that you saw we issued approximately $900 million in debt related to the Mallinckrodt spin, which Mallinckrodt will receive approximately $150 million cash from that, the balance will be retained by us. If you look at our 10-Q, at the end of the quarter, we roughly had a little over $1.6 billion in cash, so the $750 million would be incremental to that. We would plan on using that cash, as we've talked about in the past, we would either -- most likely, we're permitted to returning 50% of our cash through share repurchase and dividends. But we have no interest in holding that cash in the balance sheet, and so it would either be used for acquisitions, as they come up, as we look at them opportunistically, or to repurchase shares. So we have no interest, though, in holding that cash. And I think you know that we have recently approved a additional $3 billion share repurchase authorization in our last board meeting, so now we have $3.4 billion of share repurchase authorization out there to do any capital kind of transactions we want to do.

Coleman N. Lannum

And just to clarify, that's in addition to the about $400 million that we still have left on the old authorization as of the end of the second quarter.

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

Great. Chuck, while I've got you, maybe I'll ask one more question. There was a lot of discussion on the earnings call and subsequent to the impact of currency on the next few quarters. Can you just spend a minute on that and talk about your current math on how currency impacts remain in Covidien's earnings over basically the balance of FY '13 and into '14?

Charles J. Dockendorff

Yes. Clearly, the change that occurred between the end of Q1 and our earnings call in Q2 clearly saw the weakening -- primarily the weakening yen. The euro has kind of fluctuated up and down, but generally, the yen where we have a significant business in Covidien definitely weakened over that period of time. We're able to mitigate a lot of that FX. So it did put negative pressure on our revenues and earnings, accordingly. We were able to mitigate a lot of the negative pressure on earnings through our own operational improvements in the quarter, but we still wanted to fund some investments as well. But we're able to offset most of that from an earnings standpoint. But I think, in our guidance, in our sales guidance that we've reflected for RemainCO Covidien, you see a slight decrease in the revenue as a result of that weakening yen.

Coleman N. Lannum

Yes. And also, on our operating margin side, I mean, clearly, we're going to be pressured in gross margins over the next several quarters from the change in FX. And so that's what you are going to see it, Mike, and you're going to see it pretty significantly in the third quarter.

Charles J. Dockendorff

Yes. And I think, to add to that, and if you're looking at it by quarter, we do have a gain in the second quarter related to the hedges around those, which won't go forward if some of the currency doesn't move.

Operator

Your next question is from Bob Hopkins.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So first question would be just to follow up on that FX question. Chuck, could you just spell out specifically in basis points, in your 2013 guidance, what is the drag on -- from FX in 2013?

Coleman N. Lannum

Top line, or bottom line, Bob?

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Sorry, on operating margin. What's the drag on FX -- what's the drag on operating margins from FX in 2013?

Charles J. Dockendorff

I think, if you look at the EPS side of it, are you talking about Covidien as a whole company?

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Sorry. Let me rephrase it. I'm talking about, for new Covidien, in the 2013 operating margin guidance that you guys just gave for 2013, what is the year-over-year drag from FX versus 2012?

Charles J. Dockendorff

I don't you know that specific number on operating guidance, Bob, but I would say that it is roughly approximately $0.18 a share if we use the Covidien tax rate and things like that. And that foreign exchange, and then the device tax also has a negative impact as well. But those combined are about 7.5% impact on earnings growth year-over-year -- EPS growth.

Coleman N. Lannum

And I'll tell you, Bob, the majority of that is hitting us in the second half.

Charles J. Dockendorff

Right.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Right, okay. So $0.18 from FX year-over-year.

Charles J. Dockendorff

Roughly. It's an estimate, yes.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. And then for the second question, I'm going to switch to top line for a second. Because if you look at your -- for new Covidien, your top line growth in the first half, kind of excluding M&A and excluding FX, you had been growing 5% to 6% in 2012, and then in Q1, you also grew 5% to 6%. And then in Q2, your revenue growth rate, again x M&A and x FX, fell to roughly 4%. And there's a combination of issues that caused that. My question is, when we look at the back-half organic revenue growth, what are your expectations for organic revenue growth in the back half? Should we be roughly at that 4% level, or a little bit better?

Coleman N. Lannum

Yes, I'm -- Bob, the way to think to -- a way to think of it is we're going to quickly be anniversary-ing all the acquisitions. So really, in this quarter, the operational number we report is going to be pretty close to the organic number assuming we make no more acquisitions between now and the fiscal year, that's always a possibility. So I think we're still comfortable in that 4% to 6% kind of range on a operational standpoint. And I think you'll see similar kinds of numbers. I mean, obviously, it did -- it moves around a little bit on a quarter-to-quarter basis, but what we try to make clear on the call a week ago, and let me reiterate here, is we still feel very comfortable going forward in our vision of long-term organic growth that's similar to what we've seen historically. There's no major change here.

Operator

And your next question is from David Lewis.

David R. Lewis - Morgan Stanley, Research Division

May be quote us a thought to that growth question for the management team. Speaking about the PorwerPoint over the weekend, capital deployment and the credit ratings sort of suggest smaller deals going forward, but you've also been transparent that you intend to shift your end market growth rates. Joe's talked about that quite a bit. So I wonder, how do you -- what is your comfort that you're going to achieve both directive -- objectives? Where would you like to see your average end market growth rates in a few years versus where they are today? And over what time frame do you think you can achieve that? And I've one follow-up.

Charles J. Dockendorff

I think our market growth rates that we look at on the balanced portfolio are roughly around the 4% to 5% range. That's what we participate in today based on the portfolio of products we have, the market growth rates and then what we have geographically as well. So as you know, we're expanding faster into the emerging markets area, which is a double-digit growth rate. And some of the Energy-based products as well as the Vascular, we would expect to continue to grow at those markets rates that we have for those products as well. So again, I think our long-term guidance has been the mid single digits. The market growth rates in the 4% to 5%, we think we can achieve that in the longer term.

David R. Lewis - Morgan Stanley, Research Division

Okay. And maybe just a follow-up on spending. For the last 6-months, you've obviously talked about a desire to invest in SG&A. I wonder, post the spin or even beyond, like, the 6-month horizon, should investors expect a moderation in that level of spending? Or should they expect sort of continued investment and think about Covidien more as a gross margin expansion through improving mix in your higher-valued product categories?

Charles J. Dockendorff

Yes, I think, again, we sent that out on the tempo, but our goal is to drive that -- off that mid-single-digit sales growth is to drive-through financial and operating leverage, which should be a double-digit earnings per share growth. We have -- we sit here today with a lot of investment opportunities. Some of these we look at through acquisitions, and these investments require cash and go on the balance sheet. Other investments we have are research and development or selling and marketing, say, primarily, those investments are in emerging markets which offer a very good return, very quick payback. And so there are various headwinds, whether it's more amortization if you do an acquisition or direct expense if you add, of course, R&D and selling and marketing. But one of the things that our business units have done a great job of is really driving through opportunities for growth. We have more today than we've ever had. And again, some of these investments we are making are longer term. I guess, at the emerging markets, we certainly get those with a quicker payback. But the opportunities we see there are very, very good, and we don't want to miss out on them, specifically the emerging markets. So what we're going to do going forward is balance off the investments we make with the goal of achieving a double-digit earnings growth. So depending how we can drive productivity, depending what happens with foreign exchange, depending on what happens with other windfalls we may get, our goal is to fund the business for the long term so that we could continue to grow the top line but also drive through productivity. And we will delay some investments if we think that's prudent in order to drive-through the double-digit growth on the bottom. So I think that's the way to think about Covidien, it's more with some good investment opportunities and balancing those off as we go forward.

Coleman N. Lannum

Thanks, David. Next question, please.

Operator

That comes from the line of Matthew Dodds.

Matthew J. Dodds - Citigroup Inc, Research Division

Just to follow up on Mike's earlier question. The temporary service agreements, can you give any color on magnitude of how much that's saving Mallinckrodt and how long it'll last?

Charles J. Dockendorff

The temporary service agreements, roughly, it's not significant, it's probably $15 million to $20 million. And they will be phased out over the next, probably, 2 years as they build up their own systems. Now we've been doing a lot of work behind the scenes to put Mallinckrodt -- as you remember, Mallinckrodt was really integrated very heavily with the Covidien systems around the world. We -- they used our back offices, we drove through those synergies when we acquired them, and we were able to leverage some of those benefits. So we had to rebuild a lot of the structure, and that's going on today. So in most parts of the world, Mallinckrodt now sits on its own. And we -- they have their own systems in place, and some of that is flowing through the separation cost line, which will drive over to the normal operating expense once they spin. The primary -- primarily, the area that we're still giving them a lot of support is in Europe. That is one area we kind of postponed. It's a lot of countries. And they are using our back-office financial systems, some of our distribution systems and things like that, and they will for the next, probably, 1.5 to 2 years. But they are working on developing their own and they'll be switching over to that in the course of the next couple of years.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay. And then just one quick follow-up for the Mallinckrodt gang. Chuck, you gave a lot of color on gross margin and what will happen with you with FX. For Mallinckrodt, it seems like the 2 issues that have impacted the margins, the benefit of CONCERTA and then the impact of the higher materials cost. Can you give any color there and what we should think about the net impact of those 2 for the next, at least, 2 fiscal quarters?

Matthew K. Harbaugh

Yes, thank you for the question, Matt. This is Matt Harbaugh. We haven't given specific guidance on gross margins, but how I would think about it is FX is not a material adjustment for our business as we think about the first half the year and as we think about the back half. As Chuck mentioned earlier, Covidien has some headwinds in Japan. Our Japanese business is relatively small when compared with the total portfolio. As it relates to increased COGS, we're very hopeful that the increase that we're seeing in our nuclear franchise will go through May and then, assuming the HFR, the High Flux Reactor in Petten, The Netherlands, is able to return to normal production, that we'll see that abate as we get into the back half of the year. That is included in our guidance. It was a small amount of impact in the first quarter, significant impact in the second quarter and then, as you might imagine, a continuing significant impact in the third quarter.

Operator

And your next question is from Kristen Stewart.

Kristen M. Stewart - Deutsche Bank AG, Research Division

It's Kristen. Chuck, I guess, just for you, just on the dividend. Are you -- do you have any intentions of changing the actual dividend amount that's being paid out, with the split? Or it just kind of continues going forward, which would argue for a slightly higher, I guess, payout ratio as you split off Mallinckrodt?

Charles J. Dockendorff

Yes, we normally -- we do that dividend in September and with our board, and I think we'll keep that timing as well. As you know, we had a pretty significant increase in the dividend last year. We would expect to continue to increase the dividend above the earnings growth rate. So that's one thing we've built up over the last couple of years. We certainly have the room with it. And since we've committed a minimum of 50% of the free cash flow to shareholders, whether that comes through share repurchase or dividends, we certainly have the room and the dividend to do that going forward. So it will be -- we'll just keep that on the normal course of approval within Covidien.

Coleman N. Lannum

Yes, Kris, I want to clarify too, one thing you said because I think it's an important point. Obviously, the algebra of the Mallinckrodt split pushes the payout ratio higher in and of itself, but that's not what we're talking about last November when the board came out and said that the payout ratio is going to be higher. There's a commitment to take the payout ratio higher still over time, consistent with what Chuck says. I don't want anyone to think that -- just because the Mallinckrodt split is happening, that the "higher than earnings growth" dividend growth over time is at an end.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay, perfect. And then, by the way, thanks for just putting all of the information out over the weekend to go through it. And then obviously, we have seen the call. And just the -- on the commentary, I guess, for Covidien, obviously, you guys have talked about the longer-term growth profile of the company, mid-single-digit top line, getting to that double-digit bottom lime. When might we -- and I'm sorry if I missed this at the beginning, but when might we get a little bit better look at Mallinckrodt in terms of just kind of helping us understand kind of the longer-term outlook and maybe a little bit deeper dive on the pipeline? Is there any intention on doing any sort of investor meeting? Or should we just look to see 2014 kind of color in a similar timeline that we would with Covidien? I know you guys usually host your Analyst Meeting in September. So just maybe help us understand what kind of the next couple of data points we should be looking for with Mallinckrodt just in terms of communication and whatnot.

Matthew K. Harbaugh

Kristen, this is Matt Harbaugh. Mark Trudeau, our CEO; and myself; and John Moten will be on the road an awful lot between now and the end of June. We're planning on being in Las Vegas a week from Wednesday, meeting with investors. We'll be providing more color commentary there. We also have a number of refilings of our Form 10 that will be taking place between now and spin. As we've mentioned earlier, we will be providing our Q2 numbers hopefully later this month. So we will be providing more data. To get to your question around 2014, the answer is, yes, we like the cadence that we've followed with Covidien and we intend on following that. So you would -- we would look to be doing an investor conference in the September-October time frame to provide more clarity as to our long-term outlook.

Charles J. Dockendorff

Kris, this is Chuck. Just we will be filing, updating the Form 10 later in May, as Matt said. And then we'll have the second quarter information for Mallinckrodt on a standalone basis. We'll most likely will be putting out a disc-off piece as well for Covidien at that time, as well as updating that information. But there will be kind of a various investor conferences that Matt will go to, and Mark. And I think there'll be a more for roadshow with a lot of investors around the first 2 weeks in June where they'll have a chance to really get in-depth and understand the business and the growth opportunities.

Coleman N. Lannum

Including, I believe, the Brain [ph] conference here in Boston in late May, if I'm not mistaken.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Yes. I do believe they will be at the Deutsche Bank conference as well, so thank you for attending.

Coleman N. Lannum

Next question, please.

Operator

That comes from the line of David Roman.

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

I wanted just to come back to the question regarding spending. As I look at your absolute SG&A numbers as a percentage of revenue, they're relatively high given where your gross margin profile is, and when I look at the peers. Could you maybe just help us put the spending into context a little bit more? And I guess what I'm asking is, are these the spending levels you need to get to mid-single-digit top line growth? Or is there any potential that the spending that you're going to initiate in the back half of this year and to '14 has the potential to push that growth rate higher? Or is the nature of the end markets is such that they're competitive and challenging that, that spending is needed to keep the gross rate where it is?

Charles J. Dockendorff

Yes, I mean, I think, when you look at our SG&A spending, it is a little high. And we are committed to bringing that down over time. We have productivity opportunities that we're looking at. We think that, especially in some of the markets that we participate now, some of the developed markets which have relatively modest growth, we know we can't remain at those SG&A levels and drive the profitability that we want to do. We've done a lot of work shifting resources within our product portfolio primarily in the developed markets from those higher-growth potential, shifting more resources towards those and then taking away other sales resources for the ones that have lower growth. And I think, in general, they've been a decrease, when you take the two of them. But we've also invested in areas around emerging markets, which we talked about. And that SG&A spending will probably stay at the same cliff, as it has in the past, which is a little higher than normal because you're kind of investing ahead of the sales curve. But we really see the opportunities there for the next couple of years to continue that investment strategy going forward. As for SG&A, we're going to continue to fight through and drive productivity on those areas. We have back-office opportunities we look at all the time in Europe, in U.S., where we think we can drive those things. So I think, over time, what you'll see while we -- and the other thing that's hitting us this year is some of the acquisitions that we've done around renal denervation or around the drug-coated balloon. Those are certainly increasing expense. And we have mentioned, those were dilutive and they're dilutive because of R&D and selling and marketing expenses that are hitting our P&L this year. But over time, our goal is to drive down SG&A as a percentage of revenue. That's what we're committed to do and while still making investments, and that will be some of the levers that we drive-through for the productivity. So typically, when you think about the investments and where we're making them, clearly, investments in emerging markets will drive-through our higher growth rate on average and will drive up the overall Covidien growth rate as that becomes a bigger part of our business. Some of the expenses that we're layering in here have revenue growth that may come out in 2 or 3 years because they're R&D and developmental type expenses, which take a longer time -- turn to -- time to get to market. But if you looked at our whole P&L, we would hope to begin to leverage. I think you can see that, in the quarter 2, when we released our earnings, our SG&A was down 60 basis points on a non-GAAP basis, with the adjustments in it year-over-year. So while we're making those investments, we are driving-through the productivity on the businesses.

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

Okay, that's helpful. And then maybe just a follow-up on the pharma side. I know you've provided some details for fiscal 2013 regarding some of the key products, like generic CONCERTA and EXALGO. And I know you're probably not ready to give fiscal '14 guidance, but can you just maybe provide some perspective on the moving parts around those 2 products? In fiscal '14, I believe that it's expected there will likely be some more competition for CONCERTA and then some formulations of EXALGO go generic.

Matthew K. Harbaugh

Yes, this is Matt Harbaugh. So if we start with Methylphenidate ADR, which is also called generic CONCERTA, as you know, in our guidance, we've said net sales of at least $125 million this year. How we're thinking about it is we are planning for competition to come into the marketplace. We launched our 27 milligram in December. And assuming that 180-day window of exclusivity, that would mean we would see competition in our fourth quarter of our fiscal year. As it relates to the 36 and the 54 milligrams, which we launched in late March, that would put competition coming into the marketplace late in Q4, and then we would see them throughout the -- all of fiscal year '14. So our guidance is assuming competition will be in the marketplace. As it relates to EXALGO, we do think we'll see competition in the back half of the calendar year...

Coleman N. Lannum

Calendar year 2013.

Matthew K. Harbaugh

'13. Thank you for the correction, Cole. But we feel confident that -- the guidance that we've provided of net sales of at least $100 million for '13, we're comfortable with that, that guidance will last throughout this fiscal year.

Coleman N. Lannum

Next question, please.

Operator

That comes from the line of Gregg Gilbert.

Coleman N. Lannum

Gregg, so nice to hear a specialty pharma analyst on the call.

Unknown Analyst

For Matt. In light of the fact that you're guiding to as little as $25 million more in generic CONCERTA sales for the rest of the year, I was hoping you could walk us through a little more detail on a sort of pipeline fill, discount levels and share expectations so we can get an understanding of how you're modeling. And I'll stop there and have a follow-up then.

Matthew K. Harbaugh

Okay. Thank you, Gregg. So as it relates to pipeline fill, we did put product in the channel in late March. So I think, if you're thinking about it in relation to IMS data, we've got to see those translate into scripts in the marketplace. And so if you're looking at the IMS data as of the end of March, I don't think they'll be representative of how we're thinking about share. And as it relates to the generic CONCERTA product, Methylphenidate ADR, in general, the guidance that we've given here we feel comfortable with, and that's why we said at least $125 million. There have been speculation in the marketplace of much higher numbers. And I can tell you, our plan has done a little bit better but it hasn't changed material from where we were thinking when we launched in December. So we feel good about what we're doing here, generally, I would say, hang tight as it relates to IMS data because we should see the share numbers changing as we get through April and May as that channel sales goes down.

John Moten

Gregg, it's John Moten. One thing to keep in mind, and everyone, when you look at IMS data, remember there is a lag in that data so that data is not totally representative of the current sales trends that are going on in the marketplace. I would keep that in mind. And also, keep in mind that we launched the 27 -- the 50 -- 36- and 54-milligram strengths late in the fiscal second quarter. So as a result of that, while we have 3 dosage strengths out there, we really haven't seen the full impact of that 36- and 54-milligram launch.

Matthew K. Harbaugh

And as we think about the strengths, the 27-milligram that we launched in December, we did see the share grow in IMS data, as we guided into February and March. To John's point, the 36 and the 54, we still need to be patient and wait for it to play out in the marketplace a little bit further.

Unknown Analyst

I guess I just wanted to understand the philosophy behind how who you model competition. It sounds like, from Actavis, that you all -- that the players are being rational and that you discounted sort of a minimum amount required to get your fair second share. Is that sort of how you model the next entrant sort of your behavior as a guide?

Matthew K. Harbaugh

Yes, we expect competitors to be in the marketplace. And we model various different pricing assumptions. Generally, when the players come into the marketplace, it behaves like we generally see with other product launches in the generic space.

Operator

The next question is from Matthew Taylor.

Matthew Taylor - Barclays Capital, Research Division

I just wanted to ask one on the tax rate. I know there is a little bit of an anomaly in the way you're reporting with the Mallinckrodt tax rate. Can you talk just about the tax, the synergies and then how tax rate could trend over time as you're able institute a new tax strategy as the work goes down?

Charles J. Dockendorff

Yes, I think, if you look at it, I've mentioned this earlier, but initially, when we started this process, we were concerned about the tax synergies, that will occur as we split out our legal entity structure from both Mallinckrodt and Covidien. Our tax group, though, has done a great job minimizing a lot of that through some hard effort. And the net between the 2 companies is really a couple of cents on the EPS line. So we really have come out a lot better on that end than where we anticipated. I think the best way to think about a tax rate is we've given a RemainCO tax rate for Covidien, and that tax rate, 17% to 17.5%, we would expect to continue with tax planning opportunities to drive it down. There's other things in there, say, the R&D tax credit, which is in this year now, we've it put into Q2 but it's not yet approved for 2014 so you have to wait for that, but there are certainly long-term planning opportunities that we see to continue to drive that. And then of course it depends on the mix of income we have as a business, and some of that is where foreign exchange falls out but where our business grows and how we do that. So I think you're going to see from RemainCO a 17% to 17.5%, with some improvement over time if the R&D tax credit and things like that, and the mix of income stays the same. On the Mallinckrodt side, I think the 3 quarters that you'll see reported with us on a -- well, on a Form 10, in that side of it, there is some accounting conventions on the tax rate, both on the disc ops in the Form 10 where the tax rate is very, very high for Mallinckrodt in the quarters that they are listed as a standalone but reported in the Form 10. The guidance that we gave for the fourth quarter of Mallinckrodt is more indicative of where their rate will be when they start out as a separate entity and whatever improvements they make of off that. However, that change is -- would be their tax rate. So I think that's a better indication of where they would start off going forward.

Matthew Taylor - Barclays Capital, Research Division

Okay. And I wanted to ask just a follow-up on the some of the leverage questions. So I know that you're taking an opportunity to spend here especially on the emerging market build-out, but can you talk about how much productivity leverage you think you can drive year-over-year in SG&A? So what's the underlying leverage that we're not seeing because it's masked by an investment?

Charles J. Dockendorff

Yes, I don't think we want to talk about that on this call. I think that to say that -- just to say that we are driving productivity, we're really focused on completing the spin at this point, and getting that done. But we do see opportunities for that. And I think we'll talk more about that in our September Investor Day.

Coleman N. Lannum

Matt, that's one of the reasons why we highlighted on the earnings call last week about this. We've been talking about these incremental investments since at least November of last year, so it shouldn't be taken as anything new at all. I encourage people to go back and take a look at what we've been saying over the last 6 months or so. But the spending is real, and it's real on the SG&A side, it's real on the R&D side. We've delineated some specifics there with -- and there are other things that they were doing. And it's all targeted towards accelerating some of the revenue growth over the next several years. This is spending we probably would have done, anyway. We would've spent it in 2014 or 2015. We had identified it, but by accelerating it, we think we'll also accelerate ultimately the returns on the business.

Operator

Your next question is from Joanne Wuensch.

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

Can we spend just a moment longer on emerging markets? A lot of companies sort of say, "We're investing in emerging markets," and they mean different things to different people. Is there a way to get a little bit more granular on that topic?

Charles J. Dockendorff

Yes, for Covidien. I think we started out with a strategy to go after the top end of the hospitals in those areas with the current product portfolio that we have. And they have been very successful at gaining market share in those areas at very good margins, very similar and to what we get for pricing in the U.S., and margins in that area. So that has really worked well. We also felt a couple of years ago that we'd also wanted to try to get into those second-tier hospitals, and that would require a strategy of more around locally developed products and manufactured in those areas where were -- and that would be more price competitive and we could gain more market share there. But we have been very successful in going into these markets, adding sales people -- sales and marketing people. And like I said, they've been able to pay themselves up relatively quickly. And even these upper-end hospitals where we thought there was a cap line, we see them continuing to expand and think there is more opportunity still in that area to continue to grow into those markets. So this is very attractive to us. We do it. We get good margins on it. Like I said, we've put the spending a little ahead of the sales curve, so our SG&A is a little higher than it normally would be. But still, the margins we get on that business are higher than the Covidien average so it's a very, very good business to go on to. The other thing we're doing over there, we're also investing in research and development locations. We have manufacturing facilities in China. We are investing in training, clinical training, institutes, so where we can train physicians in various parts of the world, utilizing our products. And we think this will be a long-term benefit to us. So these are the kind of areas that we're investing in. Clearly, selling and marketing is a quicker payback. The training centers take a little longer, as well as the R&D.

Coleman N. Lannum

Next question, please.

Operator

It's from Rick Wise.

Miroslava Minkova - Leerink Swann LLC, Research Division

It's actually Miroslava. Cole, Chuck, a quick question on R&D spend. When you posted the financials, the -- for the remaining Covidien, it seemed a little bit lower as a percentage of sales than I -- we might have expected. And for Mallinckrodt, it was actually a bit higher as a percentage of sales than we might have expected. Are you where you think you should be with R&D spend for the remaining Covidien? I think, in the past, you've talked about a 5% to 6% run rate, and some of your peers -- a lot of your peers are probably there and maybe a little bit higher. And if you're not, if you see opportunities for further investment, where would those areas be?

Charles J. Dockendorff

Yes, I think we're still a little below the industry average. And I think the spending, first of all, you're seeing between our company and Mallinckrodt, that's typically where you see those spending levels. So typically, pharmaceutical-type companies have those higher spending levels, the pipeline or the time to get to market is much lower, the expenses to launch certain products are much higher. There's increasing risk and expenses as you go along those things with a pharmaceuticals business, whereas in the medical device area, you get quicker time to market. And generally, because we are adding new products, the individual expense within each product is not that high. We've spent -- but we've committed to some funds around renal denervation, the drug-coated balloon, which we've done through acquisitions, and that is beginning to flow through our research and development as we go too. So we'll see some increased spending on research and development within Covidien over time. We're not that far off where we think we need to be, but we will continue to increase that slightly as we go forward.

Miroslava Minkova - Leerink Swann LLC, Research Division

And maybe just a quick follow-up to Joanne's question. In emerging markets, I was wondering if you could speak as to your appetite for local acquisitions. It looks like you're more focused these days on organic driving your own investment there, but I was wondering if you see opportunities for acquisition there as well.

Charles J. Dockendorff

Yes, we do see opportunity there. They're difficult to do. We get concerned about the compliance issues. But we've looked at a number of opportunities. We think, eventually, we will acquire some things over there. We did acquire a suture plant down in Brazil, so we do have done some things like that. But as we look at these acquisition opportunities, there's different sizes of them. We have people that are dedicated in emerging markets to review these. We scour these things. Sometimes, the prices are too high, it doesn't really -- the benefit from them really doesn't justify the prices that they want. Others may be too -- we're concerned about the compliance issues that drive us away from them. But I would say that -- over the next couple of years, that this is clearly an area and opportunity that we would like to invest in going forward.

Operator

You have Glenn Novarro.

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

A question on the shares outstanding. It looks like you're definitely stepping-up the buyback in the second half for the year. Can you provide some assumptions behind the share count guidance for fiscal '13? I'm guessing there's a reasonable amount of offset from options. So any color would be helpful.

Coleman N. Lannum

Yes, Glenn, I think you're hitting the nail on the head. A couple of things happened. First of all, the guidance we've given anticipates both additional share repurchases between now and the end of the year, although we're not going to quantify how much, as well as some dilution from employee options, et cetera. As you know as the stock price goes higher, you do sometimes get more employee option exercising. In addition, we have some employee benefit plans that do pay out between now and the end of the year, and that's going to put a little bit of upward pressure as well. But rest assured, that range we gave, the 470 million to 475 million, takes all of them into account.

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

And then just one quick follow-up for Chuck. Did you say that -- the tax rate guidance that you've offered for fiscal '13, is that essentially a good number for us to put into the model for fiscal '14?

Charles J. Dockendorff

I think -- are you talking about RemainCO Covidien...

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

Correct, yes.

Charles J. Dockendorff

The tax rate that we have would be a good basis to begin with, yes.

Operator

Next question is from David Morris [ph].

Unknown Analyst

Please don't say, "all of the above," but for Mallinckrodt, one of the slides and discussion points on inorganic growth or direction of the company longer term includes looking at acquisitions or growth opportunities in new geographies, more branded, as well as moving into -- further into difficult-to-do generics, in-licensing. Among the different possibilities for growth, what are the highest priorities?

Matthew K. Harbaugh

Yes, David, thank you for the question. I would say, as it relates to acquisitions in general, we're very return focused, obviously. And we like the margin profile of our branded business and then our generics business, so I would say that's where our emphasis is. As it relates to one of the questions Chuck got earlier around international acquisitions, we do look at those opportunities, and generally, there are some risks around those. And so I would say we're global in nature in how we think about it, but a lot of the acquisition activity tends to be in brands and generics, which is more heavily U.S. weighted today. Long term, our goal is to continue to grow our Specialty Pharmaceuticals segment overseas, but we -- CNS Therapeutics, which was an acquisition we did in October, is a good example of an area that we think we have a lot of expertise. We know a lot about pre-filleds, it's a natural call point adjacency for us. The products in the portfolio give us a nice near-term gain with Gablofen, as well as a long-term gain because there are some pain management opportunities within that portfolio. So generally, I would say it's return oriented, margin oriented, and that's going to create the weighting to the brands in the specialty generics side of the house.

Coleman N. Lannum

Next question, please.

Operator

That comes from the line of Larry Keusch.

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

This is for the Mallinckrodt guys. I just -- I know you're not going to pay a dividend initially, but could you give us some sense of how you're thinking about, as you generate cash, what the uses would that be and what might be a longer-term dividend philosophy?

John Moten

This is John Moten, investor relations. As it relates to free cash flow, we think that the priority uses for cash for us is there will BD&L opportunities that will be out there for cash. We see adjacent opportunities in our core paying management franchises areas that we would like to focus in on. A good example of that would be the CNS acquisitions that we did last year, which focused really in the intrathecal market, which is basically delivery of pain products through the spine. That's one of the many opportunities that we see. But the -- in terms of giving you an idea of what we're looking at, we're looking at more base hits rather than home runs on the BD&L side.

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

Okay, that's perfect. And then, I guess, for Chuck and Cole, just coming back to the end market growth. Can you guys talk a little bit -- I guess mid-single-digit growth for the end markets strikes me as a little bit high, but could you talk about some of the trends that you're seeing out there that would give you confidence in that sort of market growth rate?

Coleman N. Lannum

Yes, I think that's probably a fair statement on a "seemingly a little bit high" given some of the noise you've seen in the end markets over the last quarter or so. But remember, Larry, we're not looking at growth as being measured in days or weeks or months. When we look at the long-term dynamics of what's going on in our end markets, the penetration rates, the movements from a demographic standpoint and the fact that a lot of our in-procedures tend to be very high acuity procedures like major organ surgery and cancer and people that we clearly know are out there that are going need these procedures, and we still feel pretty comfortable that that's the kind of growth rate there is. It might swing a little bit one quarter or another, but some of these can be cyclical in nature as well. Even in Europe where we've seen some volume dips, the one thing we know for sure is the patients aren't going away. Those patients are still out there, they need to be treated, and we feel pretty comfortable that you're not going to see a significant dip here over the long period of time. Now does that mean that we're going to have single-digit -- excuse me, mid-single-digit revenue growth next quarter in our end markets? We don't know. But we still feel pretty comfortable as we look out over the several years that it's in that same mid-single-digit kind of range.

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

Okay, perfect. And I just have one last one, and this is just more of a clarification and it comes back to some of the comments that you made on the conference call a week ago, Friday, relative to the investment in emerging markets. I just want to make sure that I'm understanding this correctly that it doesn't seem like that -- those increased investments are necessarily into new emerging markets per se. This may be moreso infrastructure build or additions to infrastructure in big markets that you're in such as China where you see that there is more revenue dollars to be driven if there were some more feet on the ground or more infrastructure. And I guess the point of all that is we -- if that's true, we should expect that that's got relatively short payoff period and lower risk since you're investing these dollars in places that you're already in.

Charles J. Dockendorff

Yes, I think, primarily, the areas we see the biggest opportunity for investments are some of the emerging markets, but Brazil, China where we already have some presence in those countries as well. And it is a combination of selling and marketing people feet on the street, but we also are investing in the training centers, so those are also being put into places like Turkey and other areas that we think can be used as center locations to train some of the people in emerging markets, which certainly have a longer-term payback. We have R&D centers set up in -- as well in China and other areas that we think -- in India that we think will benefit us both from developing products in those markets, but also utilizing some of those centers to reduce our costs in the U.S. as we transfer some of the R&D to those areas outside of the U.S. So it's a combination of investments, but clearly, we are already invested in emerging markets. We have a good presence there. And I think it's reflected in our sales growth that we have going forward.

Operator

The next question is from Matthew O'Brien.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Just, I know we've been dancing around it a little bit on the operating margin side going forward, but when I looked at your guidance for 5% -- 5%, 6% top line growth and then double-digit bottom line growth, that assumes something around 60- to 70-basis-point improvements in operating margins from here. Is that the way that we should think about it? And then within that question, a bunch of your competitors that are even smaller than you have operating margins high 20s, even low 30s. Is there something structurally at Covidien where you think that you couldn't, over a 5-, 6-year period, get to that 27%, 28% level?

Charles J. Dockendorff

There's nothing structurally at Covidien that will preclude us from getting to any kind of normal level on operating margin. I don't know what the differences are between those other companies and ours. Some of that is the product portfolio you're in and the margins you can generate within that product portfolio. But I don't think the -- and we certainly, we know we need to leverage some of the operating margin in order to drive-through that goal of the double-digit earnings growth, no question about it. But I think that, as we look at these things, there's a host of opportunities to drive-through productivity, drive down that piece of it, there will be investment opportunities as we go forward. Again, we could get rid of some of our product portfolio that may be at a lower margin and drive a higher margin. I don't know if that would be economically the right thing to do, if it's driving through a good cash flow, and it all depends on what kind of cash you would get for that kind of divestment. So we look at these things really everything we look at on these things: are there cash on cash returns we have in them, some longer term, some quick paybacks, we take all of that into consideration. And all of these will drive value over time, all of these investments that we make.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Okay. Just one follow-up. When we talk about the 2 businesses splitting from here, there's obviously the synergies that you're seeing modestly on the tax rate side and from a cash flow perspective for each entity. But just -- can you just -- can you give us a sense for some of the subtle headwinds that we may be -- we should keep in mind going forward as the 2 businesses split from here?

Charles J. Dockendorff

Yes, I think -- I'll talk on Covidien, and Matt, you could jump in on Mallinckrodt. But I think, on Covidien, our immediate headwind is -- clearly, as we look at this year, we've seen a big impact from foreign exchange. We'll have some of that carry over to next year, if the exchange rates stay where they are. Of course, those are hard to predict and where they go through. We have another quarter of the med device tax that we have to pick up next year, which is also a headwind which will certainly put pressure on the earnings in 2014. But from our standpoint, we see, as Cole mentioned, some of the austerity programs in Europe, where will they go. I don't know if that will be a continued headwind, but whether there's underlying demand there, that's being delayed. And we should see as the economies improve some increased spending opportunities or increased investment -- or not investment but increased sales opportunities in that area, if the underlying demographics really represent the sales growth that we could achieve in those areas. I think that's been delayed a little bit. And I think it's just that, in the developed countries, you're seeing that all of these countries are trying to curtail the cost of health care, and we'll deal with that as we've gone on. We've been in that environment for a period of time now and have been relatively successful in operating in that environment. So we think we can be successful going forward. And Matt, do you want to say something about...

Matthew K. Harbaugh

Yes, I would just say, turning to the Mallinckrodt portfolio to, your question around the synergies and tax, or so headwinds. We feel like we've got a base that we're presenting here in Q4 of the 28% to 32% in the guidance, and that's where we're getting started. And we're going to look to find efficiencies wherever possible. The more we grow internationally, the better, so we want to drive that composition over time, but we're definitely looking to drive opportunities. I would echo a lot of what Chuck said as it relates to the broader portfolio outside of tax. Our European business has not grown at historical rates, but we haven't been hampered as much as we have when we look at some of our other competitors. But generally, our growth upside is going to be driven by our pipeline. It's going to be driven by realizing the promise of the CNS Therapeutics acquisition and then looking to drive that international expansion over time.

Operator

Next question is from Anthony Petrone.

Coleman N. Lannum

Anthony, before you go, operator, we're being right at the top of the hour. Let's go 2 more questions, and then we're going to wrap up. Go ahead, Anthony.

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

A couple for Chuck, on the new Covidien side. A lot of questions around the operating margin. I'm wondering, a couple of years back, you announced the sizable restructuring program. So to what extent is that captured in the 22% to 22.5%? And just to put some round numbers around that, I think you had alluded to $425 million of aggregate savings by fiscal '14. So how much of that has been realized, and what is left to be realized?

Charles J. Dockendorff

Yes, we're pretty well along on the final restructuring program. I think a lot of that has been reflected in the improvements in productivity and gross margin and SG&A that we've driven through in the company. So we're getting to the end of that, so I would say the majority of those savings are pretty much reflected by the end here of 2013. There'll be some manufacturing that falls over into the next year, but as far as SG&A, those are pretty much within the year you complete those. I think that, as we look forward, there's certainly -- we have -- once the spin is complete, as I mentioned, we'll be driving through productivity opportunities. We do have a lot of them. I would expect to announce some other restructuring programs, going forward, around on manufacturing and some of the back-office structure to drive-through productivity there. So I think we'll be able to -- we still see some opportunities to drive costs out of the business, in that end.

Coleman N. Lannum

And Anthony, on -- I just want to clarify, too: All of those savings were fully anticipated in that operating margin guidance that we gave.

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

All right. that's helpful. And just a quick one on the Covidien side, and then one for Mallinckrodt. The overall aggregate outstanding authorization, I think you still had $425 million from August 2011, and then, of course, that would be in addition to the $3 billion. So just a clarification there.

Coleman N. Lannum

That is correct.

Charles J. Dockendorff

It's correct, yes.

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

All right. And then, Matt and John, on Mallinckrodt, to what extent are the sort of the generic -- the 5 A -- NDAs for new generic market entrants or, for that matter, the new branded products captured in the 7% to 11% growth guidance for '13?

Matthew K. Harbaugh

Yes, so just to be crystal clear, the 7% to 11% is focused on 2013 alone. And so as we get to later in the year, I would expect more activity from our pipeline as it relates to future years. Generally, I would say, buried in the 7% to 11% are the products that we've already gotten approval for that we're realizing the benefit for our share owners now.

John Moten

This is -- yes. This is John Moten. I would also add that, as we look to use these in the second half the year, as far as our product portfolio, definitely pay attention to kind of what's going on in the brands and the products that we have in the Form 10. Those are the areas that we're going to be applying resources towards.

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

So the upper end of the range doesn't necessarily include any net new launches from the pipeline this year, in '13?

Matthew K. Harbaugh

Yes, the forecast that we -- the guidance that we've provided here is taking the base portfolio that we have today.

Operator

Your last question is from the line of Glenn Novarro.

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

I have my model open here. And I know you don't like to jump to fiscal '14, but when I plug in mid-single-digit revenue growth for '14 and I take that lower -- a lower -- put in a lower tax rate around 17%, take the shares outstanding down, I'm getting to 10% earnings growth. Is that a reasonable assumption for fiscal '14?

Charles J. Dockendorff

Glenn, we're still going through the whole process here, and we're working with our businesses right now. I think the 2 biggest pressure points on 2014 is going to be around, as I mentioned before, the FX, which even though it hits us in the back half the year, will have a carry-over impact into next year as well if the rates stay the same. Secondly, we do have another quarter of the med device tax, which we have to annualize into our numbers in 2014. Those are the 2 biggest negatives on that, but we're going through with all our business units now, their growth aspects. And I'd rather leave the 2014 guidance until September when we meet.

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

How about this as a problem: We saw, on a quarterly basis, it sounds like fiscal '14 will be a little bit more backend loaded from an earnings growth point of view. Is that a fair assumption?

Coleman N. Lannum

I think that probably is fair because, as Chuck said, we do have that one extra quarter of the med tech tax. That's going to hit us in the first quarter. And then if rates stay where they are today, we'll have some pretty significant negative FX in the first quarter, a little less so in the second quarter, but then that'll annualize and normalize in the second half. So I think that's a fair statement.

Operator

Thank you. I would now like to turn the call over to Cole Lannum for closing remarks.

Coleman N. Lannum

So thank you very much for joining us today. I mean, I certainly hope it was hopeful. As we noted earlier, we know we gave you a lot of information, that's why we gave it to you over the weekend to pore through it. Changes like these don't happen very often. There's a lot of new information to learn about Mallinckrodt and a lot of new information to learn about the new Covidien as well. So hopefully, this helps you at least get started on what's going on.

Starting at 10:00 a.m. Eastern Time today, we'll have a replay of this call. The replay will also be available on our corporate website, covidien.com. For members of the media who listened to the call and have additional questions, please contact Bruce Farmer of Corporate Communications. For analysts having more detailed questions involving on material information, Todd, John and I will be available to take your call throughout the day and throughout the week.

Thanks, and have a great day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have it a good day.

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