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St. Jude Medical, Inc. (NYSE:STJ)

Q2 2013 Earnings Call

July 17, 2013 8:00 am ET

Executives

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

John C. Heinmiller - Executive Vice President

Michael T. Rousseau - Group President

Eric S. Fain - President of Implantable Electronic Systems Division

Analysts

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

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

James Francescone - Morgan Stanley, Research Division

Brooks E. West - Piper Jaffray Companies, Research Division

Matthew Taylor - Barclays Capital, Research Division

Operator

Good morning. Welcome to the St. Jude Medical Second Quarter 2013 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 2012 and 10-Q for the fiscal quarter ended the 30th of March, 2013, identify 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 and 10-Q, 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 the most comparable GAAP measures are available in the company's press release issued earlier this morning, or on the St. Jude Medical's website at www.sjm.com.

[Operator Instructions] It is now my pleasure to turn the floor over to Dan Starks.

Daniel J. Starks

Thank you, Matt. Welcome to the St. Jude Medical Second Quarter 2013 Earnings Conference Call. With me on the call today are John Heinmiller, Executive Vice President; Mike Rousseau, Group President; Eric Fain, President of our Implantable Electronic Systems Division; Don Zurbay, Vice President and Chief Financial Officer; and Rachel Ellingson, Vice President of Corporate Relations.

Our plan this morning is for John Heinmiller to provide his normal review of our financial results for the second quarter and to give sales and earnings guidance for both the third quarter and full year 2013. I will then address several topics and open it up for your questions. Go ahead, John.

John C. Heinmiller

Thank you, Dan. Sales for the quarter totaled $1,403,000,000, slightly less than the $1,410,000,000 reported in the second quarter of last year. Unfavorable foreign currency translations versus last year's second quarter reduced this quarter's sales by about $31 million. On a constant currency basis, second quarter sales increased approximately 2% versus last year. We will update our currency assumptions in a moment, but the actual average exchange rates during the second quarter were within our previous guidance range.

During the second quarter, we recognized $160 million or $0.56 per share in after-tax charges, primarily related to the make-whole provisions of outstanding notes that were retired during the quarter, prior to their scheduled maturity. For further information regarding these charges, please refer to details provided in our press release. Comments during this call referencing second quarter and full year 2013 results, including earnings per share amounts, will be exclusive of these items.

As we previously announced, during the second quarter of 2013, we made a $40 million equity investment in Spinal Modulation. Based on the terms of the agreement, and as of the date of the investment, we began treating Spinal Modulation as a variable interest entity and are consolidating their results.

Earnings per share were $0.96 for the second quarter of 2013, a 9% increase over adjusted EPS of $0.88 in the second quarter of 2012. We estimate that on a constant currency basis, EPS increased approximately 14% versus last year.

Before we discuss our second quarter 2013 sales results by product category, with guidance for the third quarter and the remainder of 2013, let me comment on foreign currency. As discussed on prior calls, the 2 main currencies influencing St. Jude Medical's operations are the euro and the yen. In preparing our sales and earnings guidance for the second quarter and full year 2013, we used exchange rates which assumed that each euro would translate into about $1.28 to $1.33 and that each JPY 95 to JPY 100 would translate into USD 1. For the second 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 third quarter and the remainder of 2013, we are assuming that each euro will continue to translate into about $1.28 to $1.33 and that now each JPY 97 to JPY 102 will translate into USD 1.

Additionally, during the second quarter, the U.S. dollar strengthened against several other currencies which we have revised in our latest forecast. The changes in assumptions regarding currency exchange rates decreased total forecasted sales for the second half of 2013 by about $15 million to $20 million, which we estimate will reduce earnings per share for the second half of 2013 by approximately $0.02.

For the second quarter, total cardiac rhythm management, or CRM sales, which include revenue from both our ICD and pacemaker product lines, were $718 million, down 4% from last year's second quarter, including $12 million of unfavorable foreign currency translations. On a constant currency basis, total CRM product sales were down 2% versus the second quarter of last year.

For the second quarter, ICD sales were $454 million, down 1% versus last year's second quarter. On a constant currency basis, second quarter ICD sales were flat versus last year. U.S. ICD sales were $270 million, a 1% increase from last year's second quarter. International ICD sales were $184 million, down 4% versus the second quarter of 2012, including $7 million of unfavorable foreign currency translations. On a constant currency basis, international ICD sales were down 1% versus last year's second quarter.

For low-voltage devices, sales for the second quarter totaled $264 million, down 8% versus last year's second quarter. On a constant currency basis, second quarter pacemaker sales were down 6% versus last year. In the United States, pacemaker sales were $110 million. In our international markets, pacemaker sales were approximately $154 million, including $5 million of unfavorable foreign currency translations. On a constant currency basis, international pacemaker sales decreased 6% versus last year's second quarter.

For the third quarter of 2013, we expect total CRM product sales to be in the range of $645 million to $675 million. For the full year 2013, we now expect total CRM sales to be in the range of $2,700,000,000 to $2,740,000,000. On a constant currency basis, the midpoint of our CRM sales guidance assumes CRM sales will decline in the low single-digits for the full year 2013 and continues to assume that we will maintain our current share of the worldwide CRM market.

Atrial fibrillation, or AF, product sales for the second quarter totaled $237 million, up 9% over the second quarter of last year, including $8 million of unfavorable foreign currency translations. On a constant currency basis, AF product sales for the quarter increased 12%. For the third quarter of 2013, we expect AF product sales to be in the range of $220 million to $235 million, and we now expect our 2013 AF product sales to be in the range of $930 million to $960 million. The adjustment to the full year AF product sales guidance is primarily due to the revised currency assumptions. On a constant currency basis, the midpoint of our AF sales guidance continues to assume that we will increase approximately 9% for the full year 2013.

Total sales of cardiovascular products for the second quarter of 2013 were $340 million, equal to the second quarter of 2012, including $11 million of unfavorable foreign currency translations. On a constant currency basis, cardiovascular product sales for the quarter increased 3%.

Our cardiovascular product category is an accumulation of a number of different product lines. As a reminder, structural heart products consist of heart valve products, septal occluder products and left atrial appendage products. Vascular products include vascular closure products, FFR PressureWire, OCT products, renal denervation, vascular plugs and other vascular accessories, as well as third-party vascular products we sell under distribution arrangements in Japan.

For the second quarter of 2013, within the cardiovascular category, sales of structural heart products were $162 million, up 4% from the second quarter of 2012 on a constant currency basis. Sales of vascular products in the second quarter of 2013 were $178 million, up 3% from the second quarter of 2012 on a constant currency basis. For the third quarter of 2013, we expect cardiovascular product sales to be in the range of $300 million to $315 million, and we now expect our full year 2013 cardiovascular product sales to be in the range of $1,310,000,000 to $1,340,000,000. The adjustment to the full year cardiovascular product sales is primarily due to the revised currency assumptions.

Total sales of neuromodulation products in the second quarter of 2013 were $108 million, up 2% from the second quarter of 2012. For the third quarter of 2013, we expect sales of neuromodulation products to be in the range of $100 million to $110 million. We continue to expect full year 2013 neuromodulation sales in the range of $425 million to $450 million.

The geographic breakdown of St. Jude Medical sales in the second quarter of 2013 is detailed in our press release. In total, 48% of St. Jude Medical sales in the second quarter came from the United States, while 52% came from international markets.

The gross profit margin this quarter was 72.9%, down approximately 110 basis points from the second quarter of 2012. For the full year 2013, we continue to expect gross profit margin to be in the range of 72.2% to 72.7%. As a reminder, we are accounting for excise taxes, including the Medical Device Excise Tax as an inventoriable cost in 2013, which we estimate will reduce our gross profit margin by approximately 80 to 100 basis points.

Our second quarter SG&A expenses were 34.6% of net sales, a decrease of 40 basis points from the second quarter of 2012. For the full year 2013, we now forecast SG&A as a percentage of net sales to be in the range of 33.9% to 34.4%, which includes the additional investment to consolidate CardioMEMS and Spinal Modulation.

Research and development expenses in the second quarter of 2013 were 12.3% of net sales, consistent with the second quarter of 2012. For the full year 2013, we now expect R&D as a percentage of net sales to be in the range of 12.2% to 12.7%, which includes the additional investment to consolidate CardioMEMS and Spinal Modulation, as well as the continued funding of our growth drivers to accelerate sales growth.

Other expense was $22 million in the second quarter. And for the third quarter of 2012 -- or for the third quarter of 2013, we expect the other income and expense line item will be a net expense of approximately $16 million to $21 million. For the full year 2013, we expect the other expense line item to be approximately $75 million to $85 million.

For the second quarter, the company's effective income tax rate was 21.6% and for 2013, we now expect the effective tax rate to be in the range of 21.0% to 21.5%.

As we mentioned previously, we are treating both CardioMEMS and Spinal Modulation as variable interest entities and consolidating their results. The guidance we have given for net sales and expenses for the third quarter and the remainder of 2013 includes their results on a gross basis. The portion of their net losses that is not attributable to St. Jude Medical has been added back to our net profit on the line captioned, "net losses attributable to noncontrolling interest," and totaled $6 million in the second quarter. For the third quarter of 2013, we estimate that this line item will total approximately $8 million to $13 million. And for the full year, we expect this line item to total approximately $27 million to $32 million.

Moving on to the balance sheet. At the end of the second quarter 2013, we had $1.2 billion in cash and cash equivalents and $3.6 billion in total debt. There were no borrowings outstanding under our $1.5 billion revolving credit facility available with a group of banks. As we have previously discussed, in April, we issued a total of $1.6 billion in debt, consisting of $900 million of 3 1/4% senior notes that are due in 2023 and $700 million in 4 3/4% notes due in 2043. A significant portion of the proceeds were used to redeem, in full, the company's $700 million 3 3/4% notes due in 2014 and the $500 million 4 7/8% notes due in 2019. As is customary with the redemption of these notes, we recognized a sizable onetime charge related to the contractual make-whole provisions of these notes. The rationale to pay the 2014 and 2019 senior notes early was based on an analysis which supported the early redemption make-whole payments if you assumed interest rates would increase by approximately 50 basis points by the time of their scheduled maturity dates. After just 3 months, interest rates have already increased by more than this amount. As a result of these actions, we retired notes with a weighted average maturity of 3.4 years, with notes that -- having a weighted average maturity of 18.75 years and a lower weighted average interest rate.

Next, I want to offer some comments regarding our earnings per share outlook for the third quarter and the full year 2013. In preparing our EPS guidance, we have assumed that in the third quarter of 2013, the weighted average outstanding shares used in our fully diluted EPS calculation will be about 288 million to 289 million shares and the weighted average outstanding shares for the full year 2013 will be about 288 million to 290 million shares.

For the third quarter, the company expects consolidated earnings per share to be in the range of $0.88 to $0.90. And for the full year 2013, we now expect consolidated earnings per share to be in the range of $3.70 to $3.73. This expectation absorbs the negative impact of currency to our revenue expectations, which we now estimate will reduce our full year 2013 revenues by about $115 million to $125 million compared with full year 2012. This impact translates into a negative EPS impact of approximately $0.16 to $0.18. On a constant currency basis, our adjusted earnings per share guidance represents EPS growth of approximately 11% to 12%.

I would now like to turn the call back to Dan Starks.

Daniel J. Starks

Thank you, John. As we discussed at our Annual Investor Meeting earlier this year and during our call last quarter, a key priority for St. Jude Medical in 2013 is to accelerate our sales growth rate on a sustainable basis. Q2 results confirm that we are making good progress toward achieving this goal. Sales growth rates improved in the second quarter across all of our major product categories. We expect our consolidated sales growth rate to improve further in the second half of 2013 as we continue to leverage our broad portfolio of growth drivers and new products. Our Q2 results also demonstrate our strong operating discipline, our commitment to maintaining a healthy balance sheet and our ability to generate significant cash flow.

I would like to spend the next few minutes reviewing the status of each of our major businesses, beginning with a review of our cardiac rhythm management, or CRM franchise. Both CRM market dynamics and St. Jude Medical's CRM sales results during the second quarter were encouraging. CRM revenue exceeded the high end of our sales guidance during the second quarter and reinforces our confidence that we will meet or exceed our CRM sales goal for full year 2013. Our high-voltage lead-to-port ratio was again stable during the second quarter on a sequential quarter basis. Average selling price, or ASP pressure, was consistent with what we have seen in prior quarters and was offset, in part, by encouraging increases in volume on the high-voltage side of our business.

A particularly important development for our CRM franchise during the second quarter is that we began launching 6 new CRM product lines into key markets. The 6 new CRM product lines had little impact on second quarter results, but should strengthen our CRM franchise for the second half of 2013. This includes the approval of our next-generation Ellipse and Assura high-voltage device families in Europe and in the United States. These 2 device families are especially important in today's environment because they include new and unique safety features designed to address potential lead complications. This includes a new automatic vector switching algorithm, which automatically adjusts shocking configurations to ensure delivery of high-voltage therapy even if an electrical short in one portion of the system were to occur. In addition, these new device families have a low-friction coating on the device can, which has been demonstrated in testing to significantly reduce the friction between the device and leads. This low-friction coating provides an extra layer of electrical insulation and is designed to reduce the risk of lead-to-can abrasion, the most common type of lead insulation failure in the industry. St. Jude Medical is the first company to help address the problem of lead-to-can abrasion by providing increased insulation on the ICD itself rather than on the lead. The Ellipse and Assura family of devices also feature protection against inappropriate and unnecessary shocks with SecureSense RV lead noise discrimination, which differentiates lead noise from true ventricular tachycardia or ventricular fibrillation episodes requiring therapy. These features also are capable of providing remote patient alerts over the Merlin.net Patient Care Network, a secure Internet-based remote care system for patients who have received a St. Jude Medical ICD or pacemaker. Taking all of these features together, we think we have compelling new product offerings for an ICD market that places a premium on the safety and reliability of high-voltage device systems.

The new CRM product lines we began launching during the second quarter also include the initial launch of our ENDURITY and ASSURITY family of low-voltage devices in Europe. These device families are especially important because they have been designed and manufactured with a new lower-cost pacemaker platform. As we have mentioned previously, St. Jude Medical has not been competitive in certain so-called "value tier" portions of the pacemaker market because of our refusal to simply drop prices as a long-term competitive strategy. Our new pacemaker platform represents a high-tech sustainable approach to support our expanding participation in the value tier of the pacemaker market, while still protecting the profit margin we need to maintain robust investment in next-generation technologies.

The fifth new CRM product line we began launching in Europe during the second quarter is our new PREMIUM tier Allure Quadra product line, which brings the advantages of quadripolar CRT to low-voltage devices for the first time. We expect quadripolar CRT to become the standard of care in pacemakers, similar to what we already see developing in the high-voltage segment of the CRM market. We estimate that the CRT-P segment of the CRM market currently is approximately $300 million in size and has the potential to increase rapidly due to the expanding body of clinical evidence, which confirms the benefit CRT-P therapy provides to appropriately selected pacemaker patients.

The sixth new CRM product line we began launching during the second quarter is our Quadra Assura MultiPoint Pacing CRT-D product line in Europe. CRT-D therapy with quadripolar MultiPoint Pacing technology is available only from St. Jude Medical. MultiPoint Pacing has been shown to have significant acute hemodynamic and dyssynchrony benefits in heart failure patients and may reduce the rate of CRT nonresponders. This is expected to translate into both clinical and health care economic benefits, as well as continued share gain for St. Jude Medical in the CRT segment of the ICD market.

In addition to launching 6 new CRM product lines in the second quarter, St. Jude Medical began launching a seventh new CRM product line at the beginning of the third quarter. This was our Accent MRI line of pacemakers in Japan, which we began rolling out during the Japan Heart Rhythm Society Scientific Sessions the first week of July. We are encouraged that in the first week of our product rollout, we recovered lost business in 24 hospitals due to the competitive advantage of our Accent MRI pacemaker product line. We expect this new product offering to help us change the growth profile for our pacemaker business in Japan over the next few quarters.

While we are providing an update on CRM product launches that are expected to strengthen CRM sales results during the second half of 2013 and beyond, I would like to confirm that we continue to expect to acquire Nanostim and begin to introduce the world's first leadless pacemaker in Europe before the end of this year. The clinical data surrounding the Nanostim leadless pacing technology are compelling and support our thinking that this technology has the potential to be truly disruptive in the pacemaker market. The first generation of Nanostim leadless pacing technology will address only the single-chamber segment of the pacemaker market, which we estimate is approximately $600 million in size worldwide. We are looking forward to adding this innovation to our CRM portfolio and expanding the Nanostim platform to address all appropriate segments of the global pacemaker market over time.

In summary, both CRM market dynamics and St. Jude Medical's CRM sales results during the second quarter were encouraging. St. Jude Medical is on track to launch a total of 8 new CRM product lines into key markets this year, of which 7 product launches already are underway. We think our CRM franchise turned the corner during the second quarter and is returning to normalcy after the pressures of the last 2 years. If we are correct in this assessment, St. Jude Medical is well-positioned to leverage its growth drivers and accelerate total company sales on a sustainable basis as we move through the second half of this year and enter 2014. It, therefore, is appropriate to draw your attention to the progress we are making with our portfolio of growth drivers and new products in our atrial fibrillation, cardiovascular and neuromodulation businesses.

The annual contribution of our atrial fibrillation or AF business is expected to approach $1 billion in revenue by the end of this year. We expect this $1 billion of our sales mix to continue growing at a high single-digit or low double-digit rate for the foreseeable future. As we have indicated previously, the core growth drivers within our AF franchise are both diverse and stable. These core growth drivers include our leading portfolio of diagnostic catheters, advanced mapping technology and specialty introducers, a modest portfolio of ablation catheters, and a competitive line of conventional recording systems, intracardiac echocardiography or ICE systems and implantable loop recorders. The benefit of these core growth drivers is offset slightly by declining revenue in our AF surgical ablation product line.

One leading indicator we monitor to predict the future growth of our AF business is the progress we are making with our MediGuide program. We've continued to make good progress with our MediGuide program during the second quarter. We stayed on track to install MediGuide systems in at least 12 additional beta sites, launched a full portfolio of MediGuide-enabled ablation catheters and CRT tools and executed on our launch of EnSite Velocity precision technology, all in 2013. These accomplishments are prerequisites for a successful commercial launch of our MediGuide program in 2014.

Our MediGuide program will give us the ability to provide a unique EP cath lab of the future in 2014, which will help pull through a complete product bundle in the EP space and resonate well on multiple fronts in today's healthcare environment, both with clinical and with economic buyers. Given the overlap of customers and technologies in our AF and CRM businesses, we think the strength and success of these 2 businesses is mutually reinforcing. Keep in mind that our MediGuide system is designed to support both CRT implants and catheterization procedures.

Next, I would like to provide an update regarding the progress we are making transforming the growth profile of our cardiovascular business. From a distance, it can be difficult to appreciate our progress because there are so many moving parts. Revenue from our vascular closure business, our mechanical heart valve business and our third-party products distributed in Japan all are declining and are expected to continue declining for the foreseeable future. Taken together, these 3 portions of our cardiovascular business comprise approximately 40% of our cardiovascular sales mix and may temporarily mask the progress we are making with our cardiovascular growth drivers.

Our transition in sales mix from declining legacy products to accelerating growth drivers within our cardiovascular portfolio has advanced to the point where investors can begin to see the impact in our reported sales results going forward. On a constant currency basis, cardiovascular revenue during the first quarter of 2013 was flat versus the prior year. In the second quarter of 2013, the constant currency growth rate for cardiovascular business improved to 3% versus the prior year. We expect this growth rate to continue to improve the remainder of 2013 as growth drivers become a higher percent of our cardiovascular sales mix each quarter.

Let me offer more specific updates about the progress we are making with some of the key growth drivers within our cardiovascular business. First, revenue from our Trifecta pericardial stented tissue valve and other tissue heart valves exceeded the revenue for our mechanical heart valve product line for the first time during the fourth quarter of 2012. Revenue for tissue heart valves grew at a low double-digit rate during the second quarter and is expected to continue growing at a high single-digit or low double-digit rate the remainder of this year. This more than offsets the continued decline of our mechanical heart valve revenue and generates a net benefit to our overall growth rate.

Second, we are continuing to achieve the major goals we set earlier this year for our Portico TAVR program. We expect to receive CE Mark for our Portico 25-millimeter TAVR product line during the fourth quarter of 2013 and be well-positioned to begin generating meaningful revenue from our TAVR program as we move through 2014.

Two growth drivers which already are contributing meaningful growth within our cardiovascular portfolio are our fractional flow reserve, or FFR, and our optical coherence tomography, or OCT, product programs. The key to the growth of both of these product lines is effective market development through clinical evidence, healthcare economic data and education. Some of this market development work already is behind us as a result of the FAME family of clinical trials. We are building on our foundation with FAME by initiating an ILUMIEN family of trials which relates both to OCT and FFR. The progress of our market development initiatives can be validated by the fact that revenue for both our FFR and our OCT product lines is growing at a strong double-digit rate and is expected to continue growing at a strong double-digit rate for the foreseeable future.

Taken together, FFR and OCT revenue already comprises the second largest percent of our cardiovascular sales mix behind Angio-Seal, and is well on the way to becoming the largest component of our cardiovascular sales mix.

Two growth drivers within our cardiovascular portfolio that still are emerging are our renal denervation and our left atrial appendage, or LAA, closure products. Revenue from our EnligHTN renal denervation products still is small in absolute terms, but its early growth rate is encouraging and we continue to meet all major milestones designed to expand renal denervation to become a major new growth driver. Our EnligHTN, EnligHTN II, EnligHTN III and EnligHTN IV clinical trials all are being initiated or are already underway or are in long-term follow-up. We are finalizing the protocol for our landmark EnligHTNment clinical trial, which is a prospective randomized controlled study of approximately 4,000 patients to be enrolled in up to 150 sites on a multinational basis. Patients in our EnligHTNment trial will be followed for 5 years under an event-driven trial design. Primary endpoints for this trial include major cardiovascular events such as heart attack, stroke, heart failure with hospitalization and cardiovascular death. Secondary endpoints include the reduction of in-office and ambulatory blood pressure and changes in renal function. This trial will primarily use St. Jude Medical's next generation EnligHTN renal denervation system, which provides the ability to deliver RF energy simultaneously from multiple electrodes and significantly reduce procedure times.

We expect our EnligHTN family of clinical trials to generate the clinical and health care economic data needed to establish or expand reimbursement for renal denervation in many key markets. We also expect these clinical trials to generate the evidence needed to help establish St. Jude Medical's EnligHTN renal denervation system as the product line of first choice.

Similar to what we have just reviewed with respect to our renal denervation growth driver, revenue from our LAA closure product lines still is small in absolute terms, but also is growing at an encouraging rate. The most important new developments in our LAA closure program during the second quarter were that we initiated enrollment in our U.S. IDE pivotal trial and began launching our next-generation Amulet LAA closure product line in Europe. We expect LAA closure revenue to increase more than 40% on a constant currency basis for full year 2013. St. Jude Medical is focused on implementing the full range of clinical education and reimbursement programs needed to help our LAA closure program continue to mature into a major new growth driver. We expect to provide additional details regarding timing and expectations for our LAA closure growth driver at our Annual Investor Meeting in early 2014.

One potential growth driver within our cardiovascular portfolio that we have not yet talked about is the status of our PFO or patent foramen ovale closure program. Given the mixed results -- the mixed reaction to the results of our RESPECT PFO closure clinical trial, we are evaluating possible alternatives for strengthening our PFO closure data in a way that would not only support product approval, but also would create a stronger consensus regarding the benefit of PFO closure for patients who have suffered from cryptogenic stroke, and help facilitate market development. We will provide a further update regarding the status of our PFO closure program when we have completed this process.

Next, I'd like to offer an update regarding the portfolio of growth drivers with our neuromodulation program. We are making good progress toward our goal of returning our neuromodulation business to high single-digit or low double-digit growth on a sustainable basis. Neuromodulation revenue improved to 2% growth on a constant-currency year-over-year basis in the second quarter compared with a decline of 4% in the first quarter of this year. We expect the growth rate for our neuromodulation business to improve further during the remainder of this year.

Our deep brain stimulation, or DBS, business already is delivering strong double-digit growth for patients who suffer from Parkinson's disease, essential tremor or dystonia. We expect to revitalize the growth of our chronic pain business over the next few quarters as we begin to launch our next-generation Prodigy spinal cord stimulation, or SCS, system and distribute Spinal Modulation's Axium Dorsal Root Ganglion or DRG stimulation system in Europe during the second half of 2013. The Burst Technology in our Prodigy SCS system and the DRG stimulation technology in the Axium system both have the potential to be disruptive technologies in the neuromodulation markets for patients who suffer from chronic pain. Early customer feedback to both of these technologies signals to us that we are on the right track to achieve our goal of restoring high single-digit or low double-digit growth to our neuromodulation franchise in 2014.

I would like to conclude our prepared remarks by summarizing our main takeaways from the second quarter. First, Q2 results confirmed that we are making good progress toward achieving our goal of accelerating our sales growth rate on a sustainable basis. Second, we are on track to meet or exceed our earnings per share guidance for 2013 and deliver constant currency growth in adjusted earnings per share of approximately 11% to 12%. Third, we are demonstrating strong operating discipline and continue to maintain the balance sheet and cash flow needed to fund disciplined acquisitions and continue to return cash to shareholders as appropriate. We expect to continue to execute successfully on all of these priorities the remainder of this year.

With that, we are ready to open it up for questions, and I will turn the call over to our moderator, Matt.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Rick Wise with Stifel. [Operator Instructions]

Your next question comes from the line of Mike Weinstein with JPMorgan.

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

Let me start, Dan, if I could, with the CRM business. I think that it's fair to say it came in well ahead of your expectations this quarter. Is there anything you want to highlight? And are you kind of -- are you comfortable with the sustainability of that, particularly the U.S. ICD performance?

Daniel J. Starks

Let me offer a couple of comments, and then I'm going to also ask Mike Rousseau to comment. First, we -- a highlight, Mike, for our CRM business in the second quarter, really, is the theme that it seems that in the second quarter, we turned the corner -- turned the corner and returned to normalcy in our CRM franchise. So the increase in usage in our -- in ICD volumes was very encouraging. The continued stability of our lead-to-port ratio was particularly encouraging. The stability of ASP pressures at a mid single-digit rate was encouraging. So we see the markets as stable, stable dynamics that we've described, including the mid single-digit pressure on ASPs. And we see us having created a good, stable core from which to build now, going through the second half of this year and into 2014. So the -- besides the stability and the return to normalcy that we saw in the second quarter, the fact that we have began to introduce 6 new product lines and now here, in the beginning of the third quarter, a seventh new product line, and that we have good visibility into the upcoming launch of an eighth new product line in the CRM business all are really the key points and give us a lot of optimism and encouragement that we have a very stable CRM platform and an opportunity to build from there, an opportunity to have a credible chance here to return to some modest share gain, particularly on the high-voltage side of our business in the U.S, and to stabilize our share on the low-voltage side outside the U.S. with the strength of all of our new technologies. And this pipeline of new technologies will continue here going forward into 2014. A number of these technologies are not yet on the market in the United States. They will come into the market here in future periods and continue to refresh our competitive position in the U.S. market in future periods. So really, just all in all, it's just really very positive. Those are my big picture comments. Mike Rousseau is -- spends a significant amount of his time talking to customers in the field, work with our global field organizations. Mike, do you have any additional comments?

Michael T. Rousseau

I would echo your comments about...yes?

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

Mike. Maybe we can chime in, any pickup in end of quarter activity? Was there a particularly high number of deals at the end of the quarter? I think it's one question everybody will have.

Michael T. Rousseau

No. I would say it was a very usual finish for us. Nothing unusual about how we finished the quarter. So from a stocking standpoint, we feel it was on track and a normal result. We -- echoing Dan's comment about stability in the market and also, the encouragement relative to the increased uses of our leads, the product cadence is very exciting. And then finally, the last comment I would make is, we've had some very successful contracting activities here in the last quarter, which we are very encouraged by, as major systems are moving to a multiproduct approach with St. Jude Medical products.

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

Let me just follow up with maybe a couple of questions on the pipeline. Dan, just to clarify. On Portico, you are still expecting to have both TA -- TF and TA delivery systems approved by the end of the year?

Daniel J. Starks

The -- we expect to have the TF delivery system here with the 25-millimeter Portico CE Mark by the end of the year. We are making good progress on the TA delivery system, but I'm going to defer, Mike, just to make sure that I don't misspeak on whether we will have the TA delivery system CE Mark by the end of this year. I believe that we will -- I'm not entirely crisp on the timeline, but I believe that we're on track for that as well.

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

And then, just the last one, I'll let some others jump in. The comment with regard to RESPECT and the filing and looking at ways to maybe supplement your existing data package. Can you give us any more on that and potentially, where any additional data may come from?

Daniel J. Starks

Yes. We are particularly -- I don't want to say too much about it because this is a work-in-process and it's a work-in-process that includes significant discussion with FDA. And so I don't want to say too much about it. But we are particularly looking at the possibility of pooling additional data with a matched patient population. And so there's a lot of statistical work, a lot of detailed analysis going on in that area to determine whether that would be helpful to the ongoing conversation about the benefit of PFO closure in cryptogenic stroke patients or not. But that's very much a work-in-process, so my remarks are only preliminary on that front.

Operator

Your next question comes once again from the line of Rick Wise with Stifel.

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

Just -- maybe just a couple of bigger picture questions, Dan. Can you give us some update, any kind of update on the status of the warning letter? Any progress you're making? Just hopes for resolution?

Daniel J. Starks

Well, I can tell you, Rick, that nothing is a higher priority for us than applying all appropriate resources and diligently remediating everything and that we've made good progress on that. Let me ask Eric Fain. If you have any additional comments, Eric, what would you say about the status of our remediation of the warning letter?

Eric S. Fain

So as Dan said, it's our top priority and we are focused on resolving all the issues that were delineated in the 483, in the warning letter. We're making good progress and we're on track with our internal goals, and we also continue to communicate closely with FDA and are updating them on our progress. So in general, I'd say we're very focused, top priority and we're on track.

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Just 2 more quick ones. Just help us, Dan, if you would, just understanding how to think about the future dilution or the outlook for both Nanostim and CardioMEMS. How are you going to manage bringing them into the company going forward? How do we think about those numbers? And just last, a quick one on -- we've seen some early reports, indications of hospitals pushing back or restricting capital spending. I mean, obviously, you're not a capital equipment company per se, but there are connections there. Are you seeing any incremental slowdown or pushback or delays in capital spending?

Daniel J. Starks

Taking your second question first, Rick, we're not seeing incremental slowdown in CapEx here at the hospital level. But again, as you mentioned, our exposure to the CapEx segment of the market is limited. And so it's a tough -- the CapEx is a tough market for us to sell into and the selling cycle is, certainly, a bit long and the value of the technology really needs to be compelling. And so we match up well in that kind of a selling environment, particularly with the compelling value propositions surrounding our MediGuide system and our entire -- our ability to really outfit a room, either to refresh the room or for EP cath lab room expansion. And the EP cath lab is generally the -- a mix of procedures being done in the EP cath lab are given -- are valued with a bit of a premium in the hospital environment, and so that's where our CapEx is primarily directed. And so we find ourselves with an ability to make the amount of progress we expected to make selling our capital equipment, particularly into the EP cath lab in the hospital. On the topic of Nanostim and CardioMEMS, what I'll say is, I won't make a comment here with respect to CardioMEMS. We won't provide any update on behalf of CardioMEMS and would defer to CardioMEMS to provide any information it finds appropriate itself, directly, and not through us. But generally, with every acquisition, our goal and our intention here -- and we have a lot of capacity to meet our goal and fulfill our intention, it's always to make the acquisition non-dilutive to expectations. So you've seen in our initial guidance for the year that we were conservative, deliberately, in our initial EPS guidance for the year and we had a number of things in mind. One was -- and the number of considerations we had in mind when we set our EP -- our earnings per share guidance was the topic of potential acquisitions in the second half of this year. We had good visibility into Nanostim and we had room in our income statement to take advantage of other opportunities if all of the stars lined up for it. So whatever we do going forward, a person would offer the caveat that we will never say never about any possibility. But our intention and our track record has been to make acquisitions non-dilutive to expectations, and either to have the acquisitions be non-dilutive on a pure basis or non-dilutive to expectations in the sense that we can -- we've got either income statement capacity or we've got the ability to shift resources to cover the imputed dilution of an acquisition. So that -- we expect to build -- continue to work in that kind of timeframe going forward with any near-term additional investments or acquisitions.

Operator

Your next question comes from the line of Bob Hopkins with Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

First of all, just back on the Q2 results for cardiac rhythm management, which are obviously quite strong. You said in your prepared remarks, you said that your product cadence was solid throughout the quarter, but that it probably didn't have much impact. So is it safe to assume that you believe the market picked up a little bit in Q2?

Daniel J. Starks

It would be premature for us to say that, Bob. We really do need to see the other companies' numbers before we opine. But on a preliminary basis, it isn't that -- I don't think it is market pickup. I think it is our position being stronger within the market. And just to say a little bit more about that, the new product in the United States came into the market in June, I think it was mid-June. So clearly, no particular impact here from that in the U.S. And in Europe, it's really just a little bit slower uptake. Keeping in mind that the CE Mark doesn't get us into all of the CE Mark countries. It really gets us sooner rather than later into some of the CE Mark countries, but there are additional steps we have to take in other CE Mark countries to begin to deploy the product line, and then, also, just given the impact of tenders in Europe, the uptake is slower than in the United States with new technology for those multiple reasons. So we had some products early in the second quarter here in Europe, but it just takes longer to really get traction in that particular environment. So it's not that there was no impact from these 6 new product lines in the second quarter. It's just that it was -- all we did was barely get started. In some instances, there was no impact. In other instances, there was a little bit of impact, but nothing -- not the level of impact we expect to see as we get fully deployed. And particularly in Europe, we think we need to get through the third quarter as a little bit of a slow quarter in the cycle and get into the fall tenders, and the real impact of the new products in Europe will be particularly of benefit to our tender position in September through the end of the year, and that will start to show up more in 2014 than it did here in the second quarter of 2013.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. But even your U.S. ICD business got better, and if there's really no benefit from the new products, then I would assume things at least felt slightly better for -- just from the math of it but -- and so maybe another way of...

Daniel J. Starks

Well, we'll see, we'll see. You may be right, Bob, and I'm not arguing with you, you may be exactly right. At the same time, a big factor for us is the continued stability of our lead-to-port ratio on a sequential quarter basis and the continued -- it's the continued uptake of our quadripolar CRT-D. And then also, we continue to benefit from a replacement market tailwind. So all of that together gives us some optimism that our share position may have strengthened slightly. It may be that the market itself strengthened slightly. We just need a little more data to really parse that.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Sure. And you raised your guidance a little bit for constant currency growth in CRM. Was that a combination of a little share and a little market? Or is that mostly assumptions on share?

Daniel J. Starks

Share. Yes.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. And then, lastly for me, just on CardioMEMS, I understand you don't want to give -- or speak for them at all. But can you just give us a sense, is it -- do you think it's likely that we'll receive a regulatory update this year?

Daniel J. Starks

Yes.

Operator

Your next question comes from the line of Derrick Sung with Sanford Bernstein.

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

I wanted to spend some time on your neuromodulation business. First, with respect to spinal modulation, what is your view on how Dorsal Root Ganglion stimulation kind of fits into SCS in your portfolio? And then, in particular, what can you do with that product in Europe today if you drop into your sales force? I mean, are you ready to start selling it right away? And kind of what's your views on that opportunity? And then, just more broadly speaking, what is it going to take to get that neuromodulation business up to the historical high single-digit growth that we've seen previously?

Daniel J. Starks

All good questions, Derrick. Let me refer your questions to Eric Fain for comment. Eric, could you comment on the spinal modulation Dorsal Root Ganglion and integration plans, impact on second half of 2013?

Eric S. Fain

Sure. So when we really analyzed the opportunity, we really saw DRG stimulation as a unique complement to our existing traditional SCS neuromodulation portfolio. And as you look at the available study data that's been published, and talk to investigators, DRG really has been shown to be able to effectively manage pain conditions that are not well treated by traditional SCS. And those are things like peripheral neuropathy, especially of the foot and groin, postsurgical pain from incisions, phantom limb pain, and then also, a number of cases where DRG has been very effective in patients who have basically been nonresponders to traditional SCS therapy. So when we look at it again, we look at it as very complementary to our existing portfolio and will allow us to offer customers, really, the broadest portfolio of pain management solutions and treatment options in the industry. So we're -- so that's why we're so excited about the partnership and how, together, that can grow our neuromodulation business in the future. And as we look at that and we look at our upcoming launch of Prodigy with Burst Technology, which, as we've talked about before, provides a way to give paresthesia-free pain relief with the traditional SCS system and without the high energy consumption that exists with systems that use high-frequency stimulation. We have good clinical data and we're expecting to launch that product in the second half of the year in Europe, as well as begin our IDE trial in the U.S. And so with all that together, we're looking at really reinvigorating our neuromodulation business. As far as Spinal Modulation and the distribution goes in Europe, I'd say that we have really a first step and that's that we need to get our people trained on DRG stimulation, on the implant techniques and procedures. So that will evolve over time, and that's really what we're focused on in the second half of 2013.

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

Great. And then, just a follow-up on your new ICD product launches, the ICDs with the safety enhancement features. Can you talk a little bit about how you're going to be positioning those or how you've been positioning those early on in the launch? Do you expect those products to actually gain share? Is that more a stabilization of some of your existing share? Do you see mixing and matching with other manufacturers' leads? Can you give us maybe just a little bit more thoughts on how you're positioning that? And also, whether you'll be pricing those products at a premium?

Daniel J. Starks

Eric, what would your comments be in response to Derrick's questions?

Eric S. Fain

So we're -- I mean, we went into this originally really focused on providing patient management solutions for physicians who are following patients with silicon leads. But as we got into the development and really looked at the 2 features, main features together, again, the automatic vector switching as well as the low-friction coating on the devices, and talked with customers, the general feedback from customers was that these devices provided a level of safety and reliability and really took that to the next level and really should be thought of, universally, as improving -- as an opportunity to improve system reliability for any lead system. So we have really gotten very positive and enthusiastic feedback from customers, and those are customers who are particularly concerned with lead issues, as well as customers who have not been that focused on it. And again, they just see this as really adding a level of robustness to the system. And comments that we've gotten back from physicians include things like, "These devices should be used on all older leads at the time of replacement." So we see it as an important feature set overall.

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

And will you be positioning this as kind of a premium product versus your existing portfolio? Or do you replace, essentially, all of your current ICD lines with this next generation?

Eric S. Fain

We see it as the premium product here. I mean, that's -- and it's got the full feature set for everything else that we have in our devices as well with these additional features.

Operator

Your next question comes from the line of Kristen Stewart with Deutsche Bank.

Kristen M. Stewart - Deutsche Bank AG, Research Division

I'm just wondering, you -- I guess, John, you had mentioned about the Spinal Modulation and CardioMEMS, just kind of the accounting for it, and that you were going to be including revenues and then taking back out the portion of earnings that are not related to you. Can you just help us understand what is the revenue contribution that you are assuming from these for the back half of the year?

John C. Heinmiller

The revenue contribution, as Eric mentioned, with respect to Spinal Modulation, it's very modest, focused on the training and really just getting into the distribution activity. And for CardioMEMS, again, very little, if any, revenue contribution. There's really none, as Eric was bringing the answer to me here, and I didn't think there might have been a little bit of revenue on some of their products, but none is in there. So there isn't any real revenue expectation of any material amount in those consolidations.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. And then, for Nanostim, I assume since you haven't acquired it that there's nothing assumed within your guidance there?

John C. Heinmiller

That's correct. Yes, that's right.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Perfect. And then you had mentioned, I think, in the prepared remarks, a comment on seeing the benefits of kind of selling the broader portfolio. Can you maybe just expand upon that, what you're seeing -- the bundling approach, what products are you bundling? And maybe how much of a change is this relative to the last couple of quarters?

Daniel J. Starks

Kristen, let me -- this is Dan, let me take that, and I'm not going to answer your question directly with all kinds of apologies. I just don't want to get into that level of discussion of our competitive strategy and our results as we work against the competition. So I don't really -- it's a good question and it's a topic that we devote a lot of attention to, but it's not a topic that we want to provide a lot of public information on. But just generally, a person could think about the way that we approach the -- particularly in the Electrophysiology world, it's long been a strategy for us to work to have the portfolio where we would be relevant to what's going on in the EP cath lab, first case, last case, every case in between. And so that's whether it's a device case or a catheterization case. And so it's an area where we really just are pervasive with our technology and with our ability to provide appropriate high-tech service. And so that would be about as much I want to say there. The only -- except just to reemphasize, I referenced the EP cath lab of the future. That's a tagline and a theme for us in our approach to the portfolio of products used in the EP cath lab, that we are special in the way that we provide capital equipment, directly associated disposable devices, implantable devices and the scope of disposable devices for catheterization procedures. We are really just unique in our -- in the expanse of our portfolio. And so as we look at the health care reform, as we look at the dynamics in the United States, as we look at the possibility of vendor consolidation, as we look at the different strategies that the economic buyers think about in how they're going to best manage their efficiency and which vendors match up well and can support economic buyer goals, particularly here in the whole space of the electrophysiology world with devices and catheterization tools, we have a very strong competitive position and I think that we'll have good leverage. So those are high-level comments, and I just don't want to be more specific.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Would you be willing to comment if you're seeing from your competitors a greater move towards bundling and specifically, bundling some of the EP products along with kind of more traditional [indiscernible] cardiology? And does that trend, if it is happening, put kind of more pressure on you?

Daniel J. Starks

Let me ask -- let me defer to Mike Rousseau. I don't know if you have comments on that or not, Mike. Are you seeing any change in the competitive behavior?

Michael T. Rousseau

The market is consolidating to an extent, and we're working more closely now with systems across a broader base of hospitals. The broader your portfolio and your ability to translate that portfolio into a meaningful change, in other words, you can show clinical benefit and substantial economic benefit to the system, it's become more important. So I think having a broader portfolio in the current environment is obviously a competitive advantage.

Operator

Your next question comes from the line of David Lewis with Morgan Stanley.

James Francescone - Morgan Stanley, Research Division

This is actually James in for David. Just a question on margins as we go forward here. To the extent that we think that a lot of incremental growth is going to be driven by more value line products, how should we think about your confidence in sustaining gross and operating margins as those products ramp up?

Daniel J. Starks

James, let me ask, John Heinmiller, if you have any comments about gross margin and trend of gross margin.

John C. Heinmiller

Well I think that we give pretty clear insight into our gross margin here for this quarter, the -- and other aspects of the income statement. And we've given our guidance, and it's all very consistent and on track with our expectations. All of the growth opportunities that we're working on, we really don't think of them as participating in the value tier or having a particular price sensitivity that's not right in line with our current product line. And so we have -- all of these products are targeting very significant disease conditions and in many cases, also provide an economic solution that's better for the health care system generally. So we think we'll be able to command a price and a margin relationship that will allow us to have the resources we need to continue to invest in the research and development and continue to manage our program on a long-term basis.

Daniel J. Starks

James, let me supplement John's comments. I think you're specifically referring to the value tier in the low-voltage market that we've referenced, where we said that, in the past, we've been disciplined in our price and margin approach and walked away from business. So that's exactly -- your question about gross margins, with that example, is something that, again, we have worked on a high-technology sustainable solution to that. And so rather than just drop prices and have a weaker margin because of it, we disciplined ourselves to wait until we had a lower-cost platform, which is really the milestone that we've now reached, and then, work to provide devices off this lower-cost platform that would increasingly expand our ability to participate in the value tier of the low-voltage device market, while still maintaining our margin. So that's -- so there, it's all really good news. And then, on the topic of -- on the broader topic and to agree with the comments John has already made, we have quite a mix of devices. So at the same time that we talk about a new lower-cost, low-voltage device platform that we're starting to leverage product offerings with, we also have new premium-tier devices, the MultiPoint CRT-D, the quadripolar CRT-P. And so there's a mix of premium new capability devices, along with expansion on a high-tech basis into certain value tier portions of the market. And all in all, it's consistent with our expectation that we'll continue to maintain very good gross margin and one that supports our continued significant investment in R&D and new technology and next-generation devices.

James Francescone - Morgan Stanley, Research Division

That was very helpful. Just one other on a separate topic. In light of some of the recent court decisions out of Germany with respect to a competitor's valve product, have you reevaluated at all your strategy regarding Portico?

Daniel J. Starks

What I would say is that the litigation involving 2 other companies really doesn't have any bearing on us and doesn't affect our assessment of our own growth driver capabilities and our patent portfolio. So we are always reevaluating, so I just hesitate to give you a crisp no. We are always reevaluating, but that litigation really doesn't involve us, doesn't have any impact on us.

Operator

Your next question comes from the line of Brooks West with Piper Jaffray.

Brooks E. West - Piper Jaffray Companies, Research Division

Dan, let me start by asking the last question differently. Not thinking about it from an IP standpoint, but now with one of the major competitors off the German TAVI market, is there anything you can do to accelerate your plans, obviously setting the CE Mark timeline aside, but can you accelerate to take advantage of a potential opportunity there?

Daniel J. Starks

It's a good question, Brooks. To -- on the topic of can we accelerate, we already place high priority and have devoted every appropriate resource to advance our Portico program. And so we will continue to look for ways to improve timelines, but we really are already fully devoted to advancing our portfolio in a high-quality way and in a measured way, and working to make clinical experiences -- working to do everything appropriate to ensure that clinical experiences with our technology are successful experiences. And so that means, don't go too fast, provide a lot of training, be very disciplined in our approach, but still all surrounded by urgency. So there's really not anything that is -- that we're -- would come to mind that we can add to what we already have a full-court press devoted to advancing. On the topic of creating opportunity in the market in Germany, for example, in 2014, that may very well be the case that there is a new opportunity for us. But that -- and that will be something that we pay a lot of attention to as we create our 2014 operating plan, and it will be something that we'll take into account in that plan and something that we'll take into account when we give our guidance for 2014. But we work to be disciplined and not talk about any specific goals for 2014 until we have our operating plan in place and fully vetted, and give our guidance at the beginning of the year.

Brooks E. West - Piper Jaffray Companies, Research Division

Let me ask one on pacers, which is maybe the underappreciated part of your CRM franchise. You've got a steady cadence of new product launches, specifically with Accent MRI in Japan. And you're also looking at some pretty easy comps from the second half of last year. I'm just wondering, can the growth profile of the pacer franchise start to approach the -- I mean, certainly, it should increase throughout the year, but can it start to approach the kind of flat profile we're seeing in ICDs right now?

Daniel J. Starks

Brooks, I don't want to give any specific guidance beyond the high-level guidance that we have updated on the call this morning. But I'll just say that I think you're on a warm trail, but I'm not going to be any more specific than that.

Operator

And your final question comes from the line of Matt Taylor with Barclays.

Matthew Taylor - Barclays Capital, Research Division

I just wanted to ask a follow-up on the question on margins. This year, you're absorbing some foreign exchange. You have some benefit from some of the cost reduction programs that you've put in place. Can you speak specifically to those and talk about what kind of improvement you expect on a, all else equal, x FX basis from the continued cost reduction programs that you have in cost of goods and SG&A?

Daniel J. Starks

Matt, I think the answer is going to be no. But let me ask John Heinmiller. If you have comments, John, is there any additional insight you want to offer? I mean, we're not going to get into 2014, obviously, and it seems like that may be a little more of a 2014 question.

John C. Heinmiller

Yes. The only comment I would make is it's something that we really have built into our businesses, where we're just on a continuous track to improve. And so what's embedded in our analysis is the impact of those ongoing programs, and those will continue and we would expect to have programs that are going to have a positive influence on 2014 and beyond. But there'll be other items that we'll have to assess as we begin to prepare guidance for 2014. I wouldn't go really beyond that.

Daniel J. Starks

A little bit of additional color commentary that we can offer, Matt, is the change in our -- the organizational structure modifications that we made in the fourth quarter of last year and continued to refine here in the first part of 2013, these are profound organizational changes and it started with our decision to make -- at a philosophical level, to transition away from what has long been our commitment to a decentralized global structure to a -- with the idea that with the ongoing focus on cost and the need for productivity gains and cost reductions, that the list of pluses and minuses weighed in favor of converting to a centralized philosophy for -- and a greater focus on shared services in our key functions. And so the -- announcing the organizational change at the -- in the first phase there, and by that, I just mean announcing the job reductions and the specific other cost savings that we measured as we talked about the benefits of that restructuring in the fourth quarter of 2012, all of that was real. And then -- but at the same time, that was -- that just changed the conditions for us to continue to improve our cost structure going forward now, starting with a -- from a centralized perspective. So that's -- when John says that we're always working on, from a continuous improvement perspective, when we have a number of initiatives always underway, that's -- think of it that way, that our focus on continuing to reduce costs and improve our cost structure and maintain favorable ratios in the face of all of the global economic and health care reform pressures, now we're doing it from the perspective of a centralized structure. It gives us additional opportunities on the supply chain side, and there's a whole host of initiatives that, really, are opened up to us and facilitated because of our decision to operate in -- from more of a centralized philosophy. So there's a lot to it, and we'll -- and so we'll look forward to capturing the benefit again for 2014 and offsetting it against continued ASP pressures, augmenting it with the technology, the innovations that continues to -- that we continue to bring into the market that we think creates a new value proposition and deserves a new premium average selling price and really helps reduce costs, even with the premium average selling price, helps reduce costs with our customers. So it's all -- that's all the chess match that we'll -- the chess game that we'll continue to play. And it will keep a lot of people busy and we'll look forward to continuing to be successful at it going forward in the same way that we have been here in the past times.

And Matt, that will conclude our Q&A, and we'll turn the call over to you for your closing comments. Thank you.

Operator

Today's call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern today. The dial-in numbers are (855) 859-2056 and (404) 537-3406. And the PIN number is 97701528. Thank you. This does conclude today's teleconference. Please disconnect your lines at this time.

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