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Executives

Coleman N. Lannum - Vice President of Investor Relations

Jose E. Almeida - Chairman of the Board, Chief Executive Officer and President

Brian Douglas King - Vice President

Michael Tarnoff

Bryan C. Hanson - Senior Vice President and Group President of Surgical Solutions

Stacy Enxing Seng - President of Vascular Therapies Global Business Unit

Amy Wendell

Robert J. White

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

Joseph F. Woody - Former Director

Analysts

David R. Lewis - Morgan Stanley, Research Division

Jason Wittes - Brean Capital LLC, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

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

Brooks E. West - Piper Jaffray Companies, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

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

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

Matthew Taylor - Barclays Capital, Research Division

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

Anthony Petrone - Jefferies LLC, Research Division

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

Covidien plc (COV) Investor Meeting September 12, 2013 2:20 PM ET

Coleman N. Lannum

Thank you. Thank you very much, and welcome, everyone. I'd like to also welcome the folks that are joining us live on the webcast for the rest of this afternoon's presentations and session. I know it's already been a long day. I hope that each of you has gotten something out of what we've already talked about this morning. The goal is to expand upon that in the afternoon sessions and talk about it a little bit more.

I want to start off with a couple of housekeeping items. You heard the voice say earlier, but I will also reiterate, if you would please make sure that your BlackBerries, iPads, iPods and electronic devices are on mute, that would be very, very helpful. It will keep me from having to point you out if you're the one that is the offender going forward.

A couple of other things to think about. There was a lot of information that was shared this morning. The presentations, for those of you that weren't able to join us in the breakout sessions, the presentations that were given, as well as all of this afternoon's presentations, with the exception of the financial data, I'll talk about that in a second, are currently online at covidien.com, so you can pull down that information.

The financial guidance slides, along with the press release discussing some of our -- not only our guidance for 2014, but other items that we're going to be talking about after the close of the market, will be available after 4:00. The press release will be filed. We'll hand out the slides here. They will also be posted to the website at the same time.

Now for -- again, for those of you on the webcast who weren't able to join us live, we are going to be posting videos of the breakout sessions for both technology and market development under our website. That should be available by the end of the day today or tomorrow, at the latest, to help you understand some of the things that we talked about.

So today, we've been trying to answer pretty straightforward question. We recognize the fact that health care is changing. There are a lot of uncertainties out there in the end market. And what we're looking at doing is trying to help you understand some of the things that we've been doing to address that. This is the sixth time that I've stood in front of you for one of these Annual Investor Days. And I'm proud to say that for the sixth time, I'm able to tell you we are yet again the best performing large cap med tech company on an inception to date basis from the period of time when we went public to today. And it's something I'm very proud of, quite frankly, it's something the senior management team is very proud of. And it's not only am I proud of that because that's how our shareholders get paid, but quite frankly, it's how we get paid as well, the biggest part of our compensation, and we take that very, very seriously.

Yet at the same time, I also realize this is also a statement about what are we going to do for you going forward. The fact that we performed fairly well in the past is what it is, but we need to keep on showing you that we're doing the right things to keep that performance where it is.

So this morning, you saw a little bit of a taste on the technology we have going on, some of the market development projects we have going on. This afternoon, what we're going to focus on is the strategy around the changing market environment.

So let's talk very quickly about the agenda. First of all, you know we try to keep our PowerPoint presentations short, to the point and simple. So I'm happy to say this afternoon, the majority of the time we're going to be spending is on open Q&A with our senior management team and senior leaders. We'll, we're also going to talk about a couple of key themes that I think you'll enjoy.

First of all, in a moment, I'm going to ask Joe Almeida to the stage to update you on our strategic thinking and on recent events around the company. After Joe presents, Brian King, the President of our Emerging Markets business, will give you some insight on why we're winning so specifically in this specific area of emerging markets. We're then going to invite our senior business leaders to the stage and have an open forum of Q&A until just around 4:00 or so. We'll stop for a break at that point, we'll pass out the press releases with the financial guidance. And then, after the markets close at 4:00, our Chief Financial Officer, Chuck Dockendorff, will discuss some financial dynamics, as well as introduce our 2014 financial guidance.

We''ll finish the day with another Q&A session, with Chuck and Joe talking about the themes that you've heard throughout the day, and I would ask that you hold your guidance-related questions until that time, whenever Joe and Chuck are up here on stage. After the final Q&A session, the senior leadership team will stick around to answer further questions informally over cocktails.

Now continuing our past practice, we really would like those of you listening to us in your office or at home to -- on the webcast, to submit questions for management so we can partake of those throughout the day. If you would, feel free to submit questions by e-mail at 2013covgmail.com or you can tweet your question to #Covidienir. And we've already been collecting some of those questions throughout the day and we'll include them at the appropriate time during our Q&A sessions this afternoon.

Now I'm about to do something that's never been done before in the history of corporate America. I am going to make the forward-looking statement slides interesting and engaging. No I'm not, that's impossible. But bear with me just one second because I think this information is fairly important, so let me have your attention.

One of the things that we're particularly proud of in the way the communication has been managed over the last several years is that we spend a lot of time thinking carefully about our guidance, about helping you understand what's driving the business. We put a lot of thought into the numbers that we're going to be talking about. And we really do try to make it fair and balanced. We try not to give an overly optimistic view nor an overly pessimistic view. But realistically, sometimes things change. Take a look at this slide. There are a whole bunch of disclaimers all over it. And again, a whole bunch more on this one as well. Our attorneys spend a lot of time thinking of all the different things that could change and to help you understand that they could change, but it's not an all-inclusive slide. A lot of things are out of our control. It's important you understand that even if our expectations change going forward, and even if they change materially, we're expressly under no obligation to update that guidance at any point in the future.

So let me summarize. In a moment, you'll hear from our CEO and other senior leaders about the company strategy. You've heard about some of the products from our technical experts. You've seen some of the early stage growth opportunities from our clinical team. You've seen some of the technology enhancing patient safe -- the technology that enhances patient safety from world-class key opinion leader or physicians who use our products every single day. So we've got leaders, experts, senior management, clinical team, Investor Relations, physicians. Oh yes, this is one more important constituency, I think, you need to hear from.

[Video Presentation]

[Audio Gap]

Jose E. Almeida

Our 200 most senior employees we have in Boston in about 2 weeks. As a matter of fact, a lot of these meetings is going to be also presented to them because this is part of our strategy. Before we get into the strategy

[Audio Gap]

Let me spend a moment and speak about 3 things that are very important to our company: Ethics, integrity and the quality of what we make. There's been a lot of conversation about FCPA issues in China, Russia, Brazil. You hear that a lot and read them a lot. And it was rejoined in the last 2 months. Covidien has an unparalleled effort in creating an environment where our employees are trained and they practice ethical behavior. There's no good business where there's no ethics behind the business of our products. We're very proud to have pioneered significant amount of changes in how we do business in many countries in the world. We were early adopters of the code of Avimed [ph] but not only we adopted for the U.S., we moved that code and we have it on a global basis.

Covidien provides a significant amount of training for our sales reps in every part of the world, telling them what is right and what is not right. We also have compliance committees and grants committees that absolutely filter any kind of disbursement of money that would go to a society or training of physicians. Covidien does not permit, or it does not pay, for physicians to travel from their country of origin to attend any third-party conference in a different country. We had -- we stopped doing that close to 4 years ago, because we thought that some of the practices were not aligned with our code of conduct and how Covidien wants to do business.

So we have 38,000 employees around the globe and I can tell you that we do everything we can to make sure that we're doing the right things for our customers and doing them in an ethical way. We also have patient safety at the top of our mind all the time. Quality of our products is the most important thing that we have. It's not just about the reputation of the company, it is about the patient that is receiving their treatment. And not having adherence to quality will create an issue in safety for those patients, and we feel very proud about our track record.

Once we get those things aligned and we are on the same page with our employees, we can now talk about strategy. We have set a lofty goal to double our intrinsic value in 5 to 7 years. An intrinsic value is our discount cash flow now using our cost of capital. And this is a lofty goal that to achieve it, there are 3 things that we're going to have to execute, and this is the message I want to leave with you today. We've got to grow above market. We've got to drive operational leverage and deploy the capital in a way that reward you, the investors, but also allows Covidien to invest strategically into M&A and other areas of the company.

So we're going to base our conversation and our strategy on those 3 fundamental points that we'll deliver top shareholder return, top quartile total shareholder return that Covidien is delivering today. It's one of the most difficult things to get consistent -- position the company at the top quartile of total shareholder return, but we're going to try our best and we think that by giving the company a vision where we're going to double that in 5 to 7 years, we'll have a higher probability of being the top quartile. Therefore, reward you, the shareholders of the company.

We will talk about the environment. The environment has changed significantly from 12 months ago. So how do we achieve those 3 levers of value in the current environment and what we're thinking about the future environment of health care? Therefore, what is the evolving strategy that makes us deliver on those objectives?

There is a significant difference between emerging markets and developed markets in terms of geopolitical differences and health care environment. It's a dichotomy that, at our company, we have clearly understood because projects and long-term investments have different characteristics. We could sit here today and invest every dime of the company in emerging markets because the return on investment is very quick, it's about 18 months. Well, we've got to be able to balance the growth in developed markets with the acceleration of the emerging markets.

In our developed markets today, the tailwinds are great still. And they're encouraging because we still have the demographics behind us. You have aging populations in Europe, U.S., Japan, Canada, Australia, they all have people who can pay for health care more extensively and want better outcomes from health care treatments. We have, in the U.S., the Affordable Care Act and Patient Rights Bill, that will afford more people health care. Also there, we have an Immigration Bill that if it goes through congress, we'll have another 10 million, 11 million people come into the system.

There is a significant momentum behind the economical and clinical advantages of minimally invasive procedures, from laparoscopy to endovascular procedures. And that's a great opportunity because you have the 2 major thrist of value behind them. However, the headwinds are different and they're changing very quickly, and we saw that in the last 12 months and we're going to see it in the next 2, 3 months with new patient population coming to the health care. I can tell you the price pressures are not very different than we have before. We've been speaking to you about price pressures for awhile. They're not very different, and we are comfortable dealing with those challenges in the developed markets. I'm not saying that is easy, they are not easy enough, but this is the devil that we know.

The economic austerity in Europe is the devil we know. We know how to deal with that. Chuck is going to speak a little bit more about how we are going to create leverage in Europe to be able to take advantage of the markets that are growing in Europe, as well, do it at the lowest cost possible. A lot of the changes that you're going to see in the U.S., I don't believe they will come right away from the Affordable Care Act. I believe they will come from corporate America. From the companies like Covidien, the companies that -- the large banks and the large institutions, the industrial companies that are in the U.S. Because the cost of health care and increasing health care are enormous. It is, for Covidien, one of the largest line item increases that we have in our company. It's a percentage of the total. So you're going to see a lot of changes being forced through companies, even before the Affordable Care Act can really take effect and you see the effect of the exchanges, and more groups, more consolidation of hospitals and groups, you're going to see a great deal of change coming from companies, and if you haven't seen that already coming from the companies that you work for.

When it comes to emerging markets, the tailwinds are there still. Brian King is going to speak to you today about what a great opportunity we had and what more is in front of us.

I was listening to the news about Brazil the other day. Not the news that we have here, but the news in Portuguese, which were saying that the second reason why people took to the street in Brazil 2 months ago was because health care. People want more health care. They want more access to health care. In turn, the government went and start importing doctors from Cuba and the Northeast, in more regional -- more rural, regional areas of Brazil.

So the need for health care is a bit independent of the fluctuations of the GDP growth. You still have countries that have very low spending, and that is the opportunity. With the opportunity comes more nationalistic views of rewarding local industries for participating in health care in the health care industry. So places like Russia, places like Brazil have laws, in Mexico, that will reward companies, which are making products in those countries. And that is something that we've got to think about and take advantage because it can be a headwind, but it can really turn in its head and becomes a tailwind for us.

The regulatory processes are cumbersome, but it's upon us, Covidien, to become better in dealing with governments across the globe. These are difficulty that we encounter like any other company, and it's about execution. So despite the headwinds, the tailwinds are so, so positive. That is -- would be irresponsible from us de-accelerate instead of accelerating investments in emerging markets.

Based on these dynamics I just spoke about, why do I think Covidien is well-positioned? We hold #1 or #2 position in more than 90% of the products we sell. We don't have any products or classes of products that account for more than 5% of our sales. So in terms of risk, there is a lower propensity for risk when we don't have high concentration of revenue. We also have a high level of intellectual property. Covidien was just listed #67 on Forbes' 100 Most Innovative Companies in the World. We're very proud to be #1 in the Wall Street patten board of the Most Innovative Medical Device Companies in the World. So that kind of position give us the assurance that we are using the allocation of capital to really good means. In creating that advantage in IP that brings Covidien to a differentiated position.

Our products are not capital-intensive. There are a few of our products, and generators and ventilators, but that is a small percentage of our sales. And when you think about where we compete in a world that is still driven by DRG, soon to eventually become more on a capitation model. We are a small percentage of the overall cost of the procedures for the most part.

So we're confident the company has the foundation to deal with these challenges and changes that we're going to be facing in the next few years.

But what is the strategy to deal with those challenges? For us, to double this intrinsic value in 5 to 7 years. We're going to be deploying 4 major strategic blocks. We're going to go away from just thinking about innovation that equates to product innovation and technology innovation. We're going to broaden their view. The technology is important, but there's more than technology. We're going to be executing on a portfolio that is driven by customer needs. We're going to double down in emerging markets for the future, and we're going to drive operational leverage. So let me go a little bit more in detail in each one of those. Our innovation has to go beyond product. So I want to take the opportunity to speak about 2 of them: Customer-focused commercial models and new value-added offerings. And I think if you had an opportunity to participate in the morning sessions, you're going to get quick -- very familiar with what I'm speaking here today. We deploy a model today, in most part, that is deployed by most medical device companies. We've been a little ahead of the curve in how we look at our franchises when we deal with our partners, mainly large partners in the U.S. and Europe. We need to advance that a step further and become one Covidien to our customers. We need to improve the sales coordination but also align the resources to the need of the account. In any given time, you have every franchise of Covidien at a hospital. Is this the best deployment of the company's expenses? Is this the best interest of the hospital? How do we bring both of them together? And we drive collaboration across the company. Because sometimes, we're missing the collaboration, we're missing that opportunity despite the fact that Covidien has one of the best corporate sales groups in the industry. By doing that, we will continue to grow above market.

So let me give you an example. We're launching 5 to 6 pilots between Europe and the U.S. where we're taking a different approach how we sell our product. And being able to bring economic advantage to the hospital system, as well as a pathway for Covidien to have technology implementation in those sites, which sometimes is very cumbersome. So there is a large customer of ours in the West Coast that we change how we go to market there. We don't have as many sales reps there, we have more specialists. A different mix of skills, and we've been very successful there. So we're going to go to the pilots. At Covidien, we do everything on a test and learn. We do it fast, but we don't like wholesale changes when it comes to dealing with our customers in our phenomenal sales force. So we do the pilot. We understand the hurdles, the objectives. If they're achieved or not. If we got a positive go on that, this is going to be a great ability for Covidien to also leverage the sales force and improve its efficiency on the double-digit level.

When we look at solutions for our customers, they are completely different than product solutions. We have 2 to discuss with you: One is project cares. And that's when you work with a customer, a hospital, to understand variability in procedure. I'm an engineer by degree, and in my early days, we designed processes. And the largest driver of cost in any process, in manufacturing or anyplace else, is variability. And when you're looking at very expensive environment, which is the acute care, variability can bring a significant amount of cost into that organization. We, through Dr. Michael Tarnoff's organization and our Endomechanical and soft tissue repair organization, are coming very close to some institutions to be able to help them change. We have a group in Covidien of health care, economics and reimbursement that is making -- that has the ability to deal with data mining, and be able to help accounts. So right now, we have one account that is being tested and there is about 15 hospital systems that if this works, we're going to continue to help them.

Another way to help a hospital system is to create an economical benefit for adoption of technology that will provide for better medical outcomes. So let's speak specifically about minimal invasive surgery. And if you had that opportunity to go and participate in the session today, you'll understand that it's pretty straightforward. But still, to this date, last in the U.S. and tremendously overseas, there is a great difficulty in convincing hospitals of the economical value of that. So we decided to take a different approach. We launched a pilot in 6 different countries with a scope of procedures that are very specific, hernia, colectomies or colon -- or deceases of the colon, and creating different protocols by country and hospital. And now, we're having success in all those pilots that launched. We're working very hard with the government of Brazil for approval of bariatric surgery and having that being reimbursed by the public sector instead of -- because the private sector is already reimbursed. So we have some good momentum there. So we decided to move from the small things, a very small pilot here and there, to a larger more comprehensive approach that is cross country.

So these are examples of how Covidien is redefining the concept of innovation. But we can't forget about the technology innovation. Covidien has 4 basic pillars when we speak about technology innovation: First of all, it has to lower the cost of care with better outcomes. So today, you had an opportunity to see superDimension, either here at our product display or upstairs. That technology is really life-saving but also, it provides a huge cost differential if the screening is done correctly. So what is the part that is missing in that technology? The therapy, and that's our next frontier. And we're going to be next year speaking to you, probably by this time, and we'll be displaying that technology. We've got to be able to lower the cost of goods when we design something. We launched 2 ligature products in June, where the cost of goods were reduced in excess of 50% and they are displayed here today. With better functionality, those are the 2 best selling ligature products that Covidien had. We've got to be able to lower the development cost. We're 5% to 6% R&D company. We don't plan to be a 7% and 8%. So how do we get more throughput in our research and development groups? We do it by specifically having products developed in Asia, in Australia, in Singapore, in Hyderabad, and Singapore -- Singapore, Shanghai and Hyderabad in India. Those are 3 centers and now are integrated in the Covidien R&D pipeline and we have products like the last pillar of the strategy for innovation and technology, which is East to West. What you see is actually a true depiction of a generator that eventually is going to make to the doctors' office in non-acute care in the U.S. It's a global product being developed, where? In China.

So we have now the ability to get our technology on a global basis and have that done in multiple parts of the world, and have leveraging. We're leveraging the cost because we think that between 5% and 6% is where Covidien should be in research and development.

Let me bring a little bit more light to what we did in 2013. In Endomechanical, the significant amount of pressure in trocars, we continue to augment the product line with launches. In Medical Supplies, we're able to improve even better -- even more, our kangaroo enteral feeding pump. We are 75 -- we have 75-plus percent of market share, but we continue to innovate to be able to give the solution to our patients at home who depend upon our product.

In our Vascular business, we went to a second generation of Solitaire. We also did not stop at the development of new stents. Despite the fact that we have a very, very strong commitment to drug-coated balloon, we still think the development of the stents is important. We're still deploying capital to that development. If you'll notice in our results, our hernia repair business has recovered very nicely. And the reason why is because we launched -- the launch of new products. We also were able to change the momentum on fixation where Covidien is a market leader, and now we have positive momentum on that with positive growth.

Oximetry & Monitoring. Covidien has very attractive line of parameters with innovations of products we just launched, we're able to capture more accounts.

In Energy, I just want to mention that we continue to have a such in attractive pipeline. So all in all, more than 25 products in 12 months, with more than $150 million in sales to our top line.

What is the future of our pipeline? So more specifically, our Endomechanical, Energy and Soft Tissue Repair has closed to 30 new products in the next 30 years coming to the market. We are not satisfied that we have a strong position in laparoscopy stapling in Energy. We've got to make sure that we are 1 or 2 steps ahead of the competition, and we will. With more than 30 products in Vascular, I feel highly confident that our veinous vascular, our neurovascular and peripheral vascular businesses are taking care but continue to deliver innovation to a very competitive marketplace.

Oximetry & Monitoring. If I showed you this chart 4 years ago, 5 years ago, it will be empty. Bob White has done a wonderful job getting that R&D group getting involved to really populate and put some real good innovation on the board. And what makes me so happy is that now, Brian King will be able to talk about the product pipeline coming out of our emerging markets.

So as we make those bets in innovation, we look at nonproduct innovation, product innovation, technology development. Covidien is moving also to very strategic investments on markets that are greater than $1 billion. So you had an opportunity today to see the interventional lung. You saw a little bit about neurovascular. We have a significant amount of work going into advanced MIS. We're not going to be discussing in a lot of detail. Barrett's esophagus is our play to continue to go deeper into the G.I. space. So these bets are necessary to be able to add to the innovation as another stepping stone for allowing us to double intrinsic value in 5 to 7 years. But there's more, that alone will not do it.

With the changes in the marketplace, primarily in the U.S. and Europe, what is happening is that we've got to own a procedure or a specialty at the acute site level, non-acute, all the way following the patient into the home. So you will see us deploying M&A, capture for M&A to go after good enough products, to compliment what we have. We've got to be able to deliver a solution in a capitation world that today, may be not necessary. So let me give you an example of our peripheral vascular business where we're now able to offer a full solution for a physician-owned lab for a periphery disease of the peripheral arterial system. And we are in a position to offer that because we have the portfolio. So Covidien has a great deal of advantage already in, in the ownership of those either procedure or the specialty. We need to augment that, and that's where you're going to see some M&A.

So I think this is a good moment for us to discuss our thoughts on M&A. Always opportunistic. Our preference to the other 50% of free cash flow that does not get returned to our shareholders, is to go against M&A. If we can't use an M&A, we'll return to you. Our preference is to create long-term value through M&A. We will expand into these adjacencies. Not only technologies, but also products that will help fill the gap and help leverage our sales force. We are open to larger acquisitions at ev3 size or larger. But like I said, it's opportunistic and we are looking at a lot of different spaces and I'm happy with what's coming out of our business units on our corporal office in terms of opportunities. We currently are looking at couple of opportunities in emerging markets. It'll take a little longer, but they look -- it really look interesting.

So Covidien's capital allocation is strategic and we prefer to do an M&A. If we don't have that opportunity, the other 50% is now going back to you in form of dividend and share repurchase. We'll turn that other 50% back to you if we don't find the targets, but we're working very, very hard to get there. But I want to tell you that we have an absolutely commitment to your money. What I mean by that is that we will not acquire growth in detriment of our returns. And our returns are set in place so we have the ability to improve our ROIC over time, which is one of the levers of creating a better cash flow, intrinsic value, total shareholder return.

It is important to underscore, emerging markets is a $6-billion-plus business. We are growing double digits very fast and we're going to continue to invest there. That's the commitment of our company to our shareholders.

So let's talk about the last pillar of our strategy. Let's talk about operational leverage. Covidien has offices all over the place. We are a global company with a business in more than 80 countries. We're well-established. We've got to draw more synergies from our ability to do business in Europe, and U.S. and other parts of the world. Now is time to deploy about $350 million to $450 million in restructuring programs and Chuck is going to get in more detail, but they will affect SG&A through leverage and back-office systems, the ability to become more productive in the front and in the back office. We also will deploy cash to continue to leverage our footprint, manufacturing footprint, and the distribution footprint. We are really good at doing that. There are plenty of opportunities still for us. And on top of it, we are very focused in creating local manufacturing in emerging markets. They have the ability to service the markets and augment what we have today in Malaysia, in Thailand, in Shanghai and the rural part of Sao Paulo, Brazil. There are more opportunities and we need to capitalize on that. We have a very strong operations group at our company, and this has been our sweet spot and we're going to continue down this path.

So I hope I was able to bring together to you that for us to continue to deliver total shareholder return at a higher level, we need to double our intrinsic value, our cash flow in 5 to 7 years. To do that is through accelerated growth above market, drive operational leverage, and giving the allocation of capital between shareholders and M&A a fair shot.

The conversation we're having here is about 5% to 10% of the work. 90% to 95% of the work is execution. It's all about our wonderful sales force that is executing every step of the way across the globe. Our operations group, our back-office, this is about our leaders in our company. And we have proven set of leaders that has -- that have the ability to deliver on these targets. We've done before and we will do in the future.

Now it's my pleasure to introduce Brian King, our President for Emerging Markets.

Brian Douglas King

Thank you, Joe. Good afternoon. It's been a long day? Anyone need a coffee or anything like that? It's -- I'm going to pep up the group just a little bit. My name is Brian King. I'm the -- I've been managing the Emerging Markets business for Covidien for 3 years now. And today, I'd like to have a bit of a discussion with you and talk about the philosophy of what we think is required for success in these emerging markets, as Joe pointed out. We've seen success and it's important that we get through and talk to that point today. We also want to discuss the opportunity, in general, not just the tailwinds. We'll talk about some of the headwinds as well. And we'll talk about our place and where we are from a present days perspective, what we've achieved to date. And also, we'll talk about the investment strategy and our strategy in total, moving forward. I'd like to end a little bit

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differently. I know you said in these Investors Days, and you hear every company talk about strategy and talk about emerging markets. I'd like to end the discussion today with a little discussion about what makes us different.

[Audio Gap]

And we employ local leaders, strong leaders in the regions with a focus on 2 things:

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Environments, regulatory hurdles, and we need to be dynamic and agile as well. We also have a laser focus on key partnerships. What is a partnership? We'll talk about that today. Partnerships with government, partnerships with clinicians in the market we serve, as well as we'll talk about relevant innovation, why it's important to us. Not just innovation as a product, but as Joe suggested, business model innovation. I'm going to give you a case study and I'm going to talk about both product and business model innovation. And underlying everything we say today, and I can't say this enough, is the importance for us of managing an ethical business and our continued commitment to ethical business.

So I'd like to take you back to 2009 when I was in the conference room in Shanghai with Joe and Chuck, and we were talking about an industry practice at that time. And the industry practice involved multinationals paying to send clinicians overseas to third-party conferences. And what was happening from time to time was some of these clinicians were taking side trips, and they were going to places that really were not places we intended them to go, Las Vegas, San Francisco. We realized as a company that we were not on the holiday planning business. That wasn't what we're about. We want to train clinicians on the efficacious use of our product. And if they're serious about partnering with us, to improve access to health care, then we're great partner to have. But holiday planning is not what we're about. We made a decision in 2009, the only multinational at the time, and we ended the practice. Joe referenced it in his speech. But it was a bigger deal than that because you can imagine the sales reps, you can imagine the sales folks in my region at that time I was running Asia, they were worried. They were worried they were going to put ourselves at unleveled playing field. Well, that was 2009. We've beaten market growth every year ever since, so that hasn't happened.

I'd like to talk a little bit about the opportunity. Joe mentioned that we saw this opportunity some years ago. We started this organization called emerging markets with a singular focus on capturing the opportunity. And we did this 3 years ago. For 4 years, almost 4 years prior to that, I was in Asia, living in Asia, managing the business there. And we really wanted to have a singular focus, an organization throughout the 3 regions that we call emerging markets. You can see around the screen, Latin America, Eastern Europe, Middle East, Africa, as well as Asia.

Now we all know the opportunity. We have 85% of the world's population, 6 billion of the 7 billion plus. The market is growing. When I first showed this slide, it was about a $900 billion market for total health care, now it's $1.6 trillion. It's going to more than double in 10 years, substantial opportunity. However, when you look at the market, it spans the entire life cycle. We have very developed markets and very emerging markets.

On top of that, the GDP, as a percent of health care, is right around 6%. And the per capita income is around USD 11,000. What does that mean for us? Well, from my team and Covidien, it means we have an obligation. We have an obligation to increase access to health care, quality health care. And we take that very seriously at Covidien.

Recent performance has been very strong. Given the scope of the opportunity, one of our biggest challenges is how do we prioritize? How do we manage from day-to-day? The opportunity is immense. And what we have done early on as a team is a significant focus on our BRIC countries. And the BRIC countries have done very well for us. When we think about strong growth, BRIC growth is around 25%. The BRIC amount of sales, the revenue from BRIC, is around 40%. When I first started in the emerging markets back in 2008, that number was about 20%, 25%. So as a percentage of our total revenue, it's expanded greatly. And when we look at how we we're doing with some of our major markets, Brazil, we're growing at 1.5x the market; India, right now, were going 2x the market; China, we're growing at 3x the market; and in Russia, we're growing at 7x the market.

So initial focus on BRIC and BRIC has been very successful for us, but that is not the only show. From a non-BRIC perspective, we have some tremendous opportunities in very strong markets. When we think about South Korea, our 3rd largest market, and we'll talk about South Korea in a little bit. When we think about Turkey, when we think about South Africa, when we think about Chile, think about Israel, these are all significant markets for us where we have a lion's share and a good market share and they're robust. And we want to continue to focus on those in the next part of this investment phase. As Joe referenced, the non-BRIC growth is around 10%, it's robust.

We've also -- as you can see, we've hired over 1,700 full-time employees in 3 years, most of whom are on sales, about 300 R&D engineers, many in key functions that we need to build out this infrastructure. You don't want to build a house on sand and we don't do that, we build it on a strong foundation. But more important than the people we've hired, according to sales data that we have on the industry, we're retaining our talent 50% better than the competition, 50%. So these are key takeaways. Ultimately, it's our ability to execute that differentiates us.

I wanted to show this slide, because I get asked often, what are you doing? Could you move faster? How are you doing in emerging markets? What more could you do? Can Joe open up the checkbook? Well the checkbook's been opened. We have invested significantly, and I wanted to show, this is a slide of both development centers and innovation and training centers. We have invested well over $400 million in 3 years, and we have built this infrastructure in about 18 months. All right? 18 months. And we'll talk about some of these centers, but this gives us a great expansion. We'll talk about why we are building training centers. Because training is very different in emerging markets right now than it is in developed markets. The needs are different. We need to be there to expand access to health care, to expand access to training. To move from open to minimally invasive surgery. And these are all important, so the infrastructure has been critical for us. And the other theme I'd like to point out, we have a nice balance between the 3 regions I referenced: Latin America, EMEA, and Asia; Asia being the one where we probably invested the most.

I wanted to spend a little bit of time on Korea, because just last month, I was blessed to be able to go to Korea, visit with the team, and open a brand-new innovation and training center, the only one of it's kind in South Korea. But why do we built the training center? Because the laws in South Korea have recently changed, and no longer can clinicians go overseas for training, it's against the law. Korea, South Korea, being one of our strongest markets, it's our 3rd largest market, we wanted to ensure that we met that need and we met the clinicians' need and then with training need. And so what we did, as a group, working with corporate functions, working with the business units. We got together and developed a plan. And from the plan, to groundbreaking, to opening the center and training clinicians. We did this in 8 months. All right? For those of you who asked, can we go faster? I'm not sure. But 8 months. We have competitors who have talked about doing this for 5 years. And in 8 months, we put this up. It's a beautiful, state-of-the-art facility, 11 operating suites, ICU lab, human simulator. To only one of its kind in Korea.

The other thing is, we're going to open 3 more of these in 2014 alone. Mumbai, India; Istanbul, Turkey, as well as Sao Paulo, Brazil. So now we have a chance, I wanted to talk about relevant innovation as it refers to product. And I don't want to just talk about product innovation. I want to talk about it in regards to speed. Because in our world, with the regulatory hurdles on class 2 and 3 devices, the need for speed and the need to get into the market quickly is very important. As you can see, in 2 years, in 2 years, we put up 2 development centers: One in Hyderabad, India and one in Shanghai, China. We have hired 300 qualified engineers, we have launched 4 products, 1 major product, which you see on the screen, and we've built a robust pipeline of 12 products. We did this in 2 years. Many companies take 2 years to develop a product. The same amount of time, when we look at the class of trades, 10 of 12 pipeline products that we have in the pipeline are going to come from classes of trade where we expect 70% of our growth, Endomechanical, Energy and Vascular. So strong product growth, strong products and really what we're looking at, lower cost, enhanced effectiveness and time-to-market.

The first major product you see on the screen is Reliamax. It's an open reposable stapler. What does that mean? It's reusable, with a disposable cartridge. It has our special DST, directional stapling technology. It lowers the cost of procedure, it allows us to compete effectively and it's been a success.

I also wanted to talk about innovation, outside of product innovation. I want to spend a little bit of time about innovation as it refers to training.

All right. Not everyone can go to a training center at a major city. And these are pictures of a new mobile training unit that we just launched in May in Brazil. I'm very proud of the team in Latin America for putting this together and making this happen in a very quick order. Now, this mobile training unit has been applauded by governments and industry alike. In fact, Joe has received a call from the embassy in Brazil thanking him for that effort to enhance access to health care in Brazil. We will have traveled 4,200 miles by the end of the year, we will have visited 13 cities, and we will have trained over 400 clinicians. This is a picture of our mobile training unit in front of a hospital in a rural section of Brazil. And when the embassy calls and thanks you, that means something to us. That means we're taking access to health care very seriously.

I also wanted to reference on this page. Our work to expand reimbursement. Currently, MIS procedures in Brazil are not reimbursed, and we're working with clinicians like Dr. Baranco [ph] in Brazil, to enhance the data set. Because why is MIS important? Minimal invasive surgery, you guys saw the clinic today. It reduces the chance of pain, reduces the opportunity for infection, it reduces scarring, you have less time in the hospital and overall, it's a lower cost burden to the health care system. So for us to ensure that we're enhancing reimbursement, in places like MIS is very important. It's critical. In fact, the opportunity of moving more procedures from open to MIS, far outweighs any geographic expansion for the Emerging Markets business. And this is where we are working with Bryan Hanson and his team to ensure that takes place.

We talked about partnerships. We've talked about innovation from a product perspective. We've talked about innovation from a business model and training perspective. I wanted to just have a dialogue on partnerships for us. What is a partnership? It's a 2-way dialogue to ensure you're working to solve solutions, and solutions to the critical problems. And we're having these dialogues now with governments around the world and clinicians around the world. We're building out case support in infrastructure, government, regulatory, clinical affairs. These are all essential when you're talking about market development and enhancing access to health care. We're providing better access to advanced surgical training, so with the last 2 or 3 slides that you've seen. And recently, we had a tour of the ASEAN Ministry, the Southeast Asia society and we had 10 Ministries of Health. And they went through and they visited 1 of Stacy's plants in Irvine, California. And they were so impressed while they watched our pipeline, the pipeline device for aneurysms. It's a flow diversion device. They were so impressed with that technology that one of the ministries of health said, what happens if I have an aneurysm? And before we had a chance to answer the question, he said, "I know what happens. I need pipeline. I want the pipeline device in my country." And this is why it's important for us to partner. This is way it's important for us to work with governments around the world, because we have clinically relevant, great products and the world wants these products.

So I know you're waiting for this slide. What this -- it's like, all the heads came up. What does it mean from a numbers perspective? Well, we have had strong growth, and we've had strong growth for years. So we are growing at 1.5x the market. The other thing you'll point out in this slide is we have a nice balance of the 3 regions from a growth perspective and a revenue perspective. 40% of our revenues come from the BRIC countries. I mentioned back in 2008, that was in the mid-20s. By 2016, 50% of our revenue will come from BRIC and by 2018, about 60% of our revenue will come from BRIC.

In 2018, China alone will be a $1 billion business. China alone, will be a $1 billion business for us. So we know we need continued and steady investment, because my team has been around, and has been working in this environment for some time, and we understand what is needed just to beat market. To be at market is an investment. To beat market is significant investment. But we're not just looking to double revenues. You can see by 2018, we expect to be over a $3 billion business. We intend to double profits as well. And we'll talk a little bit about that on a future slide.

Overall, we will look as well to continue to leverage our investment, to continue to increase our sales force productivity, to continue to enhance reimbursement around the globe, to continue to enhance how we go from market, our operations around the globe, localizing manufacturing where required. Recently, legislation was passed in Russia. Also, margin enhancement legislation was passed in Brazil. Both contingent upon us making the product in those markets, and we're working with our group, and our corporate group and operations group to make that happen.

So interesting, this slide. We call it the wheel of cheese, basically, but this really would be really no different if Joe showed it then when I'm showing today. The revenue and where the revenue comes from our company is very similar. It's not that much different. We have strong growth in all of our classes of trade. What is different is this: When we look at mature products in developed markets, those are growth drivers for the emerging markets. When we talk about sutures, when we talk about electrosurgery, hand instruments, those are all growth drivers for the emerging markets. So the life cycles are different. Joe mentioned a dichotomy, it's significant. And we have to be careful to measure them in the course of emerging and developed markets. The other thing I'd like to point out on this slide is the beauty of our breadth of class-of-trade, and the products that we offer is this: It allows our local leadership, the strong leaders we talked about in the second slide, to ultimately come up with the best solution for the local market, all right? They come up with the optimal solution to go to market, and that allows them to have that power because they have the breadth and strong portfolio.

So our investment strategy. We feel it's a low-risk, high-margin return, and a high return for the opportunity, both from a cost standpoint, investment standpoint and resource standpoint.

What is the investment strategy? Obviously, we're seeing the opportunity. The opportunity is significant. It's more about how we prioritize the opportunity. And we have done that for 3, 4 years now, we're going to continue to do that. The investments are balanced. We have the balance, the scale of the organization and prepare for the future. But I'd like to really quantify the opportunity in 3 ways: From a quick payback perspective, Joe mentioned, and we talked about the 1,700 full-time employees we hired, the commercial expansion has been fantastic for us. Ensuring that we are in the markets that we serve, ensuring that we have competent, well-trained sales reps, ensuring that our products are offered, that has been quick return for us. The second category, more about the medium -- midterm returns. Key infrastructure, building out regulatory affairs, government affairs, medical affairs, clinical affairs. These are critical when you talk about market access, developing the market and expanding the market, that is where we need to be, and that's where we're investing.

Longer-term, we have some great strategic bets as well, these pay out in the longer term. Like our tailored product pipeline that I showed you, the 12 products that we have in the pipeline. We also are looking at different segments like the value segment. The value segment may be called the Tier 2 segment, and public markets like South Africa and Brazil, it's the public market. When I say value segment, it's synonymous with both of those, okay? Now you may ask, why are you looking at the value segment? We're looking at the value segment because it's a growing in excess of 20% in many of our key markets. It's underserved, the people in those segments require health care, they have health care needs and we intend to serve that market. We want to better serve our customers there, and so we intend to participate.

So in closing, what makes us different? There's a real delicate balance between the speed and agility of startup, and the scale and sophistication of a larger organization. We have worked hard to refine that balance, and we think we're in a very good place, but we continue to evolve.

And I want to take us back to 2008. In 2008, you all know very well what happened in the markets. The U.S. market and Western Europe were in crisis. The stock markets basically crashed, housing's -- the housing sales went down, even procedure volume went down. And so what happened? Every multinational that had global expansion, or thoughts to global expansion, moved to emerging markets. That also happen to be the same year Joe asked me to move to Asia and take over the Asia businesses.

So when you look at these Investor Relation days and you look at the investor presentations, understand that every major company that had global expansion in mind in 2008, if they didn't already have their sights on emerging markets, they sure did at that point.

Now fast-forward to today and what makes us different, and why we can show the results we showed? It's the ability for Covidien to execute. It's our ability to execute daily, weekly, monthly and year-after-year. And that's what makes us different. So ultimately, what we say is we focus on what we can control, we do what we say, and we are well positioned for the future. Thank you. I'd now like to bring Cole in and back to the stage. Thanks, Cole.

Coleman N. Lannum

Thanks a lot, Brian. Thanks, Joe. I'll ask the business presidents to please join me on stage, as well as Dr. Tarnoff. While they are coming up to the stage, just a couple of things to start off with. First of all, if you would please, hold off any kinds of guidance or financial numbers until -- or questions, until after Chuck's presentation in a few minutes. Secondly, this is being webcast, very important that we get your voice on the microphone, out of respect for the people watching on the webcast. So what I'm going to ask you to do, if you please raise your hands. I'll give you in order in which we're going to go as the mike runners come to you. So we're going to go start with #1, and then we'll go to #3. Go ahead, David.

Question-and-Answer Session

David R. Lewis - Morgan Stanley, Research Division

This is David Lewis, Morgan Stanley. Maybe a quick question for Mike, I don't know who wants to take the second one. But for Mike, advanced MIS, and I know Joe already gave the disclaimer, now begin to trend this detail, but anything you can offer under what advanced MIS means to give you, even considering that MIS is a big driver in the existing franchise, so advanced MIS is sort of advanced how much you already do. So how do you think you've got advanced MIS. Anything you can provide there would be helpful.

Michael Tarnoff

Yes. So I can maybe calibrate the whole opportunity and the training opportunity, because we segment it by product and procedure. So what Brian profiled in emerging markets, in the form of innovation centers, heavily focuses more on the basic side of things. I would not call that advanced MIS, I'd call that more the migration of surgeons from legacy approaches like suturing, endostapling, hand-held devices like Reliamax, what you saw there. In markets that have already adopted basic approaches to MIS, basic laparoscopy, which could include portions of emerging markets and most of the developed markets, then you're talking about surgeons taking skills to another level. So tackling basic procedures like gallbladders, evolving into things like bariatric surgery, approaching things from right collectomies to more complex signora [ph] sections of the colon, and tackling more and more advanced types of techniques and procedures. And so, that way you approach those needs is going to be very different. What we profiled in the session, talking about hands on learning and proctoring is definitely more on the procedure side and more on the migration, more from the open approach to the minimally invasive approach.

Jose E. Almeida

May I just ask Bryan Hanson to complement that answer with some technology transfers.

Bryan C. Hanson

Thanks, Joe. Yes, the -- I look at this as phases. We are absolutely committed, as an organization, to ensuring that MIS becomes a standard of care. So it involves a lot of things that Dr. Tarnoff talked about today. Many other pilots that we have in place to ensure that, that happens. Those would be the nonproduct things that we're doing. But there are also things that we're looking at today, things like enhanced visualization, navigation capabilities, intelligence, automation, ergonomics. How do we get the right equation when I put these variables together? To get the solution that would drive a standard of care in advanced MIS? So I don't want to give too much away on what I think the embodiment of that combination will be, but we'll be looking at each of those variables, ensuring that we put a product suite together, and a solution together that allow MIS to be a standard of care.

David R. Lewis - Morgan Stanley, Research Division

Very helpful. Let me -- just a quick follow up. We've heard a lot about that peripheral stroke. And we hear a lot about pulmonary today, as well as [indiscernible] and mechanical. But on variance, post the acquisition, we have the [indiscernible] on points. Can you [indiscernible] in terms of meaningful commercial and clinical [indiscernible] because you've thinking about these [indiscernible] because of the next 12 to 18 months?

Bryan C. Hanson

Sure. I'll make some comments first and then I can also pass it to Dr. Tarnoff, but -- if he's got anything to add. What I would tell you on BÂRRX, both BÂRRX and SuperDimension, these are our opportunities for diversification for our business, taking advantage of our prowess in Energy. That was kind of impetus behind moving forward with this acquisition. And it gets us upstream in the disease management process,, which in this marketplace, is extremely important. We want to able to take care of the disease before it gets to the operating room, so we can make patients better faster and we can reduce the cost of care. So I look at this and it's very exciting. Joe mentioned, these are over $1 billion opportunities for us. When I look at either one of them, though, they're not $1 billion opportunities tomorrow. So there's a lot of market development needs that go into place. We need to make sure that we continue to talk about the clinical advantages of the product, and then change the way people care for patients today. And that's heavy lifting. So I have a lot of enthusiasm behind what these products can do and what these

[Audio Gap]

will provide for us, but it's not like they're going to be material changes to our revenue stream in the next 2 years. But they're certainly setting the foundation for future growth engines for our business. I would look at that either one of these, whether it be BÂRRX or SuperDimension as the potential to be the next LigaSure. That's how significant they are. It just may take us a while to get there.

Coleman N. Lannum

Hands, please. We're going to go with Jason up here, then #1, then #2. Go, Jason.

Jason Wittes - Brean Capital LLC, Research Division

Jason Wittes from Brean Capital. A question on emerging markets, Bryan. You mentioned a shift towards focusing more towards Tier 2 markets, from Tier 1. Question is, if you look at that -- the growth outlook you put up, 5 years. How much of that is going to Tier 1 versus Tier 2? And how long did it take to see that investment sort of start to show through?

Bryan C. Hanson

The vast majority of that growth right now is Tier 1. We see the movement into the value segment as a strategic long-term opportunity for us. I reference that because the markets, many of the volume markets are growing significantly at 20% plus, and we feel an obligation to ensure that we have access to health care in those markets. To not invest in those markets would be a tragedy right now, because they need health care and we're expanding our opportunities. So if you look at what we're doing from a tailored products perspective, we're looking at inorganic and organic opportunities to move into value. These are all going to position us better from a low-cost, high relevant procedure opportunity, and also allow us to get products that are as good as, if not better, at a lower cost basis. So we're moving in all those directions to this market, but the majority of that growth is still is Tier 1. I want to make the point that the Tier 1 market, we have not even gotten close to the ceiling of that market. In fact, we are gaining market share and we think that market is expanding. Many hospitals in places like China are expanding and trying to become what's called a Class III hospital in Tier 1 markets, so they're expanding their abilities and they're moving up the paradigm. So we haven't -- and this is not a place where we're seeing the top at all. In fact, what we're seeing is we want to compete in that value segment because of the growth opportunities, and we want to move in that segment because the opportunities is vast. We don't want to see local competitors just take that, and we think we have a great play and we have great opportunity to compete.

Jason Wittes - Brean Capital LLC, Research Division

Just one quick follow-up on that. Will that require a different sales channel? Are you looking to put...

Bryan C. Hanson

We are. We are looking at different sales channel, and Joe referenced inorganic opportunities as well. And we're looking at those to accelerate our potential and accelerate the velocity into the value segment.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Bob Hopkins from Bank of America. First, a question on emerging markets for Brian. Appreciate the presentation. You guys -- you're driving -- or your innovation is driving a very large percentage of Covidien's overall growth, both today and into the future. So if next year or the year after, we come here to this meeting and the growth rates aren't what you thought they are going to be, what are the 2 things that could go wrong here? What are the 2 things you think are the biggest risks to the growth projections that you just put up on the screen there?

Brian Douglas King

Bob, we really feel strong about our position. We have seen nothing that would tell us that, that's happening to us. And I'd like to reference this. We showed the GDP as a percent of health care, and in our emerging markets is only 6%. It's actually a little below 6%. Compare that to the U.S. where 18% of GDP is spent on health care. Compare that to the economic, the European Union, where it's 10%. There is still tremendous upside, and spend and need for access to health care in the governments around the world. Health care is a priority in the markets that we serve. And so you've got to combine that with the fact that health care is a priority. They are only spending less than 6%, and then the opportunity we see is still significant, even in the Tier 1 markets. So I'd rather not entertain the negative, because we're not seeing that. We're just not seeing it. We're seeing a velocity, and that strong velocity in our business, so.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

I appreciate that. It was just sort of a question, what are the biggest risks?

Bryan C. Hanson

The biggest risks? Allow -- they're macroeconomic in nature. I finished the presentation by talking about what we can control. And what we can control is what we focus on. If the -- global economy's changed, we still want to get -- we want to gain market share. That's how we are, we're a competitive lot. So we focus on what we can control. The types of issues and challenges the emerging markets face, look what happened in Venezuela, look what's happened recently in Egypt, look what's happened with some of the weather phenomenons we've had in Asia. Those are the things we deal with from day-to-day basis. My team knows, is really good at challenging ourselves and dealing with them. And how we deal with them, compared to the competition, is what defines and has helped provide the success we've seen, so.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

And then one quick question on robotics side. Sort of have to throw this in here every year at the meeting, and -- just wanted to know from Bryan, obviously, robotics is a major player right now in several important categories. At what point are we going to hear from Covidien, how you're thinking about that space? How long until we hear what are either your competitive response is, or just how you think you can position yourself to get a piece of that pie?

Bryan C. Hanson

Yes. I was pretty confident we wouldn't get through this without a question on robotics, so I appreciate you bringing that up. The -- what I would tell you is that, I don't think so much specifically about robotics. I think you've got to pull back and say what are we actually trying to accomplish? And again, as an organization, we're extremely focused on getting open procedures to MIS, making it repeatable and easy enough for any surgeon to do, all right? So there's a consistency in the way that we do the procedure, and there's a quality in the procedure. If that involves some form of robotics, that will be something that we look at. But I don't want to look at it by itself as a solution to MIS. It could be part of the solution, or it might not be. If I get into -- it's going to be a little while before I get into the actual embodiment of what we're going to deliver in this space. But just know that we're not sitting, waiting for someone to deliver a solution here. We see a gap that exists, and being able to create a truly advanced MIS system that is, has the potential to a standard of care, and we will be to ones that bring it to market. And as we get closer to that date, I'll give you more information on what it's going to look like.

Coleman N. Lannum

Thanks, Bob. Can we see hands, please? Okay, we're going to go with #2, #3 and then #1.

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

David Roman from Goldman Sachs. This is a question for Stacy. A lot of the -- the breakout sessions today did focus on stroke and vascular and some of the markets over which you have purview. Maybe you could just talk a little bit about the opportunity there, but also more importantly, the path to realizing that opportunity? Because it seemed like there are a number of headwinds, whether it's the need for additional clinical data, the need to train more people. It's a fragmented market. Maybe just sort of help size the opportunity, but also give us some milestones to realizing that.

Stacy Enxing Seng

Sure. Thanks for the question, David. So first and foremost, the stroke market is growing. So I think that's an important starting point. But when you look at the number of patients that are treated endovascularly, there's just nothing but runway. It's less than 5% of the patients are effectively treated. What are the things that need to be done? Really, the things we talked about, and they are the things that we are doing. First and foremost, we want to bring awareness to the globe on stroke and recognizing stroke. Secondly, we want to take the stroke neurologist, which is really the physician gatekeeper that's going to get that patient into the lab. And in order for that to be done, there need to be studies. We have our own landmark studies with these Swift prime trial, the other competitors in the space. They feel equally confident. They are doing their own landmark studies. And we are also supporting both society and physician-driven studies. So that's the second most important point. And then, of course, it comes to the technology. And if you talked to Brett Wall [ph] earlier, you would see some of the things that we're doing in the area of stroke investment. So it really is a multifactorial. What I would expect is that you will continue to see growth annually. And where some of those real accelerator points come from is when there's going to be material, clinical evidence and data, combined with reimbursement. And obviously, we project this with prime trial to be completed in a few years, 2017.

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

And maybe as a follow-up in [indiscernible]. I promise, this is not a guidance question, but it's more of a conceptional question. If you take Bryan's emerging market numbers at face value, they do imply a pretty dismal outlook for developed markets and below they're growing today. So maybe if you just sort of talk about how you see your developed market footprint evolving the next several years, particularly because it looks like a lot of the innovation, whether it's BÂRRX, esophagus, or stroke are actually focused in developed markets.

Jose E. Almeida

Bryan, do you want to?

Brian Douglas King

Sure. I don't know that I would draw any conclusions based on that. We have investments that are in core franchises today. Those areas of Endomechanical, specifically Endostapling, Advanced Energy, that still have a lot of opportunity for growth in developed markets. And when you look at some of the strategic bets that Joe referenced, and you've seen in the back of the room, there's still an opportunity for significant growth as well. So I certainly don't want to count out our opportunity for growth in developed markets. There are certainly areas of pressure, and as Joe referenced, we're looking at our infrastructure to make sure that we're properly prepared for that, but I certainly wouldn't count out pockets of growth in our business today.

Coleman N. Lannum

Brooks?

Brooks E. West - Piper Jaffray Companies, Research Division

Brooks West from Piper Jaffray. I wanted to explore a little bit more a comment Joe made in his prepared remarks around wanting to own a procedure or a specialty at the site level all the way to patient's home. And I specifically wanted to understand a little bit more what the implication of the patient's home might mean? And then I have a follow-up.

Jose E. Almeida

Is that, fine. Okay. What I would do is I'm going to pass to Amy Wendell, our Senior Vice President for Strategy and Business Development, who we can -- will elaborate a little bit more, can -- covers the whole company.

Amy Wendell

So what we're looking to do is focus on certain specialties. If you look at our portfolio, about 70% of it already lends itself to focus on specialties. And so we're looking to do, as you can see, for instance in surgical solutions and/or advance with the therapies is -- take a look at the vascular surgeon, the general surgeon, the colorectal surgeon. Understand all the different procedures they currently do out there. Look at areas where we currently participate in those procedures. Find procedures we're currently not in and procedures we are in. How we can go deeper to supply more products to them? Procedures we're not in, what procedures can we get in? And so the goal for us is to understand what new markets, what new adjacencies we can now get into to broaden the aperture, to allow us to enter into new markets that we're currently not in at this time. In addition to that, not only are we focusing on procedures, but we want to look at areas where we could now, as you talked about in BARRX, be part of the upstream solution. Prior to procedure, how do we actually get in there and help diagnose sooner and potentially prevent and disrupt ourselves from a surgical standpoint. At the same time, we're looking to see if there's opportunities for Covidien to participate downstream as the patient gets discharged. And the whole goal here is to better align ourselves with the customers, what the customers needs are, and then to make sure that we can provide a full suite of products where we can help contract, do some risk sharing with them. And so that's the focus that we are moving towards within Covidien. And it will actually help guide our investment strategy both internally and externally.

Brooks E. West - Piper Jaffray Companies, Research Division

I had another question on reprocessing, which is a service that has negatively impacted you all. Stacy, I'm thinking about you in particular. Can you talk about -- is reprocessing of devices maybe something you want to embrace? Or alternatively, how do you protect against reprocessing of your devices?

Stacy Enxing Seng

So in our chronic venous insufficiency business, that is where there has been some reprocessing, as well as our VNUS Solutions business. And in both cases, we've really managed that very well. The question is, really, how big of a need is it for our customer? And we are looking at strategies to be able to participate in that market if we think it makes sense. But very candidly, when you look at the growth profile that we've had in CVI, as well as the very significant share leadership that we've had in VNUS solutions, we feel very good about our current technology in those portfolios. But it's really about, as Amy was even talking about, just continuously assessing the customer need and whether or not that makes sense, and at what point does that make sense for us to get in the market? And we do have some plans to best address that for those categories.

Coleman N. Lannum

And, Bob, maybe you want to talk just a second about our history and what we do on the remanufacturing side of things and our understanding of that market.

Robert J. White

Sure. So within the respiratory business, we have, for a long time, had remanufacturing processing capabilities, where we would remanufacture a sensor in our own facility and then redeliver to the marketplace. And we do that to maintain the quality that's in there, but also to provide customers that option should they need it. When we think about reprocessing in general, we think about -- we build technology that delivers real value to our customers, right? We continually focus on lowering our cost of goods, and that goes across all the businesses. And then should there be a need for that, we'll have appropriate solutions as well. So we think we have all 3 of those elements very thoughtfully approached in our strategy.

Coleman N. Lannum

Hands, please, for additional questions? Okay. We're going to go to Kristen here, #1, then #2, then #5.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Kristen Stewart from Deutsche Bank. Joe put up a slide for each of the different major business units that highlighted the number of products, so there were not many specifics on what these were. I was wondering if each of the major business units could maybe just discuss what 1 or 2 new products you're most excited about over the next couple of years. And collectively, are these products something that we should think of as maintaining the current growth profile of your respective line or something that we think could or you think would more accelerate it going forward?

Coleman N. Lannum

We start with Bryan.

Bryan C. Hanson

So I do want to speak specifically to a product just for competitive reasons. But I'd just take a step back and say the areas that I'm most excited about that Joe referenced would be our advanced energy launches that we're going to see over the next 12 months. We actually did show one back there, the Maryland[ph]style geometry that we haven't launched yet. That's going to be an exciting technology for us, and then in our endostapling line. And again, if I just drop back on the -- all the products that we'll launch in those 2 categories will take advantage of technology that we have in those spaces that are very different than our competitors. So I say that because if we have 5 product launches and a competitor has 5 product launches in the same category, they're not equal because the core technology in our products is different and more desirable than the competitions. So if I look at the Tri-Staple technology, all of our future stapling technology launches will incorporate Tri-Staple. That differentiates them. We'll have specific reloads that will focus on procedures, and the geometry needed for those procedures. But the differentiation isn't so much the product as the technology. And that's the same thing in ligature. We'll have multiple launches, but the real magic in ligature isn't the end effector. It's the system. It's the way that we actually impact the tissue from an energy perspective in a consistent way. So those are the 2 areas I'm most excited about. Many others that we're going to be launching that I'm also excited of, but those are the ones that really stand out.

Unknown Executive

Kristen, to talk about our products, I would talk about our nutritional delivery devices. So we use a three-pronged strategy. One is self-development of new technology. Second is licensing technology from other partners who don't have the commercial access we have. And third is changing our commercial model to make sure we have access to get our technology and our products to the customers now that are changing care continuum in the commercial model shifts. For instance, to ensure that now the hospital pushes the customers, the patients out sooner, we're going to make sure we are aligned with the home care providers to ensure seamless care delivery and our products being used at those points.

Stacy Enxing Seng

So, Kristen, for Vascular, we actually have quite a few lined up but let me focus it this way. We are very oriented toward driving the procedural coverage so you'll see both in our neurovascular and our peripheral vascular lineup enabled catheters that are enabling better delivery, filling out our PTA lines, filling out our stent lines, really some of the workhorse, if you will, technologies that treat all patients in every endovascular procedure. And then secondarily, really, are vital few. And our vital few include ischemic stroke development, hemorrhagic stroke development, as well as hypertension and drug device combinations, in which we're leading with drug coded of balloon technology. We're also, I think, very well-aligned and engaged with Brian King's team, and we're codeveloping with the emerging markets out of China some of our coil opportunities for neurovascular. So it really is a gamut of kind of singles and doubles with everyday technology improving them as well as our vital few.

Robert J. White

Respiratory and Monitoring. We'll start first on Oximetry & Monitoring. We're really excited about new sensor technology, new software algorithms to measure advanced parameters, also building information out. So we're taking the data that comes from the information, as we showed in the back of the room, and really linking that and delivering information to physicians at the right point in time.

And on the Airway & Ventilation side, very excited about our new acute care ventilator that will come out. And like Stacy, we're doing in-country, for-country development with Brian. So products that will be just right for emerging markets, not just for developed markets.

Coleman N. Lannum

So we're going to have time for a couple more questions. We're going to go to 2 and then 5. But, Matt, before we get to you, I want to get to a question that we had -- did have come over on e-mail. And actually I'm surprised it hasn't come up already. And this is for Bob. It says, "Your agreement with Masimo will be expiring next year. Can you discuss your plans for paying the royalty into 2014?"

Robert J. White

So it seems like we're here 3 years ago. So we've been hard at work on this. As you can imagine, we pay our competitor a lot of money. So every day, I have teams waking up thinking about how we reduce that royalty. That said, we're in agreement and I expect to honor that agreement. The important thing that I want you to know is when that agreement expires, it's completely at our discretion when we exit from that agreement. So Cole doesn't let me say anymore than that. But we've been hard at work at this. And so that's all I'm going to say. It's an agreement. We'll honor it, but we've been hard at work to talk about how we reduce that royalty.

Coleman N. Lannum

Great. Matt?

Matthew J. Dodds - Citigroup Inc, Research Division

Matthew Dodds, Citigroup. It's a U.S. question, so, Michael, I'll target you. But I think anybody, but Brian King, feel free to chime in. If you look at the U.S. market, generally for surgery, the commentary has been stable in 2013, but admission volumes at the hospitals have been declining. And it looks like the worst rate of decline since 3, 4, 5 years ago, maybe even worse. Is there a concern that we may have a lag effect on some surgeries if these admission trends continue down year-over-year?

Michael Tarnoff

So part of admission trends going down in part is explained by an increasing prevalence of outpatient procedures. I've seen this direct pressure in my own practice where the notion of redefining what can be done as an outpatient, what we call a 23.9 stay, where the patients stay just shy of 24 hours, so that doesn't count as an index admission, but yet you're doing actually very complex, and to David's earlier question, advanced minimally invasive surgical techniques, where patients are actually going home without ever being admitted. So that's one piece. Relative to the exposure that we have in terms of changes in reimbursement and changes in the economy, Joe had a talking point in his presentation about the fact that we are heavily entrenched in nonelective types of procedures. The discussions in the breakout sessions, the types of technologies we have and the profile of those technologies, I think, creates a use of relative insulation, not a complete insulation, but a relative insulation, where when patients come in with the types of conditions that our technologies address, it's not really an option. It's the types of things that patients have to get intervention independent of reimbursement, healthcare insurance, work status and other parameters. So I think when you add all that up, we feel relatively preserved in terms of some of the other macroeconomic trends that could affect us.

Unknown Executive

I'll comment on it as well. I don't know that the admissions have translated into procedural volume changes. But I do want to make sure that I just do speak about it. We don't always just depend on procedural volume increases. We have a lot of opportunity for market expansion. So even if we look at the mix shift of the procedures that exist, as we move them from open to MIS, which is a real trend in moving in that direction, we make significantly more dollars and can grow the market as a result of it. And the beauty of that movement, as we've talked about in these sessions, is that helps everybody. It helps the payer, the provider, the patient, and we benefit as well. So it's not just procedural volume increases or decreases that help or hurt us. It's our ability to move the market and do a mix shift of the procedures.

Coleman N. Lannum

So I may actually cut us off right now. We're after 4:00. You will be the first question later on. Remember, we still have plenty of time for Q&A this afternoon. We're going to take a very quick break. Pass up the press releases. We'll be back at 4:10 sharp, and start with the financial presentation. Thank you.

[Break]

Coleman N. Lannum

Okay, everyone, as I promised you, we will -- we're going to expand the Q&A session a little bit after Chuck talks. So don't worry, there'll be plenty of time to ask questions. I would ask you to return to your seats because this is, of course, the moment you've all been waiting for. Everyone wants to wait and see what we're going to we have on the financial side.

So with that, I'd like to introduce Chuck Dockendorff, our CFO. Chuck?

Charles J. Dockendorff

Thanks, Cole. So yes, today we'd like to go through the financial portion of the presentation of the Investor Day. What I like to cover with you is to just to take a minute to look at our long-term financial goals, look at 2013 and how we've done there, talk about some of the operational leverage that Joe outlined in the strategy and where we see the opportunities in that area. And then finally, of course, I think that will give you a good framework for our guidance in 2014.

I would refer you to the forward-looking statements, as Cole so eloquently spoke earlier. These as our long-term financial goals. You should be all familiar with these by now. We've been consistent with these over time. We showed this identical slide last year at the same time, the same Investor Day conference. As you can see here, it really is a balance of generating short-term growth and continuing to invest in the business with the long-term health of the business, so we can grow it long term both sales and EPS. If you look at the basis of it, again, it is mid, single-digit sales growth which is above market growth rates and utilizing operating and financial leverage to drive that double-digit growth. We also...

Coleman N. Lannum

We got too compressed for time, but...

Charles J. Dockendorff

What? Somebody's on there? So we'd also like to use our cash flow, our strong cash flow that we have in order to continue to improve it in acquisitions but also return a significant portion of that back to shareholders over time.

So if we could just take a look at how we've done over this period, which is the last 5-year period for Covidien, and how we balanced up against these goals, you can see that in each of these categories, we've achieved or exceeded our objectives on these long-term financial goals. Our compound annual growth rate over this period is at 7% on a recorded basis. You can see the adjusted EPS again growing at 12% on a compound annual growth rate during this 5-year period. We've returned over $6 billion of cash back to shareholders, which represents 73% of our free cash flow during this period. It does not include the dividend that we most recently did at the end of June on the Mallinckrodt spin, which was an additional return back to the shareholders.

We've also been able to deploy the cash flow and invest into over 20 acquisitions and invest over $5 billion during this period. The biggest one, of course, was ev3, but we've been able to do a number of technology acquisitions and improve our capabilities for fast-growing markets in Endomechanical, in Vascular and Energy.

We've also added some nice product lines, acquisitions that we've been able to leverage through our global footprint. So as you look at Covidien, we've exceeded these goals, our financial goes for the 5 years. And if you look at where we stand today versus 5 years ago, our portfolio is at a much stronger standpoint. We have accelerated the rate of innovation from 5 yeas ago. You've seen the new product launches that everybody's talked about. You've seen the technology in the past. We've been able to invest successfully in emerging markets and grow and capture market share over there. We have been driving productivity and leverage across the components of our business worldwide. And I think we've maintained that strong cash flow, which has allowed us to invest going forward.

So with that, I'd like to just go through some of the components of the P&L and talk about our 2013 results in relation to our past history and our long-term financial results.

So again, as you can see here, through 9 months for 2013, Medical Devices growing at 7% on an operational basis, Supplies, 1%. Overall for Covidien, 6% growth. This, again, is above market growth and represents the success we've had in launching new products, driving in some acquisitions, and also in growing over in emerging markets above the market growth rates.

On the gross margin, you can see here the improvement over time. So here, we have been driving through a lot of cost reduction, and we have a favorable mix. You see a slight decline in 2013. This was primarily from the FX headwinds that we've had this year. About 70 basis points has impacted this gross margin from FX alone in 2013 over the prior year. We're very fortunate. If you look at the drivers on the right, these have been consistent over time. And we're very fortunate in that the volume, mix and price and new products that we launched in our business is favorable. It is more than offsetting the price declines or price pressure that we've had out in the marketplace. We've also driven through manufacturing cost reductions and restructuring programs in this area with the goal of offsetting inflation and other costs in our manufacturing business, which we've been very successful doing. And we expect that to continue going forward.

Foreign exchange, as I mentioned, hit us 70 basis points this year. And as we look at it going into next year, we still see pressure from foreign exchange in the first half of next year on this line. And it will be based on today's rates. So we expect some headwind pressure on gross margin from FX into next year.

If you look at SG&A, this line has remained relatively constant. And over this period, you see a slight uptick in 2013. Again, this comes from the investments that we've made in emerging markets and on some of the acquisitions we did in 2012. They come in at a much higher SG&A rate as [indiscernible] in the marketplace, developing markets and launching these products to drive this revenue growth up.

I would like to tell you though, but while we are investing, we are also driving productivity across all of these functions around the world. And to give you an example, while there's 100 basis points of productivity in the SG&A number in 2013, when we compare it with the prior year. But to give you an example, in emerging markets, Brian put up a slide, we've added over 1,700 people in the last 3 years. About 1,000 of those had been selling and marketing people, the other around R&D and some back-office functions. In the U.S. and Europe, where the markets have slowed and the growth has slowed, the business leaders actually took a new approach to this, the go-to-market strategy and optimizing it. And they were able to reduce the number of sales reps in those areas, configure it to provide better customer service at lower cost, better efficiency for the sales reps, and actually able to reduce 500 salespeople out of those 2 areas,

U.S. and Europe, which helped fund some of the investment growth.

So the productivity is built into this number, and we're investing at a much faster rate in emerging markets that truly is reflected in this rate going forward. Going forward as well, next year, we have one more quarter of the device tax that we have to annualize, which will be the first quarter of our year. And so we'll have that as some headwinds for next year.

Research and development. Here is -- you can see the increase of this expense over the course of time. This we managed very carefully. We are also focusing on productivity and research and development in a couple of ways. First of all, we're driving more of our research and development offshore. We have opened up centers in India and China, so we're trying to get more to spend over there, which in itself is at a lower cost and a higher productivity, more dollars on this. The other thing that we do in this area is we make sure we look at all the projects and all the spend we have across the company. We do that centrally. So we have all the R&D projects in front of us. We look at

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And tax planning initiatives that we had established to take advantage of certain attributes. But because of the good execution exhibition on the spin and the ability of our tax planning people to go in and put in new initiatives there, we've actually been able to lower the rate for 2013. The one component that's in this rate, that may provide some headwind, is on the R&D tax credit. It impacts our rate by about 50 basis points. We expect this rate to continue to go down going forward. The only thing we can control is the R&D tax credit. As you know, it gets reviewed every year. We don't put it into our rate until it is approved by the government. But here, they've done a great job, and we see this tax rate, while it's continuing to lower the other advantage of the tax situation we're in, and we stressed this before, is the company's ability to access its cash around the world without paying repatriation taxes. So it's a nice position to be in and we think is a very competitive advantage with other companies.

Return on invested capital, this is still very important to us. We look at this in all of our acquisitions and investments, and the impact on this. But clearly, it is around driving and better utilization of assets and driving more productivity from the assets that we deploy. You can see that we have a dip in the years where we do big transactions. 2010, of course, we did 3 for over $3 billion in 2012. You can see the impact from doing those deals, which were a little over $1 billion for those other deals that we have there. But over time, we expect this to increase and we look at it through all of our product lines, all of our invest

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You'll see that we paid out over 73% of our free cash flow back to shareholders. We certainly want to do the acquisitions. They're opportunistic. Joe talked about all of that. They have to meet our strict strategic and financial hurdles before we execute on them. But I think the important part to take away from our capital at Covidien is that we have a strong cash flow. We have the access to that cash around the world, as I mentioned, with the tax structure that we have. And we have a very strong balance sheet. So between those 3 things, we feel that we generate enough cash in the business, have access to it and can leverage the balance sheet to maintain this commitment of 50% of free cash flow and to do any strategic acquisition that we need to do. There really is no limitation, we think, on achieving this capital strategy with that leverage we have.

This is a historical slide of cash returned to shareholders over the past 5 years. You can see the acceleration of this cash flow. And you can see that in 2013

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we are committed to a 30% payout ratio, and that is payout ratio defined as a percentage of earnings per share. A 30% payout ratio in the next 12 months, and we have a commitment to drive this up to 35% plus over the next couple of years. So the rate of these increases and how we get there, I'll think, will bring us to the right level of where we have the strong cash flow in the business and we feel good about the future prospects of that cash flow as well.

So I want to take a few minutes and talk about the operational leverage that Joe outlined in his plan. This was a key element of the strategy that he's outlined for the company. And I would tell you the management team understands the importance of this.

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marketplace and the difficulties that are out there.

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To back out the Mallinkrodt portion of these restructuring numbers. These would be the Covidien remaining numbers and the savings associated with them, that are into, now, our gross margin and some of the SG&A, some of the programs that I talked about. You can see the returns on these investments are very high, they've been very successful and good execution on them that have driven this profitability going forward.

In our manufacturing footprint, if you go back to 2007, the beginning of when we spun, this includes pharmaceutical

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on our last earnings call to drive through additional $350 million to $450 million of restructuring around our business. And it's going to entail both SG&A and manufacturing. And most of these we have been doing in one capacity or another, we're going to expand this.

And just to talk about some of the opportunities around SG&A. First of all, reducing corporate expenses. We talked about this. We've spun off Mallinkrodt, 20% of our business. We've gone after our corporate functions and we requested a reduction in those expenses and headcounts for 2014, which we've achieved. We're not going to get 20%, but we will get a good portion of that, and we know we have to do that now that a significant portion of our business has spun out into a separate company.

We have an opportunity to expand shared services. We've been very successful establishing these. In Europe, we have 1 shared service center in Prague that supports all of Europe. We're all in 1 system. And in the U.S., we have a centrally located shared service center in the U.S. that has most of our systems on here. We have a few acquisitions yet to integrate in. So we've been very successful in moving transactional processing into these shared service centers, driving efficiencies and lower cost. We have a couple of other opportunities for expansion. One is to take more transactional processing that sits in countries in Europe and move that into Prague as well, as move some of the shared service centers we have in the U.S. into lower-cost countries and benefit from the labor arbitrage that we can generate there. The other thing is that we've invested heavily in emerging markets and we have the opportunity to begin to establish shared service centers, primarily in Latin America, we're looking at next year, to drive cost out of the system there in the back office.

We'll be outsourcing and off-shoring more nonstrategic-type processes within the company. We've done that in the past with some of our financial processes, and we see more opportunities there as well. We've reorganized our businesses into more regional models both in Europe and in the U.S. And really, it is to drive the focus around the customer there, who is also consolidating there, and we talked about this optimized go-to-market strategy, to be able to utilize that going forward. So we think, here, with this regionalization, if you remember, we created a lot of GBU structures when we spun. We built a lot of growth functions around them. We think that, for the regionalization, we can reduce the spans and layers of the cost involved in the organization, and we can also drive through more efficiencies on some of the other areas and eliminate duplicate resources.

So this is a continuation of programs that we've done in the past and we feel we have a number of programs listed, ready to go, we refine these and we'll be executing on these in the next year.

On the manufacturing side, again, more of what we've done in the past. We're going to continue to reduce our manufacturing facilities. We want to bring that low-cost country sourcing up to even a higher level. I think you've seen some of the investments we've made in some of the local markets in manufacturing. Brian King talked about that. We can utilize some of that as well, to drive to some of that low-cost country sourcing. We want to double the amount of, again, nonstrategic manufacturing we do to contract manufacturing. This drives a big savings for us, it also reduces our overhead in our capital equipment and structure, which improves return on invested capital. And finally, we'll continue to optimize our distribution centers around the world.

So as we look at these operational leverage opportunities going forward, these will continue through 2018, and as you know, the manufacturing has the longer headwind. We have SG&A -- and the leverage that you see will come through the SG&A, in the gross margin lines, as they have in the past. We're looking for savings in the $250 million to $300 million range. We'll be refining that as we go through and approve the specific projects. And we will have some savings in '14, but most of the projects will really be in to accelerate in 2015.

So with that as a framework, I just want to talk about the guidance that we have for next year. In Medical Devices, you can see here we have 2% to 5%. Supply is flat, with overall Covidien remaining at 2% to 5%, and there's 150 basis points of headwind in that reported rate. So we're still looking at the first half of the year as a negative FX impact in our sales, based upon the rates as they sit today.

In the operating margin, you can see we have a flat to declining -- slight decline in the operating margin of the business. A couple of factors here, which I've talked about. One is FX headwind, about half a year compared to what we've had this year. So we had 130 basis points this year and we have 1 quarter of device tax. So that's putting pressure on it. We're going to continue to invest in the emerging markets. We are driving through productivity, but we think that productivity will come more towards the end of the year and into 2015.

You can see the tax rate, 16% to 17%. We've left this relatively at the midpoint. You can see it's relatively flat with where we are in the current year, and that's a result of the R&D tax credit not being in there, but issuing some other tax planning strategies or executing on them in the coming year.

Capital expenditures, pretty much in line with where we've been in the past. And finally, the weighted shares outstanding down to 455 to 465 as a result of the share repurchase program that we've done over the course of the year.

So when we look at this guidance, you've seen the long-term financial results we have achieved, the guidance that we put out there for 2014. We're looking at about 4 percentage points of EPS growth headwind from foreign exchange and device tax next year. When you back that out, the underlying business will be achieving our long-term financial goals, again, for 2014.

Thank you, all, very much. And at this point, I'd like to call out Joe Almeida and Cole for questions.

Coleman N. Lannum

Thanks, Chuck. As we get settled, I want to note that I cut off Glenn Navarro as the last question last time. So being true to my word, he's going to be the first one this time. So if we can get a mic to Glenn. And while we're doing that, could everyone else raise their hands so we can get a queue going?

Okay. So after Glenn, we're going to go 2, 4, 5, 3. Go ahead, Glenn. Can we turn on the microphone in the middle here, please? Number five.

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

Glenn Navarro with RBC. Two questions on the '14 guidance for Chuck. One, I hear what you're saying, it sounds like the first half of the year, from an EPS point of view, is going to be in the flattish to maybe down range with a big hockey stick in the fourth quarter. So I'm wondering if you just give us a sense of how we should model fiscal '14 from an EPS point of view, on a quarterly basis?

Charles J. Dockendorff

Well, we don't give quarterly guidance, but you're right and that the foreign exchange will hit us in the first half of the year. And that impact, as I said -- and the annual device tax will hit in the first quarter. The total impact of that is about 4% for the year. So I think you can figure out, through those numbers, how that will impact us within the course of it. Now, FX rates can also change, but that's based on today's rates and what we see. So I think it would flow through that way.

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

Okay. And then just a follow-up on the revenue guidance. On the device side, the revenue is a little bit lower than what we had thought. I'm wondering if you could give us kind of the puts and takes in terms of device revenues, which businesses that may be outperforming and doing a little bit better, which businesses may be coming in little bit slower.

Charles J. Dockendorff

You want to talk about some of that?

Jose E. Almeida

Sure. We still have a very good growth from our Energy business, Neurovascular. I think you have -- and Endomechanical as well. You had a little bit of pressure in the Vascular pressure, the Peripheral Vascular business, but with better performance this year. This is a wide range, and with the FX impact, I'll say that Covidien has an opportunity to be, for Medical Devices, within that range but on the higher side of that range if things go well.

Charles J. Dockendorff

I think, too, if you look at that underlying growth rate when you add back the FX, it still represents above market growth rates that we put out there as guidance for all of our businesses.

Jose E. Almeida

You're going from 3.5% to about 6.5%. So if you'll think about -- that we can deliver, maybe on the higher side, there's a great deal of opportunity there and in some of those markers, twice as much as the current market growth.

Coleman N. Lannum

Thanks, Glenn. We're going to number 2.

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

Mike, JP Morgan. So let me come back to the revenue guidance and I want to circle back to the commentary about emerging market growth in the developed markets. So, first, the revenue guidance. As always, the range is a relatively wide range, so we backed out currency and looked at the guidance. As you've given it here, let's call it 3.5% to 6.5%. I think most people here would think 3.5% would be a disappointment and 6.5% is probably optimistic. So how do you think about what could drive you to the lower end and the upper end of those ranges if you think about the potential for performance this year? And then the second question is really getting back to the global emerging markets over the next 5 years, and if you do that, then basically your developed world business just looks to grow just about 3%, just under 3%, in order for the company to grow the top line 5%, which would be I think a good target for the company. Do you think that the developed world view, the developed world markets, can give you enough growth to get you to 3% or do you think you need to do acquisitions for the developed markets to give you enough growth to get you to that 3%? Again, that's my target, not yours.

Jose E. Almeida

Yes. We think that, for us to be on the lower side, a lot of things probably have not to go well. And I don't know if I have enough indications to date that that's going to happen. So I can't comment on what would drive that number. A lot of things can drive that number down. Remember, there's a lot of new things going on, from October, on the Affordable Care Act. I don't think the positive or the negative impact would be tremendous for Covidien in the next 12 months, because we still need to see if that population coming into the system is going to be really served the same way. If there's any additional volume that comes out of this. I would say that there's some key drivers that can get us to be on the above mark, above 5% growth. Now, if we can get emerging markets over-performing like they've been over-performing, our Endomechanical business continues to bring share. So there's a lot of assumptions, and including Energy, they can drive that number to a better range on the upper side.

Charles J. Dockendorff

I think, too, when I look at the components of it, the Neovascular, Vascular businesses had some tough compares this year. So we expect that to do a little better next year as we've gone through some of those, with product launches and recalls. I think, also, the Endomechanical and Energy business is still growing. Energy is still growing very good in the U.S. and Europe. And the Endomechanical business as well, with Tri-Staple, which we've launched, is really a good driver, and we still see some growth there. There's no question, though, that we're looking at the developed markets with a slower growth rate, and of course emerging markets, we don't project it any worse than where we are this year, nor do we project it as a big rebound or anything like that. I think that's one of the reasons the business leaders are really taking a look at the resources around that, to make sure we have them deployed correctly within those marketplaces.

Jose E. Almeida

In terms of the acquisitions, we are focused, as I said, 50% of our free cash flow should be dedicated to acquisitions. If we can't, we return back to you. So I can see acquisitions fueling some of the growth and going into businesses that'll be more synergistic. Not only technology, but also acquisitions that have more of a good-enough or fill-the-bag kind of aspect. So we're looking at so many different opportunities at this point in time. I'll not be surprised if we have couple of opportunities coming into fruition. But we don't want to speculate, acquisitions are opportunistic.

Coleman N. Lannum

Thanks, Mike. We're going to over to number 4, Matt.

Matthew Taylor - Barclays Capital, Research Division

Matt Taylor with Barclays. Wanted to ask one about operating leverage. You talked a lot about that in the presentation today. There's a couple of headwinds next year. So first, I wanted to just ask if you can help quantify the impact of FX med tech [ph] in investments in emerging markets? And then second part of that, as you continue to invest in emerging markets, are we going to start to see some operational leverage there next year or is that really more driven by restructuring?

Charles J. Dockendorff

I think, as you get into the operating leverage and our projections out there, I think if you look at this year, as I mentioned, there's about 130 basis points of headwind from the FX and device tax. They'll continue in to next year, 2014, at today's rates. Probably at half that rate. Somewhere in that range, as far as basis point pressure on that line item. So those are things are offsetting it. The productivity, we've got about 100 basis points of productivity and SG&A, and that would drive to the operating level as well, and we would see that continuing going forward. The amount investment we have out there, close to, I think it's the numbers we've given at [indiscernible] as far as we're investing on emerging markets specifically...

Jose E. Almeida

I don't think we're giving specific numbers.

Charles J. Dockendorff

But we're over $100 million in that area and we're bringing out with more sales force and some of the clinical things that we're building out there. So we still think we can drive investments and drive operating leverage going forward. Emerging markets, if I stop investing today, you'd have tremendous leverage off of the growth of the sales in there. But again, the markets are so attractive and we've had so much excess there that we think those investments are critical to the growth of the company going forward. And despite the fact that they put pressure on that operating margin, we think they're important, we need to get those done. If you take away the FX and the device tax, the operating leverage is increasing. And it's increasing in '13 and it's increasing in '14, even with the investments we're making in emerging markets. And remember, we're also making investments in acquisitions, technology acquisitions, which have a higher SG&A, there's R&D components of that. So all of those things. We're also be increasing the R&D portion of it. So once we get in to 2015 -- and again, I can't speak to FX, but we've had 2 negative years here. I think that being just stable, you'll see operating leverage grow the company despite the investments that we want to make as a business.

Jose E. Almeida

Let me add one thing, Matt, just real quick for you, and this speaks to Glenn's question as well. Remember, this med tech tax phenomenon, as well as the vast majority of the FX headwind in 2014 is really going to hit us in the first half of the year. It gets a lot better, assuming no changes in rates from here, in the second half of the year. And because of that -- I don't think that should be any surprise to anyone. We've talked about this extensively, really, over our last couple of earnings calls, and told you guys that, yes, we are going to get hit significantly by the med tech tax in the first quarter of 2014, and yes, at current rates, we're going to getting hit by FX in the first half of 2014.

Matthew Taylor - Barclays Capital, Research Division

And just a quick follow-up on capital allocation. There's not a lot data points, but it seems like you've had the big acquisition here, then kind of a digestion here than acquisitions. The next year would be a deal year. I was just curious, in terms of the environment -- i know there are some good rates out there, but the evaluations have come out, so maybe it's more difficult for them to hit your hurdles and how does that, those kinds of headwinds and tailwinds, balance in terms of how you're thinking about deals today?

Charles J. Dockendorff

I mean, I just comment. Joe, you want to comment to that?

Joseph F. Woody

I haven't seen the number of opportunities really diminish. I mean we still look at a lot of things. I think we got a great team out there. They see all the opportunities. There isn't a deal done in the business that we don't know about or we haven't look at. So that's a nice capabilities you have in that area around strategy and business development. Some of this is -- we did a number of deals last year, so there's a natural tendency -- you want to integrate those in. But the opportunities are out there and our financial hurdles haven't changed. We passed on some of them because of the pricing, but we think there's others out there that we think we can do and execute upon next year.

Jose E. Almeida

The acquisitions that we passed were not because valuation. In this couple, I can't remember, just strategically, they were not a good fit. And we didn't think the technology there, what's being sold, was attractive to the company. I think that we will always pay fair price for an acquisition. And when we don't think we can pay, somebody else is willing to pay more and we cannot put more value on the table, we usually have a back-up plan, how to get to the market, vis-à-vis, [indiscernible] for instance. We're able to get into the market with an acquisition that we had made a venture capital, an equity investment, before we're very knowledgeable about technology. So the things that are really strategic for Covidien, we always have a backup plan. If we don't, the strategic value is important enough, we have the ability to get to where we want to get. But we're very disciplined on all the aspects of the financial return of those acquisitions. We're not going to compromise on that.

Coleman N. Lannum

Other hands for questions? Okay, runners, if get there because, we're going to David Roman here, then we're going to 3 after that, and then we're going to a Web question. David?

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

Actually, it's Joanne Wuensch [indiscernible]. Two questions, one foreign exchange rolls through gross margins heavily. Can you discuss how 2014 gross margins may look on absolute basis or in comparison to 2013?

Charles J. Dockendorff

Yes, we don't give that guidance on the gross margin line specifically. Foreign exchange will be a headwind. This year it's about 70 basis points. Probably it'll be less than half of that next year, as we look into it, based again on rates where they are today and the fact we have a half year to go through it. So that's pretty much where we are on that. But we have other productivity programs driving through, the mix and volume will be positive. So I think you'll see a flat, maybe slight increase in gross margin going forward into next year.

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

And the next question is, in your guidance, what have you dialed in for price pressure and they may or may not be different from the past? And any potential volume pickup according to Obamacare?

Charles J. Dockendorff

No pickup from ObamaCare. I don't think anybody -- I talked to the business leaders here, but I don't anybody has raised their forecast because of this ObamaCare. Pricing pressures, more of the same. What we've seen in the past. Again, we're fortunate with the portfolio we have. We're able to offset a lot of that with the mix and new products we've launched. But they've been going after us on price for a long time, so we think that'll be consistent with what we've had in the past.

Coleman N. Lannum

Thanks, Joanne. We're going to go over here to number 3.

Unknown Analyst

[indiscernible] Can you maybe talk about the pace and timing of the savings that you expect from your [indiscernible] restructuring program? Do we really have to wait until 2018 to get the majority of the benefit or could some of it happen sooner than that? And what would determine the timing? And I do have a follow-up on EPS guidance.

Charles J. Dockendorff

Sure. Yes. I mean, the savings we have out there, we initialed this program. Remember, we just got done with the Mallinkrodt spin. We've had people working on that. And we're mitigating some of the -- some of these restructuring savings are mitigating some of the lead behind cost on Mallinckrodt. We're trying to reduce corporate expenses. We have other structures in Europe and things like that, that we're trying to reduce. So the speed at to which we do this, we have these programs identified at this point in time. Some of these we are beginning to execute on, but we'll be refining the programs here in the next quarter and begin to execute on them. The corporate expenses clearly will be executed before the end of the year. But some of the other ones, you have to go through them and there's risk involved, certain levels of risk around each of these restructuring initiatives. So if I'm moving a shared service center, there's a certain amount of planning that has to go there. You can imagine the planning that has to go around when you shut down a facility. Other things, we've been able to optimize the go-to-market strategies and reducing duplicate cost. I think some of those, same as you'll see in 2014, and that will probably be halfway through the year and we'll begin to get that in the back half of the year.

Unknown Analyst

And on EPS, I appreciate you don't give explicit EPS guidance. But just taking your numbers, at the low end, it's something like flat, just like even down EPS. Of course, FX is a factor. And if you bake this back in, it's probably like a low-single-digit EPS growth. Why so conservative and what is the scenario that could even push you down there?

Charles J. Dockendorff

I don't know how you calculate your numbers, but from where we've given the guidance in the midpoint, with about 4% of headwind from FX and device tax, we see the business -- the underlying business growing double digits on EPS. Cole, do you want to say something?

Coleman N. Lannum

I think offline, anyone -- and it's a fair question that we should have a discussion about multivariable aggregates of ranges and how that works. The reality is it's extremely unlikely that we would come in at a very low point of the range of every single variable that we've given. And it's similarly unlikely that we'll come in at a very high point on every single one of these ranges. So I think, truly, aggregating them up and taking a look at a range from the EPS side of things is not really what we're trying to get at here.

Unknown Analyst

Okay. So we should really look at it as the midpoint?

Coleman N. Lannum

No, I'm not saying midpoint either. Some may fall outside the ranges. I would look at each variable as our best guess of where those variables are going to come out. Clearly, there's going to be variability within those ranges on all of them, okay?

Raise your hands for the next questions. As the runners are getting you the placards, Joe, let me bring you to one from the Internet. The question is, your presentation barely mentioned Medical Supplies. What's your strategy for this business going forward and will it follow the same path that Mallinckrodt did?

Jose E. Almeida

My presentation was about strategy, not about business units. So we had a very clear path to determine -- to present 4 specific pillars of our strategy. Medical Supplies is a business that, for Covidien, makes sense. We've got to make sure that we understand the implications of portfolio management. So at this point in time, it is an essential business for Covidien. It's a business that Covidien continue to launch products like I demonstrated. We just have a significant amount of leverage with some of our distribution partners because of that business. So it is a business that Covidien is going to keep. Our -- the same question was asked to us about 3 years ago about Mallinckrodt. At one point in time, our business in Covidien is core anymore. We're going to make sure that we understand the implications of removing that business from Covidien's portfolio because of significant dis-synergy in doing it so. And who is paying the price at the end of the day? The shareholders. So we want to make sure, first of all, do you understand that's the business that Covidien is planning to keep. If there's a change in portfolio, we'll let you know. Third, think about the dis-synergies that are removed over business and that size will do to a business or the size of Covidien. And we want to make sure that your investments are preserved instead of being eroded through a portfolio management or a portfolio change that does not make sense.

Coleman N. Lannum

Okay, we're going to go to 2, then 4, then 5. 2?

Anthony Petrone - Jefferies LLC, Research Division

Anthony from Jefferies. Just a couple on the buyback and M&A. First on M&A, if you look at future M&A, is it an existing verticals or should we be thinking about new verticals when you go into adjacencies outside endovascular, Endomechanical, Vascular, Energy, et cetera. And then on the buyback, the guidance calls for 10 million to 20 million shares of buyback relative to 9 months of 2013. You have $2.8 billion authorized. That's about 45 million shares at today's prices. So should we be looking at the disconnect as leverage into the back half of the year if no transactions were done?

Charles J. Dockendorff

I think as far as the -- you might want to talk to acquisitions, I'll talk to shares. But I think as far as the shares outstanding, there's a lot of factors that go into that, part of it is what we buy this year, what we plan on buying next year. We do have the $2.8 billion authorization outstanding as of the end of last fiscal quarter, the end of June. So there's other components that go into that, the number of options exercised and the process to the year and other grants that are made. Also, the price of the stock itself has an impact on those shares. So that range we give takes into account all those parameters as best that we can see it. So it does include some share repurchase next year as well. You don't get the full year impact of that in the course of the year that you do it.

Coleman N. Lannum

And since you brought it up, and I think this is important for us to reiterate because we talk about this all the time but I'm going to say it yet again. We're going to give a minimum of 50% of free cash flow back to shareholders every single year. But one of the variables, going back to the question earlier on these ranges, one of the variables is what are we going to do on acquisitions if 2014 ends up being a year like 2013 where there aren't appropriate acquisitions? I think you'll see, just like we've done historically, that we'll give more cash back to shareholders and that will likely drive that shares outstanding range to a very different number than what we've given today. But that's what drives things. Ultimately, you're going to get 50%, 5-0 percent, no matter what. After that, we look at reinvesting in the business first. And if we can't find anything, we're going to give more back to you.

Charles J. Dockendorff

I think, too, we've talked about the dividend and that would probably increase to become a bigger portion of that cash back to shareholders. Acquisitions, I think, Joe, you -- we covered that.

Jose E. Almeida

Yes, we covered that. Our preference is to buy companies a strategic fit with our portfolio. If we can't, we return the money to the shareholders. Our preference is to acquire companies.

Coleman N. Lannum

We'll go to #4,.

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

Larry Keusch from Raymond James. Just picking up on the dividend and the payout ratio. You indicated 35% is something that will work towards the next several years. Certainly, your cash flow generation will better than that on the payout ratio. So why 35? How did you come to that number?

Charles J. Dockendorff

We think, when we look at the competition, where we sit, I think that brings us up to the top end of where we are with all of other competitions. And you do retain some flexibility with the remaining cash flow, as Cole just said, with acquisitions and things like that. I think the key point here is that we will -- we still are committed to the minimum of 50% return to shareholders each year. And so we are increasing the dividend. And to get to that 35% over the next couple of years will require a significant increase in the dividend rate from where it's been for the next couple of years.

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

Okay. And then second question is, I may have missed this, but on the emerging markets investment, how much incremental are you guys investing? I guess, as I think back in the first you talked about these incremental investments back the time, in the spring, it felt like it was going to be temporary. But I think what we're hearing today is going to have a longer tail to that. So if you could walk us through, again, what the incremental spending is now coming into the operating expenses and how long we should anticipate the spending.

Charles J. Dockendorff

I think as long as we see the market growing the way it is, and I think Brian mentioned it, when we began the investment process, we had a strategy, we're going to go after the Tier 1 markets with our existing product portfolio. In addition to that, we're going to look at the Tier 2 markets with locally-manufactured and developed products. And this is going back 3 years ago. So as we put people over there, the returns are very fast. It's a very low-risk type of investment. And now that we're here today, that Tier 1 market is much larger than what we thought it was, and we have not hit the limits of that yet. So we are able to invest this at the rate where you could control it and yet have these returns that are very good, very quick and low risk. We will continue to invest in that area as it presents itself. We have to. It's such a good market and our products do so well over there and they get the same price as what we get in the developed markets. So it's a huge opportunity. Having said that, we know that's one of our biggest investment opportunities as a company, and we are really striving for these operational investments and the savings that we can generate in some of the developed areas and the infrastructure there, because we know as a company, the more we fund in those -- more we can save in those areas, the more we can bring to other investments in the business. We're still committed, though, over time to that double-digit earnings per share growth. So we balanced all of that off to drive through current year growth and long-term investment with the business. So we'll continue, this business grows and emerging markets, we're sitting here 3 years from today and we still see this as a big market and we can put salespeople on a payback in 1.5 years, we'll continue to do that. I don't think we could do anything else and I don't our investors will want us to do anything else on that part of it.

Jose E. Almeida

I just want to make sure that I go back 20-plus years when we're developing the U.S. market in laparoscopy in Europe. Significant investments needed to bring the market up to speed. So when you have a market which the penetration is so low but the growth is so high, the growth is so high, and has the highest return on investment. I don't think we have alluded to temporary investment. However, what we're alluding is that we need to create faster productivity improvement in the company to be able to offset that and return to you at the halfback of 2014 and beginning in '15 more leveraged to the bottom line so we can get both world -- the both of the best worlds. Leverage is also finance of investment. Covidien has undertaken a significant amount of investment in "Strategic" best. Our drug-coated balloon program, our BÂRRX program, all of those are very expensive to develop. Why are we doing that? Because we want to make sure that our growth in Medical Devices doesn't go below 5% and is twice as much as the market is today. So if we let those linger, I can give you next 12 months a great deal of leverage. You're not going to enjoy the conversation 2 or 3 years from today. So we've got to balance this load, the short term and the long term. And as we get to this FX period where we have this tremendous headwind and we get into half -- the second half of 2014, things have a significant potential for change. As we continue to execute like we're executing in all our franchises today, this is a very, very good business and we'll be growing at mid-single digits in Medical Devices. And as our Medical Supplies start coming up to speed some of their new products, we're going to get a little bit of leverage there, too. So in 2014, the first half is a tough comp. The second half is a good story. Overall growth for the company is still above market, is still in the range that we expect it to be.

Charles J. Dockendorff

I think, too, the level of investment we do in emerging markets, there is a pace you have to go at. Remember, you are putting salespeople out there. They have to be trained. You have compliance issues. If you go too fast, you can lose control of that, and you'll be in a worse spot than where you were at the beginning. So that is the risk of doing the investments in that area. And in addition, I think Brian talked about some of the CCI institutes we put in. Those are a little bit longer investments because it's an infrastructure you're building, training people, paybacks are a little longer. But you could see the benefit of them and a -- that they bring in the product and they stay with the product once they leave there.

Coleman N. Lannum

We're going to #5, other question? Bonnie, can you get the gentleman in the blue shirt by Alana [ph]. Going #5, David. This time it really is David. My apologies.

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

David Roman from Goldman Sachs. Just 2 [indiscernible], one is on revenue and one on earnings. On the revenue side, I just want to make sure. I was looking at the organic underlying performance of the business, I actually think the midpoint of your guidance is a little bit better than what you're going to do in your guidance once you exclude acquisitions. But I think this year, it's just under 100 basis points of acquisition contribution. Is that a correct assessment, Cole?

Coleman N. Lannum

Yes, I mean, we don't want to talk about midpoints. The ranges as specified in the press release are the ranges they are. You can decide where you go within there. Yes, the acquisition of Soft Tissue [ph] was about 100 basis points.

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

And 0 next year, more or less?

Coleman N. Lannum

At this point, yes, we would be assuming no acquisitions.

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

And then I understand the guidance ranges provide flexibility for things. And maybe there's any perspective around whether you are comfortable with the consensus numbers and that is a statement that you've been willing to make in the past and how you feel about it, $4-ish, give or take, earnings number for fiscal 2014?

Charles J. Dockendorff

Yes, I'm comfortable with that. And I think that if you look at our guidance, it falls within that guidance ranges that we give. And I think that's -- I'm comfortable with that range on the EPS.

Coleman N. Lannum

And I want to reiterate too, again, I don't think these numbers should come as any surprise from the things we talked about, particularly in the last quarter call. But, and I think this speaks to your question on EPS, regardless of the things we talked about, there are still some people out there that clearly have some numbers that are well outside these ranges. You know who you are, don't make me call you out. And look, at the end of the day, you own your numbers and you can put anything you want. You want -- if you want to say we're going to earn $10 a share next year, you're more than welcome to. But I can tell you what, you're probably going to be wrong. So I think one thing to keep in mind is that some of those people that are way outliers, they should seriously consider what we're saying today with these ranges. We do put a great deal of thought into them. As I said earlier, we think it's a fair assessment of what the numbers really ought to be, taking into account the variables we have right now. And I don't think I would be outside those ranges as a couple of people clearly are. Go to #4, please.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

All right, just real quickly. It's Rob Hopkins from Bank of America. Sorry if I missed this, Chuck, but can you talk about free cash flow generation in 2014, what you expect there? And then the other question I had was I was interested in the comments throughout the meeting from Joe about intrinsic value over the next 5 to 7 years. And just, Chuck, from your perspective, what kind of operating margin does that contemplate over that sort of time period?

Charles J. Dockendorff

Yes, the -- I'm sorry, the first question was on...?

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Free cash flow in '14.

Charles J. Dockendorff

Free cash flow. So free cash flow, if you look at '14, '13 is a difficult year. As you look at the numbers that we report, it includes -- because of the way we ended up separating it out, it includes 3 quarters of pharma and 1 quarter of us and some of the separation costs as well as that. But going forward, we were upwards of around $2 billion of free cash flow as a business. With the pharma divestiture, we probably lost around 3 to 3.50. So we think the free cash flow will be in that, close to $1.6 billion, 1.7 billion range as we look out into next year on that component of it. As far as intrinsic value, there's a lot of drivers of intrinsic value. It is revenue growth. And the faster you can grow that drives your intrinsic value higher. It is operating margin improvement, which we have to get on those lines. It's also deploying the cash that we have into acquisitions. Now, I just want to make it clear here that we're not making this assumption that when we go buy a company and it has cash flow effects, and that's increasing our intrinsic value. It is the net present value of that acquisition that really increases the intrinsic value of the company. So it's a combination of all those factors that we've set out as a goal to drive through and double that intrinsic value. It is a goal. That's a big challenge for any company to do, but we're coming in thinking about that everyday about how we get our revenue growth up, how we drive through efficiencies, how we improve the operating margin. But it's clear we will have to be leveraging operating margin out after the FX and the device tax settles, there will be an increase in operating margin and leveraging operating margin going forward in 2015 and beyond.

Jose E. Almeida

Otherwise, you can't get there. So it has to be a leverage from it.

Charles J. Dockendorff

That's a component of it.

Jose E. Almeida

As I said, FX is playing a big role in the first half of this year. The underlying operating margin is very healthy, as well as the gross margin because that's what the FX is hitting. It's hitting on the gross margin. It's in the operating income. It's just transaction cost of FX. In terms of growth of the top line, if you're comfortable with the range and if you're comfortable with us getting opportunities throughout the year to improve that even to the midpoint. But when we look at the first half, this is a conversation that bring us to grow the operating income to that point which we just discussed.

Coleman N. Lannum

So we're going to do 3 more questions, then we're going to break. I know it's been a long day for everyone. Before we get to the questions, I want to go back to one more question from the Internet, then we're going to go to #5 and #4. But first, Chuck, this is for you. With the number of restructuring programs the company's had over the last several years, why haven't we seen more of a favorable impact to the bottom line?

Charles J. Dockendorff

I think we have seen a very favorable impact to the bottom line from those restructuring programs. I think if you go back and look historically at the improvement in gross margin, a lot of that improvement came from the restructuring programs we initiated. We took cost out of the system. Some of that was from mix. But a big part of that increase, and you go back to when we spun in 2007 and the improvement to be able to drive in that line, a lot of that count. Now remember, when we spun as a company, we were deficient in certain growth areas. We really didn't have the right kind of strategy in BD&L and growth functions supporting our businesses to go after strategic markets. We added that. We had to add that into SG&A. We also had a very low level of R&D. And so we've more than doubled our R&D over that same period. And we've added sales forces and investments and acquisitions, like we said, into the various regions like emerging markets and things like that. So what you've seen is these restructuring programs driving into the business, but we've correspondingly made some nice investments. And I think I still -- you have to go back to the 5 years, where you see us 12% compound annual growth rate on EPS. So it's a combination of all that restructuring, and that's in our -- we're balancing off again these investments we made, that growth, restructuring drives that. So we could have let all that restructuring drop through. Would be better off today? Would we have the portfolio, all of the investment and capability we have in emerging markets, the capability we have around strategy? No, we wouldn't have that. So we think this is the right balance. We're much stronger today by making those investments. But all of those savings are in the numbers that you see today.

Jose E. Almeida

We would not be growing above market and beating the competition that all of you know the name of the companies in most of the businesses that we have if we had to return 100% of that leverage to the market, because our R&D was sub 2%. You can't make a dent in any technology business that is driven like ours with that kind of R&D. So I think the mix and the choices that we made in terms of what we invest in the portfolio, how we deploy cash, was done to optimize the return to our shareholders. And Covidien has been positioned in the last couple of years at the top quartile of total shareholder return, and we have absolutely no intentions to give up on those positions. Now it's very difficult to maintain all the time your position top quartile. But I think with the programs that we have here, the technologies and the leverage that is very important to us to execute in those $350 million to $450 million in restructuring programs, that is going to provide us with the leverage that you're asking for and the leverage that we need as well to be able to reinvest.

Charles J. Dockendorff

I think it's -- we had this discussion just before my presentation, a lot of you have been with the company since 2007. And I think if you go back to that, we're kind of joking around to look at that Investor Day, but to see our business presidents sit up here and talk about the product pipeline they have and talking, moving from opened MIS and the strategic initiatives they have. The company is so much better off today from that capability to grow and then compete in the marketplace. And during this time, to be able to drive that kind of earnings growth and sales growth of our market, we think is the right balance on the company.

Coleman N. Lannum

Then we're going to do 2 more questions, then we're going to break. So first, #5.

Unknown Analyst

[indiscernible] Chuck, maybe on the tax side of things, I think you've mentioned, as you have in the past, initiatives to reduce the tax rate. Can you just give us a sense of what you think the tax rate will be over time?

Charles J. Dockendorff

I think what you've seen, a slight decline, 50 basis points. As you work on it a year, you execute those planning initiatives. Some of it has to deal with where we sell in the world. And we're able to put in planning strategies to take advantage of that. But look, I think over time, you're going to see some decreases in that just from planning, ignoring that R&D tax credit, which gets renewed every year, but we have to wait for it to get renewed. So I think that we'll see continued improvement in that area. We can't get into 0, but we can certainly go move down from where we are today. And I would tell you the group did a phenomenal job. We were extremely, I mentioned this, very concerned about the breakup of this. But they were able to go in and still implement new strategies to take that down, even this year where I can't tell you how busy they were on this spin and how complex it was with what they had to accomplish. So next year, we don't have that. And I think that, that will be an advantage to do and make more planning activities.

Coleman N. Lannum

And just let me add, too, and again, [indiscernible] forgive me for coming back to this point. But again, the R&D tax credit, another great example of an exogenous variable that could affect that range, one of those many, many things that could flow this through that range.

Unknown Analyst

Okay. And then for Joe, I think my sense was you feel comfortable with that price you're going to get or at least that was what the [indiscernible] in the opening remarks. And there was something, if you could just give a little more color on a particular product categories. Where do you feel most insulated? What gives you confidence that this is, as you said, thick enough?

Jose E. Almeida

There's no insulation thick enough. Everything gets affected. I think because our position of strength in, portfolio-speaking, in several areas of Endomechanical/Energy, we can't provide that advantage to our customer without having to significantly undergo a price restructuring because you have a portfolio of products that have different price points. And you can't offer value without having to significantly discount your technology. So I feel comfortable, not happy, but comfortable, that where we are today in terms of price and we always talk about 50 to 100 basis points that we feel comfortable with that. And we have, across our businesses, a variant of several different products that will be some positive pricing, some negative pricing. And we feel comfortable there. I don't think we're going to go down worse than it is today. But we've been telling you all along that this price pressure has been there for 3 years now. And not everybody saw that. And now, we're saying it's not getting worse. But it has to do a lot, and comparing us with other companies sometimes does not equate well because Covidien has an exclusive portfolio of products that not everybody has. We don't have long-term implantable products in orthopedics or cardiovascular. So it makes for a very different dynamic. That's why I'm comfortable with where we are in terms of price erosion.

Coleman N. Lannum

And the last question, David.

David R. Lewis - Morgan Stanley, Research Division

David Lewis, Morgan Stanley. Chuck, just thinking about the fiscal '13 through '18, the long-term cost structure. And I appreciate you said fiscal '15, things will accelerate. But you initiated the [indiscernible] in '14, so they can accelerate to '15. And some of them were obvious. If you think about that 5-year plan, can you at least tell us, if you'd be back 2.5 years of that plan, is that 70% of the restructuring savings? What's the pacing?

Charles J. Dockendorff

No, I think when you look at the savings related around the plan, probably I would say 1/3 of it is -- a little more than 1/3 of it is SG&A. The other piece of manufacturing. Those are the ones with the longer tail. I think the SG&A portion will come sooner, and the manufacturing will begin next year and ramp up to that '18 period when we get it out.

David R. Lewis - Morgan Stanley, Research Division

So kind of half in the first half of the plan, half in the second half?

Charles J. Dockendorff

It's not back-end loaded, that's for sure. I mean I haven't -- we haven't really sat here and looked at it from that perspective of what year it is, but we'll get some of these savings in '14 and '15. So it will ramp up in the -- but I don't think it's a ramp that you see tailing up to '18 and nothing in between. So the SG&A, like I said, will come earlier, '14 and '15. They'll be manufacturing in '15. Mike's told me that. But they will be manufacturing savings in '15, and we'll get it going to '16, '17, and those are annualized.

David R. Lewis - Morgan Stanley, Research Division

Very helpful. And then maybe just lastly, you're sort of laying out the next 5 years for Covidien, you've got significant investments, '13 and '14. But emerging markets kicks in, the pipeline kicks in, your 2 initiatives kick in '15, '16 '17. Was there any consideration just given the FX and the increased spending heading into '14 of a more aggressive share repurchase heading into '14?

Charles J. Dockendorff

No, I think that had to do strictly with, again, we had the share authorization program. We had the excess cash, and we put it back into deployment against shareholders. Again, we have enough balance sheet strength and cash flow going forward where we can execute any strategy we want from an acquisition standpoint, so that's really where it came to. We didn't see the use of that cash sitting on our balance sheet.

Jose E. Almeida

So we're not going to let cash -- we're not hoarding cash. So either go through an acquisition or return back to you. But I think it's important to remember the slide that Chuck had on our payout ratio for dividend, 30% the next 12 months, 35% more longer term. So that should give an indication of what -- where we are in terms of our thoughts going forward at capital allocation.

Coleman N. Lannum

Thanks, Joe. Thanks, Chuck. And thanks to all of you. As I said earlier, I know it's been a long day. I appreciate it. Hope you got something out of today. I hope everyone learned at least a little bit about what we're doing. As always, I expect you to not be shy whatsoever about coming back with comments, criticisms, suggestions on how we can make these days even better. Please join Joe and Chuck and I, as well as the senior management team, upstairs. Nice frosty, cold adult beverage awaits any of you who are interested. And thanks for attending to everyone. Good night.

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