Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Covidien (NYSE:COV)

Q1 2014 Earnings Call

January 24, 2014 8:30 am ET

Executives

Coleman N. Lannum - Vice President of Investor Relations

José E. Almeida - Chairman, Chief Executive Officer and President

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

Analysts

Matthew J. Dodds - Citigroup Inc, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

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

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

David R. Lewis - Morgan Stanley, Research Division

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

Robert A. Hopkins - BofA Merrill Lynch, Research Division

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

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

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

Matthew Taylor - Barclays Capital, Research Division

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

Richard Newitter - Leerink Swann LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Covidien plc Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the call over to Mr. Cole Lannum, Vice President of Investor Relations. You may begin.

Coleman N. Lannum

Thanks, Frances, and good morning, everyone. With me today are Joe Almeida, Covidien's Chairman, President and CEO; and Chuck Dockendorff, our Chief Financial Officer. We'll be making some brief introductory comments and then spend most of the time this morning answering your questions.

Now during today's call, we may make some forward-looking statements, and it's possible that actual results could differ materially from our current expectations. Please refer to the cautionary statements contained in our SEC filings, including Form 10-K, for additional information about factors that could cause actual results to differ from those anticipated in such forward-looking statements.

We may also discuss some non-GAAP financial measures with respect to our performance. A reconciliation of non-GAAP to GAAP measures can be found in our press release and its related financial tables, as well as in the Investor Relations section of our website, covidien.com.

As a reminder, we recently announced changes in our revenue reporting to provide a more transparent view of our financial performance. Beginning this quarter, we will be speaking to revenue under this new format.

For the first quarter, we reported GAAP diluted earnings per share of $0.87. After adjusting for certain specified items, our non-GAAP earnings came in at $1 per share. The after-tax impact of amortization in the quarter impacted earnings by $0.09 per share.

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

José E. Almeida

Thanks, Cole. Let me begin by saying that we're very pleased again this quarter with our results. Sales were above plan, up 5% operationally and 3% -- and up 3% as reported. In the Medical Devices segment, we had a very good quarter, posting 6% operational growth.

I'd like to start off with some brief comments of our sales performance on a geographic basis. First, we were very pleased with our sales growth in the developed markets, particularly in the U.S. and Europe. Sales growth was stronger than anticipated in both of these regions. We're hopeful that this is a sign of improving market conditions and that this momentum will continue for the remainder of the year.

Turning to emerging markets. We had another solid quarter with operational sales growth of 14%. We also posted double-digit growth for the BRIC countries despite changes in the reimbursement system and difficult comparisons in Russia.

Let me now turn to our first quarter performance in individual product sales categories. As usual, I will discuss our growth on an operational basis, excluding the impact of foreign exchange. Within Surgical Solutions, our Advanced Surgical business, which makes about 1/3 of our overall revenue, had an excellent quarterly performance with 10% growth. This growth was primarily attributable to stapling and vessel sealing, 2 of our largest product categories. We continued to grow above market in stapling during the quarter, led by the innovative Tri-Staple reloads. This growth is a result of the strong demand and market share gains as we continue to execute on our strategy of moving from open to MIS procedures. Growth in Advanced Surgical is also driven by a double-digit gain from vessel sealing, which continued to benefit from the introduction of Sonicision, as well as from new products, including LigaSure Impact and Blunt Tip.

In addition, we're very pleased with the performance of our GI and interventional lung businesses, which both had double-digit gains this quarter. Finally, we were also pleased with our performance in the hernia space. The investments we have made in the synthetic mesh space are paying off as this product category achieved substantial growth this quarter.

Growth in General Surgical was driven by sutures and primarily resulted from gains in our barbed V-Loc suture, particularly in emerging markets. For the next quarters, we expect growth of General Surgical to be negatively impacted by the divestiture of our Confluent BioSurgery product line, which closed last week. As a reminder, this product line had quarterly revenues of between $15 million and $20 million, predominantly in the U.S.

In Vascular Therapies, we delivered middle -- mid-single-digit growth in both Peripheral and Neurovascular. Growth in Peripheral Vascular was driven by chronic venous insufficiency products, which once again posted strong double-digit growth. As we mentioned in our last call, we faced difficult comparisons in compression this quarter. Now that this is behind us, we expect to see an improvement in the growth rates for compression throughout the year.

We also had good growth in Neurovascular, driven by gains in emerging markets, particularly in coils and Solitaire. While our Pipeline Embolization Device is close to reaching peak sales in the markets in which it is currently approved, we expect to be able to serve new markets including China and Japan in 2014 and '15, respectively. In addition, growth of Solitaire is accelerating and should perform better this year than we previously expected. As a result, we currently expect Neurovascular growth to pick up throughout 2014.

Turning to Respiratory & Patient Care. In Patient Monitoring, sales were above a year ago, led by increases for pulse oximetry and capnography sensors. We're very pleased with the performance of our capnography business, which continued to grow significantly during the quarter.

In the Airway & Ventilation category, sales declined from last year due to lower ventilation sales, primarily in Russia. We expect vents to rebound in the latter half of the year as we're looking to launch our new acute ventilator in this area.

Finally, Nursing Care and Patient Care grew 1.5%, driven by significant growth for enteral feeding products in the U.S. As a reminder, these 2 product lines represent our worldwide Medical Supplies sales.

This quarter, we continued to execute on our customer-focused portfolio investment initiative. We announced the acquisition of Given Imaging and entered into 2 smaller transactions in Brazil and China that support our emerging markets growth strategy in the value segment. We also had strong execution on new product launches and grew ahead of market in several categories. We're committed to continuing to invest in product development to expand our product offers and drive future growth.

We're off to a great start in fiscal 2014. We finished the quarter even stronger than expected despite a difficult market environment, the medical device tax and FX headwinds. We remain cautiously optimistic about the market and feel we're on track to deliver a solid operational performance this year.

I will now pass the call to Chuck, who will discuss the first quarter financials in more detail. Chuck?

Charles J. Dockendorff

Thanks, Joe. As Joe mentioned, we're pleased with our performance in the quarter as sales came in ahead of plan. Sales rose 3% in the United States and 7% outside the U.S. on an operational basis.

Despite the positive net impact of price, volume and mix, adjusted gross margin declined 50 basis points this quarter, primarily resulting from increased manufacturing costs. On a sequential basis, adjusted gross margin improved 120 basis points, mostly due to better manufacturing performance by our U.S. Medical Supplies business. I'm sure you recall that last quarter, we had some operational issues in our supplies business. I am pleased to report that we have largely addressed these issues, which resulted in improved gross margin and operating margin for the business.

Despite continued investments in sales and marketing in emerging markets and the adverse impact of the medical device tax, adjusted SG&A remained flat as a percentage of sales. Excluding the impact of the medical device tax, adjusted SG&A as a percent of sales was down about 60 basis points year-over-year, reflecting operating leverage and productivity improvements.

We also continue to make incremental investments in research and development to support future growth. During the quarter, R&D grew over 10% to $125 million or 4.7% of sales. This represents a 40-basis-point increase over a year ago.

Our first quarter adjusted operating margin was 22.7%, a bit ahead of our annual guidance range due to the drop-through on revenue. This amount includes a headwind of approximately 115 basis points from the impact of unfavorable foreign exchange and the medical device tax compared with the prior year.

Net interest expense was slightly higher than a year ago, and the adjusted tax rate for the quarter came in above previous guidance. The mix of income, primarily resulting from stronger-than-expected sales in the U.S. and unfavorable foreign exchange, caused some upward pressure on the tax rate. We now expect our effective tax rate to be in the 16.5 to 17.5 percentage range for the year. As a reminder, this range does not assume the renewal of the R&D tax credit.

We delivered adjusted earnings per share of $1 for the quarter, a 3% increase over the prior year, despite the impact of unfavorable FX and the medical device tax. Excluding these items, we once again achieved double-digit earnings per share growth as these items reduced EPS by about $0.08 per share or 8 percentage points on a combined basis.

During the quarter, we repurchased about $300 million of stock. In the last 12 months, we have returned more than $2 billion to shareholders in the form of dividends and share repurchases, representing over 100% of our free cash flow.

As Joe mentioned, we are optimistic about our prospects for the remainder of 2014. We are hopeful that our strong sales performance in this quarter in the U.S. and Europe may be a sign that the market is improving. That said, it is still too early to determine if the magnitude of this revenue strength will continue for the entire year. So for the time being, with the exception of the tax rate, we remain comfortable with the guidance that we previously issued in December.

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

Coleman N. Lannum

Thanks, Chuck. [Operator Instructions] We will be ending the call promptly at 9:30, so please be considerate of others on the call when asking your brief questions.

Frances, can you please review the process for signaling the question again?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Matthew Dodds from Citigroup.

Matthew J. Dodds - Citigroup Inc, Research Division

Joe, versus some of the other companies that reported already this quarter, it seems like you did particularly well in other developed markets outside the U.S. Can you comment where you saw the strength? Was it -- which countries in Europe? And was Japan part of that as well?

José E. Almeida

Matt, we did see good growth in Japan and overall in Europe. I tell you, Europe was uniformly better than last year with exception of Spain and Italy being the 2 countries that probably will have more challenging growth ahead. I would say Spain is the one that we see flat, slightly declining. But everything else in Europe looks more positive than last year. We also had very good sales growth in Australia.

Matthew J. Dodds - Citigroup Inc, Research Division

And then just one more quick country follow-up. Can you just discuss what happened in Russia? Because it seems like that market has bounced a lot for you from being really good to then weak. What's changed now?

José E. Almeida

Simply a reimbursement change from the central government to the provinces. And they are the ones making the decision in buying. There's a lot of confusion. And we sell a great deal of capital goods. And I believe that transition from central government to the provinces have created disruption. We don't think the disruption is permanent, and now we'll be ready to engage that market whenever the changes are settled and things improve. We are still very confident in the Russian market, and we continue to work hard there to continue to train physicians and provide education support in all modalities of businesses that Covidien has.

Charles J. Dockendorff

Matt, one more thing on Russia, too. You heard us talk in the last couple of quarters that the first quarter had some tough comps. Russia, in particular, had very tough comps in the first quarter. Our growth in Russia in the first quarter of last year was well above 50, 50%.

Operator

And your next question will come from the line of Kristen Stewart from Deutsche Bank.

Kristen M. Stewart - Deutsche Bank AG, Research Division

I was just wondering, Joe, if you could just spend a little bit of time just talking broadly about the M&A strategy, especially the Given Imaging deal, maybe just help put it into perspective in terms of how you're looking at that deal, just kind of folding into Covidien some of the milestones that we should look for over the next 12 months, and then just more broadly on the M&A side, to what extent we could continue to see additional deals coming and kind of how should we think about size.

José E. Almeida

Let me address the size first. Covidien is always looking at opportunities to expand into specialty or expand into procedures. So the Given acquisition was direct to the specialty of GI where we think we can get more momentum. Our GI business is doing well. And if you remember, this was the acquisition of BÂRRX. So the size of the acquisitions will be managed according to the opportunity. I said before a few times that we are not afraid of a larger-sized acquisition. But those larger-sized acquisitions are not very easy to come by. And above everything, Covidien is focused in delivering value to our shareholders. And we have our thresholds. They're set in place that we do not change. So we will continue to look at opportunities where it makes sense. We have a full slate of potential acquisitions. We're looking at small deals, mid-size. We're looking at everything right now. But be certain that 2 things are paramount to us: either we spend into a specialty or a procedure, so you're going to see those movements, and we also will not compromise on our financial metrics to deliver value to our shareholders in our M&A activity.

Kristen M. Stewart - Deutsche Bank AG, Research Division

And I guess just on Given, I guess how do you see that business just kind of over the next couple of years? Will this be more of a new platform? And I guess what part of the kind of product pipeline are you excited about there?

José E. Almeida

I think we're excited about some development that they have. I would say that's probably mid- to long-term development. But I would say that probably the initial excitement that we have is more so expansion geographically, more into Europe and also Japan. I think Japan offers a great opportunity for Covidien with the Given business. And our Japanese business is an excellent location for market development while we continue to penetrate the U.S. and develop Europe. So I would say that in the short term, we're very excited about the platform combining with ours, as well as geographic expansion. I would say the product pipeline will come in the mid-term.

Operator

And your next question will come from the line of Rick Wise from Stifel.

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

Joe, you highlighted that Surgical Solutions, particularly Advanced Surgical, had another terrific quarter. You had both market rebounding and you're gaining share. Can you talk about that in a little more detail, how you see the market growing? And I assume technology is the major factor driving the share gains. Maybe just, again, a little more color on if this is technology driving it or is it enabling you to win new contracts? Just a little more detail on how we think about things going forward.

José E. Almeida

Thank you, Rick. Two fronts. One is technology, and the other one is market development. And let me tackle the technology first. I think Tri-Staple has proven to be a great product. Covidien continues to invest in that platform. You saw the rate of reload. And we also have new developments coming in the next 18 to 24 months in that area. Even more innovation in an area of bringing technology and value to our customers. We continue to invest very heavily in some subtechnologies in our stapling platform. As an example, we are very, very, very close in the imminent approval in Japan of the relaunch of Covidien's buttress material on the Tri-Staple load, which used to be our duet that we removed from the market. And following that, we're probably going to have approvals in the U.S. and other countries in the world. That just shows that our R&D is really focused on bringing technology to the market. The other aspect of that business is our energy devices. In the energy devices, we continue to launch products at a pace of 2 or 3 a year, not only segmenting, even deeper to market and providing even more economical solutions for our customers, including better outcomes, clinical outcomes. So between the 2 franchises, stapling and energy, we're really focused in delivering that technology to expand our MIS presence. So let me bring now the MIS component to the minimally invasive surgery to it. You have a huge wave that we are working so hard and you see in many other companies' scripts about the move from open to MIS. And MIS is our sweet spot. These are the things that Covidien has the best product. So as that movement, growth in the market, accelerates, Covidien tends to benefit. And our portfolio, I would say, is second to none. So I'm very confident that, that business, managed by a global group of very, very competent people, will continue to deliver well.

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

A quick follow-up for Chuck. Chuck, you highlighted the operating margin outperformance this quarter. You're already above the range, as you said. I wasn't sure if I understood, what's the message? Is that 21.5 to 22.5 range still good for the year? Or you started out strong and actually that could prove low?

Charles J. Dockendorff

We are starting out very strong since we're above the range in the first quarter. But then again, sales did come in. And we had some extra sales and very good strength in the U.S. and Europe, and the margin on those sales fell through to the bottom line. So the first quarter, exceptionally good with the fall-through of the profit on those sales. Going forward, if we continue and Europe and U.S. stays at the rate it has in the first quarter, fully operating margins will be higher. But we're not quite forecasting that yet for the balance of the year.

Operator

Your next question will come from the line of David Roman from Goldman Sachs.

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

I was hoping you could give us just a little bit more detail in perspective around the 2 acquisitions you did in the value segment in emerging markets. Maybe if you could just frame that for us as to where you are in the evolution of sort of penetrating those markets. And is this an acquisition that sort of augments your growth? Or are we getting toward the end of the opportunity set in the sort of "high-end segment of the market" that requires you to go, look elsewhere for incremental growth?

José E. Almeida

David, it's very hard to conceive that we're getting to the end of the opportunity in the markets that we currently participate in. This has absolutely played at Covidien's make [ph] in areas that we currently have low penetration. It's a highly competitive area. So we thought by acquiring companies in that space will give us an edge instead of ourselves going after those products. And as well, we're setting up the sales force there. So we have very modest contribution from those acquisitions in the first year or 2. But it's also going to test some assumptions that we put in place about the growth of that business -- of the market -- the value segment, also how big it is and what kind of tools you need to compete in the market. So for the record, we need to be very clear, the opportunities in emerging markets and the business that we currently compete in are not subsiding at all. They are good, and they are thriving. We need to explore and make sure that in the future, Covidien can't play in all segments.

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

Okay, that's helpful. And then in your prepared remarks, you did talk about strength in GI. You did call out Barrett's esophagus as well. I think you also referenced the interventional lung franchise. Those are 2 deals, I think, that you did a couple of years ago. Maybe just if you could update us on how those franchises are progressing. And any sort of thoughts that you could provide on sort of size of those opportunities now versus when you acquired them and sort of how things are going on those 2 particular product areas.

José E. Almeida

I would say that the GI opportunity, which started with the acquisition of our BÂRRX to treat Barrett's esophagus, they are proven to be a great opportunity, more difficult than we anticipated in the very beginning because it was not an issue of reimbursement, which is right there and very healthy. It was more about the conversion of physicians to change how they manage their time and practice. We are getting over that barrier, and the business is starting to do quite well. But it was a little longer time that we thought about getting after the market development. We're deploying a significant amount of effort in direct-to-consumer advertisements and things that now make people think twice about the disease state and also to understand and feel more comfortable with the procedures. So all in all, it's a good thing. Timing of our expectation was a little off, but we're getting back on track. Great team, by the way, managing that business. The lung solutions are a little different. That growth is really as per expectations, which was already very high, what we expect that business to do. But also, we're very excited about the technology we'll be launching later this year and then into '15 and '16 to then treat what is found in the lung. So it's a great complement to our surgical business, which currently is the leader in thoracic surgery. Now we will be able not only to diagnose that disease state, but also, we have the therapies there.

Coleman N. Lannum

And David, I think it helps if you think about the size-wise, we bought each of those businesses. They were about $5 million to $10 million a quarter in revenues. They're now $10 million to $15 million a quarter in revenues. And each of them has been growing consistently double digit, and we expect that to continue for the foreseeable future.

Operator

Your next question will come from the line of David Lewis from Morgan Stanley.

David R. Lewis - Morgan Stanley, Research Division

Joe, just a quick question on Neurovascular and then one for Chuck on earnings. You have talked about Neurovascular pressure the last several quarters and do describe it as obviously the comparables have been challenging. But could you help us understand as we ease past these comparables, which I believe will happen next quarter, can you talk more about the Neurovascular pipeline? We haven't heard much on the pipeline post Solitaire. What is the plan for the pipeline? Can we see new product launches in Neurovascular to reaccelerate that business beyond the easing comparables?

José E. Almeida

Sure. We have augmented our portfolio in our Neurovascular business with a couple of very small R&D acquisitions last year. And those are midterm acquisitions. But we are working on new generation of pipeline. Pipeline with different codings. So we are going down the path of expanding that market. I think there is -- David, just -- you're speaking about Neurovascular, right? You're talking about Neurovascular?

David R. Lewis - Morgan Stanley, Research Division

Yes.

José E. Almeida

Okay. So we want to make sure that our pipeline will continue to be enriched. So we will be looking at the small acquisitions in terms of technology as we develop the next generation of pipeline. We are developing coils in China, which will be launched in the emerging markets, as well as in the U.S., in Europe. So I see the portfolio quite rich going forward. I would tell you that it's an arm's race. The technology is evolving quite rapidly. We believe that our technology in large neck aneurysm, which you can use a woven intersecular basket, it is a great opportunity to continue to bring some of the acquired business into new different products like we did with Pipeline. So the accumulation of organic opportunities in the pipeline that we have today and some inorganic opportunities that we are looking very shortly, I would say that we feel confident that the team in Irvine will bring to bear the growth that we expect this year.

David R. Lewis - Morgan Stanley, Research Division

Okay. And then, Chuck, just a question on earnings. You talked about question pressures in '14 here given Confluent and the tax rate. Can you just kind of remind us the positive offsets to those 3 dynamics keeping earnings flat? And then FX pressure, you talked about the first half of the year pressure. It was right in line with the first quarter. We're sort of looking for a 1% headwind to currency in the second quarter. Do you still feel reasonably comfortable with that estimate?

Charles J. Dockendorff

Yes. Those things, I think on the FX piece of it, yes, that looks like it's starting to abate right now based on the existing exchange rates. The first quarter is definitely the worst when you do year-over-year comparisons. It definitely declines within that range you mentioned in Q2. And then actually, it will turn on revenue, but our earnings is slightly favorable as we look out into Q3 and 4. And that again is on a year-over-year basis. Some of the positives that are offsetting some of the negative headwind that we have, certainly we're continuing to drive through productivity through all phases of our business. We have the restructuring program. Even within this quarter, we have significant productivity and SG&A, over 200 basis points. So that's offset by some of the investments we're making in emerging markets and some of the FX that we're facing. But clearly, these programs are continuing. We're driving big productivity programs in Europe as we're continuing to consolidate our operations over there on a regional basis. So we have many programs there. We're continuing on with our manufacturing, which is -- as part of our restructuring programs. So we expect that. Continued improvement in our gross margin from -- when you look at the net of pricing, volume and mix, we see that as continuing to be favorable as we go through. And that's a trend that will continually expect, for the balance of the year. So there are a lot of positives on that end. And so we feel comfortable again with the guidance that we've given. Again, what we look to do is driving that double-digit earnings per share on the bottom line, which we've been successful at doing, and balance that off with the investments as we go forward. So we have options within ourselves to measure these investments, balance with the productivity and achieving our goal of double-digit. The other thing is while the tax rate is high now and we've actually increased that as we look upon the earnings we see out there, we certainly have tax planning opportunities that we haven't implemented yet. But we will be pursuing those. And as I mentioned in my remarks, the R&D tax credit, which could adjust tax rate by 50 basis points we do not have that included. And the timing of that, we can't predict, but that could be an upside as well.

Operator

Your next question will come from the line of Mike Weinstein from JPMorgan.

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

So just a follow-up on that. So if I look, Chuck or Cole, the gross margin impact from FX, it looks like it was less than you guys feared this quarter, the first quarter. Can you just talk a little bit about how that plays out in the second quarter? And I bring this up in part because we have had a handful of companies that have surprised people with the degree to which they are concerned about FX in their March quarters.

Charles J. Dockendorff

Yes. I think, Mike, we built that into our guidance when we gave it out originally in September. Since that point, we've seen a slight deterioration in the FX components going forward, mostly from the yen. That has been the biggest mover. And some of the emerging market currencies have also declined. But the biggest one probably impact for us is the yen. So specifically on gross margin, the FX component was a little lower this quarter than it has been previously. And again, we expect that to abate going forward and become somewhat neutral in the back half of the year. But as far as that going forward, I see the gross margin -- we're continuing to pursue that positive price mix and volume component of it. And that will be an upside driver on that. And I think in this quarter, we talked about some manufacturing costs, and it really had to do around some of our new distribution systems we're implementing and some of the start-up costs associated with that. So that's an area that we think that we can fix going forward and should reduce the cost in that area going forward as well.

Coleman N. Lannum

Mike, let me jump in here real quick, too, and address something that I know it's talked about a lot. But I think your question illustrates this very handily. A lot of times, people will paint the brush of Covidien as somehow being impacted by FX in some differential way against other companies out there. The reality is if you're a multinational company operating in international markets, FX is what it is. It's mathematical. It's straightforward, and you can calculate it. I think what sometimes happens is as we give our forward-looking guidance for the following year, in the fall of every year, sometimes simply by addressing what is a fact. And that is the fact that currency was very, very tough last year when other companies have not really addressed that can give the impression that it's somehow different for us than it is for everyone else. But I think your comments and some of the things that we've heard, not only from other medtech companies, but other multinational companies throughout the world, illustrate the fact that FX is what it is and it affects all of us.

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

Great. So one follow-up. Can you just spend a minute on the Patient Monitoring business and talk a little bit about what your pipeline looks like there. I know capnography is obviously doing well. But can you just talk about where that plays out over the next -- I'm not talking quarter, but over the next couple of years?

José E. Almeida

Michael, our business Patient Monitoring now, as I continue to say, is -- has passed beyond oximetry. And what we're very excited about is despite the fact we have good new products coming in oximetry and as well as cerebral oximetry, we have our new tool to remote monitoring in the hospital to have the patients done in a way that the information is available to all in the general floor. Capnography, particularly, is an area where Covidien is investing a great deal of time and money on market development because the potential for that business in a worldwide basis is enormous. So if you think about how utilitarian that technology is and how quickly it can reveal an issue with the patient, we are deploying our market development methodology right now to that business, and the results can be extraordinary. So we have high hopes for that technology. And before, sitting here 3 years ago, we were talking about a very meager portfolio of Patient Monitoring parameters. Today, we're thinking about a very rich and mid-single to slightly ahead of that growth for that business. We're very excited about that.

Operator

Your next question will come from the line of Bob Hopkins from Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So 2 questions. First, just to start off on the Peripheral Vascular business, the growth there this quarter was a little bit better than we were expecting. So I was wondering if you guys could just give a little bit color as t the state of that market, what's driving the growth and what the pipeline looks like there?

José E. Almeida

Bob, the market is still very tough. The competition is very intense. There's 5, 6 competitors coming after that business, everybody with similar products. I think Covidien has an advantage we have in a full portfolio of products, from accessories, guidewires, balloons, stents, all the way to directional atherectomy. So that proves to be utilitarian for our company. We're still working on our pipeline of products and organic and inorganic opportunities. We have the DCB coming up, the EU within 12 months. So we're excited about that. I really like that portfolio. But the market is really difficult. I think what we also have is a great opportunity. We still continue to expand our venous insufficiency products, which is our CVI, chronic venous insufficiency, products. I think that is doing extremely well. And I'm very excited about new product development that is happening in China. They will be able to use on a global basis for Covidien. I want to say product development in China is in Covidien's research and development in Shanghai. So there are some good opportunities there. But I don't want to discount the fact that this is a difficult market.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

And then the other thing I wanted to ask about just a little more broadly was Europe. You mentioned, obviously, some better results there. But I was wondering if you could be just a little more specific in terms of what has been the growth rate in Europe and how much did things improve. And it seems to me like seasonality may be affecting the United States but perhaps less likely to be affecting Europe. And therefore, Europe, you probably have a little more confidence that it might be sustainable. So do you think that's a fair way to look at it? And again, trying to get an understanding of just how much things have actually improved.

Charles J. Dockendorff

I think in Europe, Bob, typically it's been around 1%, maybe a little higher than that as we have looked at it, of course we had different growth rates within various product lines that's still the Energy products have been growing double digits over there despite some difficult economic trends. But this quarter, we saw over 3% growth. So that's a nice increase and now more in line with where the U.S. was as well. So that's a big base of business, as you know. And it was pretty much across the board. So while we had the pockets that continue to do well, the Energy and those things, we also saw it across other components, including some of our basic supplies business. So it was a nice return. So we're sitting here saying, "Boy, wouldn't it be nice if that economy is getting a little better." You can kind of feel that happening. They seemed to be getting under control on the austerity measures and some of the debt situations over there. And I think it's too early to call if it's going to continue at that rate. But certainly, it has been better in the past.

Operator

Your next question will come from the line of Matthew O'Brien from William Blair.

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

I was hoping to follow up a little bit on the last commentary Joe just had on chronic venous insufficiency. I think that's going to be a sizable business for you at this point. And can you just give us a sense for how much of the Peripheral growth is coming out of that business? Is it U.S., OUS that's really driving that growth? And then there was a recent reimbursement change there in the U.S. in the hospital setting. What kind of impact do you anticipate from that change?

José E. Almeida

The growth of CVI greatly influences our Peripheral Vascular. That business now is over $200 million run rate. So when we bought it from Venus about 4 years ago, it was about slightly -- it is sub $100 million or just about $100 million. So we doubled it -- more than doubled the size of the business. So we're very confident on that technology. Second is the reimbursement rate changes in the hospital. It did not make our product unfavorable to the laser competition, just probably brought to par. And we think that it may sway a few physicians to look differently at it. We have a significant amount of leeway in how we sell the product in the ways we sell that product to physicians' offices and hospitals. I don't think that will have a significant impact in our growth going forward. But we're not sitting here and just thinking that this product has a long lifetime, a lifecycle as it is today. We have a very interesting product that is very close to be finished in our Chinese R&D center that is very different than what we have today. And in terms of the cost of the product, it is much more advantageous for Covidien, which will give us above all a good advantage in pricing the product accordingly.

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

Okay. Just quickly turning to pulse ox, I think that you could have provided Massimo with the notice on January 14 with regard to the agreement there. Just can you give us a sense for your intentions there going forward? And specifically, should we continue to model in kind of that $30 million, I think that's roughly the number, quarterly royalty rate that you pay them?

Coleman N. Lannum

Just to be clear, it's about $30 million dollars annually, not quarterly.

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

I'm sorry, so just intentions there going forward.

José E. Almeida

Listen, we are a company that was just listed among the 50 most innovative companies in the U.S. amongst -- and we're the only medical device there. We are a company that pursues innovation left and right. So for us to write a check on royalties is not something that comes easy. But we'll do the right thing for our shareholders. And at this moment in time, I'm not going to comment on letters and things. Just keep in mind, Covidien will do whatever is necessary to the best outcomes for our shareholders.

Coleman N. Lannum

That's really what I want to say on that.

Operator

And your next question will come from the line of Glenn Novarro from RBC Capital Markets.

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

If I take the new tax rate and I take the midpoint and I put it at 17% in the model, it looks like it shaves $0.02 off of EPS. So that's about a $0.02 hit. Yet you just beat 1Q by $0.06. So should consensus be moving up by $0.04? Or are there offsets that we should be considering?

Coleman N. Lannum

Glenn, I'm really glad you asked the question that way so I could scold you little bit. Always beware using midpoints. We don't give those ranges designed for midpoints. In particular, the tax rate, it's very important you understand that year-to-date tax rate tends to correspond with the tax rate we expect to have for the full year. So the year-to-date tax rate for us was 17.5%. You should expect a tax rate for the full year of 17.5%, thus our need to raise the guidance range to include that 17.5%. Separately, although I don't want to talk about specific guidance numbers because, as you know, we don't give earnings guidance, let me remind you that we will be -- we closed the sale of Confluent early. We will be closing, we believe, the sale of Given sometime this quarter. Both those transactions together are dilutive by several cents a share. Now we noted that when we announced Given that we thought that we could offset that dilution with strength elsewhere in the business, with today's press release, you saw some of that strength elsewhere in the business. The reality is, though, that is going to put some pressure, particularly on the amortization line because there will be a significant amount of amortization around that Given transaction.

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

Okay. So I guess the message is very strong fiscal 1Q, but given the tax rate and some of the acquisitions, you don't want the Street taking numbers up too aggressively this morning.

Coleman N. Lannum

Well, I think the reality is some of those things are real, and they are going to be putting some pressure on. And we love the fact that we were able to offset a lot of that pressure with what was a spectacular first quarter result, I think coming in well above our expectations and well above pretty much everyone on the Street. But the reality is those transactions will be putting some downward pressure, and the tax rate will be putting a little bit of downward pressure in as well.

Charles J. Dockendorff

Glenn, this is Chuck. I think the way to think about it is we had a real good, strong quarter here. And we mentioned that with that strength in the U.S. and Europe, which we have not seen before. And we're not ready to sit here and call a win on those. I don't think anybody is in the industry yet because there's so many other factors out there. But it is such a nice trend. And if that trend continues, certainly we would revise our guidance. But we're not prepared to at this point in time.

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

Okay. And Joe, let me just ask that to you, and hopefully you won't scold me like Cole just did. But you mentioned that at Pipeline, there would be some launches in Japan and China. Can you talk about timing to us? And then you also mentioned that you expect Solitaire to accelerate. And can you remind us what drives that acceleration?

José E. Almeida

Yes. The Pipeline is '14 in Japan and '15 in China. So as you know, we'll go after those markets very vigorously. We think our Pipeline is a wonderful product. We think in the current markets that we commercialize based on indication, we can't get into big sales. But I think Japan and China will be a good opportunity for Covidien to grow and do the same thing that we did in the U.S. in terms of ramp. In terms of Solitaire, I think the product is starting to get more of a footing. We're doing a lot of market development there as well despite the fact that we had that issue with the Journal's article. Things are starting to settle. And I think there's an opportunity. We have the IMS III. You have an opportunity to continue to accelerate. Our people feel very comfortable about the Solitaire device and how it's going to perform even better this year. So we're seeing some strength there, and we are confident that we can probably keep that going. And by -- for the record, I will never scold you.

Operator

Your next question will come from the line of Larry Keusch from Raymond James.

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

Maybe just, Chuck, starting off with you, I know it's obviously very early days in the restructuring, but could you just give us some thoughts as to what activities are going on within the restructuring program currently, and again, how we should think about the impact for fiscal '14?

Charles J. Dockendorff

Yes. I think the restructuring activities, we've got a number of programs going on. Like I mentioned earlier, over in Europe, we have some significant programs. I don't want to mention them specifically, but there are significant productivity and savings going on in those areas. And that's part of the -- we kind of regionalized that group. So they're looking at all the components of it and streamlining it. It's building better -- it's partly better commercial models. It's partly moving some functions out of Europe in the countries to our back office system over there in Prague. So it's a combination of all these programs that we're exiting some facilities as well. So we feel pretty good about the management team and what they've been able to kick off there. And they seem very good on driving through those productivities. In the U.S., we're looking a lot. In fact, we'll be, midyear, moving a lot to outsourcing and offshoring. So we have some nice productivity programs there, as well as what we've already done and executed in our Med Device segment in the U.S. on the different commercial models, which has been very successful. So all of these things have streamlined our expenses and brought into the market in a more efficient way. And I think you can see it's had actually no impact on our sales growth. In fact, our sales growth has increased. So they're pulling off these programs very successfully. And then on top of that, we have a lot of goals around the footprint reduction of our manufacturing facilities. And we are in the process of doing that right now, bringing down a number of facilities by about 10 over the next couple of years, 10 to 15 over the next couple of years. So those are on track and proceeding. We are in the midst of changing some of our logistics, both in Europe and in U.S. And those programs will drive through productivity on those as well. And we see that while we're having some start-up costs associated with those, we think going forward that those will be productive and continue to reduce cost in those areas. So we're going on all fronts on this thing. This is built into part of our DNA. It's one of the strategic objectives that Joe has laid out for the company. It's something that we actually expect to accelerate as we go into the balance of this year and next year as well.

José E. Almeida

Yes. I just want to make a correction to my response to Glenn Novarro from RBC. Our Pipeline Device will launch in China in 2014 and Japan in 2015. I said it the other way around. So I want to -- I also underscored that Covidien holds #1 market share in Neurovascular in China. Thank you.

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

Okay. And Joe, just coming back to some comments that you made earlier, I think it's not lost on any of us the focus and strength that the company has in that conversion of open procedures to MIS. You clearly got a terrific product line. But as you look broadly at the opportunities from a product perspective, and I know, again, you're pursuing lots of training and awareness activities, but are there any things in the portfolio that you're missing that you could look to get into perhaps from a capital equipment side or disposable side? Just any thoughts there as to how you think about the total portfolio currently.

José E. Almeida

Larry, there's a significant variability in adoption of MIS procedures across the globe. So if I look at where we are in the U.S., Europe, Japan, Canada, Australia, Korea, there's no need for us to get into equipment and there must be no -- the hospitals have everything they need. So what Covidien is going to do in those markets is to proliferate going to areas that we can put in the back of our sales rep to become irrelevant. But don't miss the fact that what drives a lot of that is technology. So we have some really interesting technology in the pipeline. Chuck and I are just ready to sign a large capital request for a really, really nice project in our Endomechanical product line. So there's significant things that we are doing to maintain technology leadership. But in terms of equipment, we're also creative. And we have a center in China, which is very, very quick to develop products. And I tell you something, I've seen some product development there. They'll come to market very soon to help us in emerging markets to create more adoption of MIS to go beyond just having Endomechanical and instrumentation. So Covidien is taking this market development proposition very seriously, and we have developed this methodology to do it and get there. And you're starting to see some of the growth that's coming from there.

Operator

Your next question will come from the line of Matthew Taylor from Barclays.

Matthew Taylor - Barclays Capital, Research Division

I wanted to ask a follow-up question on emerging markets. I guess I wanted to ask first if you could give us a little more color on the 2 small deals that you did and how they play into your strategy. And then just an update on how things are going in terms of leveraging that investment that you've made over the last couple of years and what impact that will have on spending in the back half and into next year.

José E. Almeida

Those 2 acquisitions, one is outright acquisition. The other one is a joint venture. And as I said, Covidien sees great opportunities still remaining in all the markets that we participate in and emerging markets. But we have seen -- and we want to confirm that the value segment is a segment for Covidien, and the best way to test that is through these 2 opportunities in China and Brazil where Brian King and his team will be probably putting a different structure to absorb those 2 acquisitions. And we're going to do some tests and learn. First of all, is the market as big as we think and about how competitive it is, what is the pricing situation, can we compete with some of our products there. We need to have a brand-new platform of products. And by this joint venture in China, we're going to adapt with a very cost-effective line of open statement, for instance. So we'll be able to test not only China but some other emerging markets. In Brazil will be Energy, Energy at a much lower entry point, which is very interesting for us because that's the way we start getting adoptions. So we have a lot of assumptions that the team is putting together. And we believe it's going to be a good learning experience for us. But as I said, the contribution is modest. So that's...

Charles J. Dockendorff

I think, Joe, on leveraging those investments, we get pretty significant leverage off the investments we make in emerging markets. In fact, as you look at this year, most of our investments in SG&A are in that area. We mentioned that on our Investor Day. So the return on these is within a little over a year as we put this out here. So we're continuing -- we're expecting to continue to invest in that area the balance of the year. And as you look at it, the profitability is high. It's in line with what Covidien makes on an operating margin basis. But the expenses will stay high as long as we continue to invest and we do it at the right pace. Once we stop investing, the leverage of these things will come through. But we are getting good leverage off the investments and we are making good returns.

Operator

Your next question will come from the line of Joanne Wuensch from BMO Capital Markets.

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

You mentioned positive volume, price and mix in the quarter. Could you flush that out a little bit, particularly the price and the volume metrics?

Charles J. Dockendorff

Yes. I think again, this has been favorable for us in the past. We expect this will be favorable for us continuing on price. It was pretty much where it's been in the past, probably at the low end of that 50 to 100-basis-point hit that we take and forecast in. It's been in the low end this quarter. So again, that's not something that we see a trend changing dramatically over the next couple of quarters. And the mix was favorable, which again, we expect to continue as you look at the high-growth products we have, Advanced Surgical and some of the other surgical, Endomechanical products, the emerging markets, CVI. These will all drive high gross margins, and the mix of our portfolio is such that it will continue to do so.

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

And I'm also trying to understand volume. I mean, we're sitting here with the implementation of ACA. We have some anecdotal commentary about volume ahead of that implementation. I'm just sort of curious what you're seeing.

Coleman N. Lannum

Yes, remember to...

José E. Almeida

Let me take this, Cole. I think there's nobody out there today that can really speak about what is happening with the ACA and volume [ph] because there's not enough trending. There's not enough data for trending. When -- so that's why Covidien is cautiously optimistic about what we saw in our first quarter. And we need to understand a little bit more some of the volume trends and some of the utilization in hospitals. It's a multi-factorial analysis because it's about -- not about admissions only. It's about volume of surgery. It's about people dropping off insurance, buying insurance, unemployment levels. So we have a couple of indicators in-house that really follow well the market because we sell products that are used in every single surgery like the endotracheal tubes and things like that. So we don't have a conclusive answer about if things are picking up definitely or not. Our systems don't say -- don't indicate that. So what we can say is in about 12 months or 18 months from today, we're going to be able to see the effect of all this exchange in ACA coming through. And then we'll be able to draw a much more conclusive response to you.

Operator

Your final question will come from the line of Mr. Richard Newitter from Leerink Partners.

Richard Newitter - Leerink Swann LLC, Research Division

I only have one. It's on -- just on GI. I wanted to get a bit more perspective on the strategy there, specifically with targeting the customer and the call point. My understanding is it's an extremely fragmented market, particularly with all the endoscopic equipment there where surgeons kind of go for scopes, et cetera, and all that's involved in surgery. Is your goal to eventually be the sole kind of product provider there, a one-stop shop kind of style strategy? And Given and Barrett's are more kind of the Phase I, the higher-tech technology there and you'll fill out the bag over time? Or am I not thinking about that right?

José E. Almeida

I want to tell you a couple of cautionary notes. We will be in spaces where we can get growth, profitability and be #1 or #2. We don't see Covidien getting solely into scopes and instrumentation for polypectomy and things like that. This is a more -- I would not say commoditized because there's a great amount of technology there, but it's populated by very good companies and large companies and the growth is very modest. So because the fragmented base of the GI, and you rightfully so said that, we with Given and BÂRRX will give us the ability to cover more of these physicians because not every GI would do a BÂRRX procedure but they will have people there who do the imaging like Given and do other things. Covidien will continue to pursue avenues in early detection of diseases in the GI tract. So we will go into spaces. There will be more niche. But we will accumulate enough technology to make us relevant with very good, healthy gross margins and top line growth.

Coleman N. Lannum

Folks, thanks a lot. Starting at noon Eastern Time today, a replay of the call will be available. This replay will be also available on our corporate website, covidien.com.

Let me apologize to the long number of people who were in queue who didn't have a chance to ask a question. I know sometimes we do these on Fridays. We have a healthy number of people who want to ask questions, and it just isn't enough time in our limited time to get through to everyone. So for all of them and for all of you who have more detailed questions involving nonmaterial information, Todd and I will be available to take your calls throughout the day.

Thanks and have a great Friday and a great weekend.

Operator

And ladies and gentlemen, this concludes your presentation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Covidien Management Discusses Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts