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St Jude Medical Inc STJ
Q4 2009 Earnings Call Transcript

Transcript Call Date 01/27/2010

Operator: Welcome to St. Jude’s Medical Fourth Quarter and Full Year 2009 Earnings Conference Call. Hosting the call today is Dan Starks, Chairman, President, and Chief Executive Officer of St. Jude Medical. The remarks made during this conference call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Such forward-looking statements include the expectations, plan and prospects for the Company including potential clinical successes, anticipated regulatory approvals and future product launches, and product revenues, margins, earnings and market shares. The statements made by the Company are based upon management’s current expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include market conditions and other factors beyond the Company’s control and the risk factors and other cautionary statements described in the Company’s filings with the SEC, including those described in the Risk Factors and Cautionary Statement sections of the Company's quarterly reports on Form 10-Q for the fiscal quarter and year ending April 4, 2009, July 4, 2009, and October 3, 2009. The Company does not intend to update these statements and undertakes no duty to any person to provide any such update under any circumstance. At this time, all participants have been placed in a listen-only mode, and the floor will be opened for questions following the presentation.

It is now my pleasure to turn the floor over to Dan Starks. Please go ahead, sir.

Daniel J. Starks - Chairman, President and CEO: Thank you, Celeste. Welcome to the St. Jude Medical fourth quarter and full year 2009 earning conference call. With me on the call today are John Heinmiller, Executive Vice President and Chief Financial Officer; Eric Fain, President of our Cardiac Rhythm Management Division; Mike Rousseau, Group President; and Angie Craig, Vice President of Corporate Relations.

Our plan this morning is for John Heinmiller to provide his normal review of our financial results for the fourth quarter and full year 2009 and to give sales and earnings guidance both for the first quarter and full year of 2010. I will then address several topics and open it up for your questions. Go ahead, John.

John C. Heinmiller - EVP and CFO: Thank you, Dan. Sales for the quarter totaled $1.203 billion. Favorable foreign currency translations versus last year’s fourth quarter increased this quarter’s sales by about $50 million. We will turn to currency in a moment, but the actual average rates during the fourth quarter were within our previous guidance range. For the full year 2009 net sales were $4.681 billion, up about 7% over 2008. Unfavorable foreign currency translations versus those in 2008 decreased 2009’s net sales by approximately $99 million resulting in constant currency sales growth for the year of approximately 10%.

During the fourth quarter we recorded $6 million of in-process research and development expenses related to the acquisition of certain predevelopment technology assets and $44 million of after-tax special charges consisting of $33 million of employee termination and other costs related to restructuring actions announced in the third quarter, and $11 million of inventory write-offs related to discontinued products. Also during the fourth quarter we recorded a $24 million after-tax benefit related to certain annual discretionary compensation accruals that were reversed in the fourth quarter due to the fact that we do not intend to pay out these awards. Comments during this call referencing fourth quarter and full year 2009 results, including EPS amounts, will be exclusive of these items.

Earnings per share were $0.64 for the fourth quarter of 2009, a 10% increase over adjusted EPS of $0.58 in the fourth quarter of 2008 and above our guidance range of $0.61 to $0.63. For the full-year 2009 adjusted earnings per share were $2.43, a 9% increase over adjusted EPS of $2.22 for the full-year 2008. On a currency neutral basis, we estimate our earnings per share growth for the full year was approximately 15%.

Before we discuss our financial results and offer our sales and earnings guidance for 2010, let me provide a few comments about currency exchange rates and the assumptions we are using in our outlook for this year. The two main currencies influencing St. Jude Medical’s operations are the euro and the yen. On our conference call one quarter ago, we stated that our guidance assumed that for the fourth quarter of 2009 each euro would translate into about $1.45 to $1.50 and that each �88 to �93 would translate into $1. For the fourth quarter, the actual average exchange rates for the euro and the yen versus these assumptions did not result in a material difference in reported sales. In preparing our sales and earnings guidance for the first quarter and full-year 2010, we are assuming that each euro will translate into about $1.40 to $1.45 and for the yen each �88 to �93 will translate into $1. Additionally, as you analyze our results, please note that due to our 52-53 week convention, we had one less week in our 2009 fiscal fourth quarter compared to our 2008 fiscal fourth quarter.

I will now turn our discussion of the sales – to the sales by product category. For the fourth quarter total Cardiac Rhythm Management sales, which include revenue from both our ICD and pacemaker product lines were $698 million, up 3% from last year’s fourth quarter, including $28 million of favorable foreign currency translations. Total CRM product sales for the full-year 2009 were $2.769 billion representing a 3% increase over 2008. Unfavorable foreign currency translations decreased 2009 CRM sales by approximately $64 million. On a constant currency basis total CRM product sales for the full-year 2009 increased 5%.

For the fourth quarter ICD sales were $395 million, up 2% from last year’s fourth quarter. U.S. ICD sales were $237 million. International ICD sales were $158 million, a 14% increase over the fourth quarter of 2008, including ($13 million) of favorable foreign currency translations. For the full year 2009, ICD sales were $1.578 billion, up 3% versus 2008. Unfavorable foreign currency translations versus those in 2008 decreased 2009 ICD sales by approximately $38 million. On a constant currency basis total ICD product sales for the full-year 2009 increased 5%.

For low voltage devices sales for the fourth quarter totaled $303 million, up 3% from last year’s fourth quarter. In the United States pacemaker sales were $122 million. In our international markets pacemaker sales were approximately $181 million, up 13% from the fourth quarter of 2008 including $15 million of favorable foreign currency translations. For the year 2009 pacemaker sales were $1.191 billion, up 2% over 2008. Unfavorable foreign currency translations versus those in 2008 decreased 2009’s pacemaker sales by approximately $26 million. On a constant currency basis total pacemaker product sales for the full-year 2009 increased 4%. For the first quarter of 2010 we expect total CRM sales to be in the range of $700 million to $730 million. And for the full year 2010 we expect total CRM sales to be in the range of $2.9 billion to $3.0 billion.

Atrial fibrillation or AF product sales for the fourth quarter totaled $171 million, up 10% over the fourth quarter of last year, including $8 million of favorable foreign currency translations. For the full year 2009 AF product sales were 628 million, an increase of 15% over 2008, including a $30 million decrease due to unfavorable foreign currency translations. On a constant currency basis AF product sales increased 17% in 2009. For the first quarter of 2010, we expect AF product sales to be in the range of $155 million to $170 million. We expect full year 2010 AF product sales to be in the range of $705 million to $735 million.

Total sales of cardiovascular products for the fourth quarter of 2009 were $240 million, up 10% over the fourth quarter of 2008, including $12 million of favorable foreign currency translations. Total cardiovascular product sales for full-year 2009 were $953 million, up 11% over 2008, including a $19 million decrease due to unfavorable foreign currency translations. On a constant currency basis cardiovascular product sales increased 13% in 2009. Within this category of products, sales of vascular closure products in the fourth quarter of 2009 were $94 million. Total vascular closure product sales for 2009 were $381 million. Sales of heart valve products in the fourth quarter of 2009 were $79 million and total sales of heart valve products for calendar year 2009 were $323 million. For the first quarter of 2010 we expect cardiovascular product sales to be in the range of $235 million to $250 million, and we expect full year 2010 cardiovascular product sales to be in the range of $1.35 billion to $1.65 billion.

Total sales of neuromodulation products in the fourth quarter of 2009 were $94 million, up 21% from the fourth quarter of 2008. For the full-year 2009 neuromodulation products sales were $331 million, up 32% on a constant currency basis over 2008. For the first quarter of 2010 we expect sales of neuromodulation products to be in the range of $85 million to $90 million, and we expect full-year 2010 neuromodulation sales of $375 million to $395 million.

Let me pause at this point and recap our 2010 sales guidance. For cardiac rhythm management devices we expect sales for 2010 in the range of $2.9 billion to $3.0 billion. Sales of our AF products for 2010 are expected to reach $705 million to $735 million. For cardiovascular products we expect 2010 sales in the range of $1.35 billion to $1.65 billion, and we expect sales of neuromodulation products to be $375 million to $395 million. If you add up the sales across all growth platforms, total sales in 2010 are expected to be $5.15 billion to $5.195 billion. This guidance range assumes consolidated sales growth in the range of 7% to 11%. The geographic break down of St. Jude Medical sales in the fourth quarter of 2009 is now part of our press release. We would refer you to this detail. In total, 50% of St. Jude Medical sales in the fourth quarter came from the U.S. market while 50% came from international markets.

The gross profit margin this quarter was 73.2% representing a 100 basis point sequential decrease from the third quarter of 2009. Approximately, 70 basis points of the 100 basis-point decline was the result of providing for the disposition of certain obsolete or slow-moving inventory items. For the full-year 2009 the gross profit margin was 73.9%. For the full-year 2010 we expect gross profit margins to be in the range of 73.2% to 73.8%. One factor influencing our gross profit margin this quarter and our 2010 gross profit margin guidance is the impact of absorbing the first full year of costs associated with the new remote monitoring and wireless telemetry capabilities in our pacemaker product line. These costs include providing patients a free of charge wireless transmitter as well as a higher unit cost for pacemaker devices incorporating the wireless telemetry components.

We first introduced our wireless functionality in the U.S. pacemaker product line during the third quarter of 2009. There was a significant increase in the mix of these products in the fourth quarter. We estimate that the increased mix of wireless ICDs and pacemaker products in 2010 will account for a 60 basis-point reduction in gross profit margin in 2010 versus 2009. We expect the higher unit cost of these pacemakers to moderate as we gain production efficiencies and achieve planned cost reductions. We also expect the 2010 impact of remote monitoring to be partially offset by an increase in our gross profit margin related to our continuous improvement initiatives targeting other manufacturing cost reductions. In addition, during 2011 and 2012 we expect our gross profit margin to benefit from increasing manufacturing operations in Costa Rica and Malaysia.

Our fourth quarter SG&A expenses were 35.3% of net sales, representing a 150 basis-point improvement over the fourth quarter of 2008. For the full-year 2009 SG&A expenses were 36.3% of net sales compared with 36.7% in 2008. For the full year 2010 we expect SG&A as a percent of net sales to be in the range of 35.2% to 35.8%. Research and development expenses in the fourth quarter of 2009 were 12.1% of net sales, consistent with the fourth quarter of 2008. For the full-year 2009 R&D expenses were 12.2% of net sales consistent with 2008. For the full-year 2010 we expect R&D expenses to be in the range of 12.0% to 12.6% of net sales, as we continue to balance delivering short-term results with the right investments in long-term growth drivers.

Other expense was $20 million in the fourth quarter. For the first quarter of 2010 we expect the other income and expense line item will be a net expense of approximately $17 million. For the full year 2010 we expect other expense of approximately $68 million to $73 million, primarily driven by interest expense on our outstanding debt. For 2009 our effective income tax rate was 26.5%. For 2010 we expect the effective tax rate to be in the range of 24.5% to 25%. This rate assumes that the R&D tax credit is extended for 2010. The decrease in our effective tax rate in 2010 reflects the expansion of manufacturing operations in more favorable tax jurisdictions. We expect this trend to continue as our new manufacturing facilities in Costa Rica and Malaysia come online.

Moving on to the balance sheet, at the end of the fourth quarter we had $393 million in cash and cash equivalents and $1.922 billion in total outstanding debt and $1 billion available under a revolving credit facility with a group of banks. The debt on our balance sheet consists of the $1.2 billion public offering of senior debt issued in the third quarter of 2009 with $700 million due in 2014 and $500 million due in 2019. In addition to the senior notes, the outstanding debt primarily represents $432 million of borrowings under our domestic credit facilities, which mature in 2011, and $297 million of notes issued in Japan, which mature in 2010 and 2011.

Next I want to offer some comments regarding our EPS outlook for the first quarter and full-year 2010. In preparing our EPS guidance, we have assumed that in the first quarter of 2010 the share count used in our fully diluted EPS calculation will be about 326 million to 328 million shares with the weighted average outstanding shares for the full-year 2010 estimated at 328 million to 330 million. This guidance on outstanding shares takes into account that during the fourth quarter of 2009 we completed our $500 million share repurchase program that was announced last October resulting in a reduction of 14.1 million shares of common stock. The company expects consolidated EPS for the first quarter of 2010 to be in the range of $0.66 to $0.68. For the full-year 2010 we expect consolidated EPS to be in the range of $2.71 to $2.76. This expectation represents EPS growth of approximately 12% to 14% over the 2009 adjusted EPS of $2.43.

I would now like to turn it back to Dan Starks.

Daniel J. Starks - Chairman, President and CEO: Thank you, John. I am pleased to confirm that here at St. Jude Medical we did what we said we would do during the fourth quarter of 2009. We delivered quarterly results that met or exceeded our guidance. We completed numerous organizational, leadership, and program changes designed to improve operating discipline and overall organizational effectiveness leading into 2010. This included restructuring and flattening our marketing organization, strengthening our forecasting methodology, redirecting spending priorities where appropriate, and holding accountability for cost-effective results. As a result of the restructuring we started in the third quarter of 2009 and completed in the fourth quarter, we have now reduced our total global workforce by almost 5%.

SG&A spending as a percent of sales dropped a full 150 basis points in the fourth quarter versus the same quarter one year ago. We expect SG&A as a percent of sales to fluctuate from quarter-to-quarter moving forward, but for full-year 2010 we expect SG&A to stay below 36% of sales while we implement programs in 2010 that are designed to further improve productivity of SG&A spending in future years. This includes investment to complete the implementation of our SAP enterprise software system and investment to bring online by the end of 2010 new manufacturing facilities in Brazil, Costa Rica, and Malaysia to complement the new manufacturing facilities we recently brought online in South Carolina and in Puerto Rico.

It is important to note that although we have a strong commitment to optimizing our cost structure and generating operating leverage, we invested more in research and development on an absolute dollar basis during the fourth quarter than in any other single quarter in the history of our company. We plan to continue to invest at least 12% of sales in R&D moving forward with a strong focus on continued investment in clinical trials for the benefit of our customers and the patients they serve. The benefits of our sustained commitment to R&D should be highly visible during 2010. We expect to launch over 15 new products within our Cardiac Rhythm Management franchise. We will expand our entry into the deep brain stimulation market in Europe, the Spinal Cord Stimulation market in Japan, and the pericardial segment of stented tissue valve market as we continue to invest longer term in transcatheter valve therapies, applications for our MediGuide technology, heart failure diagnostics, ischemia detection, our atrial fibrillation program, depression, and other long-term growth programs. We look forward to giving you an overview at our investor conference next week of our entire lineup of new products scheduled for release in 2010 along with additional insights into a selection of our longer-term growth drivers.

Next, I’d like to offer an update on the overall growth dynamics we see for our global Cardiac Rhythm Management or CRM franchise in 2010. We continue to expect the global CRM market to grow at a mid-single-digit rate, which we define as approximately 4% to 6% growth on a constant currency basis. We estimate that St. Jude Medical’s international CRM business grew faster than the market in 2009 and is on track to do so again in 2010. Sales from St. Jude Medical’s U.S. CRM business were virtually flat in 2009, but we expect a return to growth in 2010 and are optimistic that the U.S. portion of our CRM business will get back on track to grow faster than the market in 2010. Our optimism is based on ongoing improvements in sales force effectiveness, customer inventory destocking that occurred in the second half of 2009 that is not expected to recur in 2010, replacement market dynamics that favorably impact St. Jude Medical’s position in this segment of the market, and the strength of our flow of new products that we will review in more detail at our investor conference next week. The midpoint of our CRM sales guidance range for 2010 reflects growth of approximately 6.5% for CRM sales. We fully expect to meet or exceed this guidance range.

In summary this morning, we place a high priority on meeting or exceeding our expectations. With respect to St. Jude Medical as a whole, we expect to deliver high single-digit or low double-digit organic sales growth for full-year 2010. We are committed to and I am focused on St. Jude Medical maintaining strong operating discipline and delivering meaningful EPS leverage while we continue to invest in our diverse portfolio of long-term growth drivers. In short, we believe we are well positioned to continue to deliver sales and earnings growth towards the top end of our peer group. At our annual investor conference next week, we look forward to providing all of you with extensive information on our assessment of market dynamics, new product introductions, clinical trial programs, and our comprehensive growth program for 2010. We will be happy to touch on these topics briefly in this morning’s call, but we would like to defer more complete discussion to our forum next week. We look forward to seeing many of you there.

With that, I’d like to turn it back to the moderator and open it up for questions. Celeste, would you please host the questions.

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