STJ STJ
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/17/2013

Operator: Good morning. Welcome to the St. Jude Medical Second Quarter 2013 Earnings Conference Call. Hosting the call today is Dan Starks, Chairman, President and Chief Executive Officer of St. Jude Medical.

Before we begin, let me remind you that some of the statements made during this conference call may be considered forward-looking statements. The Company's 10-K for fiscal year 2012 and 10-Q for the fiscal quarter ended March 30, 2013 identifies certain factors that could cause the Company's actual results to differ materially from those projected in any forward-looking statements made this morning. The Company does not undertake to update any forward-looking statements as a result of new information or future events or developments. The 10-K and 10-Q as well as the Company's other SEC filings are available through the Company or online.

During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to most comparable GAAP measures are available in the Company's press release issued earlier this morning or on the St. Jude Medical website at www.sjm.com.

At this time, all participants may have been – maybe placed in listen-line-only and the floor will be opened for your questions following management's prepared remarks.

It is now my pleasure to turn the floor over to Dan Starks.

Daniel J. Starks - Chairman, President and CEO: Thank you, Matt. Welcome to the St. Jude Medicals' second quarter 2013 earnings conference call. With me on the call today are John Heinmiller, Executive Vice President; Mike Rousseau, Group President; Eric Fain, President of our Implantable Electronic Systems Division; Don Zurbay, Vice President and Chief Financial Officer; and Rachel Ellingson, Vice President of Corporate Relations.

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

Go ahead, John.

John C. Heinmiller - EVP: Thank you, Dan. Sales for the quarter totaled $1.403 billion, slightly less than the $1.410 billion reported in the second quarter of last year. Unfavorable foreign currency translations versus last year's second quarter reduced this quarter sales by about $31 million.

On a constant currency basis, second quarter sales increased approximately 2% versus last year. We will update our currency assumptions in a moment, but the actual average exchange rates during the second quarter were within our previous guidance range.

During the second quarter, we recognized $160 million or $0.56 per share in after-tax charges, primarily related to the make-whole provisions of outstanding notes that were retired during the quarter prior to their scheduled maturity. For further information regarding these charges, please refer to details provided in our press release.

Comments during this call referencing second quarter and full year 2013 results, including earnings per share amounts will be exclusive of these items.

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

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

Before we discuss our second quarter 2013 sales results by product category with guidance for the third quarter and the remainder of 2013, let me comment on foreign currency.

As discussed on prior calls, the two main currencies influencing St. Jude Medical's operations are the euro and the yen. In preparing our sales and earnings guidance for the second quarter and full year 2013, we used exchange rates, which assumes that each euro would translate into about $1.28 to $1.33 and that each JPY95 to JPY100 would translate into one U.S. dollar. For the second quarter, the actual average exchange rates for the euro and the yen were consistent with these assumptions.

In preparing our sales and earnings guidance for the third quarter and the remainder of 2013, we are assuming that each euro will continue to translate into about $1.28 to $1.33 and that now each JPY97 to JPY102 will translate into one U.S. dollar. Additionally, during the second quarter, the U.S. dollar strengthened against several other currencies which we have revised in our latest forecast. The changes in assumptions regarding currency exchange rates decreased total forecasted sales for the second half of 2013 by about $15 million to $20 million, which we estimate will reduce earnings per share for the second half of 2013 by approximately $0.02.

For the second quarter, total Cardiac Rhythm Management or CRM, sales, which include revenue from both our ICD and pacemaker product lines were $718 million, down 4% from last year's second quarter including $12 million of unfavorable foreign currency translations.

On a constant currency basis, total CRM product sales were down 2% versus the second quarter of last year.

For the second quarter, ICD sales were $454 million, down 1% versus last year's second quarter. On a constant currency basis, second quarter ICD sales were flat versus last year.

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

On a constant currency basis international ICD sales were down 1% versus last year's second quarter. For low-voltage devices sales for the second quarter totaled $264 million, down 8% versus last year’s second quarter.

On a constant currency basis, second quarter pacemaker sales were down 6% versus last year. In the United States, pacemaker sales were $110 million. In our international markets pacemaker sales were approximately $154 million including $5 million of unfavorable foreign currency translations.

On a constant currency basis international pacemaker sales decreased 6% versus last year's second quarter. For the third quarter of 2013, we expect total CRM product sales to be in the range of $645 million to $675 million.

For the full year 2013 we now expect total CRM sales to be in the range of $2.700 billion to $2.740 billion. On a constant currency basis the midpoint of our CRM sales guidance assumes CRM sales will decline in the low single digits for the full year 2013, and continues to assume that we will maintain our current share of the worldwide CRM market.

Atrial fibrillation, or AF, product sales for the second quarter totaled $237 million, up 9% over the second quarter of last year, including $8 million of unfavorable foreign currency translations. On a constant currency basis, AF product sales for the quarter increased 12%.

For the third quarter of 2013, we expect AF product sales to be in the range of $220 million to $235 million, and we now expect our 2013 AF product sales to be in the range of $930 million to $960 million. The adjustment to the full-year AF product sales guidance is primarily due to the revised currency assumptions. On a constant currency basis, the midpoint of our AF sales guidance continues to assume that we will increase approximately 9% for the full year 2013.

Total sales of cardiovascular products for the second quarter of 2013 were $340 million, equal to the second quarter of 2012, including $11 million of unfavorable foreign currency translations. On a constant currency basis, cardiovascular product sales for the quarter increased 3%. Our cardiovascular product category is an accumulation of a number of different product lines. As a reminder, structural heart products consist of heart valve products, septal occluder products and left atrial appendage products. Vascular products include vascular closure products, FFR (WirePressure), OCT products, renal denervation, vascular plugs and other vascular accessories, as well as third-party vascular products we sell under distribution arrangements in Japan.

For the second quarter of 2013, within the cardiovascular category, sales of structural heart products were $162 million, up 4% from the second quarter of 2012 on a constant currency basis. Sales of vascular products in the second quarter of 2013 were $178 million, up 3% from the second quarter of 2012 on a constant currency basis.

For the third quarter of 2013, we expect cardiovascular product sales to be in the range of $300 million to $315 million and we now expect our full year 2013 cardiovascular product sales to be in the range of $1.310 billion to $1.340 billion. The adjustment to the full year cardiovascular product sales is primarily due to the revised currency assumptions.

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

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

The gross profit margin this quarter was 72.9% down approximately 110 basis points from the second quarter of 2012. For the full year 2013, we continue to expect gross profit margin to be in the range of 72.2% to 72.7%.

As a reminder, we are accounting for excise taxes, including the medical device excise tax as an inventoriable cost in 2013, which we estimate will reduce our gross profit margin by approximately 80 basis points to 100 basis points. Our second quarter SG&A expenses were 34.6% of net sales, a decrease of 40 basis points from the second quarter of 2012. For the full year 2013, we now forecast SG&A as a percentage of net sales to be in the range of 33.9% to 34.4%, which includes the additional investment to consolidate CardioMEMS and Spinal Modulation.

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

Other expense was $22 million in the second quarter and for the third quarter of 2012 – for the third quarter of 2013, we expect the other income and expense line item will be a net expense of approximately $16 million to $21 million. For the full year 2013, we expect the other expense line item to be approximately $75 million to $85 million. For the second quarter, the Company's effective income tax rate was 21.6% and for 2013, we now expect the effective tax rate to be in the range of 21.0% to 21.5%.

As we mentioned previously, we are treating both CardioMEMS and spinal modulation as variable interest entities and consolidating their results.

The guidance we have given for net sales and expenses for the third quarter and the remainder of 2013 includes their results on a gross basis. The portion of their net losses that is not attributable to St. Jude Medical has been added back to our net profit on the line captioned net losses attributable to noncontrolling interest and totaled $6 million in the second quarter.

For the third quarter of 2013, we estimate that this line item will total approximately $8 million to $13 million and for the full year we expect this line item to total approximately $27 million to $32 million.

Moving on to the balance sheet, at the end of the second quarter 2013 we had $1.2 billion in cash and cash equivalents and $3.6 billion in totaled debt. There were no borrowings outstanding under our $1.5 billion revolving credit facility available with the group of banks.

As we have previously discussed, in April we issued a total of $1.6 billion in debt, consisting of $900 million of 3.25% senior notes that are due in 2023 and $700 million in 4.75% notes due in 2043. A significant portion of the proceeds were used to redeem in full the Company's $700 million 3.75% notes due in 2014 and the $500 million (4.875%) notes due in 2019.

As is customary with the reduction of these notes, we recognized a sizable one-time charge related to the contractual make-whole provisions of these notes.

The rationale to pay the 2014 and 2019 senior notes early was based on an analysis which supported the early redemption, make all payments if you assume interest rates would increase by approximately 50 basis points by the time of their scheduled maturity dates. After just three months, interest rates have already increased by more than this amount.

As a result of these actions, we retired notes with a weighted average maturity of 3.4 years with notes that's having a weighted average maturity of 18.75 years and a lower weighted average interest rate.

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

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

On a constant currency basis, our adjusted earnings per share guidance represents EPS growth of approximately 11% to 12%.

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

Daniel J. Starks - Chairman, President and CEO: Thank you, John. As we discussed at our Annual Investor Meeting earlier this year and during our call last quarter, a key priority for St. Jude Medical in 2013 is to accelerate our sales growth rate on a sustainable basis. Q2 results confirm that we are making good progress toward achieving this goal.

Sales growth rates improved in the second quarter across all of our major product categories. We expect our consolidated sales growth rate to improve further in the second half of 2013 as we continue to leverage our broad portfolio of growth drivers and new products.

Our Q2 results also demonstrate our strong operating discipline, our commitment to maintaining a healthy balance sheet, and our ability to generate significant cash flow.

I would like to spend the next few minutes reviewing the status of each of our major businesses, beginning with a review of our Cardiac Rhythm Management or CRM franchise. Both CRM market dynamics and St. Jude Medical's CRM sales results during the second quarter were encouraging. CRM revenue exceeded the high end of our sales guidance during the second quarter and reinforces our confidence that we will meet or exceed our CRM sales goal for full year 2013.

Our high-voltage lead-to-port ratio was again stable during the second quarter on a sequential quarter basis.

Average selling price or ASP pressure was consistent with what we've seen in prior quarters and was offset in part by encouraging increases in volume on the high-voltage side of our business. A particularly important development for our CRM franchise during the second quarter is that we began launching six new CRM product lines in the key markets.

The six new CRM product lines had little impact on second quarter results, but should strengthen our CRM franchise for the second half of 2013. This includes the approval of our next generation Ellipse and Assura high-voltage device families in Europe and in the United States.

These two device families are especially important in today's environment, because they include new and unique safety features designed to address potential lead complications. This includes a new automatic vector switching algorithm, which automatically adjusts shocking configurations to ensure delivery of high-voltage therapy, even if an electrical short in one portion of the system were to occur.

In addition, these new device families have a low friction coating on the device can, which has been demonstrated in testing to significantly reduce the friction between the device and leads. This low friction coatings provides an extra layer of electrical insulation and is designed to reduce the risk of lead-to-can abrasion, the most common type of lead insulation failure in the industry.

St. Jude Medical is the first company to help address the problem of lead-to-can abrasion by providing increased insulation on the ICD itself rather than on the lead. The Ellipse and Assura family of devices also feature protection against inappropriate and unnecessary shocks with SecureSense RV Lead Noise Discrimination, which differentiates lead noise from true ventricular tachycardia or ventricular fibrillation episodes requiring therapy.

These features also are capable of providing remote patient alerts over the Merlin.net Patient Care Network, a secure Internet-based remote care system for patients who have received a St. Jude Medical ICD or pacemaker. Taking all of these features together, we think we have compelling new product offerings for an ICD market that places a premium on the safety and reliability of high-voltage device systems.

The new CRM product lines we began launching during the second quarter also include the initial launch of our Endurity and Assurity family of low-voltage devices in Europe. These device families are especially important because they have been designed and manufactured with a new lower cost pacemaker platform. As we have mentioned previously, St. Jude Medical has not been competitive in certain so-called value-tier portions of the pacemaker market because of our refusal to simply drop prices as a long-term competitive strategy.

Our new pacemaker platform represents a high-tech sustainable approach to support our expanding participation in the value-tier of the pacemaker market, while still protecting the profit margin we need to maintain robust investment in next-generation technologies. The fifth new CRM product line we began launching in Europe during the second quarter is our new Premium tier Allure Quadra product line, which brings the advantages of quadripolar CRT to low-voltage devices for the first time.

We expect quadripolar CRT to become the standard of care in pacemakers, similar to what we already see developing in the high-voltage segment of the CRM market. We estimate that the CRT-P segment of the CRM market currently is approximately $300 million in size and has the potential to increase rapidly due to the expanding body of clinical evidence, which confirms the benefit CRT-P therapy provides to appropriately selected pacemaker patients.

The sixth new CRM product line we began launching during the second quarter is our Quadra Assura MultiPoint pacing CRT-D product line in Europe. CRT-D therapy with Quadripolar and MultiPoint patient technology is available only from St. Jude Medical.

MultiPoint pacing has been shown to have significant acute hemodynamic and dyssynchrony benefits in heart failure patients and may reduce the rate of CRT non-responders. This is expected to translate into both clinical and healthcare economic benefits, as well as continued share gain for St. Jude Medical in the CRT segment of the ICD market.

In addition to launching six new CRM product lines in the second quarter, St. Jude Medical began launching a seventh new CRM product line at the beginning of the third quarter. This was our Accent MRI line of pacemakers in Japan, which we began rolling out during the Japan Heart Rhythm Society Scientific Sessions, the first week of July.

We are encouraged that in the first week of our product rollout, we recovered lost business in 24 hospitals due to the competitive advantage of our Accent MRI pacemaker product line. We expect this new product offering to help us change the growth profile for our pacemaker business in Japan over the next few quarters.

While we are providing an update on CRM product launches that are expected to strengthen CRM sales results during the second half of 2013 and beyond, I would like to confirm that we continue to expect to acquire Nanostim and begin to introduce the world's first leadless pacemaker in Europe before the end of this year.

The clinical data surrounding the Nanostim leadless pacing technology are compelling and support our thinking that this technology has the potential to be truly disruptive in the pacemaker market. The first generation of Nanostim leadless pacing technology will address only the single chamber segment of the pacemaker market, which we estimate is approximately $600 million in size worldwide.

We are looking forward to adding this innovation to our CRM portfolio and expanding the Nanostim platform to address all appropriate segments of the global pacemaker market over time.

In summary, both CRM market dynamics and St. Jude Medical's CRM sales results during the second quarter were encouraging. St. Jude Medical is on track to launch a total of eight new CRM product lines in the key markets this year, of which seven product launches already are underway.

We think our CRM franchise turned the corner during the second quarter and is returning to normalcy after the pressures of the last two years. If we are correct in this assessment, St. Jude Medical is well-positioned to leverage its growth drivers and accelerate total company sales on a sustainable basis as we move through the second half of this year and enter 2014. It, therefore, is appropriate to draw your attention to the progress we're making with our portfolio of growth drivers in new products in our Atrial Fibrillation, cardiovascular and neuromodulation businesses.

The annual contribution of our Atrial Fibrillation or AF business is expected to approach $1 billion in revenue by the end of this year. We expect this $1 billion of our sales mix to continue growing at a high single-digit or low double-digit rates for the foreseeable future.

As we have indicated previously, the core growth drivers within our AF franchise are both diverse and stable. These core growth drivers include our leading portfolio of diagnostic catheters, advanced mapping technology and specialty introducers. A modest portfolio of Ablation Catheter and a competitive line of conventional recording system, intracardiac echocardiography, or ICE systems and implantable loop recorders.

The benefit of these core growth drivers is offset slightly by declining revenue in our AF surgical ablation product line. One leading indicator we monitor to predict the future growth of our AF business is the progress we are making with our MediGuide program. We continued to make good progress with the MediGuide program during the second quarter, we stayed on track to install MediGuide systems in at least 12 additional beta sites, the launch of full portfolio of MediGuide enabled ablation catheters and CRT tools and execute on our launch of EnSite Velocity precision technology of in 2013. These accomplishments are prerequisites for a successful commercial launch of our MediGuide program in 2014.

Our MediGuide program will give us the ability to provide a unique EP cath lab of the future in 2014, which will help pull through a complete product bundle in the EP space and resonate well on multiple fronts in today's healthcare environment, both with clinical and with economic buyers.

Given the overlap of customers and technologies in our AF and CRM businesses, we think the strength and success of these two businesses is mutually reinforcing. Keep in mind that our MediGuide system is designed to support both CRT implants and catheterization procedures.

Next, I would like to provide an update regarding the progress we are making transforming the growth profile of our cardiovascular business. From a distance it can be difficult to appreciate our progress because of so many moving parts. Revenue from our vascular closure business, our mechanical heart valve business, and our third-party products distributing in Japan, all are declining and are expected to continue declining for the foreseeable future.

Taking together these three portions of our Cardiovascular business comprise approximately 40% of our Cardiovascular sales mix and they temporarily mask the progress we are making with our Cardiovascular growth drivers. Our transition in sales mix from declining legacy products to accelerating growth drivers within our cardiovascular portfolio has advanced to the point where investors can begin to see the impact in our reported sales results going forward.

On a constant currency basis, cardiovascular revenue during the first quarter of 2013 was flat versus the prior year. In the second quarter 2013, the constant currency growth rate for cardiovascular business improved to 3% versus the prior year. We expect this growth rate to continue to improve the remainder of 2013 as growth drivers become a higher percent of our cardiovascular sales mix each quarter.

Let me offer more specific updates about the progress we're making with some of the key growth drivers within our cardiovascular business. First, revenue from our Trifecta pericardial stented tissue valve and other tissue heart valves exceeded the revenue for mechanical heart valve product line for the first time during the fourth quarter 2012.

Revenue for tissue heart valves grew at a low double-digit rate during the second quarter and is expected to continue growing at a high single-digit or low double-digit rate the remainder of this year, this more than offsets the continued decline of our mechanical heart valve revenue and generates net benefit to overall growth rate.

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

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

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

Two growth drivers with our cardiovascular portfolio which still are emerging are our renal denervation and our left atrial appendage or LAA closure products. Revenue from our EnligHTN Renal Denervation product still is small in absolute terms, but its early growth rate is encouraging and we continue to meet all major milestones designed to expand renal denervation to become a main new growth driver.

Our EnligHTN, EnligHTN II, EnligHTN II and EnligHTN IV clinical trials all are being initiated are already underway or are in long-term follow-up. We are finalizing the protocol for our landmark EnligHTNment clinical trial, which is a prospective randomized controlled study of approximately 4,000 patients to be enrolled in up to 150 sites on a multinational basis. Patients in our EnligHTNment trial will be followed for five years under an event-driven trial design. Primary endpoints for this trial include major cardiovascular events such as heart attack, stroke, heart failure with hospitalization and cardiovascular death. Secondary endpoints include the reduction of in-office and ambulatory blood pressure and changes in renal function. This trial will primarily use St. Jude Medical's next generation EnligHTN Renal Denervation System, which provides the ability to deliver RF energy simultaneously from multiple electrodes and significantly reduce procedure times.

We expect our EnligHTN family of clinical trials to generate the clinical and healthcare economic data needed to establish or expand reimbursement for Renal Denervation in many key markets. We also expect these clinical trials to generate the evidence needed to help establish St. Jude Medical’s EnligHTN Renal Denervation System as the product line of first choice.

Similar to what we have just reviewed with respect to our Renal Denervation growth driver, revenue from a LAA closure product line still is small in absolute terms, but also is growing at an encouraging rate.

Most important new developments in our LAA closure program during the second quarter were that we initiated enrolment in our U.S. IDE pivotal trial and began launching our next generation Amulet LAA closure product line in Europe.

We expect LAA closure revenue to increase more than 40% on a constant currency basis for full year 2013. St. Jude Medical is focused on implementing the full range of clinical, education and reimbursement programs needed to help our LAA closure program continued to mature into a major new growth driver. We expect to provide additional details regarding timing and expectations for our LAA closure growth driver at our annual investor meeting in early 2014.

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

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

Our deep brain stimulation, or DBS business already is delivering strong double-digit growth for patients who suffer from Parkinson's disease, essential tremor or dystonia. We expect to revitalize the growth of our chronic pain business over the next few quarters as we begin to launch our next-generation Prodigy spinal cord stimulation, or SCS, system and distribute Spinal Modulation's Axium dorsal root ganglion or DRG stimulation system in Europe during the second half of 2013.

The burst technology in our Prodigy SCS system and the DRG stimulation technology in the Axium system both have the potential to be disruptive technologies in the Neuromodulation markets for patients who suffer from chronic pain. Early customer feedback to both of these technologies signals to us that we are on the right track to achieve our goal of restoring high single-digit or low double-digit growth to our Neuromodulation franchise in 2014.

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

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

Transcript Call Date 07/17/2013

Operator: Mike Weinstein, JPMorgan.

Michael Weinstein - JPMorgan: Good morning, I fill in for Rick. Let me start, Dan, if I could with the CRM business. I think that it's fair to say it came in well ahead your expectation this quarter. Is there anything you want to highlight and are you comfortable with sustainability, that particularly the U.S. ICD performance?

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

Michael T. Rousseau - Group President: I would echo your comments about…

Michael Weinstein - JPMorgan: Mike, when you chime in, any pickup in end of quarter activity? Was there a particularly high number of deals at the end of the quarter? I think that's one question everybody will have.

Michael T. Rousseau - Group President: No, I would say it was a very usual finish, Russ, nothing unusual about how we finished the quarter. So from a stocking standpoint, we feel it was up on-track and a normal result. We – echoing Dan's comment about stability in the market, and also the encouragement relative to the increased uses of our leads, the product cadence is very exciting. Then finally, the last comment I would make is, we've had some very successful contracting activities here in the last quarter, which we are very encouraged by as major systems are moving to a multi-product approach with St. Jude Medical products.

Michael Weinstein - JPMorgan: Let me just follow-up with maybe a couple questions on the pipeline. Dan just clarified. On Portico are you still expecting to have those TF and TA delivery systems approved by the end of the year.

Daniel J. Starks - Chairman, President and CEO: We expect to have the TF delivery system here with the 25 millimeter Portico CE marked by the end of the year. We are making good progress on the TA delivery system, but I am going differ Mike just to make sure that I don't misspeak on whether we will have the TA delivery system CE Mark by the end of this year. I believe that I am not entirely crisp on the timeline, but I believe that we are on track for that as well.

Michael Weinstein - JPMorgan: Then just last one, I will let some other jump in. The comment with regard to respect in the filing and looking at ways to be maybe supplement your existing data package. Can you give us any more on that and potentially where any additional data may come from?

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

Operator: Rick Wise, Stifel Nicolaus & Company.

Rick Wise - Stifel Nicolaus & Company: Sorry about that, can you hear me this time.

Daniel J. Starks - Chairman, President and CEO: Yeah, loud and clear.

Rick Wise - Stifel Nicolaus & Company: Just maybe just couple of bigger picture questions then. Can you give us some update – any kind of update on the status of the warning letter, any progress you're making, just hopes for resolution?

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

Eric S. Fain, M.D. - President, Implantable Electronic Systems Division: As Dan said, it's our top priority and we're focused on resolving all the issues that were delineated in the (43) in the warning letter. We're making good progress and we're on track with our internal goals. We also continue to communicate closely with FDA and are updating them on our progress. So, in general I'd say, we are very focused, top priority and we are on track.

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

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

Operator: Bob Hopkins, Bank of America Merrill Lynch.

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

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

Bob Hopkins - Bank of America/Merrill Lynch: But even your U.S. ICD business got better and if there is really no benefit from the new products then I would assume things at least felt slightly better, for just doing the math of it, but…

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

Bob Hopkins - Bank of America/Merrill Lynch: Sure. You raised your guidance a little bit for constant currency growth in CRM. Was that a combination a little share and a little market or was that mostly assumptions on share?

Daniel J. Starks - Chairman, President and CEO: Share.

Bob Hopkins - Bank of America/Merrill Lynch: Then lastly for me, just is on CardioMEMS. I understand you don't want to give or speak for them at all. But can you just give us a sense, do you think it's likely that we receive a regulatory update this year?

Daniel J. Starks - Chairman, President and CEO: Yes.

Operator: Derrick Sung, Sanford C. Bernstein & Company.

Derrick Sung - Sanford C. Bernstein & Company: I wanted to spend some time on your neuromodulation business. First, with respect to Spinal Modulation, what is your view on how dorsal root ganglion stimulation, kind of fits into FES in your portfolio and then in particular, what can you do with that product in Europe today, if you drop it into your sales force, I mean are you ready to start selling it right away and kind of what's your views on that opportunity? Then just more broadly speaking, what is it going to take to get back Neuromodulation business up to the historical high single-digit growth that we have seen previously?

Daniel J. Starks - Chairman, President and CEO: All good questions, Derrick, let me refer your questions to Eric Fain for comment. Eric, could you comment on the Spinal Modulation, dorsal root ganglion and integration plans impact on second half of 2013?

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

Derrick Sung - Sanford C. Bernstein & Company: And just a follow up on your new ICD product launches, the ICDs with the safety enhancement features. Can you talk a little bit about how you are going to be positioning those or you how you’ve been positioning those early on in the launch? Do you expect those products to actually gain share, is that more stabilization and of some of your existing share. Do you see mixing and matching with other manufactures leads. Can you just give us maybe just a little bit more thoughts on how you are positioning that? And also whether you will pricing those products at a premium? Thank you.

Daniel J. Starks - Chairman, President and CEO: Eric, what would your comment be in response to Derrick’s question.

Eric S. Fain, M.D. - President, Implantable Electronic Systems Division: So, we went to this originally really focused on providing patient management solutions for physicians who are following patients with silicone leads, but as we got into the development and really looked at the two features, the main features together, again, the automatic vector switching as well as the low-friction coating on the devices and talked with customers, the general feedback from customers was that these devices provided a level of safety and reliability and really took that to the next level and really should be thought of universally as improving – as an opportunity to improve system reliability for any lead system. So we have really gotten very positive and enthusiastic feedback from customers, and those are customers who are particularly concerned with lead issues as well as customers who have not been that focused on it, and again they just see this as really adding a level of robustness to the system. Comments that we've gotten back from physicians include things like these devices should be used on all older leads at the time of replacement. So we see it as an important feature set overall.

Derrick Sung - Sanford C. Bernstein & Company: Will you be positioning this as kind of a premium product versus your existing portfolio or do you replace essentially all of your current ICD lines with this next generation?

Eric S. Fain, M.D. - President, Implantable Electronic Systems Division: We see it as the premium product here. I mean that's – and it's got the full feature set for everything else that we had in our devices as well with these additional features.

Operator: Kristen Stewart, Deutsche Bank Securities.

Kristen Stewart - Deutsche Bank Securities: Just wondering, I guess, John you mentioned about the Spinal Modulation in CardioMEMS just kind of the accounting forward and that you are going to be including revenues and then taking back out the portion of earnings that are not related to you? Can you just help us understand, what is the revenue contribution that you are assuming from these for the back half of the year?

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

Kristen Stewart - Deutsche Bank Securities: Then for Nanostim I assume, since you haven't acquired it, that there is nothing assumed within your guidance there?

John C. Heinmiller - EVP: That's correct. Yeah, that's right.

Kristen Stewart - Deutsche Bank Securities: Then you had mentioned, I think, in the prepared remarks a comment on seeing the benefits of kind of selling the broader portfolio, could you maybe just expand upon that, what you're seeing, the bundling approach? What products are you bundling and maybe how much of a change is there, relative to the last couple quarters?

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

Kristen Stewart - Deutsche Bank Securities: Would you be willing to comment if you're seeing from your competitors a greater move towards bundling and specifically bundling some of the EP products along with the kind of more traditional and interventional cardiology, and does that trend if it is happening put kind of more pressure on you?

Daniel J. Starks - Chairman, President and CEO: Let me ask – let me defer to Michael. So I don't know if you have comments on that or not Mike, are you seeing any change in competitive behavior?

Michael T. Rousseau - Group President: The market is consolidating to an extent and we're working more closely now with systems across a broader base of hospitals, the broader Europe portfolio and your ability to translate that portfolio into a meaningful change. In other words, you can show clinical benefit and substantial economic benefit to the system, it's become more important. So I think having a broader portfolio in the current environment is, you know, obviously competitive advantage.

Daniel J. Starks - Chairman, President and CEO: Matt, go ahead with the next question.

Operator: David Lewis, Morgan Stanley.

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

Daniel J. Starks - Chairman, President and CEO: James, let me ask John Heinmiller if you have any comments about gross margin and trend of gross margin.

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

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

James Francescone - Morgan Stanley: Just one other on a separate topic. In light of some of the recent court decisions out of Germany with respect to a competitor's valve product. Have you reevaluated at all your strategy regarding Portico?

Daniel J. Starks - Chairman, President and CEO: What I would say is that the litigation involving two other companies really doesn't have any bearing on us and doesn't affect our assessment of our own growth driver capabilities and our patent portfolio. We are always reevaluating, so I just hesitate to give you a (crest), no, we are always reevaluating, but that litigation really doesn't involve us, doesn't have any impact on us.

Operator: Brooks West, Piper Jaffray & Company

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

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

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

Daniel J. Starks - Chairman, President and CEO: Brooks, I don't want to give any specific guidance beyond the high-level guidance that we have updated on the call this morning, but I'll just say that I think you're on a warm trail but I am not going to be any more specific than that.

Operator: Matthew Taylor, Barclays Capital.

Matthew Taylor - Barclays Capital: I just wanted to ask a follow-up on the question on margins, this year you are absorbing some foreign exchange, you have some benefit from some of the cost reduction programs that you put in place. Can you speak specifically to those and talk about what kind of improvements you would expect on all else equal (except that) spaces the continued cost reduction programs that you have in cost of goods and SG&A?

Daniel J. Starks - Chairman, President and CEO: Matt, I think the answer is going to be no, but let me ask John Heinmiller, if you have comments, John, is there any additional insights you want to offer, I mean we’re not going to get into 2014 obviously and it seems like that maybe a little more of a 2014 question.

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

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

Daniel J. Starks - Chairman, President and CEO: Matt, that will conclude our Q&A, and we'll turn in the call over to you for your closing comments. Thank you.

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