Kinetic Concepts, Inc. (KCI)

Q2 2010 Earnings Call

July 27, 2010 8:30 am ET


Todd Wyatt - VP of IR

Cathy Burzik - President and CEO

Marty Landon - CFO

Mike Genau - Global President, Wound Therapy

John Bibb - Attorney-in-Fact


Michael Matson - Wells Fargo Securities

Mike Weinstein - JPMorgan

Jayson Bedford - Raymond James

Paul Choi - Caris & Company

Matt Miksic - Piper Jaffray



At this time, I would like to welcome everyone to the KCI second quarter 2010 earnings conference call. (Operator Instructions) I would now turn the call over to Mr. Todd Wyatt, Vice President of Investor Relations.

Todd Wyatt

Thank you and welcome to the KCI second quarter 2010 earnings conference call. Today, we will review the results that we announced in our press release earlier this morning.

Today's webcast and conference call will include prepared remarks by Cathy Burzik, our President and Chief Executive Officer; and Marty Landon, our Chief Financial Officer. We are also joined by other selected members of our senior leadership team.

If you have not received a copy of KCI's earnings release, it is currently available on our corporate website at A replay of this webcast will be made available on our website shortly after conclusion of the call.

Our conference call this morning will include forward-looking statements about our business, including guidance on future plans, revenues and earnings. These statements are based on our current expectations and are subject to a number of risks and uncertainties, which could cause actual results to differ from our expectations. More information about potential risk factors may be included in our filings with the SEC.

Also, quarterly and full year results discussed on this call may reflect adjustments to revenue for changes in foreign currency exchange rates and adjustments to expenses related to the LifeCell acquisition and restructuring and other charges incurred in the periods discussed. Please refer to the non-GAAP reconciliation of these metrics contained in our earnings release issued this morning.

I would now like to turn the call over to Cathy Burzik, President and Chief Executive Officer of Kinetic Concepts.

Cathy Burzik

Thank you, Todd, and good morning, everyone. We appreciate your joining us to discuss our second quarter 2010 results. On today's call, I will provide commentary on key developments in the quarter and then review the performance of our three businesses, including comments on new products and strategic initiatives. Marty Landon will review our financial results. We will conclude the call with the question-and-answer session.

As you know, 2010 is a year of transformation and investments for KCI. We are gaining momentum with the launch of our new AHS products globally as well as our very successful launch of V.A.C. Therapy in Japan. Additionally, we are pleased with the results of our launch of new surgical applications for our LifeCell tissue matrices as well as our expanded LifeCell launch in EMEA.

For the second quarter, total worldwide revenue of approximately $498 million increased 1% from Q2 '09 on a reported basis and increased by 2% on a constant currency basis. EPS on an adjusted non-GAAP basis was $1.01, an increase of 3% versus the prior-year quarter.

Key highlights for Q2 include FDA approval for two new key AHS products, our novel single-use V.A.C.Via and our Prevena Incision Management System for use in the operating room. Also during the second quarter, we launched V.A.C. Therapy in the Japanese market and we're very pleased with the progress we're making there.

Another positive for the quarter was the recent favorable ruling in the U.K. in our patent trial against Smith & Nephew, in which the Court found Smith & Nephew to infringe two of our NPWT patents. Additionally, we had very strong performance in our regenerative medicine business, including a return of AlloDerm to optimal inventory levels, strong growth in our European markets and positive market acceptance of our new stoma reinforcement product.

Also, we announced our single-source contract extension for Novation for our TSS business, and we announced the formation of an Advanced Research and Technology group for KCI.

We also faced some challenges in the quarter, including the sharp decline in the value of the euro and other currencies in relation to U.S. dollar and a later-than-planned FDA approval of Prevena resulting in a delayed launch of this promising product. This quarter also saw a decline in our TSS rental business and a challenging environment for our AHS business in EMEA and Canada.

Notably, as we enter the second half of 2010, we are pleased with the stability of our U.S. V.A.C. business. And we are confident in our new AHS products, the robustness of our LifeCell business and in our revenue growth in Japan.

Turning now to a review of our performance by business segments, all revenue growth rates will be stated in terms of constant currency figures. In our AHS business globally, revenue was equivalent to last year. North American AHS revenue declined slightly in the quarter compared to last year, primarily as a result of a decline in our business in Canada.

U.S. AHS revenue was essentially equivalent year-over-year in a very challenging environment. Sequentially, U.S. AHS revenues rose over 6%. We saw order growth in the hostile environment where the post-acute AHS market remains under pressure driven by a number of factors, including a decline in the number of chronic wounds treated outside the hospital that led to an unfavorable wound mix and an increase in utilization of other advanced wound care therapy.

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