Kinetic Concepts' CEO Discusses Q2 2011 Results - Earnings Call Transcript

Kinetic Concepts (KCI)

Q2 2011 Earnings Call

July 26, 2011 8:30 am ET

Executives

Catherine Burzik - Chief Executive Officer, President, Executive Director and Chairman of Technology Committee

Lisa Colleran - Global President of LifeCell

Michael Genau - Global President of Active Healing Solutions

Martin Landon - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Todd Wyatt - Vice President of Investor Relations

Analysts

Christopher Cooley - Stephens Inc.

Ross Comeaux - JP Morgan Chase & Co

Tao Levy - Collins Stewart LLC

Lennox Ketner - BofA Merrill Lynch

Presentation

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the KCI Second Quarter Earnings Call. [Operator Instructions] Thank you. I would now turn the conference over to Todd Wyatt, Vice President of Investor Relations.

Todd Wyatt

Thank you, and welcome to the KCI Second Quarter 2011 Earnings Conference Call. Today, we will review the results that were 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 www.kci1.com. A replay of this webcast will be made available on our website shortly after the 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 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 found in our filings with the SEC. Also, quarterly results discussed on this call may reflect various GAPP and non-GAAP financial measures. A reconciliation between the two is contained in our earnings release issued this morning.

We are [indiscernible] approximately 45 minutes for the duration of the call, including prepared remarks and Q&A. After our prepared remarks, we will open the lines for the Q&A session. I will now turn the call over to Cathy Burzik, President and Chief Executive Officer of Kinetic Concepts. Cathy?

Catherine Burzik

Thank you, Todd, and good morning, everyone. We appreciate your joining us to discuss our second quarter 2011 results. On today's call, I will make some comments about our recently announced leveraged buyout transaction and review the highlights to the second quarter and the performance of our 3 businesses, including an update on our new product introduction and geographic expansion. Marty Landon will then review our quarterly financial results and we will conclude with a question-and-answer session.

On July 13, we announced that a consortium led by London-based Apax Partners together with the Canadian Pension Plan Investment Board and the Public Sector Pension Investment Board of Canada had offered to take KCI private at $68.50 a share. Their interest in KCI represents an endorsement of our market leadership, our differentiated products and the services and consistently strong performance.

As provided for in the Merger Agreement, we are actively soliciting offers now from other potential buyers during a 40 day go-shop window that expires August 21. If a superior bid does not emerge and our proxy is not reviewed by the SEC, we will then conduct our shareholder's meeting in the late September time frame. Leading up to this meeting, we would be taking the required steps to broadly syndicate the debt associated with this acquisition, although the debt financing for the transaction is fully committed by Morgan Stanley, Bank of America Merrill Lynch and Credit Suisse First Boston.

The transaction is also subject to certain regulatory approval. If approved by the shareholders, we expect the transaction to close in the fourth quarter. We see them as superior bid or an extended review by regulatory agencies may lengthen the timing, although any time extension is uncertain at this point. As you can appreciate, I'm not going to be able to provide any further detail at this time or during the Q&A session following our prepared remarks. Additional details will be included in our preliminary proxy and will be filed with the SEC no later than August 2, 2011.

Turning now to our second quarter results. Revenues totaled $520 million for a growth of 4% on a reported basis and 1% on a constant currency basis, driven by LifeCell revenue growth and favorable currency exchange rates. Diluted earnings per share in the second quarter posted a robust 45% increase on reported GAAP basis and a 22% gain on an adjusted non-GAAP basis. These results were driven by both operating and financial leverage during the quarter, including a full quarter release from the Wake Forest royalty. Our free cash flow was strong again in the quarter and was $162 million in the first half of 2011 versus $99 million for the same period last year.

I'll now review some of the key events and operating highlights since our last call. We reported 2 encouraging developments in our AHS business in Europe during the quarter. The first was the award of 3 out of 4 regional contracts to provide our V.A.C. Therapy system to the German home care market. This is the maximum allowed by law. We anticipate that once the study is completed that NPWT will receive reimbursement in the home care setting in Germany likely in the 2014 time frame. The second was our announcement that V.A.C.Via was placed on the U.K. drug care tender list. We are the first Negative Pressure Wound Therapy product approved for reimbursement in the post-acute care market in the U.K.

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