CareFusion Corporation, Q2 2012 Guidance/Update Call, Jan 09, 2012

Carefusion Corporation (CFN)

January 09, 2012 9:00 am ET

Executives

Kieran T. Gallahue - Chairman and Chief Executive Officer

James F. Hinrichs - Chief Financial Officer

Jim Mazzola - Senior Vice President of Global Marketing and Communication

Analysts

Lennox Ketner - BofA Merrill Lynch, Research Division

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

Amit Bhalla - Citigroup Inc, Research Division

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

Matthew Taylor - Barclays Capital, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

David R. Lewis - Morgan Stanley, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the CareFusion Corporation Investor Meeting. My name is Pamela, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. At this time, I would like to turn the conference over to Mr. Jim Mazzola. Please proceed.

Jim Mazzola

Thank you, Pamela. This is Jim Mazzola, and thanks for joining us on today's call as we discuss CareFusion's preliminary results for the second fiscal quarter ended December 31, 2011, and provide updated guidance for our fiscal 2012.

We issued a news release containing our preliminary financial results this morning at 8:00 a.m. Eastern time, which is posted in our website at carefusion.com and filed on Form 8-K with the SEC. Joining me on today's call are Kieran Gallahue, our Chairman and CEO; and Jim Hinrichs, our CFO.

Before I turn the call over to Kieran, I would like to make a few remarks. In today's call, we will discuss some non-GAAP financial measures, including financial results on an adjusted basis. A reconciliation to GAAP measures can be found in today's release and on the Investors section of our website. We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency into CareFusion's ongoing results of operations, particularly in comparing underlying results from period to period.

Additionally during today's call, we'll be making some statements that are forward-looking, including statements about expected financial results for the fiscal quarter and our fiscal 2012 guidance. These results are preliminary and subject to change as we complete our quarterly close and reporting process. Our actual results could differ materially from those expressed in our forward-looking statements due to risks and uncertainties, including the risk factors set forth in today's release and our filings with the SEC. We ask that you refer to these materials for a more detailed explanation of the inherent limitations of such forward-looking statements. With that, let me turn the call over to Kieran.

Kieran T. Gallahue

All right. Thanks, Jim, and thanks, everyone for joining us on this call on such short notice. We're in San Francisco today, meeting with a large portion of our investors. And as such, we wanted to provide this update in order to be as transparent as possible and to make those discussions today as productive as possible.

While we're still in the process of closing our second quarter, and we'll report our results on February 2, we felt it was important to release these preliminary results. Revenue for the quarter is expected to be between $910 million to $915 million and adjusted operating income is expected to be $148 million to $153 million. Adjusted EPS is expected to be $0.41 to $0.45.

Our largest segment, Medical Systems, performed very well in the quarter, growing in the high-single digits and continuing its positive organic growth momentum. Bookings in all 3 Medical Systems businesses, Dispensing, Infusion and in Ventilation, were strong and remain in a good position for the full year.

Sales and gross margins in Procedural Solutions were lower than we have forecasted, which is the primary reason operating income is lower than our expectations. Segment revenue declined about 5%, or about 2% after adjusting out revenue from our on-site divestiture in the prior year.

Procedural Solutions is comprised of 4 business groupings: Infection Prevention, Medical Specialties, specialty disposables and our diagnostics businesses. Our core products in this segment continued to grow faster than the market, just slightly below our internal expectations. In addition, our margins in the segment were negatively affected by pricing pressure on our less clinically differentiated products. The net effect was lighter conversion volumes for our products like ChloraPrep and MaxGuard and margin pressure on respiratory disposables and Medical Specialties.

It's important to note that we are not losing share in our clinically differentiated products. We believe growth rates will continue to be above market in ChloraPrep and Medegen. ChloraPrep grew in the mid-single digits during the quarter, for example, and we've revised our fiscal year '12 forecasts to reflect this trend. When we announce the full quarter, we expect to revise downward our fiscal year '12 revenue guidance for the Procedural Solutions segment and the Infection Prevention businesses.

On the positive side, we continue to see the benefits of our reorganization last year into the 2 business segments. It provides us and our investors greater transparency into the business. We are focused on investment in our core businesses and isolating those areas where we need to take action. As an example, we reorganized at the Procedural Solutions segment level during the quarter, and realigned our sales territories to decrease the windshield time of our reps and increase the selling capacity. This will take a quarter or so to ramp, but we expect will drive additional growth in the near term.

Across the company, we continued in Q2 to make the necessary investments we've talked about to strengthen our foundation to grow faster over the long term. We must continue to invest during the balance of the fiscal year. So while we continue to have scenarios that enable us to meet our original full year EPS guidance, we felt it was prudent to lower the bottom end of the adjusted EPS range by $0.05 to a new range of $1.75 to $1.90. This provision will be reflected in the Procedural Solutions segment and largely in the Infection Prevention business within that segment.

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