CareFusion's CEO Discusses Q2 2012 Results - Earnings Call Transcript

CareFusion (CFN)

Q2 2012 Earnings Call

February 02, 2012 5:00 pm ET

Executives

Jim Mazzola - Senior Vice President of Global Marketing and Communication

Kieran T. Gallahue - Chairman and Chief Executive Officer

James F. Hinrichs - Chief Financial Officer

Analysts

Kimberly Weeks Gailun - JP Morgan Chase & Co, Research Division

Lennox Ketner - BofA Merrill Lynch, Research Division

Daniel Sollof - Barclays Capital, Research Division

David R. Lewis - Morgan Stanley, Research Division

Lawrence S. Keusch - Morgan Keegan & Company, Inc., Research Division

Amit Bhalla - Citigroup Inc, Research Division

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

Rajeev Jashnani - UBS Investment Bank, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 CareFusion Corporation Earnings Conference Call. My name is Tayesha, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Jim Mazzola. Please proceed.

Jim Mazzola

Okay, thanks, Tayesha. Thank you for joining us on today's call as we discuss CareFusion's results for our second fiscal quarter ended December 31, 2011, and provide updated guidance for fiscal 2012. We issued a news release with our financial result at 1 p.m. Pacific time today, which is posted on our website at carefusion.com and filed on Form 8-K with the Securities and Exchange Commission.

We also filed and posted several slides to accompany today's webcast. They are provided as a reference and include comparisons of our results in the prior year, our financial outlook and definitions of non-GAAP items with the reconciliation to their GAAP equivalent.

Joining me on today's call are Kieran Gallahue, our Chairman and CEO; and Jim Hinrichs, our CFO.

Before I turn the call over Kieran, I'd like to highlight that we will discuss some non-GAAP financial measures on today's call, including financial results on an adjusted basis. A reconciliation to GAAP measures can be found in today's release, our slide deck 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 will be making statements that are forward-looking, including statements about our fiscal 2012 guidance. Our actual results could differ materially from those expressed in our forward-looking statements due to risks and uncertainties, including the risk factors 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

Thanks, Jim, and good afternoon, everybody, and thanks for joining us today. There are 2 main themes reflected in our second quarter performance that I'll cover on today's call. The first is about the steady growth and progress that we continue to drive in our Medical Systems segment even as we make the critical investments necessary for our future. This segment covers 60% of our business and is performing just as we planned for the year.

The second theme is about the lighter conversion rates in our Procedural Solutions segment, which led to the announcement of our preliminary results on January 9. I recognized and understand the uncertainty that this created in January. Our visibility was and is good in these businesses, and we'll spend plenty of time on the topic today.

There should be no surprises in today's announcement. We'll provide additional detail that neither the facts we laid out on January 9 nor our outlook for the longer term have changed for the past 3 weeks.

Before I go any deeper into Procedural Solutions, I want to start at the top.

Consolidated revenue for Q2 grew 3% to $915 million, led by 9% growth in Medical Systems and contributions from several product lines in Procedural Solutions, including ChloraPrep and our MaxGuard, MaxPlus products. With revenue growth approaching 4% in the first half of the year and good visibility into our historically stronger second half of the year, we remain comfortable with the top line expectations we set back in August or 3% to 5% constant currency revenue growth this year.

In Medical Systems, we saw strong performance across our 3 product lines, including encouraging improvement in Ventilation. The team continues to execute well, leveraging capabilities across the segment and rapidly adding new value-added capabilities. That's the strategy and the reason we reorganized into the structure last summer.

We have a large and growing installed base of capital equipment, what we call the bricks in our foundation. They include our Pyxis dispensing, Alaris infusion and VIASYS Ventilation products. As our base grows, we have software, services and complementary products to add scale and stickiness. This is the mortar. The bricks-and-mortar combination is working well today and delivers even more value to customers and to our bottom line as we develop additional capabilities.

During the quarter, we released a major enhancement to the Pyxis' line with the introduction of the Pyxis MedStation ES. And next month, we have multiple introductions planned at the largest annual gathering of hospital CIOs. So the strategy is taking shape and beginning to deliver results. Medical Systems increased segment profit by 12%, including the contribution from our Rowa acquisition. Jim will get into the business line details in just a few minutes.

The Procedural Solutions, as we said last month, revenue declined 5% or about 2% after adjusting out revenue from our OnSite divestiture in the prior year. The year-over-year decline was largely attributable to our Specialty Disposables business, which we indicated at the beginning of the year will be down in the high-single digits.

The primary issue in the Procedural Solutions segment was the profit impact from somewhat slower sales of higher-margin clinically differentiated products on Infection Prevention business. Allow me to make a few points on this topic.

Number one, these products continue to grow above the market, just below our expectations. Both ChloraPrep and Medegen had steep conversion rates in fiscal '11. When we built our 2012 guidance, we naturally expected these conversion rates would slow somewhat as our overall penetration grew higher. The last quarter came in below those rates.

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