CareFusion Earnings Call Insights: Operating Margins and Medical Specialties and Disposables

CareFusion Corp (NYSE:CFN) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Operating Margins

Constantine – Raymond James: This is actually (Constantine) for Larry. So maybe, if I could just start off on the operating margin side, was there any one-time items that benefitted operating margin this quarter and then longer term question, you’re clearly doing a great job and seeing operating margin expansion. You’ve targeted end of fiscal ’14 to exit 21.5 plus, but where can – longer term as you look two to three years out, where can operating margins really go for this Company? Is mid-20 realistic?

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Jim Hinrichs – CFO: So, on the first question, which is was there anything specific or any special items in the – unusual items in the quarter. I would say, the answer to that is basically, no. We’ve always got some this and that to go one way or the other, but if those numbers get significant enough that they make a material difference in our margins, we’d obviously disclose them. So, we didn’t have anything unusual in the quarter that changed the operating margin profile of the Company. With respect to the second question that’s right, we have a goal as we exit ’14 of having – of exiting ’14 with operating margins of 21.5% or better. We certainly remain committed to that goal and we’re making good progress toward that goal. Beyond that, we’re not going to stop there. There’s no reason for us to stop there. There’s probably more room beyond that. I think I’ll wait till we get there before I make any promises beyond that, but certainly I think we won’t stop there. Kieran, anything to add?

Kieran Gallahue – Chairman and CEO: No, expect us to run through the tape.

Constantine – Raymond James: Then last question from me. I know you’re not going to provide fiscal 2014 guidance but maybe if you can just help us out a little bit think through some of the headwinds and tailwinds as we go into 2014 in terms of I guess, revenue and just how that kind of would flow through the P&L and maybe you can also put that in the context of your three-year targets to grow EPS, 12% to 14% with I guess, fiscal 2013 being closer to 10%?

Kieran Gallahue – Chairman and CEO: So, Jim and I’ll just tag team this a bit. So, on the overall macro side of the business, right now we got a bit of a headwind with some of the systems businesses that may last a couple of quarters or so, really more of a macro issue that we’re seeing. Fully expect that over the course of time that, that’s going to reverse itself and become a much more normalized situation. We’ve got confidence in that because we’re seeing more than anything else. The decision process is being elongated, but not stopped. People are still very much interested in trying to drive operational efficiencies within the hospital. They’re trying to do it, while they are improving patient safety, basically the areas that are our sweet spot. So, as you look at us rolling out the medication management strategy, as you look at our focus from a competitive perspective in the near-term, in Infusion, you look at the success that we have begun to feel at least from a feedback perspective for the Pyxis, yes, and we’ll have that full system rolling out. We’ve got the renovation platform where we’re getting tremendous amount of excellent feedback on the system selling and the focus on reducing the length of stay and helping in the anti-effective programs of the hospitals. We’re feeling very comfortable with those sorts of individual drivers and some of the macro drivers within the business that should be very helpful. The Procedural Solutions side of the business, the big changes that we went through last year, it’s very clear that we’re – it’s paying dividends this year. The organization is stabilized. We continue to build scale and we continue to invest for both businesses in markets around the globe. So, I think as we look out over the next couple of years, the trend, favors where we’re positioned. The investments that we’re making and have been making over the last year began to pay back, and so I’m very encouraged with the strategical progress that we’re making on the top line. Jim you want to start talking about…

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Jim Hinrichs – CFO: Yes. From a kind of specific thoughts on headwinds and tail winds and you are absolutely right Constantine, we are not going to provide fulsome guidance on FY ’14. We won’t do that till our Q4 call as we always do. But some of the bigger trends that are out there specifically for next year obviously we would expect that the Pyxis ES platform will get traction through the latter half of this year and into the first half of next year. Of course what that means is the revenue would be delayed until probably the second half of next year as we contract for it very late this year and early next and we push revenue to next year. So that’s a trend we are looking at. Certainly we have got the full year of the medical device tax annualizing and so that creates a bit of a headwind for us. In Europe also, creates uncertainty. It’s been slow over there this year, whether that comes back or not is something worth looking at very carefully. From a tail end standpoint it’s a lot of the same stuff that we are talking about. We’ve got line of sight to continue margin expansion. All of the same factors that are happening today should continue to happen next year. So positive mix, positive sourcing dynamics, positive pricing dynamics and then the annualization of the benefits that we recognize this year and as we focus on our next round of these bigger initiatives we hopefully have some juice to get after. Then finally I think the Infusion market is one where we are also looking at. There have been some interesting competitive dynamics happening out there and that could potentially create opportunity but it is not clear exactly when and how much that materializes in too.

Medical Specialties and Disposables

Richard Newitter – Leerink Swann: I was just wondering, if you could elaborate a little bit more, your Medical Specialties and Disposables growth rate really took a big step up and double-digit growth. I was wondering, if there was anything in the quarter there that was different or unexpected that drove that and how sustainable is that level of growth going forward?

Jim Hinrichs – CFO: This is Jim. A couple of things; number one, on Med Specialties, the growth there, nothing really unusual at all in there. It’s all organic. Growth there comes other than the U.K. medical acquisition which was pretty small. The growth there is coming from our differentiated products. So, our chronic drainage products, our spine products, our biopsy products, those products tend to be differentiated tend to sell quite well. That was really what drove the growth in that business which as I said was largely organic. On the Specialty Disposables or the Respiratory Disposables line, we have a tail end of what was a strong flu season. That certainly helped that business as it did in the second quarter. Then we did sign on a new strategic vendor, Smith Medical as part of that group and that also helped drive the growth. That probably drove about half of the growth that we saw in Specialty Disposables. Those are the things that drove those two businesses.

Richard Newitter – Leerink Swann: Then just how should we think about that going forward? Is the stepped up level of growth kind of more in those divisions or is it more on the corporate side for the race towards the upper end of your guidance in 4Q?

Jim Hinrichs – CFO: It’s strength across all businesses. I do not think we should continue to expect double-digit growth in those and especially in Specialty Disposables, we’d be happy to take it, but I don’t think that’s what we’re expecting or planning for. But it’s really strength across all three businesses. All three have done a little better than we thought. So that’s kind of our thinking going forward.

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Kieran Gallahue – Chairman and CEO: They all tend to be led by the clinically differentiated products. In those categories, the team’s done an excellent job of selling the clinical value. I think the transformation in those commercial organizations is it’s paying off.

Richard Newitter – Leerink Swann: Then maybe just one follow-up, Jim you had mentioned on the – Europe as a potential headwind or the puts and the take, that was maybe one that you’re not so sure if the pressures abate next year, what are you seeing there, incrementally quarter-to-quarter, any kind of changes in the environment there and anything to lead you one way or the other to think that it’s stable or deteriorating or getting better?

Jim Hinrichs – CFO: I’d say that we’re staying – stability, but stability at a reasonably low end. So, that market really began to turn quite some time ago as everybody’s been talking about and it’s really just a matter of living with it at this point, making sure that the organization’s the right size, they’re focused, but I wouldn’t be counting on a significant macro change within the near-term.