Hospira Earnings Call Insights: Remediation and Margins

On Wednesday, Hospira, Inc. (NYSE:HSP) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Remediation

Shibani Malhotra – RBC Capital Markets: Mike, I know you’re doing everything that you can to resolve the remediation, but you did say that it’s more extensive and will take longer than you expected. Can you just comment conceptually about whether you feel you’re moving forward and how long you think this is going to remain an issue and in particular, as this relates to the Austin facility and the fact that you’ve had quite a few interactions with the FDA, but the observations tend to be the same or look the same on the surface level. So, can you just talk about the progress and how long you think it’s going to take?

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F. Michael Ball – CEO: So, from our standpoint, I believe we are really making progress. Meeting our commitments; but as I’ve said before, there is still work to do and the fact that the FDA is in our plants I think is a necessary thing to continue our constructive dialogue. We are making sure we are in alignment with their expectations and as we go through the inspections and have an opportunity to discuss the inspections with them, and again have this discontinued interaction, I feel like we are gaining the trust and credibility with the agency as we move forward. So, I’m actually very pleased with the interaction with (Cedar) and the districts. So, I’ll address Austin now because that was at the tail end of your question there. So with respect to Austin then, when we actually look at the 483 and its observations, we believe that if the FDA had looked at the observations from the prior 483 and also had reviewed the commitments only, we would have had a very different outcome there. When you look at the 483, it’s focused on very different things than the original 483 was and when we talk to the district, and in fact, this was prior to the inspection, we made the point that we have lived up to our commitments but there was still work to do and I think what this 483 confirms is that’s exactly right. Now, with respect to that 483, my sense of it is these issues are entirely manageable. We have put a response back into the agency and I feel very good that we will be able to live up to the commitments we’ve made in this next response and I also feel good that the agency went in with a very extensive four-week four inspector national expert review of the plant. So from my standpoint we’re making good progress.

Margins

David Roman – Goldman Sachs: Tom, I was hoping you could expand a little bit more detail on your comments regarding the gross margin line and the increased spending, and may be specifically if you could help us by using the third quarter as a starting point as I look at the 33.6% number you put up in Q3. How much of that was impacted by the standard plant shutdowns that occurred in the third quarter, because your guidance obviously has gross margins in second half below where they were in the first half, so as we think about the moving parts around that line item, can you maybe just walk us through the pivot points up and down on the gross margin line going forward?

Thomas E. Werner – SVP, Finance and CFO: Yeah, our margins in the quarter were a little bit lower than we had initially expected. Overall the earnings were fine as we got through the rest of the income statement, but as you look at the margins in the third and fourth quarter, they are always impacted about 100 basis points negatively by the shutdowns that occur right around 4th of July and then over the Christmas, New Year’s holidays, sometimes into the new part of the year. So, about a 100 basis points there. The other things that affected margins in the quarter, obviously the shutdown was something we planned and factored in, but our inventory losses in the quarter as well as failure to supply penalties, all related back to the quality issues and the supply issues impacted the margins as well roughly about 125 basis points. So, hopefully that won’t continue on and on again in the fourth quarter. We’ll have another set of shutdowns and the inventory losses and the failure to supply those are always things that are pretty difficult to call ahead of time but those were the main factors.

David Roman – Goldman Sachs: So just to quickly follow on that the guidance that you’re providing does assume that gross margins have to be up fairly significantly sequentially in 4Q. So, how do we think about that in 4Q and how realistic is that given what you just laid out and is the second half of ’12 the right run rate going forward for ’13 and gross margins to be next year?

Thomas E. Werner – SVP, Finance and CFO: When we follow up with you in terms of the sequencing I can walk you through that. I’m not sure I would agree with your comment and then we need to move on to the next question.

A Closer Look: Hospira Earnings Cheat Sheet>>