Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Rick Wise with Leerink Swann.
Rick Wise - Leerink Swann
Good morning, everybody.
Chris Begley
Good morning, Rick.
Rick Wise - Leerink Swann
How you are doing?
Chris Begley
Okay.
Rick Wise - Leerink Swann
Let’s start with maybe gross margins again. You all highlighted that it was slightly below your expectations. Can you dig into that a little more for us, currency and mix? I would have thought that given the Project Fuel, the exiting from North Chicago, some of the new product launches, that they would have been stronger. How do we think about all of these pieces, especially going forward?
Tom Werner
Hi Rick, it’s Tom. You’re absolutely right. As we gave our guidance for the second quarter and beyond at the first quarter call, we did factor in Project Fuel savings in North Chicago, etc. What happened in the quarter frankly are really two things; we had stronger performance in I.V. solutions and slightly less than what we expected for MMS. So you get some mix issues there and then this is about half and half.
The second half of the margin sort of short fall to our expectations was really related to foreign exchange and this gets a little bit complicated, but essentially the Australian dollar, Canadian dollar and the Euro have tended to move in parallel, even throughout all of these volatile currency moves over the last 18 months. This last quarter was an exception though, and the Australian dollar actually moved about 15%; it strengthened against the U.S. dollar, whereas the other currency strengthened only about 5%.
Given what we manufacture in Australia versus what we sell, our natural hedges that we normally have plus the fact that these currencies always sort of move in tandem didn’t happen in the quarter, so we suffered from that. You’ll also see the impact of that showing up in the European operating margins.
So Project Fuel happening as we expected, North Chicago happening as we expected, the two things that were a little bit unexpected were some of the sales mix, which we think will come back into balance in the back part of the year. The currency where the Australian dollar is at right now, we’re going to take some steps to try to mitigate that. Should it not change, we could see similar impact in the back part of the year, but I think we’ve got enough offsetting that to get us back to the margins that we indicated.
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