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Executives

Joe Kaufmann – President and CEO

Mike Celano – CFO

Analysts

Matthew Wysong [ph] – Jefferies & Company

James Sidoti – Sidoti & Company

Kensey Nash Corporation (KNSY) F1Q2011 (Qtr End 09/30/10) Earnings Conference Call October 21, 2010 9:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the first quarter earnings release. (Operator Instructions). And I would now like to turn the conference over to your host, President and CEO, Mr. Joe Kaufmann. Please go ahead, sir.

Joe Kaufmann

Thank you. Good morning. Welcome to the Kensey Nash fiscal 2011 first quarter conference call. Joining me today are Doug Evans, our Chief Operating Officer; and Mike Celano, our CFO. Mike will start.

Mike Celano

Thank you Joe. The statements made by Kensey Nash and its representatives in this conference call will contain certain forward-looking statements, including financial forecasts that are based on the current beliefs of management as well as assumptions made by and information currently available to management. Wherever possible, we will try to identify these forward-looking statements by using words such as belief, expect, anticipate, forecast, and similar expressions. Please note these words are not the exclusive means for identifying such statements.

Please see today’s press release and Kensey Nash’s SEC filings, including our Annual Report on Form 10-K for the year ended June 30, 2010, particularly the information under the caption "Risk Factors" for a discussion of risks, uncertainties and other factors that could cause our actual results in the remainder of fiscal year ‘11 and beyond to differ materially from those expressed in or implied by our forward-looking statements. Thank you.

Joe Kaufmann

Today we reported our financial results for the first fiscal quarter. Total revenue was $17 million, and EPS of $0.41, both were at the low end of our previous guidance. Royalties of $6.1 million were slightly below our guidance of $6.2 million to $6.3 million. And net sales of $10.9 million were at the mid-point of our guidance of $10.8 million to $11 million.

We did expect that our first quarter results would be weak relative to the prior year and also on a sequential basis. Both spine and cardiology sales were in line with our expectations but sports medicine was a little weaker than expected. Our general surgery products which primarily consisted of our ECM products sold by Synthes were on target for the quarter, and I would like to point out that what we were seeing in the field with Synthes and the uptick in the sales throughout the last couple of months, we think that Synthes is doing an excellent job in the sales and marketing arena with these products and we think as the year progresses, we will be able to give you more details and more insight into what is happening in the marketplace and the uptick on these particular products.

The products also will be launched in the EU later on this calendar year. And as the year moves further on, for fiscal year 2011, we are very confident that this is going to be a nice driver for Kensey Nash, not only for our product sales but also starting to generate some royalties for Kensey Nash on an ongoing basis.

Our Angio-Seal royalties were 5% below prior year and our Orthovita royalties were flat year-over year. And – so the decline or the slightly lower than expectations for the quarter were driven by the slightly lower than what we expected on Angio-Seal, but we do expect that in the next quarter, we will see an increase – sequential increase for both Orthovita and also Angio-Seal royalties.

Now, as stated in our press release, certainly the overall economic climate coupled with high unemployment and reduced procedures, particularly in spine and sports medicine, is having a negative impact on our order flow to date. This is what’s causing us to now reduce our second quarter expectations. Initially we felt that we would see somewhat of a rebound or an improvement starting in the second quarter with our customers, but quite frankly we haven’t seen that yet. So, we think that with the higher unemployment rate, people dropping off of COBRA, all the other economic pressures that are out there globally, certainly is affecting Kensey Nash and affecting our partners as we’ve been following the earnings releases of many other companies, and it has impacted us.

So, for us, we think it’s prudent to reduce our expectations for the second quarter, and our full-year guidance. We are reducing our estimates for net sales by approximately 6% to 7% or $4.5 million to $6 million for the fiscal year from our previous guidance. This includes a reduction in two areas. First, in sports medicine, where we believe we are taking the guidance down by about $2.7 million to $3.2 million. And again, this is due to what we feel is ongoing issue with the overall economic climate and some reduction in inventory that is taking place and that we don’t expect to see a rebound in sports medicine until the early part of calendar year 2011.

We are also taking down the spine products. The spine products we are taking down for the full year about $1 million to $1.5 million. Again, reflecting the pressure that is at – that we are all seeing in the spine market and the reduction in procedures, more conservative treatment of patients. We also believe that this is going to be temporary and that there will be a rebound in procedures as treatment methods change and treatment methods are adjusted for these particular patients, but at this time, with the situation the way it is, we think it’s prudent to take these numbers down.

Now, when you look at our guidance, I will give you some numbers here for the second quarter and the full year. First, the St. Jude collagen sales we are all including in our guidance the minimums that are under the new contract that we talked about previously. So, for the second quarter, which ends in December that’s under the old contract, we expect that our sales are going to be approximately $4 million. For the full year of fiscal year 2011, we are expecting sales will be $12.5 million, and compared to 2010 full year of $19.3 million. So, again this reflects the change in the contract that was put in place previous quarters.

Looking at our biomaterials business, excluding the St. Jude component, for the second quarter, we expect our sales in biomaterials, excluding St. Jude will be between $5.8 million and $6.4 million. Compared to the prior year in the second quarter the same [compare] was about $7.3 million. And this is down primarily because of spine. So, we expect the spine sales to be down about $1 million year-over-year in the second quarter.

For the full year, we expect that our core biomaterials, excluding St. Jude will be in the range of $32.5 million to $35 million. This compares to $32.7 million in fiscal year ‘10. So we expect to see flat or a slight increase in our sales year-over-year in all the markets that we participate ex St. Jude.

For the second quarter full year sales, including some Endo business, our total sales for the second quarter now, we expect to be $10.3 million to $11 million. For the full year, we expect $48.3 million to $51 million, and this compares to $54.2 million in fiscal year 2010.

Royalties for the second quarter are now expected to be $6.7 million to $6.8 million compared to $6.6 million in the prior year, and for the full year, $26.7 million to $27 million, which is up slightly from the $26.4 million in fiscal year ‘10.

If you look at our total revenues for the second quarter, we now believe the number will be $17 million to $17.8 million compared to $19.1 million prior year. And for the full year, $75 million to $78 million compared to $80.6 million. And again, the reduction compared to prior year is entirely due to the reduction in the Angio-Seal component sales under the new contract.

For EPS, for the second quarter, we are looking at $0.37 to $0.40 a share compared to $0.43 a share last year. And for the total year, $1.75 to $1.80 compared to a pro forma number last year of $1.85. So, it will be down slightly year-over-year on a pro forma basis.

Operating cash flow continues to be strong. We expect our full year operating cash flow to be $25 million. And, however, for the second quarter, which is always the case, we expect cash flow to be relatively neutral as this is the quarter where we have large tax payments. We also have bonus payments from prior year. So, when you look at the operating cash flow for the second quarter, it tends to decrease significantly but rebounds significantly in the third and fourth quarters, and we expect this will equate to about $25 million in cash flow for the year.

CapEx for the current year, we expect is going to be $3 million to $4 million. And we also expect that we are going to continue to invest heavily in our R&D programs, primarily in the ECM products, some additional pre-clinical works, also some – getting some clinical data, patient data over the next year, continue to move forward with our cartilage program. As I stated previously, we do expect that we will have a cartilage partner in place, hopefully very soon for the OUS rights, and sales and marketing, and distribution, and that will continue to move forward with our US plans in terms of clinicals.

We are continuing to be very optimistic about the business in general. We don’t think that any of this shortfall for the quarter or for the year has anything to do with lost market share or any issues with our products. We are very confident in our partnerships and the products that we have in the market and the new products we are bringing to the market. And this reflects more of what’s happening in the overall economy in the US and OUS.

And with that, I would like to turn it over for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll go to the line of Josh Jennings at Jefferies. Please go ahead.

Matthew Wysong – Jefferies & Company

Good morning, this is actually Matthew Wysong [ph] for Josh. I had a couple of questions here. First, I was hoping you’d give me a little more granularity on the relative strength that we saw on gross margins this past quarter. You had decreased volumes and you are obviously reducing guidance on royalties. So was just trying to get a little better idea of what drove that this past quarter.

Joe Kaufmann

It was predominantly a mix with lower sports medicine business in general. Our sports medicines products have a slightly – have a lower margin than some of our other products within the collagen space – through collagen space. So, it’s really a mix.

Matthew Wysong – Jefferies & Company

That’s helpful. And now in terms of revenue guidance, I know you already obviously provided a good deal of granularity there. But looking at the revised outlook and taking into account way to this quarter and your physical 2Q guidance, it’s obviously suggestive of a pretty strong back half for the year, you know, by my math averaging about $20 million plus in both the back – fiscal 3Q and fiscal 4Q quarters. I mean, you talked a little bit about your expectations and revisions, but can you talk maybe a little more specifically about how – what gives you sort of that confidence that this incremental ramp is attainable. Is it the new ECM product launch that you discussed, the cartilage product launch in EU, any else there?

Joe Kaufmann

Well, I think it’s a combination of factors. Certainly, we do expect that the ECM products will continue to do well in the marketplace, and we do anticipate that we are going to see higher volumes in the second half of the year with the ECM products. We also do expect that with the potential new partner in Europe for the cartilage, that that’s going to increase our sales in the second half of the year. And you may recall that we did a licensing agreement with another product on the ECM with Arthrex. So, that product will also be launched more towards the second half of the year.

Now on top of that, what we can see now with our – some of the forecasts that we are receiving from our customers that we did experience without question in our first and second quarter, a reduction in some of our core business, and you will recall that in our fourth quarter we had a very, very strong fourth quarter of last fiscal year. So, as we head into the back half of this current fiscal year, we are anticipating a rebound, basically in the spine area, we will see an increase in just from replenishing inventories. And also on the sports medicine, we are expecting the same increase there, not only from the products that I mentioned, but also some of the core business. So, it’s a combination of factors.

Matthew Wysong – Jefferies & Company

Okay. That’s definitely helpful. And then what expectations for Angio-Seal are baked into your revenue guidance, and I don’t think you mentioned that, but has there been any change to those expectations since the last time you gave your outlook?

Joe Kaufmann

No, we expect that Angio-Seal year-over-year is essentially going to be flat. We are not anticipating any growth there. It was down 5% in the first quarter, but we expect for the full year that it’s actually going to be flat or down slightly.

Matthew Wysong – Jefferies & Company

And that what’s you had expected last quarter as well when you provided your outlook?

Joe Kaufmann

That’s correct.

Matthew Wysong – Jefferies & Company

Okay. Then lastly, just a little clarification on the buyback, I think you gave actual share count in the release, that 8.8, little more to 8.6. Can you give me just a little more color on where you expect that to go into the December quarter? Obviously you guys have been pretty active on the buyback front and sort of what your expectations are for that and sort of (inaudible).

Joe Kaufmann

We ended September 30 with roughly 8.6 million shares outstanding. After we – and we have roughly about $4 million left on the $30 million buyback program which will be executed on this quarter. So after that buyback will be roughly shares outstanding at roughly about 8.5 million shares outstanding. And on a weighted average basis, in terms of guidance, we have a weighted average shares outstanding of about 9 million shares.

Matthew Wysong – Jefferies & Company

Great. Thank you, gentleman.

Joe Kaufmann

Thank you.

Operator

Thank you. And our next question will come from the line of James Sidoti of Sidoti & Company. Please go ahead.

James Sidoti – Sidoti & Company

Good morning Joe, good morning Mike.

Joe Kaufmann

Good morning Jim.

James Sidoti – Sidoti & Company

Can you just give a thought of the guidance? Can you give us a sense – do you have – how much revenue you have from either the new cartilage repair product in Europe or new versions of the Orthovita product in the back half of fiscal 2011?

Joe Kaufmann

Well, for the cartilage product, I can only – I will give you maybe a range here that we expect, it’s going to be relatively modest by the time it gets out there in the marketplace, but I would less than $1 million.

James Sidoti – Sidoti & Company

Okay.

Joe Kaufmann

And on the new product with Orthovita, it’s also relatively small because we expect that by the time it gets approved and ready for launch that there’s not going be a lot for Kensey Nash in the latter half of our fiscal year, probably in the range of about $0.5 bucks, something like that.

James Sidoti – Sidoti & Company

So then the bulk of the pickup in the back half of the year will be from ECM and a pick up to your existing customers. Is that the way we should look at it?

Joe Kaufmann

I think that’s fair, yes.

James Sidoti – Sidoti & Company

And then as far as the buyback goes, you said you have $4 million left, but there’s nothing stopping you from opening up another plan itself, right?

Joe Kaufmann

There isn’t anything preventing us from doing that and we will always look at that or Board looks at that very closely, and if we think that’s a continued good use of our cash then we will take the appropriate action.

James Sidoti – Sidoti & Company

All right. And any update on the (inaudible)

Joe Kaufmann

It’s not over Jim. It’s not over.

James Sidoti – Sidoti & Company

All right. Thank you.

Joe Kaufmann

All right.

Operator

Thank you. (Operator Instructions). And gentlemen, there are no further questions in queue.

Joe Kaufmann

Great. Okay, well I’d again thank everyone and again we hope that we will be speaking with you next quarter with further updates and highlights and thank you for calling in.

Operator

Thank you. And ladies and gentleman today’s conference will be available for replay after 11 a.m. Eastern time today until October 28 at midnight. You may access the AT&T playback service by dialing 320-365-3844 with the access code of 174247. Those numbers again are 320-365-3844 with the access code of 174247. That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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