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Kinetic Concepts, Inc. (NYSE:KCI)

Q2 2008 Earnings Call Transcript

July 24, 2008 8:30 am ET

Executives

Catherine Burzik – President and CEO

Marty Landon – CFO

Rich Cockrell – VP, IR

Woodrin Grossman – Director

Analysts

Tao Levy – Deutsche Bank

Matt Miksic – Piper Jaffray

Michael Matson – Wachovia Capital

Taylor Harris – J.P. Morgan

Eugene Oliva – CIT Group

Larry Keusch – Goldman Sachs

Operator

Good morning. My name is Melissa and I’ll be your conference operator today. At this time, I would like to welcome everyone to the KCI second quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. (Operator instructions) Thank you. I would now like to introduce, Rich Cockrell, Vice President of Investor Relations for Kinetic Concepts. Mr. Cockrell, you may now begin your conference.

Rich Cockrell

Thanks, Melissa, and good morning to everyone, and welcome to KCI’s second quarter 2008 earnings conference call. Today, we will review the results that were announced in our press release earlier this morning. If you have not received a copy of KCI’s earnings release, it is currently available on the Company’s Web site at www.kci1.com. Today’s call is being webcast live over the internet, and a replay of the call will be made available on the KCI’s corporate Web site shortly after the conclusion of today’s call.

Today’s conference will include prepared remarks by Catherine Burzik, our President and Chief Executive Officer; Marty Landon, our Chief Financial Officer; and, we’re also joined by Steve Sobieski, CFO of LifeCell; and, other selected members of our senior leadership team.

I would like to remind everyone that KCI will be hosting an analyst day event on Thursday, October 30th, at the Grand Hyatt, and it will be here in San Antonio. The event will include presentations by key opinion leaders in the field of wound care, advanced wound care, as well as presentations by KCI leaders. We will also have the tour of our R&D facilities and other clinical advantage facilities as well. We look forward to seeing you there, and if you have any questions, feel free to call me directly.

Our conference call this morning will include forward-looking statements about our business including guidance on future plans, revenues, and earnings. These statements are based on our current expectations and are subject to a number of risks and uncertainties, which could cause actual results to differ from our expectations. More information about potential risk factors may be found in our filings with the SEC. Also, quarterly results discussed on this call may reflect adjustments for expenses related to the LifeCell acquisition and other related adjustments. Please refer to the non-GAAP reconciliation of these measures contained in our earnings release issued this morning.

I would now like to turn the call over to Catherine Burzik, President and Chief Executive Officer. Go ahead, Cathy.

Catherine Burzik

Thanks a lot, Rich, and good morning, everyone. Today’s call will begin with general comments and a review of key components from our earnings release that we posted earlier this morning. I would like to provide updates on a range of topics, including comments on LifeCell integration and our back therapy and V.A.C. Therapy and TSS businesses.

Let me start by saying that I am very pleased with the overall strength of our business. We demonstrated an ability to drive solid growth in the face of a more challenging and competitive environment, both in terms of more competitors as well as competitive bidding. I’m also very pleased with the progress that we have made on the integration of LifeCell.

Consolidated revenue for the period increased 17% to $462 million. Global V.A.C. revenues delivered double-digit growth, increasing 11% to $353 million during the period. The Therapeutic Support Systems business grew as expected to $81 million, compared to $79 million reported during the same period of 2007. Consolidated revenues per period includes 42 days of LifeCell operations, LifeCell’s revenue during the second quarter of 2008 were $28 million.

We recorded a net loss for this period on a GAAP basis of $3 million, compared to net earnings of $58 million in the prior year period. Excluding the results of the LifeCell operations and the impact of purchase accounting and transaction related cost, net earnings were $70 million on a non-GAAP basis, an increase of 21% when compared to results reported during the second quarter of 2007.

Marty Landon will provide a more detailed review of our financial performance at the conclusion of my remarks.

LifeCell’s business performed well in the second quarter. We included only LifeCell’s results of operations for the period May 20th, 2008 to June 30th, 2008 in our reported results. For the full second quarter, LifeCell achieved record revenue of $58 million, which is an increase of $11 million or 22% when compared to the same period during 2007. This growth was primarily driven by an increase in revenues from (inaudible) hernia repair and breast reconstruction applications. Notably, LifeCell’s growth margin, excluding purchase price adjustments, was 70.1% in the quarter, up from 69.7% in the first quarter of the year. We expect LifeCell growth margins to improve over time as we bring on line our next generation of automations for (inaudible) manufacturing.

I am pleased to report that integration of the LifeCell business has gone extremely well. I have personally spent significant time with LifeCell management and employees since bringing them into the KCI family. LifeCell’s focus on patient outcome is very aligned with how KCI feels about patients. Additionally, LifeCell’s focus on innovation, the science of tissue regeneration, and consequently, LifeCell’s ability to bring unparalleled solutions to surgeon customers is remarkable. I am convinced that bringing KCI’s knowledge of tissue repair together with LifeCell’s knowledge of tissue regeneration will yield significant results over the next several years.

Going forward, our LifeCell franchise will continue to focus on tissue-based products for use in reconstructive, orthopedic, and Euro [ph] gynecological surgical procedures to repair soft tissue defects, as well as new applications in the cosmetics, cardio repair and prevention, chronic wounds, and orthobiologic markets.

We continue to be excited about the progress we have made today on the Strattice launch and its potential for the future. Strattice is exceeding KCI’s expectations and accounted for approximately 10% of LifeCell’s revenue in the second quarter. Strattice, in the long term, will provide new application opportunities unavailable to us with AlloDerm. We are very pleased with initial surgeon acceptance further validating our belief that Strattice should significantly expand our business over time.

Additionally, we are making good progress on our plan to launch to Strattice in Europe, and expect to be on the market late this year in Germany and the UK for challenging cardiac and breast reconstruction.

Turning now to our V.A.C. Therapy business, revenues of our global V.A.C. Therapy business increased 11% during the period to $353 million. Increased V.A.C. revenue in all geographies was attributed to continued penetration in each care setting. V.A.C. sales in North America increased 6% for the period to $262 million. EMEA and APAC sales increased 31%, or 16% when excluding currency impact to $92 million.

We were particularly pleased with the growth that we saw in the Germany and UK businesses in the quarter, which are two countries that have been considerable competitions.

And now, specifically regarding the US market, as the second quarter progressed, we sought an increase to V.A.C. units in use. Importantly, we also sought increase in units in use per account executive, indicating an increase in (inaudible) in spite of a meaningful increase in the trialing of free or inexpensive wound drainage devices. However, and importantly, our observation from the fields indicates that these trials, of certainly distracting, ultimately have not been successful in obtaining a meaningful amount of market share. In fact, what we are seeing is that an overwhelming majority of customers return almost exclusively to V.A.C. post trial. This once again proves that (inaudible) understand that outcomes matter, and that V.A.C. Therapy is the only cost effective NPWT that truly heals the most serious, complex, and life-threatening wounds.

Now to further enable our sales force to sell the economic value of V.A.C. Therapy, we are currently rolling out our business impact model aimed at helping to educate our customers regarding the economic benefits associated with V.A.C. Therapy when compared to lower priced and less efficacious standard-of-care wound care products. The model effectively illustrates the advantages of V.A.C. Therapy and the cross effectiveness using an individual hospital and payer data, and validates that V.A.C. saves money for hospitals and payers. The model helps clinicians and administrators understand that V.A.C. routinely cost 25% less than standard-of-care wound therapy, and importantly, heals wounds 35% faster. We are very encouraged by the dim [ph] reception among administrators to date. The business impact model, as you know, is already successfully used in major countries in Europe.

Relevant also to our second quarter results is that the latest Medicare competitive bidding program for negative pressure wound therapy. We recently announced V.A.C.’s availability in round one CVAs as a result of (inaudible) decision to delay competitive bidding of NPWT for 30 months. As you know, I’ve been very vocal against the competitive bidding of NPWT because of the severe and critical access issue and post-traumatic (inaudible) patients with complex wounds.

The delay of competitive bidding for NPWT provides a fresh opportunity for KCI to work with CMS in a constructive review of NPWT to prove that (inaudible), V.A.C.’s clinical significance and superior outcomes. Importantly, the new law mandates a review of NPWT coding, and KCI will be very active with CMS in this review. Needless to say, I am mostly (inaudible) V.A.C. Therapy will continue to be available to Medicare party [ph] patients who were denied our home V.A.C. as a result of round one competitive bidding. As of July 16th, we began servicing those CBAs where V.A.C. Therapy was discontinued on July 1st.

Now regarding our efforts to (inaudible) back globally, we’ve continued to make good progress with our launch plans for V.A.C. Therapy in Japan. As reported at the World Union of Wound Healing Societies in June, the patient outcomes of our clinical trials in Japan were extremely impressive, with the difference in median time to wound closure of 15 days for V.A.C. Therapy versus 41 days for the historical control. This represents one of the most clear and remarkable results for KCI to date. Keep in mind that Japan is the second largest medical device market in the world with an estimated 250,000 V.A.C. -appropriate wounds annually in the acute care setting, and Japan represents a sizeable opportunity for the Japanese healthcare system and for KCI.

We are seeing signs of pent up demands from positions in Japan where some of them are with V.A.C. Therapy, and to date, we have been nominated for fast track regulatory approval status and are awaiting approval from the Japanese government. Our goal is to be on the market in Japan by the late 2009.

We also continue to make reimbursement progress in Germany as well. KCI is in the later stages of finalizing its negotiations with payers for homecare reimbursements. This entails an agreement on the required studies in the registry of participants in the study. These studies are anticipated to begin later in 2008. Homecare reimbursement represents a significant opportunity for patients in healthcare systems and for KCI in Germany.

In summary, KCI has created a very attractive as a result of our V.A.C. business. Consequently, we fully expect global competition and we are well prepared for it. KCI’s V.A.C. Therapy is the only clinically-proven effective negative pressure wound therapy system. We believe the competitive situation has stabilized, and that our performance will strengthen in the second half of the year as compared to the second quarter. Our expectation for 2009 remains that we will sustain double-digit growth of V.A.C. growth globally. We enter the second half of the year with confidence regarding our V.A.C. business.

Turning now to Therapeutic Support Systems, this business continues to perform in line with our expectations. While we expect the business to remain essentially flat for the year, profitability should continue to improve as we focus on delivering profitable revenue growth and improved service levels consistent with our focus on customer and patient satisfaction.

Now, beginning in October 2008, CMS decided that it will no longer reimburse for pressure ulcers acquired while the patient is in the hospital. And as you know, hospital-acquired pressure ulcers result in additional costs of $11 billion to the healthcare system. And these pressure ulcers result in 60,000 deaths annually. KCI’s TSS AtmosAir products represent the best in class solutions for the prevention and treatment of pressure ulcers, and therefore, we believe this represents a good opportunity for KCI.

On the Research and Development front, we’ve continued to invest in innovation and the science of wound healing. Progress on the development of every aspect of our pipeline remains strong. We continue to execute our plans for our negative pressure technology platforms, which is our strategy for expanding the utilization of negative pressure to different clinical settings and tissue types.

Our surgical wound management system platform aimed at surgical platforms is progressing as planned. We expect to see the first commercial surgical wound management product, which is designed to reduce post-surgical procedure complications on the market early in 2009. We are also making progress of both our new V.A.C. Instill programs and our (inaudible) program, which will diversify our products in the active wound healing category, and expand the number of wounds that will be applicable for treatment within the NPWT universe.

As we have discussed previously, we have a large effort in R&D dedicated for advanced materials and to dressings. We anticipate that new dressings resulting from these efforts will begin entering the marketplace towards the end of the year, and will include will knee grafting for our V.A.C. Therapy systems and a new system for managing complex abdominal wounds.

In this (inaudible) of dressings, we are very pleased and excited to announce a new partnership with 3M Healthcare, whereby they will supply their Tegaderm brand transparent film dressing for use with KCI’s V.A.C. Therapy system. This partnership combines the advance technology of two global market leaders making strides to improve wound care outcomes. Configured exclusively for the use with V.A.C. Therapy, this newly designed Tegaderm dressing will provide a skin-friendly interface and will conform to body flex for greater comfort. Additionally, this dressing will be easier for healthcare professionals to apply. The first commercialized V.A.C. Therapy dressing featuring this new technology is projected to launch come year-end.

We also continue to make progress with our vacuum-assisted tissue regeneration technology aimed to acquire tissue and connective tissue applications. With the addition of LifeCell, our R&D efforts become even more robust and exciting. One of the key advantages of the LifeCell acquisition will be the ability to leverage its historical strong knowledge of and presence in the operating room to deliver this new product platform to the market.

So in conclusion, we remain enthusiastic about KCI’s business fundamentals, and look forward with confidence to the remainder of the year.

I will now turn the call over to Marty to review the financial performance of our business for the quarter.

Marty Landon

Thank you, Cathy, and good morning, everyone. We have a very active second quarter, which included our acquisition of LifeCell Corporation and financing activities related to the transaction. Hopefully, our release this morning and today’s conference call will provide you with a good perspective of the new combined entity.

Starting at the top, consolidated revenue for the second quarter of 2008 increased 17% to $462.1 million. The revenue increase was due mainly to higher global V.A.C. revenues, which increased 11% to $353.2 million during the period. As expected, second quarter from our Therapeutic Support Systems was $81.3 million, up 2% from $79.3 million reported during the same period in 2007.

Consolidated revenue for the period also included 42 days of LifeCell operations. For the full second quarter, LifeCell recorded $58.3 million in total revenue, representing an increase of 22% year-to-year. And of that total, we recognize $27.6 million in our consolidated results.

Second quarter revenue for KCI, excluding the LifeCell division, was $434.5 million, an increase of approximately 10%. As you recall, this quarter presented a challenging (inaudible) for us given the strength of Q2 2007 results.

Foreign currency exchange movements favorably impacted total revenue by 4% for both the second quarter and first six months of 2008, compared to the same periods one year ago.

Our results for the quarter included transaction-related expenses of $71.1 million related to our preliminary purchase accounting adjustments and incremental net interest expense of $13.5 million associated with the acquisition financing. Our preliminary purchase accounting adjustments were comprised of the write offs of in-process R&D expenses, initial amortization of acquired and tangible assets with definite lives, higher costs of sales resulting from the step up of LifeCell inventory affair value, and certain other related items. The write off of in-process R&D was not deductible for federal income tax purposes, also negatively affected our effective tax rate for the period.

These incremental expenses resulted in a net loss for the second quarter of 2008 on GAAP basis of $2.7 million or $0.04 per diluted share, compared to net earnings of $58.1 million or $0.81 per diluted share for the same period a year ago.

On a non-GAAP basis, excluding the impact of the acquisition and related transaction expenses, second quarter net earnings were $70.5 million, an increase of 21% over the same period a year ago. Net earnings per diluted share, excluding those impacts were also up 21% from the prior year to $0.98 per share.

As I’ve said, worldwide V.A.C. revenue was $353.2 million for the 2008 second quarter, and increase of 11% from the prior year’s period, and 6% growth sequentially due primarily to increased market penetration. Foreign currency exchange rate movements favorably impacted V.A.C. revenue growth by 3% in the period. V.A.C. revenue in North America increased 6% for the period at $261.7 million. This growth was achieved in an environment of increased competitive efforts represented most often by pre-evaluations or product trials of new gauze-based systems. EMEA, APAC V.A.C. revenue increased 31% to $91.5 million or 16% counting currency.

As Cathy mentioned, we are pleased with the growth that we saw in the German and UK businesses for the quarter, which are two countries that have seen considerable competitive activity.

Revenue from our Therapeutic Support Systems or TSS was slightly above the prior year’s quarter at $81.3 million for the quarter versus $79.3 million in the second quarter of 2007. The results were primarily driven by prudent account management under our GPO contract strategy and favorable currency exchange movements. Excluding the effect of currency, TSS revenue was slightly lower than in the prior year due primarily to our focus on profitability.

We’ve improved our service levels in this area while driving operating efficiencies, and our WhiteFoam [ph] critical care product is being recognized for its life-saving therapy. We are making good progress on proving the profitability on this part of our portfolio and would expect continued margin progress as we move forward.

Our LifeCell business performed well in the second quarter achieving record revenue of $58.3 million, which is an increase of 22% over last year. Again, we recognized $28 million of this revenue in our results. The increase in LifeCell revenue was primarily driven to an increase in demand for LifeCell’s reconstructive surgical products, AlloDerm and Strattice, which increased 28% to $53 million in the current quarter, compared to $41.4 million one year ago.

Orthopedic product revenue, which includes graft jackets and allograft GBMs was flat at $3.2 million compared to the prior year period.

RotoProne revenue was $1.6 million in the second quarter of 2008, compared to $2.1 million in the prior year.

As Cathy mentioned, Strattice has received strong early adoption in the market and provided solid sequential growth from the first quarter of 2008. We expect continued growth in the Strattice product, and we are investing in both capacity and efficiency in our New Jersey facilities to support our product demand.

Gross profits for the second quarter improved to $226.9 million, up $36.8 million or 19% for the period. Gross margins improved approximately 120 basis points year-over-year. LifeCell gross margin, excluding purchase price adjustments, was 70.1% in the quarter, up from 69.7% in the first quarter of this year. We expect LifeCell gross margins to improve over time as we bring the next phase of automation for Strattice manufacturing on line.

Excluding the LifeCell division, gross margins increased approximately 60 basis points over the previous year due to lower selling and field services expenses as a percent of revenue. Reported operating profit on a GAAP basis was $43.2 million in the second quarter, compared to $90.1 million in the year ago period due to preliminary purchase accounting adjustments and related transaction expenses.

Excluding the LifeCell division results and purchase accounting adjustments, operating profit for the 2008 second quarter increased almost 18% to $106.2 million, including a 23% increase in R&D spending.

As previously reported, we financed the LifeCell acquisition with a combination of cash and debt. We utilized cash on hand of approximately $330 million (inaudible) $690 million of 3.25% seven-year convertible senior notes, and borrowed $1 billion under a five-year term credit loan facility. We also entered into a new $300 million five-year revolving credit facility, which was only drawn at June 30th. With regard to convertible senior notes, as indicated in our acquisition update call, the transaction was oversubscribed allowing our underwriters to exercise their over allotment options, which increased the initial $600 million offering to $690 million. The convertible senior notes have a coupon of 3.25% and a conversion premium of 27.5% over the closing of KCI common stocks on April 15th. This translates to a base conversion price of $51.34 per share. In order to minimize potential per earnings per share dilution, we entered into convertible note (inaudible) and warranty transactions, which effectively increased the per share conversion price of the notes to $60.41.

The current mode A interest grade is based on spread above liable rates and utilizes a leverage group that varies based upon our consolidated leverage ratio. Based on our current borrowing level, the spread is 325 basis points above LIBOR. As required under the terms of the credit agreement, we have fixed the interest rate on at least 50% of our outstanding debt by entering into a fixed rate interest swap for approximately $200 million of our outstanding term loan.

Our overall effective interest rate then is approximately 5% at June 30th. Our leverage ratio at the end of the period was approximately 3.1 times trailing EBITDA, and we were in compliance with all debt covenants.

As mentioned in our press release, the effective tax rate for the second quarter resulted from non-deductibility of certain costs and expenses associated with the LifeCell transaction. Excluding LifeCell acquisition related items, the second quarter of 2008 effective income tax rate was approximately 33.1%, which was slightly lower than the same period a year ago.

Our preliminary purchase price allocation entries included a step up of LifeCell inventory of approximately $15 million. We also recorded acquired and tangible assets with definite lives that were valued at approximately $490 million, and we recorded goodwill of approximately $1.3 billion associated with the acquisition. The amortizable and tangibles have an average useful life of approximately 12 years.

Pre-tax flows at first half of 2008 was, of course, also significantly affected by acquisition items. Excluding those items, first half pre-tax flow approximated $84.4 million compared to $77.5 million in the prior year period.

During the second quarter, we increased production levels of our next generation Info V.A.C. and Acti V.A.C. units to support the global roll on of these unique and innovative products, which increased our gross capital expenditures for the interim period to $61.6 million, an increase of $20.2 million or 49% from the year ago period.

Because of the unique impact of the LifeCell acquisition on our consolidated operations, we have provided, in this morning’s release, second half guidance for 2008. We are currently projecting second half consolidated revenue to be in a range $1.035 billion to $1.065 billion, representing an increase of 23% to 26% from the prior year period due primarily to revenue contribution from LifeCell and continued growth from our V.A.C. Therapy product lines.

Second half GAAP net earnings per diluted share are projected to be in the range of $1.57 to $1.67 per share, an increase based on weighted average shares outstanding of $72.5 million shares.

On a cash EPS basis for the second half, excluding non-cash items such as intangibles, amortizations, the cash EPS is projected to be in a range of $1.90 to $2.00 per share.

On a full year 2008, the currently projected revenue will be in the range of $1.917 billion to $1.947 billion, and full year of 2008 GAAP EPS is projected to be in the range of $2.47 to $2.57 per diluted share.

To this point, our combined operations are producing a range results that are in line or slightly ahead of our original expectations. And as a result, we look forward to the future with confidence.

And at this time, operator, we’ll open up the floor for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We’ll pause for just a moment to compile the Q&A roster. Our first question is coming from Tao Levy with Deutsche Bank, please go ahead.

Tao Levy – Deutsche Bank

Good morning.

Catherine Burzik

Hi, Tao.

Marty Landon

Hi, Tao.

Tao Levy – Deutsche Bank

Maybe we just first touch on the North America V.A.C. business. A little bit lighter, you did talk about the trialing that continues. So maybe you can just talk about how things have been progressing. Like you said, at the beginning of the quarter and how things kind of look at the end of the quarter, and any insights you have thus far on Q3. And then maybe you could contrast that with what’s going on internationally where the business was a bit stronger. You’ve seen these competitors for a little bit longer, and then specifically, dwell into the UK market, the type of growth that you’re seeing there with V.A.C. and what’s happening there historically. Thanks.

Catherine Burzik

Okay. Thanks, Tao. Happy to comment on that. All things considered here, we’re really proud of the performance of the business starting on the second quarter. Now (inaudible) in North America, you were right and I indicated in my script, we certainly saw some (inaudible) competition. The really good news is that we think that the environment has stabilized. We think that we’re somewhat at a steady state at this point in time.

And the second piece of good news is that, by and large, this has once again proved what we all know that these gauze-based wound drainage devices really don’t work. So the vast majority of these trials fail. There are very few hospitals or sites that continue to use the product. So that certainly saw some play out during the quarter. But at the same token, we know we’ve created a great business opportunity here, and we’re going to continue to see competition come into the market, and we fully expect that to happen.

Now, that’s why I don’t want to signal here that we think the trial will stop. The trial will continue of different competitors’ products, but we certainly are now very well prepared to deal with this. And also, I think that the business impact model rollout that we talked about, which is really aimed at really expanding the market here by showing how effective the V.A.C. Therapy is versus standard-of-care gauze-based systems. It’s a very important initiative for the company in the second quarter.

We’re also taking some additional steps in the area of consignment V.A.C. inventory and hospitals, and some other flexible solutions for our customers that we think really are going to help the performance of the business going forward.

You’re also right internationally, certainly they’ve seen competition a lot earlier than – for several years prior to the level of competition we see in the United States, and yet their business has continued to do well. And as I highlighted, their strength in both the UK and in Germany, and while we don’t give exact dimes [ph] , I would say strongly north of 10% performance results in those countries, and driven by very strong leadership of Lily Bronson [ph] in the UK as (inaudible) and Germany are two of our very strong managers both within Europe.

I hope that gives you a little bit more color, Tao.

Tao Levy – Deutsche Bank

That’s definitely helpful. And then maybe can you talk a little bit about the trialing effort. Is that primarily taking place at the hospital level? You’re also seeing it in the other segments such as in homecare. And maybe, Marty, in a passive comment that’s sort of on pricing and general trends in each one of those segments, if you could touch on that that would be helpful.

Catherine Burzik

So yes. The trialing is in both sides. I’m going to – both acute and post-acute. I’m going to ask Marty to comment on it in a moment. Our checks right now think that we’re at a level of somewhere between 300 and 400 trials within the US. I’d say we see the most of these in the acute care setting, but also in post-acute. So I just provided a little color on that.

Rich Cockrell

Yes, thanks, Cathy. We see a fair amount of trialing going on in the extended care market because that market’s a bit more price sensitive due to the reimbursement mechanism. We see some trialing going on in the acute care space, but obviously, those are where more serious wounds are treated and the gauze therapies had very little traction in that space. So overall, I think, when you look at how we’re handling these trials, for the last, probably, five or six years, KCI has been a very offensive company, on the offense, I should say, not offensive.

So now, over the last three to six months, we’ve become accustomed at playing defense, and I think what we’ve seen over the last couple of months is that the sales forces are doing very well now playing both ways in the field. So we’ve got a lot of successes out there. And as Cathy have said, the overwhelming majority of the customers are coming back to KCI when they do trial the product.

Marty Landon

And then just from a pricing standpoint, Tao, I think probably the easiest way to think about it is that our revenue growth in the period, certain amount in North American side of things, approximated our unit growth in kind of similar in the international arena. You’re always going to have, as Cathy said, flexible options around different models. It can change a little bit whether somebody’s on a lease program or a daily rental program, and other things are set up, but generally from a contracting standpoint, no change in pricing.

Tao Levy – Deutsche Bank

Can I ask one more?

Catherine Burzik

Sure.

Tao Levy – Deutsche Bank

On the 3M announcement or comments that you made, can you go into a little bit more specifics, the exclusivity of that, I guess the matrix that you’re going to be using. Is it much different than foams? Is that a foam-based product, and is that – again, is it possible if you were to patent it? Is it possible that other companies could partner up with the 3M and use their negative pressure wound therapies with that type of product?

Catherine Burzik

Let me just make one comment, and I think, Woody, if you want to come out of this too, but yes. I don’t want to confuse things here and think that this is anything that replaces our GranuFoam. GranuFoam is the base. What we’re talking about here is the drape that sits on top of the GranuFoam that ends up doing the sealing. And I think everyone who is familiar, wound care nurses really love the Tegaderm product. We were very pleased to be able to work with 3M here. To be able to design a Tegaderm, a version of Tegaderm that has been a – really worked well with our GranuFoam system. And we’re also making some changes GranuFoam, but I’m not going to go into on this call.

So the idea here is to bring that new kind of kit into the marketplace. Woody, do you want to comment further on that?

Woodrin Grossman

Yes, I would love to, Cathy. When you bring these two products together, obviously, Tegaderm, which is a leader in the market and has property around their adhesives, and they’ve – those capabilities as well as our GranuFoam when you bring those two together. I think what we’ll have is an offering that is going to be much more intuitive in how it works to our customer base.

And you have to remember that with thousands of V.A.C.s going on everyday, there are a number of customers who put them on for the first time, and we train most of these, but in the outlying areas and homecare areas, et cetera, some of the – some of the customers put these on for the first time, and what we’re excited about with this dressing is that the combination of how we deliver the foam and the dressing makes it much more intuitive and easier for the nurse to apply or the doctor to apply. So therefore, we feel we’ll get some – in our usage in that product [ph].

Tao Levy – Deutsche Bank

Thank you very much.

Catherine Burzik

And this a – Tao, to your question, this is an exclusive relationship to us in the field of negative pressure wound therapy, and clearly 3M has terrific patents around Tegaderm as we do around that.

Tao Levy – Deutsche Bank

Thank you very much.

Catherine Burzik

You’re welcome.

Operator

Thank you. Your next question is coming from Matt Miksic with Piper Jaffray. Please go ahead.

Catherine Burzik

Hi, Matt.

Operator

Matt Miksic, your line is live.

Catherine Burzik

Hello, Mike.

Matt Miksic – Piper Jaffray

Hi, it’s Matt Miksic.

Catherine Burzik

Oh Matt, hi. How are you?

Matt Miksic – Piper Jaffray

Good, thanks. Thanks for taking my question. Sorry. I had to unmute. I think you mentioned your plans a little bit for – this question on LifeCell for Strattice on US. I was wondering if you could – I know this is early in the US launch, but if you could give us perhaps an update on how that’s going in the US.

Catherine Burzik

Sure. I’ll make some comments and Steve Sobieski may want to too, but as I indicated in my prepared remarks, we’re very pleased by the adoption here of Strattice within the United States market. I think that’s exceeding what KCI expected both in terms of occurrence of surgeons who use, AlloDerm as well, as you know, newer doctors. So obviously, it’s early days, but this first quarter or so that it’s been on the market, KCI is pleased with it.

Steve, you can comment from the LifeCell perspective.

Steve Sobieski

Yes. I’ll just add to what Cathy said and kind of echo that we are very pleased. I mean the rollout of Strattice is actually exceeding our internal expectations. There’s a lot of demand out there, and surgeons are very interested in the product. It has a couple of unique features, I think, that is interesting to them, and we’ve seen a lot of interest in the product to date.

Matt Miksic – Piper Jaffray

Okay. And then just one question here on price and mix or immediates. How that has affected the business in the US in the quarter?

Catherine Burzik

Price and mix of –

Matt Miksic – Piper Jaffray

Of your core – this is your core business, not the Strattice, back to that.

Catherine Burzik

Yes. So yes. Our price remains stable, I mean our V.A.C. business, across our Info V.A.C. and Acti V.A.C. businesses both in the home and in the acute care setting. So the mix that you see is a mix shift that we see as we’re rolling out the Info V.A.C. and Acti V.A.C. products, which is our next generation of V.A.C. Therapy obviously replacing our previous therapies. And where possible, where contracts allow us to do that, we certainly take price in that regard.

Matt Miksic – Piper Jaffray

And one follow up, if I might? The core business, it sounds like you’re doing more work, understandably so, on the market development side, being your position in the US market. How are you striking a balance doing that kind of effort on the marketing and R&D side in terms of the studies that you’re doing while also making sure that you’re highlighting the benefits of your products over the competition, not just the standard of care?

Catherine Burzik

Right. I mean and that’s a terrific question, Matt. This is the whole concept behind this business impact model that we have put together. I’ve had an opportunity here to protect a pretty deep dive on that, and what that really encapsulates is KCI has 17 RCTs that we’ve done. And those RCTs have really proven how when you treat a wound with V.A.C. versus treat a wound standard-of-care wound therapy or moist wound therapy, the risk of reduction is so significantly reduced with V.A.C.. The number of dressing changes is so significantly reduced.

What you find is that the overall cost effectiveness of V.A.C. truly is usually at least a 25% savings for individual hospitals. So we’re in the process – I mean we’ve known that. We’ve had all that data for quite some time, but we just felt that we really need to be able to train our sales force to be able to more effectively deliver that message because you’re talking now – there’s no issue about clinicians and WOCNs. They love our product. It’s the whole thing about administration that looks at the sheer dollars. And what we need to help people understand is one day at the hospital side is $1,500 plus versus – any (inaudible) people in the hospital, the cost effectiveness of V.A.C. that – when you’re talking about that savings differential is truly remarkable.

I don’t know, Woody.

Rich Cockrell

Yes, Cathy. I would add to that with the business impact model training that I just came from. One of the things that’s very clear in that model is the hospital CEOs or CFOs is that we can show through those RCTs that we can – we can lower the length of stay of patient, we can reduce the number of re-surgical operations, and we can reduce the number of re-admissions, which are all really three areas that CEOs are very concerned about, reducing the cost of their overall care of their patient base.

Marty Landon

And then just one last thing, and this is Marty, I mean we go out on the field from time to time, Cathy and Woody, and some of us executives out there make sure we kind of keep grounded in the business. And one of these I found interesting was physicians are still learning about the different applications of V.A.C. So we talk about the under served market here. There’s still a lot of medical professional education that’s got to go on in terms of physicians getting familiar with the various uses of V.A.C. because they maybe familiar with the certain type of wound, but they haven’t used it maybe on other types of wounds. We’re really aware that it could be used or how it might be used with some of those other wounds.

So I know that Woody and his team are still doing a fair amount of just standard blocking and tackling around medical education around the best usage of V.A.C. I mean we, as you know, don’t target V.A.C. for every wound. It’s very effective on a certain select core of wounds, and that’s what we focus on. We think that’s a great opportunity still.

Matt Miksic – Piper Jaffray

Great. That’s helpful. Thanks for taking the questions.

Catherine Burzik

You’re welcome.

Operator

Thank you. Your next question is coming from Michael Matson with Wachovia Capital. Please go ahead.

Michael Matson – Wachovia Capital

Hi. I guess I was wondering if you could talk a little bit about LifeCell, the sales, while they were strong, they were a little bit behind where we had though they might be based on our prior modeling. Was there any disruption or sales force turnover there? I mean I know Strattice is doing well, obviously, but –

Catherine Burzik

Let me just give you, Mike, a little bit more color on this. Steve may want to comment on this too. We have not seen any kind of significant sales force turnover of the LifeCell sales force, and I am very pleased with that. As a matter of fact, I think LifeCell has a particularly unique sales force with a tremendous amount of operating capability. And we are investing in that sales force, clearly to both (inaudible) and also to position it for some of the cosmetic applications last year.

I would say it to you, Steve, any likeness in the LifeCell numbers at all, it really is in the area of some of its third party relationships. I would say, in particular, their relationship with Wright Medical is a little softer than what we would have liked to see in the orthopedic space, and clearly that’s on our radar screen, and we’ll work on that. But I mean that’s what I would attribute the softness.

I don’t know. Steve, do you want to say anything else?

Steve Sobieski

No. I don’t think there’s much I could add to that, Cathy. That’s exactly right. If you look at the growth in the – we’ll consider the core business, which is AlloDerm and Strattice for challenging hernia and breast reconstruction, we were very pleased that we were clearly on target. And as we noted earlier, even the Strattice revenue exceeded our expectations.

As Cathy mentioned, as you look at our orthopedic revenues, we were flat, and with the Euro gynecologic revenues, we were down slightly. And I think that’s what pulled the overall total growth rate down slightly, but the core business is still going strong.

Michael Matson – Wachovia Capital

– the reimbursement levels for the home setting, what are your thoughts on how the private insurers are going to react to that? Is there any risk that they are going to follow suit and cut their payment rates based off of what Medicare has done?

Catherine Burzik

So, thanks –

Michael Matson – Wachovia Capital

Or going to do, I guess, 'cause it doesn't happen until January 9.

Catherine Burzik

Right. It (inaudible).

Michael Matson – Wachovia Capital

January 1, sorry.

Catherine Burzik

Right. January 1, 2009. But – yes. Let me talk a little bit about this. Marty (inaudible) make some comments on this too but, Mark, as we've talked about in the past, most of the insurance companies today, the managed care organization, (inaudible), and the United Healthcare, they are the ones that are also the Medicare managed care organizations and because we have historically had a significant – our Medicare pricing is significantly below the rest of the pricing in the marketplace. Sometimes as much as (inaudible) 20s, I think 20% to 30% kind of numbers that you've got these insurance companies that are used to understanding that the Medicare reimbursement structure is different, and so we believe that we will be able to manage through with a minimal to no impact in the managed care organization of this 9.5% reduction. You know this 9.5% reduction well. It's probably in total somewhat less than or around $18 million to $20 million per (inaudible) on an annual basis. Certainly there's a very good outcome for us in the overall competitive bidding program. Marty, you've got more experience –

Marty Landon

Yes. The only thing I'd add to that and I'd go back to that discussion around the business impact model, right, and the discussions around in these players, right? They're compensated based upon payments that go out of other areas to beneficiaries and so there is certainly inclined to look for ways that actually save money and we think that business impact model is very effective in demonstrating that the use of the V.A.C. based upon the – so, we're selling a valued proposition that based upon our contracted rate, is actually saving them money through the use of the product and we think that generally that's fairly well understood recognizing that in a reimbursement environment you are always going to under some cost pressures. But by and large, we've had a good relationship and continue to have good relationships. The only other time Mark, and that I think you probably noticed, that the only other time we had this situation come up is in late 2005 when CMS effectively cut the reimbursement on our canister by more than two-thirds that ended up being an overall price reduction in the Medicare environment to us of 6%. We actually had to go out to all of our payers 'cause we actually had to change the code sets of – we were face to face with our payers saying we have to make this change for Medicare. We're not going to make it for you. We didn't see a bunch of changes as a result of that. A bunch have spread and we think the reason for that is because the valued proposition is strong in terms of those payers actually saving money through the use of V.A.C.

Michael Matson – Wachovia Capital

Okay. And then I think Cathy mentioned or referred to a new product that was called Futura or something. Maybe I heard that wrong but I just was wondering if you could give a further [ph] – more of an explanation of what that is exactly.

Catherine Burzik

Yes. That is actually is an internal – it's a good question. I should be more explaining that better, Mark. That is an internal product. It's under development. You've heard us refer to it as a single-use V.A.C. that aims at less serious wounds.

Michael Matson – Wachovia Capital

And that's different from the (inaudible) product?

Catherine Burzik

Yes. The (inaudible) product, yes. So, just to help put some color here, the (inaudible) product we see is a primarily – it's a product that will have multiple versions to it although ultimately will be aimed for surgeries (inaudible). So it's aimed for wounds associated with surgery to improve both the cosmetic effect as well as importantly reduce the risk of infection where V.A.C. is sometimes used today but this will be a single-use product probably with a re-usable pump but it's more of a single-use kind of a product and it will be based mostly in the operating room. Our first version of this is really going to be aimed at reducing post-surgical complications most likely related to cosmetic kind of surgeries like liposuction, and then we will move on into more surgical applications, surgical incisions throughout 2009. The Futura products – so that's one of the more serious wounds – a higher-end price. The Futura product is a lower-end product and that again is an internal code name that's really is aimed at a product for less serious wounds that today are not treated by V.A.C.

Michael Matson – Wachovia Capital

Okay.

Catherine Burzik

Did that help?

Michael Matson – Wachovia Capital

Yes, that helps. And then the Tegaderm – the pricing and/or margins on that I would assume would be favorable or higher than your existing product there?

Catherine Burzik

Yes. We are still working through all of that. But clearly, we understand that there's value that were being added to that product that we certainly – why work to capture all that value. So we have not disclosed those details yet, Mike.

Michael Matson – Wachovia Capital

Alright, that’s all I’ve got. Thank you.

Catherine Burzik

You’re welcome.

Operator

Thank you. Your next question is coming from Taylor Harris with J.P. Morgan. Please go ahead.

Taylor Harris – J.P. Morgan

Thanks a lot. Just wanted to run through a couple of items in the P&L. So, first of all could you give us for the quarter what you think EPS was if you include LifeCell operationally but exclude all of the non-recurring transaction expenses?

Marty Landon

So, if you – yes. We’ve got the slide in the press release this morning, Taylor. Kind of gives you a sense for that. So operating margins in the 30% range on LifeCell but we’ve included the cost of the financing on that. Of course one other item you’d want to add is the amortization that would go with that. When you – I’ve kind of done that analysis a little bit differently but you can kind of get a sense for that just by looking at those numbers on that sheet. Now we’d say that that’s probably would take you down to about $0.91 to $0.92.

Taylor Harris – J.P. Morgan

Okay, yes, that’s about where we had gotten and then if you add V.A.C. amortization, so sort of an adjusted cash EPS figure for the quarter maybe about $0.93, is that about right?

Marty Landon

It’ll be a little higher than that, right in the –

Taylor Harris – J.P. Morgan

A little higher?

Marty Landon

It’d be about $0.95 to $0.96.

Taylor Harris – J.P. Morgan

Okay. I was surprised at the interest expense number in the quarter, was that higher due to any sort of fees you had to charge in the quarter?

Marty Landon

Certainly it includes the amortization of any loan issuance costs and that will continue to be there but more than anything maybe it was a little bit higher because remember we did those convertible notes in early April, so you had almost a full quarter on the convertible notes.

Taylor Harris – J.P. Morgan

I see.

Marty Landon

– had all the write-off of the loan issuance cost associated with the prior debt that we paid off when we did the transaction. So once again, a little bit of noise in those numbers.

Taylor Harris – J.P. Morgan

Okay. So what do you think for the ongoing quarterly interest expense charge? What’s the ballpark for that?

Marty Landon

So I think that if you think about it, just let’s do round-number terms, right. So if you do 5% on $1.7 billion, right? That gives you an annual charge and you can divide that by 4 and then there’s another call it $1 million to $2 million worth of loan issuance cost that you’re going to amortize. That’ll get you in a pretty good neighborhood there.

Taylor Harris – J.P. Morgan

$1 million to $2 million per quarter?

Marty Landon

Yes. So you’re talking about somewhere between $24 million and $25 million in total interest.

Taylor Harris – J.P. Morgan

Not on a quarterly basis, right?

Marty Landon

On a quarterly basis.

Taylor Harris – J.P. Morgan

Okay.

Marty Landon

Right? Yes, it’s divided by 4.

Taylor Harris – J.P. Morgan

Okay, gotcha. So, okay. Yes. That’s about right. How about the amortization charge? Can you give us – did you mention that? And what is it approximately going to be quarterly going forward?

Marty Landon

Yes, so just think about again. You’ve got roughly amortizable intangibles of roughly $490 million in a 12-year amortizable life.

Taylor Harris – J.P. Morgan

Okay. Okay, great. And then one last question just on the P&L guidance you gave for the V.A.C. after the year, a GAAP earnings number and a cash earnings number. Is the difference purely the amortization or there’s some other one-time transaction expenses, maybe the inventory step-up that’s continuing to flow through?

Marty Landon

Yes, exactly, that’s how we consider a non-cash item, right? So you had to step-up the inventory base so it’s got the intangible amortization, it’s got the cost increase related to the step-up in inventory and a little bit of the amortization of those loan issuance cost. So, the non-cash items.

Taylor Harris – J.P. Morgan

Okay. Sounds good. Great, and then just one business question as well, Cathy. For the acceleration in US V.A.C in the back the year, would you say that’s primarily a function of the trialing effect diminishing or are you expecting, hey there’s still going to be a lot of trialing but we’ve got our sales force realigned and more productive so we’re just going to grow through that?

Catherine Burzik

A good question, Taylor. I was feeling left out with all those P&L questions.

Taylor Harris – J.P. Morgan

Sorry for that.

Catherine Burzik

So, the way we look at the back half the year – to just say this maybe a little bit differently. We think that in the US, we’re at a kind of trial basis of 300 to 400 trials going on at any point in time. We don’t really think the market can absorb any more than that. As far as the hospital is going, the non-hospital goes. So we see that happening. It’s impossible to know some of the new (inaudible) when and if that thing is going to start declining because a lot sell but then more starve. So, the most important thing is for us to sell through them. So what you’re hearing from me is the confidence relative to the tools that we put in the hands of the sales force [ph] and our confidence with sales force [ph]. We went through some redeployment in the beginning of the year. We're absolutely through that. The competitive bidding program was a distraction. We were spending time worrying about those CBAs and the spillover and people were making noise about that. So, a lot of these things that were kind of a few headwinds coming into the second half of the year. We don’t see that now and that’s why you’re hearing some more confidence. I’m signaling that it's going to be easy. The competition is going to be out there but we are definitely prepared for it.

Taylor Harris – J.P. Morgan

Okay. And final question for 2009, you’re expecting double-digit growth, in fact globally, same for the US or not?

Catherine Burzik

It’s too early for me to signal that yet and to give that level of granularity. Taylor, certainly if we will go through the end of this year or the beginning of '09 we’ll give you that level of granularity. I think you can understand. We want to really make sure we have a good handle on this. We look at everything at the global perspective at this point and I think it's less important to communicate the number globally.

Taylor Harris – J.P. Morgan

Okay. Great. Thank you very much.

Catherine Burzik

You’re welcome.

Operator

Thank you. Your next question is coming from Eugene Oliva with CIT Group. Please go ahead.

Eugene Oliva – CIT Group

Hi. That’s CIT Group just not to confuse anyone. Hi. My question is directed towards the LifeCell technology and whether you are working on anything towards the stem cell as some competitors, not directly in skin but rather in another targeting breast reconstruction, that kind of reconstruction? These indirect competitors that are bringing in adipose stem cell technology without naming them directly has demonstrated the pre-clinically dramatically revascularization in the angiogenesis and I wonder if there’s any programs in place to integrate a likewise technology with the LifeCell Strattice and AlloDerm products.

Catherine Burzik

So Eugene, this is Cathy and it's vital to me to have had the opportunity to meet you and hopefully I will but as continue to learn about the LifeCell prototype line in the research and what it has underway but I can tell you the primary focus of LifeCell is on acellular dermal matrices, applications of Strattice, and we have a huge pipeline full of those. Clearly, we will continue to evaluate things like stem cell research and other new capability. It just has not been a focus of LifeCell.

Eugene Oliva – CIT Group

Okay. I was just curious because it occurs to me that they would be extraordinary complementary technologies and there’s some good stuff out there but I didn’t want to belabor that too much. And then the second real quick question was on the fixing of the interest rates. When you say there’s a 5% all-in rate on the debt, can you tell me what hint what the (inaudible) on that 250 was? What you (inaudible) into?

Marty Landon

We don’t get that granular unit. We just as you might imagine, most of those things are market based and so if you look at 2 years loss, 3 years loss, you’ll probably get a handover from what the rate (inaudible) on that.

Eugene Oliva – CIT Group

Okay, fine. Okay, thank you.

Catherine Burzik

Thanks Eugene.

Marty Landon

We’re going to take one more question.

Operator

Thank you and our final question is coming from Larry Keusch with Goldman Sachs. Please go ahead.

Larry Keusch – Goldman Sachs

On

Catherine Burzik

Hi Larry.

Larry Keusch – Goldman Sachs

Hi. On the Kathy on the goals for V.A.C. for 2009, when you talk about double digits, I’m just is that constant currency or are you factoring some effects into that when you think about that globally?

Catherine Burzik

It it’s a blended number Larry, I don’t want to go into a lot of details here about everything that goes into this because we’re in the process right now of locking at our overall 5-year strat plan. Though we look at all of the economics everything associated with the global V.A.C. business. Clearly, the goal is to have the global V.A.C. business see a double digit growth growing business and as this year moves on into the early part of next year, I’ll provide more color about what’s in it and what’s not in it.

Larry Keusch – Goldman Sachs

Okay. That’s fair. Just to take the question one other way just as I think about this. Your constant currency V.A.C. growth was 8% in the quarter. Japan sounds like that's kind of late '09 event hopefully if all goes as planned you obviously have the opportunities in Germany in the homecare side, and so, am I thinking about it correctly that again and obviously you had a tough comp this quarter but am I thinking about it correctly when you think about the global V.A.C. business that you are counting on some of these new opportunities to come in to give you that double-digit growth?

Catherine Burzik

Yes. The one thing that you didn’t mention there are several. Let me just point to a couple of things here.

Larry Keusch – Goldman Sachs

Sure.

Catherine Burzik

Clearly, Japan, we're not exactly sure when we're going to be on the market. However, we are very encouraged by the fast track approval which is pretty new coming from Japan. So that does give us some potential for '09. Certainly, we know that we‘ll be involved with German homecare reimbursements during the course of '09 because we will be reimbursed for the price. And additionally, I've talked about the confidence we have with our sale force [ph] now with these new tools. The one thing we haven’t talked about is the new product that we have to have coming out and there's a lot here about innovation and so heard me talk about this new dressing thing that we're quite excited about with 3M. We have an abdominal dressing coming out at the end of this year. We have our (inaudible) product being launched and anticipate follow-on launches during the course of 2009. So a piece of our confidence comes – it's the role on also of these new products.

Larry Keusch – Goldman Sachs

Okay, gotcha.

Catherine Burzik

And I’ll back up some forms.

Larry Keusch – Goldman Sachs

Yes, that’s great. Thanks. And then the SG&A increased about 2% year-over-year on your core business, so excellent leverage there. I’m just wondering if you could talk a little bit about getting – does that leverage continue or is there is something unique on the SG&A side for this quarter and then sort of the same question on the tax rate, a little bit lower at 33.1 then the 33.5. Again just trying to understand what we should be thinking about sort of the tax rate on a go-forward basis.

Marty Landon

Yes, so – Larry, this is Marty. We are certainly looking to continue to drive operating efficiencies, process improvements. Any particular quarter could be choppy for one reason or another, just Steve and I talked from time to time, even litigation activities at any particular quarter can move the number a little bit this way or that way. But overall, in terms of our overall cost structures, we still believe we have the opportunity to drive margin expansion because of some of the work we’re doing around globalization because of some of the work we're doing around process improvement. So I wouldn’t point to any necessarily particular line. You are going to see us to continue to invest in R&D. With all of that said, we anticipate what we've said in the past like expanding operating margins as we go forward. I think certainly, bringing on a company like LifeCell and what they‘re doing and with the margins that they bring to the table that's going to help as well. As far as the tax rate is concerned, we are trying to be conservative on our approach there but we think we’ve put in place some descent structures that will lead to lower tax rates over time. Part of that depends upon product mix, where a product is produced, where you have earnings, etc. But I think from our vantage point, we’ll have lower tax rates as we go forward but I’ve just cautioned that those are going to be marginal improvements over time 'cause we‘re going to do the things that pay off in long run.

Larry Keusch – Goldman Sachs

So it sounds like both of those items there were no one-timers and again it's just all part and parcel with the efforts to continue to optimize the structure across the board and those could bounce around the bed as we move to the second half of the year.

Marty Landon

Yes. I would only modify that in saying no one-timer was significant. There is always something in that period that was in one period and not in another but nothing significant to where you say, I really ought to look at this trend a whole lot differently.

Larry Keusch – Goldman Sachs

Gotcha. And then just the last one for you, just given the rise in fuel costs and obviously you guys move a lot of equipment around. Just is that material at all in terms if you are P&L and something that we should thinking about on a go-forward basis?

Marty Landon

Yes. It’s not material but for us it's something certainly that we look hard at. Mike Snyder who runs our operations area and certainly feeling that tension, the expectation is that he manages that and around that and so he is looking at various improvements in terms of how we do move product around, how that make his way around the use of outsourced services, etc. So, our expectation is that, yes, it is a burden right now but not of a material nature and that we have to do things as any business does as the environment changes to make sure we continue to deliver improved results.

Larry Keusch – Goldman Sachs

Okay, terrific. Thanks very much.

Catherine Burzik

Thank you Larry.

Rich Cockrell

Thank you everyone. If you have any further questions don't be afraid to give me, Marty or Cathy a call directly.

Operator

Thank you. This does conclude today's KCI's second quarter 2008 earnings conference call. You may now disconnect.

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Source: Kinetic Concepts, Inc. Q2 2008 Earnings Conference Call Transcript
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