ICU Medical Inc (ICUI) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning, good afternoon, good evening, and welcome to the ICU Medical first quarter conference call. At this time, all phone lines are muted or in a listen-only mode. However, after our presentation today, there will be opportunities for questions, and the instructions will be given at that time. Should you require assistance during today's conference, you may reach an operator by pressing '0' then '*' on your phone keypad, and as a reminder, today's call is being recorded for replay purposes. We will be giving out the replay information at the end of today's first quarter conference. With that being said, here with our opening remarks is ICU Medical's Chief Financial Officer Mr. Francis O'Brien. Please go ahead sir.

Ladies and gentlemen, good morning, and welcome to our quarterly conference call to discuss ICU Medical's first quarter 2002 earnings release. I am Frank O'Brien, Chief Financial Officer. Dr. Lopez our Chairman and President is with us this morning too. On the phone also are a number of the corporation's directors. In the event that we touch on forward statements in this call, please be aware that they are based on the best information currently available to management and assumptions that management believes are reasonable, but such statements are not intended to be representations as to future results and are subject to risks and uncertainties. Future results may differ materially from management's current expectations. Highlights of the release for those of you who may not have seen it, net sales came in at $20.905 million, almost 21 million, up from 15.6 million in the first quarter of '01. Net income was 4.523 million versus 3.533 million last year on a per share basis, and this reflects the restatement for the stock split. Net income per share was ¢30, up from ¢25 in the first quarter last year. So net sales for the first quarter were up 39% of our sales through the first quarter of 2001. Earnings were up 28%. Dilution of earnings per share came from more shares outstanding, as well as the effect of the higher stock price in the calculation of EPS, and that reduced earnings per share by about ¢2 per share. Sales growth at 39% exceeded our more typical growth of 20%-25%. As we have said many times before, in addition to being in a somewhat seasonal business, we are subject to fluctuations in sales patterns with our OEM partners, Abbott and B. Braun. We expect our full-year 2002 growth to be in total in the 20% or higher range, certainly not the 39% experienced in the first quarter. The Abbott CLAVE business is continuing to expand rapidly, and we expect the new SetSource program where ICU makes all of Abbott's new custom I.V. systems will have good acceleration and growth throughout the year. Growth in international sales should be strong as well; they could almost double from last year. For the quarter, CLAVE sales accounted for most of the net sales increase. They were 77% of sales in 2002 versus 73% in 2001. Abbott and B. Braun, our 2 major OEM customers, accounted for 75% of our sales in 2002, up from 61% in 2001's first quarter. Abbott was up about 74% year over year mostly CLAVE, and as expected, B. Braun was below the 2001 level of sales. Among our new initiatives, custom I.V. systems accounted for 14% of sales, up from 30% in 2001 and almost 40% increase in sales year over year principally because of the Abbott SetSource program. CLC2000 and international were each about even with last year, but we expect both to grow more as the year progresses. Gross margin was 59% for the quarter, up from 57% last year. Operating expenses for the quarter were 27% of sales, up from 24% last year. The increase was principally because of legal costs on 2 matters the Medex and Porex cases that are now both behind us. The balance sheet remained strong. Cash and securities at March 31, 2002 were 85 million, up 11 million over last year. Cash flow from operations for the quarter was about 1.3 million. We spent about 1.5 million on capital expenditures for the quarter and received 12.1 million from the exercise of stock options, and that number includes tax benefits. Cash flow from operations is actually better than the 1.3 reported. It would have been about 7 million or more if the tax benefits or stock options had not put us in the prepaid tax position. We'll get this back later in the year. Let me now turn the meeting over to you for questions.

Very good. Thank you. And ladies and gentlemen if you do have any questions or comments, please press the '1' on your phone keypad. You will hear a tone indicating that you have been placed in queue, and just as a note, you may remove yourself from the queue by the pressing the '#' key. Once again, if there are questions or comments, we ask that you would queue up at this time, just press the '1' on your touchtone phone. Representing Sidoti & Company, our first question comes from the line of Mitra Ramgopal. Please go ahead.

Yes, hi. Good morning Frank. Couple of questions, I guess with the 39% year-over-year revenue growth in the first quarter, you are saying for the rest of the year we should see it really I guess slowing down, so we see 20% year over year?

Yeah, for the entire year, I can't tell you exactly how it's going to fall on a quarterly basis, but for the entire year, we are very comfortable with 20%. It could come in higher. GEORGE A. LOPEZ, M.D.: 20% plus.

20% plus. And the spike on the gross margin improvement, I know you had alluded to a couple of reasons, how do you see that also holding up for the rest of the year?

We are looking at 57% to 58% for the year, which is probably a little better than what we said the last time.

58%, okay, thanks.

And did you have any followups, Mr. Ramgopal.

Yes. Could you give us an update on the litigation with Braun, and how do you see any efforts in terms of extending that contract progressing?

Nothing much in terms of tangible developments on the litigation. Really, we continue to be in discovery and nothing much is happening other than a lot of documents being produced. Our belief is that they will renew the contract next year, and they are going to continue to need CLAVE for a long time. Beyond that no real new developments.

Okay. Thanks. GEORGE A. LOPEZ, M.D.: Frank, can I comment on revenue?

Ladies and gentlemen, are there any additional questions or comments, once again just press the '1' on your touchtone phone. Next we go to Lance Stringham with RedChip. Please go ahead.

Good morning.

Hi Lance.

Just two brief questions in terms of capacity expansion and product developments, can you give us an update on the Czechoslovakia plant that is coming on and also can you tell us about where R&D is at on Gumby? GEORGE A. LOPEZ, M.D.: Lance, let me take that. Lance, this is Dr. Lopez. As far as the Czech plant goes, I just returned a month or so ago from the Czech Republic, and what I, after spending a couple of weeks there in great detail, I could not find the gamma sterilizer that was available to us. There was a lot of what we call EtO gas sterilization but not any e-beam or even there was one gamma sterilizer in the south, so we were unable to, we'd be unable to go our sterilize our product, we have to ship it to Austria which goes against all of our manufacturing methods of high inventory turns, quick throughput which is how we, as you know, we make our money is via carrying low inventory fast turns and delivering customs sets or I.V. sets quicker to the customer, so I couldn't do that. So what we have decided to do is we are setting up nodes. In other words, we will take orders from Europe. Right now we're shipping somebody, we've trained somebody and shipped him over to Italy, we are sending somebody to New Zealand, we'll put somebody in Central Europe, and then we'll take orders and we'll use the Internet to connect to our plant in Mexico. We have got a $5 million expansion in Mexico. We think we could get product quickly to the customer, at least the first box, via airfreight and give it to him within five days. Here in the United States we can ship it in three, but we think we can do it in five. But they are not used to that kind of speed anyway. The best they are used to in Europe is about three months, 90 days at best. So we are going to use airfreight. So at this particular moment, I am not going to build a plant in Czech Republic. We are going to expand the one in Mexico. We are also building an e-beam sterilizer because we think we can knock a third of the inventory days down by doing that. So, I hope that answers your question. We are not going forward today. We will in time build a plant there, I am very sure of that, but without a sterilizer available...

It wouldn't make sense. GEORGE A. LOPEZ, M.D.: No, it wouldn't make sense, and we also need to go down the learning curve on how to run that sterilizer ourselves so we can write the procedures and manuals so we can expand it into Europe.

Okay. And then can you give us some color on development with Gumby? GEORGE A. LOPEZ, M.D.: Yes. Gumby's applying for 510Ks now. I think we said last time we're in the process of doing that. The criteria for microbial challenge, bacterial challenges, are many times stricter than we did years ago, but so far, everything looks good, so we are applying, we are in the last stages, all we do is wait for the 510K. We are applying for it now. We expect to launch that product, as I said, this summer.

Okay. And then lastly, can you give us some color on what drove gross margin expansion in the first quarter versus the same quarter last year?

Lance, it's two things. One is we are continuing to pull money out of our production costs. It is a little bit here, a little bit there, and after a while it adds up to a lot of money, and the other is with the higher volume we are absorbing overheads at a better rate. Particularly notable in our production costs is a drop in our average labor rates for the manual assembly operations, and that has been a lot of very hard work in making the processes as efficient as we can, and we are still working on it. GEORGE A. LOPEZ, M.D.: Lance, we believe the CLC machine automation will be up this week. We believe it will be the 102s now running, so removing from manual cleanup labor down in Mexico with automation, so our efficiencies are picking up substantially.

Okay. Thank you. GEORGE A. LOPEZ, M.D.: We don't have a lot of people. We don't have a lot of SG&A people also.

Okay. Very good. Thanks.

And thank you Mr. Stringham. Next we go to the line of Sandi Gleason with Kayne Anderson. Please go ahead.

Actually it's Kevin Chen here at Kayne Anderson Rudnick. Dr. Lopez or Dr. O'Brien would you be able to talk about the SG&A and why it was so high? Can you give us an update on what else is in the pipeline, the market timing for that and what market opportunities?

Yes. The growth of the SG&A was 2 things. One is non-recurring. We had a lot of litigation expenses hit in the first quarter on the Medex and the Porex case, both of which were resolved in the quarter, but that was huge. The money was already spent by the time the things were resolved, and we reported the resolution of these in February. So that is behind us, and that will not recur. The other was just some normal growth, particularly in sales and marketing. Those expenses were up at a lower percentage than our sales growth, but they were up. And that's just... GEORGE A. LOPEZ, M.D.: Most of it was litigation expense.

Yes. The litigation was the biggest piece of it, so we expect that the sales and marketing percentage will be down by the end of the year on an annual basis, more than 24% of lower range. GEORGE A. LOPEZ, M.D.: Expect the fact that when we are in a number one position as we are in the marketplace with our type of product, we will always be attacked. There will always be litigation. It will come and go. It's just part of doing business in the United States.

Okay. I guess the second part of your question Kevin was what, which...

And could you talk about the new product pipeline? GEORGE A. LOPEZ, M.D.: Not too much. We talked about Gumby being the 510K and where we are going to take that product and how we are going to launch it really is internal. I've has been very verbal about the fact that I think that product will replace all CLAVE products in time. It's simpler, cheaper, smaller, and usually that's the rule. If you read Christian's book on, what's the name of that book, I forgot, Christian's book on new inventions or whatever, smaller, faster, cheaper, usually wins like [_______________] and such versus still-on-the-streets, but he still knows, but Gumby's in the pipeline. The biggest thing that we are pushing now, we're putting all of our energy in is custom set business. I keep telling everybody that the competitors are cutting down on the SKUs, and they are very proud of the fact that they are cutting down on the different SKUs, which is a different line item, the billability of the customers, and they keep narrowing that line. Everybody's going left, all the big companies that make custom sets or make I.V. sets, they cut them down and narrowing that line. Everybody's going left, in 3 years. I have been going right. What you don't see there in the numbers, gentlemen, is that the custom set business is about 14%, but that's it. With a rapidly growing CLAVE business, which is masking that growth and that percentage, 14% of this number may not seem big to you, but on a percentage growth rate it is pretty good.

It's still in the 14... GEORGE A. LOPEZ, M.D.: Yeah. And this business will accelerate, and as we expand into Europe, we set up these nodes that via the Internet connect our manufacturing, and we can supply them with the roll. The next thing is to set up a plant in Europe, set up a plant in China and just keep expanding. This custom set business, you are not seeing it because it's been masked. That's where most of our energies are going.

So R&D, 1-1/2% of sales, are you happy with that level? GEORGE A. LOPEZ, M.D.: It's traditional for us. It's fairly traditional, low R&D costs. And yes, I am very happy with that. I wouldn't spend anymore than we are spending because most of our efforts right now are in process improvement. Compare our inventory turns to anybody else's. Compare how efficient we are, and we are getting more and more efficient. So most of our research, especially our IT research, is operation eye blink, to be able to do in one second what it takes any other company 20-30 days of paperwork to do. So that's where most of our energies are focused. We are going to continue to push on this custom set business. Everything is moving over to higher pricing too. Frank, do you want to comment on that?

Yes. One thing on the R&D, Kevin, it does move up and down from quarter to quarter. I think a lot of what the doc mentioned, in terms of process improvement, is not being captured as R&D expense, it's just part of the production process, and we spend effort at it, but it doesn't pitch off as R&D. The software development, most of that is part of R&D, and we capitalize very little of it, but the actual effort is probably more than the 1% or 2% that we are seeing on the income statement. GEORGE A. LOPEZ, M.D.: Yes. Kevin, I wouldn't spend any more than that. I think we are spending more of the shareholders' money, more than adequate.

Okay. Thank you.

And thank you sir. Ladies and gentlemen, once again, if there are any additional questions or comments, please take this opportunity to queue up, just press the '1' on your touchtone phone. Representing Pennant Capital, we go to the line of Alan Fournier. Please go ahead.

Good morning Frank.

Hey Alan, how are you doing today?

Good. Could you just provide additional balance sheet data for us if you have it, receivables, inventories, payoffs?

Yes, I do. Let me go through it. I mentioned that the cash and cash and equivalents was just short of 85 million, receivables are 14.3, inventories are 1.6, prepaid income tax is 2.3, other prepaid is 300, and deferred income tax is current 2.1, total current assets 105.7, profit and equipment net 25 buys, total assets 132.8, current liabilities 9.6, and total equity 123.4.

Thank you very much.

And thank you Mr. Fournier. With that Mr. O'Brien and Dr. Lopez, I will turn the call back to you.

Okay. Let me just go through a few things that might be of use to you in playing with numbers for the rest of the year. As usual, we are not furnishing a projection for the full year, but we can tell you our internal targets with a caveat that these are targets that will change over the course of the year and don't purport to be representations of what will happen in 2002. We are likely not going to disseminate any changes for these targets and whether we expect to achieve them during the course of the quarter because they are only our internal targets. As I mentioned, we are going to continue to target sales growth, 20% in 2002. We expect to be in the 20% or higher range. In terms of seasonality, we foresee the same quarterly fluctuations that we've had over the past couple of years. Operating ratios, we are targeting to maintain our gross margin of 58% or more. We would anticipate running in the 57%-58% range for the full year. SG&A, excluding R&D, was 25% of sales in the first quarter. We are targeting to stay in a range of 24% or below for the full year. R&D is targeted in the range of 2% to 3% of sales, likely to come in closer to 2, or slightly below. The income tax is looking like 30% or lower for the full year. We used 37% for the first quarter of 2002. We are working to get it down. The rate was impacted by lower investment income. The investment income, no secret here, was hurt by the decline in rates. Things are stabilizing and looking up a bit, but I don't expect to see any year-to-year quarterly improvement in investment income until the second half of '02. The decline in rates, by the way, cost us about $600,000 on a year-to-year basis in the first 3 months. It's a lot of money. We are talking to EPS diluted to increase 20% or more. Of course, the share count is affected by our stock price, and that could cause some variation. Any questions?

And ladies and gentlemen, once again, just press the '1' on your touchtone phone. And we have no response, Mr. O'Brien.

Okay. Very good. Thank you for joining us everyone, and I will talk to you in 3 months.

Ladies and gentlemen, your host is making today's conference available for digitized replay for one week starting at 11:30 a.m. Pacific daylight time, April 18th through 11:59 p.m. April 25th. You may access AT&T's executive replay service by dialing 800-475-6701. At the voice prompt, enter today's conference ID of 619296, and that does conclude our earnings release for this quarter. Thank you very much for your participation, as well as for using AT&T's executive teleconference service. You may now disconnect.