ICU Medical Inc (ICUI) 2004 Q1 法說會逐字稿

Good afternoon and welcome ladies and gentleman to the ICU Medical earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all the participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. I will now turn the conference over to Frank O'Brien, ICU Medical CFO. Please go ahead sir.

Good afternoon. Doc, will pick it up.

Okay, welcome to our first quarter conference call to discuss ICU Medical's results for the first quarter ending March 31, 2004. I am Dr. George Lopez, Chairman and President ICU Medical. With me today is Frank O'Brien our CFO. On today's call, I will provide an overview of our operational results for the first quarter. Frank will then provide detailed financial information for the first quarter and then I will wrap up our prepared remarks with an upgrade on the guidance for the second quarter and the remainder of 2004 and a discussion of current business trends before we go to the Q&A. As always, we will limit the length of the call to about 45 minutes. Before we begin, any events that we touch on forward statements on this call, please be aware that they are based on the best information currently available to management and assumptions of management beliefs are reasonable, but such statements are not intended to be representation as to future results and are subject to risks and uncertainties. Future results may differ materially from management's current expectations. We refer all of you to our filings with the SEC for a more detailed discussion of the risks that may have a direct bearing on our operating results, performance, and financial conditions. Having said that, I am pleased with our performance in the first quarter as the results were in line with expectations. By successfully managing the controllable aspects of our business, we met our quarterly goals and improved our strong balance sheet with our positive operating cash flow.

We are focused on improving the efficiency of our operations and expect business to improve later in the year as Abbott Labs, Hospital Products Division, Hospira begins to distribute our safe medical connectors and custom IV systems worldwide. Over the past 15 years, we have delivered solid growth due to our three-point strategy of ever efficient and low-cost manufacturing processes. Adding new proprietary products and expanding our deep distribution channels as we look into 2004 and beyond, we believe our focus will continue to produce strong growth both domestically and internationally as well. And we will continue to improve our balance sheet and working capital to our strong cash flow and industry leading inventory turns, as we continue to diversify our revenue stream. In short, we have proprietary manufacturing processes that can produce products quickly and inexpensively for our customers. We have access to over 50% of the distribution channels for IV stuff through our relationship with Abbott Labs and leading the independent distributors. And we can deliver innovative custom IV sets to the end user faster and at less cost than our competition. We believe these efforts and results substantiate our position as the leading manufacturer of safe medical connectors and custom IV systems. Before I get into greater detail about the current business trends and opportunities for this year and beyond, I would like to turn the call over to Frank to discuss our first quarter financial results. Frank?

Thank you Doc. As Dr. Lopez mentioned, our first quarter results were in line with the targets that we had set at the beginning of this year. Revenue for the first quarter was $22.2m versus $30.8m last year. Net income was $4.1m versus $7.1m in '03, and EPS was $0.28 diluted compared to $0.46 in the first quarter of '03. As you should recall in the first quarter of 2003, we had approximately $4m of sales that happened to post of December of 2002 and non-recurring license fees of $1.7m. We expected our revenue to be down from the first quarter of 2003 and it was. The drop was about 9% on a comparable year-to-year basis after eliminating the non-recurring items. That has decreased net income and earnings per share by about the same percentage. In our year-end call at the beginning of February '04, Dr. Lopez stated that our first quarter revenue would be approximately 18% of the annual total of 2004 and that is exactly were we came in. During the first quarter, we continued to diversify our revenue by product offerings and the break down of product lines for the quarter was as follows: Clave products excluding custom sets, 50% of the revenue, custom sets 29%, Punctur-Guard 7%, CLC 4%, our non-product revenue 4%, and other which is just a potpourri of miscellaneous products 6%. I didn't talk about Clave and custom sales. Clave sales to Abbott for the first quarter were $9m as compared to $16.1m for the first quarter of '03. As we discussed on our fourth quarter call, Clave sales, should also include custom sets with claves on them because about two-thirds of our custom IV sets have Claves. Looked at this way, Abbot Clave sales including custom IV systems were about $10.9m for the first quarter as compared with $18.1m for the first quarter of '03. Keep in mind, our first quarter this year followed a very strong fourth quarter in '03, and we expected some temporary drop in demand. Put that separately for the quarter, total Clave sales were $11.1m versus $17.8m in the first quarter of '03. Clave sales to domestic distributors in the first quarter in 2004 were $800,000 versus $1.4m in the same period of '03. But when you add in the custom IV sets with Claves on them, the numbers are $2.8m in '04 and $2.9m in '03.

Our international accounted for $1.3m in 2004 versus $800,000 in '03, and with custom set replaced on them came out to $1.7m in '04 and $800,000 in '03. So we had a nice up tick on international after a rather weak year in 2003. Our gross margin based totally on product sales and excluding non-product revenue was 54% for the first quarter compared to 55% for the first quarter of '03 and 55% in the fourth quarter of '03 as well. As we progressed in 2004, we believe we will start realizing the cost benefits of our earlier investment in new tooling. The Punctur-Guard product line continues to depress our margins. This and the new facility nearly cost us 500 basis points on the margins, mostly in Puncture-Guard, but the company excluding recent acquisitions was actually 200 basis points better than our 57% benchmark. In other words, if this hadn't happened in San Clemente, it came in at 59%. We had identified a number of specific ways to improve our margins in Punctur-Guards and the Italian plant and we believe we will continually show improvement in these margins throughout 2004. It is important to note that our pricing has remained steady with Abbott. The only significant pricing adjustments we have made recently is in the Punctur-Guard line where we have made some pricing concessions to achieve wider distribution of this product, and this will be beneficial in the long-term.

Operating margins as a percentage of revenue was 29%, lower than in recent periods, but the decline was almost entirely from the low revenue base in the first quarter of '04. Our cash flow was very strong for the first quarter. We finished the quarter with $85.7m in cash and investments. For the quarter, they increased by $12.6m. For the quarter operating cash flow was $12.8m, we spent $1.4m on capital expenditures and we had about $600,000 of cash generated by the employee stock claims. Our free cash flow for the quarter after CAPEX or the maintenance level of about $1.4m was $11.4m. We expect our capital expenditures for the remainder of 2004 to be about $4.6m bringing the year's total to about $6.0m in total. Remember, in '02 and '03 we upgraded all of our facilities to handle a substantial increase in output and the way our business is positioned most of our '04 capital expenditures will be for maintenance. The expansion needs were covered by what we spent in 2002 and 2003. Trade receivables at the end of the first quarter were $17.8m, down to $25m at December 31, 2003. DSOs based on quarter end balances were 76 at March 31, 2004 compared with 79 days at the end of December '03. Again, most of our sales were in the last half of the quarter, so the quarterly DSO statistic is inflated. Balances are still very current. Our inventory at March 31, 2004 was $5.9m which is up from $3.4m at December 31, 2003 and the day sales and inventory of March 31, 2004 based on quarter-end balances is 58 days as compared with 24 at the end of December 2003. The increase is mostly in finished goods, as we increased our production levels beyond current demand to avoid the inefficient production spikes that we've had late in the last several years. Now let me turn the call back to over Dr. Lopez to discuss business trends and our targets for the rest of 2004.

As you know, during the first quarter we signed three contracts with Abbott. This will give Abbott worldwide distribution to all of our products including the Punctur-Guard line of products and our contract with Abbott now runs through 2014, they previously ran through 2009. We are working with Abbott's management team soon to be Hospira's management team on the roll out of these new contracts as well as expanding our own sales force. While the benefits to ICU will be substantial and both companies are eager to expand the distribution quickly, we do not anticipate much of anything until the later half of 2004 with larger numbers hitting in 2005 and keep in mind that customer sales force will precede the sales growth from this new relationship and opportunity. During the second quarter of 2004 Abbott will spin out Hospira as a separate operating company and we are very excited about this partnership opportunity. We have worked with the management of Hospira for many years and we believe this new company will present a greater opportunity for us in the future. We are very confident this will be a smooth transition and do not believe that we'll have any major effect on our business whatsoever. We look forward to a long and prosperous relationship with Hospira.

Hospira has been working to reduce inventory levels including the first half of 2004 in preparation for the spin-off. We have been working with them in this endeavor. This may cramp our sales in the short term but this is not in the least way indicative of any problem with Hospira's business. Hospira's personnel have been spending much time on the transition issues such as getting contract assignments, and this has caused some dilution of our sales effort. We expect to see a reversal of this in the later half of 2004 after the spin-off is done. When ICU acquires or introduces a new product or enters into a new contract such as the new Abbott international and domestic contracts, we have always believed that it is prudent to be conservative in our estimates for revenue and earnings. We are very excited about the long-term growth opportunities for these contracts, but we are going to take a very conservative stance regarding our estimates. We will not account for any revenue from this contract in our target until we begin to actually receive it. We are including the expenses in our budget for 2004. It is important to note that we have been working with Abbott labs for over eight years and the trade pipeline currently represents less than 1% of their overall revenue. Trade pipeline will be approximately 12% of the new Hospira revenue going forward. These are high margin sales and there is significant untapped market potential, both in North America and internationally with needles, IV sets and pump. Currently international is a very small part of HPD's and IP's revenue and we are very excited about the potential of the international market, which is larger in size than the North American market. In addition, I would like to note that the leadership team of Abbott HPD is the same exact team that we've been dealing with, with Abbot. We have had a close working relationship with these individuals and we expect this to continue.

We will continue to ramp up our sales force in order to generate additional sales from our new domestic and international opportunities and we have a highly skilled and trained sales force when we hire new individuals or introduce new products into existing force. We are conservative on our forecast of sales and do not expect to generate revenue for at least six months from these new products or new hirers. In terms of growth, excluding the new Abbott agreement, we expect our largest growth product in dollars to be CLAVE, although in percentage growth within specific product lines, we see custom IV systems and Punctur-Guard, both achieving growth of 35% or greater. Based on these facts and our results for the first quarter we are very comfortable with our projections as we discussed at the beginning of the year, which was top line growth of 15% to about 125m. We are comfortable with 15% earnings growth for 2004. Also know that this takes into account our increased spending on sales and marketing and additional R&D. We believe the second quarter will be about 15% to 19% of the total annual earnings in revenue. Remember that our operating expenses do not vary directly with revenue and in fact are relatively linear. I would like to reiterate some important points we saw in our business in the first quarter that highlight our dedication to long term efficiencies in the business. We believe our free cash flow excluding share repurchases will contribute 25m to 28m to our balance sheet in 2004. Some numbers one more time. First quarter, operating cash flow - $12.8m; free cash flow - $12m; cash and investments - $85m; accounts receivables- $17.7m;

DSO - 76; inventory total -5.3; finished goods - 2.1 finished good turns - 29; GSI - 58; Capex total for the quarter - $1.4m; Capex expected as Frank said - $6m; Capex maintenance - $1.4m for the quarter. Sales by product group; custom sets are 2.7m; custom total - 6.3m; custom percent as a percent of revenue - 29%. One year ago first quarter - 16%. CLAVE and custom with CLAVE - 15.4m; Punctur-Guard - 1.4m. Sales by channels: Abbott - 13.1m; domestic - 5.7m; domestic distribution international - 2m. Before we go to the Q&A, I would like Frank to address a few more topics that we feel are core to our continued growth, and to make a few remarks about the exciting opportunities we see in these new products market and channels. Frank?

Yes thanks Doc. Our financing unit currently has about $8.3m in loans outstanding, down from $8.9m at the end of December and a maximum that can be borrowed under commitment of less than $8.5m, this is down from $12m at the end of the fourth quarter of '03. We will not be making any new loan commitments under this program. We are out of the businesses of new lending and this may be the last time you will hear us even talk about this aspect. As to our strong cash flow, we will continue to use our existing very strong positive cash flow to make investments in our business such as our international expansion into Europe. We are actively looking for companies or product lines to acquire. While some of these investments will temporarily impact our gross and operating margins, we'd expect gross margins to go back to historical ranges during the next two years to about the 57% benchmark that we've had. Of note, without the two acquisitions, our gross margins would have been 59% for the first quarter. Abbot pump sets, as mentioned to you earlier in 2003 on the live call, Abbot is very serious about their pump business. In December of '03, they announced their new MedNet drug library software, which expands the functionality of their industry leading medication infusion system or PUMP, as some refer to it. This innovative software will give hospital caregivers access to the hospital's drug reference library and corresponding dose guidelines at the patient's bedside. To put the importance of the Abbot technology combined with our medical connectors and intravenous systems in perspective for you, medical errors contribute to 98,000 deaths every year including 7,000 that are due directly to medication errors. Because of increased insurance cost and other costs associated with hospital errors, hospitals cannot afford these types of errors. The Abbot PUMP, combined with our system, helps lower these medication errors and help hospitals continually enhance the quality of care they provide to their patients.

Our custom IV sets, we introduced our patented custom IV sets five years ago and have since seen compounded growth of 48%. This is a very young and fragmented industry and we continue to maintain the leading market position due to our proprietary technology and patented manufacturing processes. We make IV sets that are specific to our customers, but faster and less expensive than anyone else in the world to produce them. Based on our competitive advantages, we expect to capture a greater portion of this growing market and expect to see over 35% topline growth in -- for the full year 2004.

In summary, we are excited about our future. Our advanced manufacturing processes enable us to deliver quality proprietary products in record time and at the lowest cost to our customers. We are in the majority of the distribution channels for our IV sets and continue to capture market share. We are the market leader in the growing custom IV set market and we are moving into the large and relatively untapped international market with the leading marketer of medical devices, Abbott Labs, soon to be Hospira. We also believe that our solid balance sheet is a competitive advantage as it gives us the ability to drive shareholder value through opportunistic share buybacks, acquisitions, and further investments in our business that will drive internal efficiencies and introduce or acquire new products to drive long-term growth for years to come. Now, I'd like to open the call for questions. Operator?

Thank you sir. The question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your push button telephone. If you'd like to withdraw your question, please press star two. Your questions will be taken in the order that it is received. Please stand by for your first question. Our first question comes from Tony Please state your question.

Hi, I was wondering if you can talk a minute about why we saw such a rise in the inventory during the first quarter?

The increase was mostly in finished goods, as we increased our production levels beyond the current demand. At the end of the last several years, we've had huge spikes in the fourth quarter, which have involved a lot of overtime and lot of excess costs, lot of inefficiencies in our production, and we are doing our best to avoid that this year. We expect to continue to build finished goods inventory past the end of the second quarter, but we expect to also have them all shipped by the end of the year.

Great. Thank you.

Let me add a little bit to that. It's a major change for ICU Medical. My belief is that inventory as a rule is not good, the lower the inventory the better, if we have two minutes of inventory, I'd be happy. But what had happened last year is, it required working overtime, required working through the holidays. We actually didn't get all the orders up in December. So this year, what we are doing is we are building inventory on the level-load basis. So, you are going to see my inventory levels go up beyond my traditional levels, but as Frank said by the end of the fourth quarter, that inventory should be gone.

Great. I appreciate it.

Your next question comes from Mitra Ramgopal with Sidoti & Company. Please state your question.

Good afternoon guys, just a few questions. First if you could comment with regards to the gross margin, it was about 54% in the first quarter with regards to products, what's your expectation in terms of, for the full year. And also with regards to SG&A, obviously we assume that is going to ramp up as Abbott spins off it's new division. If you can give us a sense in terms of the absolute number for SG&A for '04?

Is a diluted number with - - with the diluted number. It is three numbers there. One is our core business. Two, the other number is with the Bio-Plexus with the Connecticut division and with the plant in Italy, which is negative right now, as we are developing that plant, getting ready for mass production of custom sets. So, if you look at our core business, our margins have actually jumped up to 59% of strength stated with Bio-Plexus or with the Connecticut division and Italy were down to about 54%, that should go up slightly.

Yes. We were working towards 200 basis point improvement by the end of the year. It is going to take to some work to get there, that will take us from 54 to about 56. To get back to 57, we will be well into next year by the time we do that and mostly with some magic, which as you know we are capable doing from time to time, but it is - - we still got a ways to go with Connecticut with Italy, now the traditional business in Sacramento is doing fine. On the operating expenses, they will go up over the balance of the year, we were still expecting them to come in at about 23% of revenue for the year, which is about where we think we were last year. There are some increases in sales personnel and some increase in our R&D spending, but as I said it we have it right now and that will be our operating income for the year, again in the range of 32% to 33% of revenue, depending on our gross margin. If our gross margin improved from this, we will spend a little more in operating expenses, but that is something we will decide when the time comes.

And just to make sure I got that correct, in terms of the guidance for the second quarter, the 15% to 19% range, is that for both the top and bottom line?

Topline. As you know our operating expenses seemed to somewhat more linear, so that it is - - as it was in this quarter, we are not going to get bottom line to necessarily track with the topline, but that is just 18% of the annual revenues, but they got another year-over-year increase.

Okay.

And that is why we were building inventory. We expect most of that as you know their spinning off, they are very busy. The Abbott sales force and our sales force with them are very busy, switching the contacts over from Abbott to Hospira, which is, we expect most of the sales to hit in the last 67%, as last year where 60% of our sales hit in the last two quarters. So, we can expect that plus to get in the last two quarters for us. That's why we are building up excess inventory, and this inventory is not risk. This is partly sold hundreds of millions of units or so, because we felt there is very little risk even though I am against inventory.

Okay, thanks.

Your next question comes from Adina Dodi with B.Riley & Co. Please state your question.

Good afternoon. Could we get a quick update on your products in the pipeline?

Yes. Let me take that one. The last conference call, I think, they asked me about our new products to replace Clave and also enter into a new market. I stated that at that time we were waiting to apply - - waiting to apply to the FDA. At this particular time, we are waiting to hear from the FDA, whether we will get our approval or not. The product is now being used, it's being used in Europe, it had great results in Europe and we are scaling up for automated production. That is the stage for out there. We haven't got a name for the product, but it is my opinion that we will replace Clave in the future, five years from now, 20% of our sales will be Clave, 80% will be this product, as far as connector store, of course will be mainly a custom set manufacturer. Also, we will make any, we got 5, 10-K approval on our diabetic set, where we are going to OEM that, we are not going to compete with anything, we are going to just supply that set to the manufacturers. We think it is a superior set and it has patent protection. That product is - - we are ramping up, went up to - put in the marketplace. We put no numbers into these new products because we don't know until after we get in the marketplace. This to me places to - still between there and here. Other products where we kind of we - we currently have another connector that we think could be very big, it is a check valve.

Clave connector, which doesn't require FDA approval as we found a way to make it checked out instead of spending say $0.08 plus the bonds required, the 6% bonds. We found a way to do it without a penny. We think this might be a good product, we are ramping up productions for that product. And let you know after we reached a certain level, and then we'll talk more about it. But then -- up until then, it's still new products that haven't proven themselves yet. We normally don't like to talk about them till we get at least a million in sales. Those are in the pipelines that are coming out in the near future as of within months, I guess. Okay?

Fair enough. Did you purchase any shares during the quarter?

We won't.

But you still have an open authorization for buying that stock. Correct?

And when the opportunity comes along, we'll buy them.

Regarding your cash, we've a significant amount of cash. Any new thoughts on the potential uses of the cash?

No. I think as I mentioned while we're out looking actively at acquisitions of companies and their product lines. Nothing imminent there. But we're looking very actively.

We're. On a full-time basis we're looking.

We're looking. There are still people doing it full-time.

But we've turned down a hundred, I guess, probably once. So.

We were busy on the project. Where do we find the friends? The other thing obviously is share repurchases at opportune times. But that's as much as we've identified so far.

Okay. You mentioned some pricing concessions on the Punctur-Guard product line. I mean, obviously enough can we find out what the current product margin is? I know at the time of the acquisition it was about 35% for that product line, what is it currently?

I would rather not get into that one today. It's been kind of up and down as we've adjusted the price and also made changes the manufacturing processes. It's getting better. But I don't want to try to put a number on it today because it's changing that faster.

One of the things that's happening in our product line is -- a little bit frustrating for us is -- we've got, we think very large opportunities ahead of us. But we have a bottleneck right now in terms of our -- one of our key components, the major part is a bottleneck, we're thinking of removing that part. It's actually - we stick to ourselves because the tool is less than efficient. So we're working full-time on that. Once we remove that bottleneck, volume should go up significantly, and that allows to sell more product. So, I think it'll be premature to talk about margins with a bottleneck in place. As we stated earlier, we expect margins to increase and become more in line with the traditional margins in that product. Otherwise we wouldn't be doing this.

Okay, can we quickly go over the breakdown of sales again, if you don't mind?

Sure. You need by channels or by products?

By products.

Okay. Customs outsource - $2.7m. First quarter last year it was $2m. Custom total - $6.3m, up from $4.8m last year. As a percent 29 versus 16. Clave and custom with Clave - $16.4m. Clave - $11.1m. Punctur-Guard - $1.4m.

Okay.

Adina, with some luck by the time the quarter is over, we'll have these numbers all on our website too.

That would help. Thank you.

Thank you.

The next question comes from Dan Owczarski with Belmont Harbor Capital. Please state your question.

Thanks and good afternoon. Just the figure that going to Punctur-Guard, I think it was last quarter I thought that you had said that it reached profitability. Are we listening to that sell in that profitable range for that as a product line?

Oh, yes. Yeah, it's profitable. In one of these, we'll be a little bit coy on this because -- only because we don't want the competitors to have this kind of information, and whoever that listens to these conference calls. And secondly as the margins are just influx. They look profitable.

Okay. Okay.

We're not talking . So, we'd assume, we'll be profitable fairly soon, maybe by next quarter.

And then looking back, I think in the last call you did talk about increases in the R&D. And I don't think we're seeing that in the first quarter, but then it sounds like you've already got some approvals in a lot of that. Some of your next generation is already done for the rest of the year. Should we look for that R&D number to increase or?

Again what's happened there, you've some things that are basically -- some slowdowns that were in R&D in the first quarter of last year, particularly software development. We've very little of that this year, giving you our due line. So what's happened is some of the R&D that we're doing are pushed around due to lack of money. It is going up. But it should offset the numbers in the first quarter by the things slowing down. That won't - - we won't see that anywhere near worth a lot.

Okay. And then just to clarify on the topline, the 15% and around a $125m, are there any, I don't know one-time licensing fees or anything like that or it's all just your core business?

It is definitely core business.

Okay. And then again just to clarify this for myself for the second half of the year, if you're looking at $75m to $80m just in the second half of the year to meet that number, I mean really that's more just the Hospira's -- or the contracts switch over that all of a sudden are going to have to -- you know, the slow down in the inventory levels and then got to re-supply them, is that what is expected?

There is some of them there, but we're also looking for some very good growth for the new Abbott business itself.

The Abbott has weakened down to another tier level with the CLAVE IV systems and they think that's going to generate a large amount of new business plus the 60 orders for international loan should add substantial business growth. We're comfortable with that number. As we get closer to the quarter, next third quarter by the end of - - in July conference call, we can probably move it up or move it down or tweak it a little bit to be more exact. Right now, that's our best look into the future.

So, you are assuming some increase in or some - - that you're going to see some results for Abbott International or Hospira International this year?

We're not counting on it. We're talking about most of the business, but what I talked about first is Abbott has changed its pricing to reach out and make it the CLAVE IV needle assistance more affordable to the next tier of hospitals.

And that's in the US.

Pardon.

And you're talking US?

Yes. And we think the best can add substantial revenue for Abbott or for Hospira and will require holding from us.

Okay. Great. Thank you.

Your next question comes from Bruce Cranna with Leerink Swann, please state your question.

Hi. Good afternoon guys.

Hi Bruce.

I guess a couple of fine points too, if I could. On the inventory side, just to follow-up a question there. Frank, was the number 5.9 at the end of the quarter?

Yes. It was.

And did you throw out the split between rep and finished there or did I miss that?

I can give it to you. The raw material was $3.1m, rep was $0.6m, and finished goods was $2.2m. And remember the decline, Bruce.

I'm sorry.

In fact, the finished goods declined, and raw materials declined this year. Untraditional for us, but it's planned in the - - we think it makes a huge difference in our margins to run efficiently as opposed to one in the last quarter and the third quarter, all the time.

Okay. And one of you, I can't recall who had I think eluded to Hospira, maybe during some inventory rationalization on their part, was that the comment they were actually - - reducing their level of inventory?

They're coming down their inventories, yes.

Do you know what --?

We have to ask them why. We don't know why.

What level of inventories are they carrying?

Traditionally, I was curious about 12 weeks of inventory, three months of inventory traditionally.

Bits and pieces. You get three months of finished goods, you get 12 plus or minus some large numbers at the factory and then it's not a must in the pipeline from here to there. So, you could get - - you get there a pretty big number and if they change it little bit, the changes - -

If you have a little pipeline, yes.

So - -

Finished goods, we typically carry about 12 weeks. We're not reconciled from it - - we're no comfortable carrying less than that because their customer service drops down.

Okay. So, they're at 12 weeks and we think that's where the comparable being?

That's where they were comfortable.

And so, we're - -

We believe it from them that, what - - we don't have all the details that they have on this obviously.

You get them.

I'm sorry.

I said you can get them.

It might be an interesting number to have. I'm just curious as to --

We will forecast it to you in the next conference call in July. We'll give you that number.

Okay. And then - -

Remind the question or I'll forget by then.

I'll do my best to remind you.

Okay.

And then, just again to sort of push a little bit more on Hospira and in the EU end of this year end '05. Do you know currently what level of set sales Hospira - - I'm just going to call it Hospira instead of talking about Abbott. What level of set sales are at currently in the EU?

Yes, not necessarily whole dollar, but even on a percentage basis --

No. I can tell you what Germany is, I could tell you what Spain is, we know those numbers, but I can't ensure those numbers without Hospira's permission.

We have it pretty fragmented, we do have some but it's proprietary.

And we can't share without their hook.

I suggest you ask Hospira.

Yes. There are unfortunately not completely forthcoming about that either.

Well, they are in a quite period.

The question that I'm trying to figure out is what level of penetration they currently have in that market? Any idea what that would be?

I do know the numbers, I consider it significant, to my size company, very significant to -- I consider it very significant.

Do you think it --

There's wide variations from country-to-country and I suppose you probably know Europe is somewhat fragmented market in comparison how the US market is viewed.

They are very, very serious about international though. They are very serious about changing the whole way the business is done. This is where they are going. And I suspect that they have a strong enough foundation to do it, strong enough sales force to do it. As you know they've sold pharmaceuticals, they've sold other things before, and have been focused on high-margin IV sets, but than the high-margin drugs are gone. So now the emphasis has to be on the high-margin IV sets and pumps.

Let me try it a different way. I guess the question is, what is Hospira going to do differently in the EU as a stand-alone entity that was not being done under Abbott, in other words how they are really going to move the needle in Europe? What do we need to --?

We certainly can't speak for Hospira.

Well, no, but what they are doing is --

Another organization, Abbott International, each country had its own sales, and fix the products that they want to take in order to -- heavy concentration of pharma products because of that, although some countries did a very good job with the HPD product line. With Hospira's gone out now we are going to have a dedicated sales force in each country selling nothing but the HPD product line, which is going to be your pumps, your sets, your solutions, critical care, and things like that. It's going to be more concentrated sales effort and lot more capability for results, so I think it should make a big difference in terms of --

A different question of category in many directions that went in one direction and they going to follow the margins. The margins are on the pump sets, some were in the pumps. But mainly the pump sets. They are going to follow the dollars is our best guess from what our conversations with Abbott. So, but it is really those questions are best, they will be spun-off, my guess, my understanding is that, that will be spun-off by the end of this month. So, it will be over in a few weeks.

Yes that's correct. I'm still trying to figure out though if -- so Frank your question is it's a more concentrated sales effort on their part that's really going to move the needle for them in any use that's kind of, some measure?

They look at international as a huge growth opportunity. And their's is only dedicated to if there is something with the opportunity.

And where those people -- would you comment those folks prior were selling sets as well as pharmaceuticals?

Yes. Each country was a big thick. It is all over the place. Somebody with pharma and know HPT products, some were doing very well with both. Some actually were doing very well with the HPT products line, not doing very much pharma.

Saudi Arabia.

So its, each country was different and they were better on their own.

That's over now, we think its going to be a focused, dedicated, very focused company that's selling the higher-margin product at least for the --

Remember the were left with Bruce our generic and not the proprietary products, they are generic products that they were stuck with so.

Yes. I guess that's another question as to whether or not -- I mean as you know, they are taking and I don't know whether or not that means that the folks selling those products for Abbott on the field are somewhat of a disadvantage or not because the HPD won't have the anesthesia franchise but I guess that's a different question. And I leave that one late. One last question if I could. Do you know of the top of your head or just in rough terms the EU market is it sort of pump centric as it is in the States or is it more of gravity feed?

That really depends on which country you are talking about but as a rule, as of general rule it's still pump centric but as they -- each country is individually different. You can take a country like, you just mentioned Saudi Arabia very pump centric, other countries that are not as concentrated, so for the most part, that is a standard and you lead with the PUMP.

Okay, great. Okay thanks.

I can get more specific for you after I talk to Hospira. We will give you more information in the next conference call.

This whole thing is evolving.

Well, we do not know what -- anything is possible, we have to walk on high heel with what we know versus what we are told, so we can't be sure of what we are told.

No, I appreciate that, overall trying to. I mean you are joined at the hips. So, what we are all trying to do is figure out, the extent of Hospira may or may not be successful. So, that's kind of why you are trying to drill down on it. Okay, thanks. I'll get back in queue.

Okay Bruce.

Thank you. Due to time constriction, ladies and gentlemen we have time for one final question. The final question comes from Glenn Schneider with SC Capital Management. Please state your question.

Hi Frank, how are you?

Good, how is everything with you?

Great. Frank, I have a quick question. I just want to clarify something. If you guys do 15% to 19% of the full year in sales in Q2, it looks like revenues will be fairly flat or slightly down from this quarter on the product side. If it is flat, would you still expect to see gross margin improvement on the product side or do you need improving sales to get some efficiencies and better gross margins?

We're looking at the margins on an annual basis.

I guess, to get to that annual basis, what needs to happen. I mean, I am kind of looking at it, is it more of an inefficiency as sales ramp or can you eke improvements with the same level of sales?

It's a bit of both. I think if we look at what we're going to do here is just additional efficiency. We're pretty good in terms of absorption. If you're taking a look at Connecticut, it is very definitely scale as well as efficiencies in production and in Italy it's going to be scale.

That's in level loading mode.

Yes, level loading serve us very well here in San Clemente in terms of efficiency.

So, we could see some improvements sequentially in the product gross margin on flat sales?

Possible. We have still not assessed, relatively low, I, more sound nervous about how the margin is going to show up, I can tell you what we are going to do when the sales number is high though.

Okay. And then just to clarify the SG&A and R&D will start ramping up sequentially from the current quarter levels?

I think you can pretty much get to where we expect to be on the year if you take a look at the numbers I had talked about earlier. That will give us a ramp of first starting '04, on the first quarter to what we're going to be in the fourth quarter.

Just in terms of the expenses as a percentage, it ramps sequentially, obviously it's higher with higher sales, but on a percentage basis it still ramps?

Yes. I take a look at the thing on a linear basis, Glenn, rather than trying to do this as a percentage of revenues.

Okay. Is that on a dollar basis linear throughout the year or some kind of ramp?

Yes. There will be some variation based upon sales, I think the real way to look at this is on a linear basis because the variations are going to be that way.

Okay. So the net sale is similar from the higher expenses, okay got you. And then just on that license revenue number of 960, that's a new -- I didn't hear it if you said it, is that the new level going forward or is that a one-time item?

No, 300 to 700 a quarter going forward, we had a little bit of a catch up, one of our licenses in the first quarter which helped us.

Okay great. Thanks for your help.

Okay Glenn.

Thank you. At this time, I'll turn the conference back to Frank O'Brien for final remarks.

Okay. I appreciate you all joining us and to discuss this, it's time to go home. We'll talk to you next quarter.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 345652. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.