ICU Medical Inc (ICUI) 2004 Q4 法說會逐字稿

(OPERATOR INSTRUCTIONS) Mitra Ramgopal, Sidoti.

If you could just comment -- I know when Hospira provided their rough guidance for 2005 they took down earnings and they expressed some concern in terms of the progress they're making on the international side. I know you're betting a lot on international sales. How do you see that relationship working out?

We continue to work with them. Bear in mind that a fair bit of our international growth is not slated to be with Hospira at all but with other distributors. We'll continue to work with them in the countries that are doing well. And we do appreciate it's going to take them a little longer to get their plans in place, but I don't think it's going to have any near-term negative effects on us.

Let me get at our probably of failure or success by going with other distributors where Hospira is not direct. We have independent distributors in those areas, where Hospira is direct. We have done deals to expand with them and working closely with them, countries like Spain -- those types of places. So I think we're in good shape as far as international growth with or without -- Hospira -- it's a big company, it takes longer -- and everything takes longer.

And also on the acquisition front, I know you mentioned that could be one opportunity for you this year. In light of the difficulty you have had with Bio-Plexus do you see acquisitions as more of a near-term or a longer-term issue?

I would change the word "difficulty" to -- we have not been successful with Bio-Plexus (indiscernible). The only thing good about it is we received about $3.5 million on taxes and we've got royalty stream rolling in over $1 million a year which makes the acquisition basically free. So I would say that we have not been successful with that product line. We still believe in the Wing Set and we still have distribution channels as we lined up to sell that product. So difficulty is not the proper word. I think closer to not succeeding or whatever that represents would be more accurate.

We've learned a lot. I hate to say that but we know what we don't want to do and what we don't want to do is to get away from what we're good at. What we're good at is doing what others don't do and that's customization. So if you see us doing acquisitions, they'll be what we can expand into new markets with our core capability of quicker, faster inventory (indiscernible) approach to manufacturing. It would be into areas where customization is valued and where customers pay more money for speed and for what they want. As opposed to Bio-Plexus, there was no possibility of customizing that product.

And if you could just quickly repeat the guidance you had provided for 2005?

I don't think I called it guidance, I think we called it target. I gave you -- for 2005, I gave you 90 million in revenue, 90 cents a share, gross profit margins expanding from 53 to 55 percent each quarter, operating expenses about 28 to 32 percent, net income of 14 to 18 percent of revenue in each quarter and about 15 percent for the year. I gave you CapEx at about 7 million which we have usually been right on. For the first-quarter, 25 percent of the revenues for the first-quarter, and diluted earnings per share in a range of 23 to 24 percent -- cents. For the remaining quarters we expect to see normal seasonality.

Okay, thank you.

Bruce Cranna, Leerink Swann.

It is actually Juanid Husain in for Bruce. I've actually got a couple of quick questions for you. With regards to the gross margin line, I know they took a hit in Q3 and then again in Q4, but with the Hospira inventory issue essentially behind us, you were saying that you expect a sequential improvement in gross margins by -- did you say 200 bps?

We'll be 200 bps, basis points, off what our normal margin would be. We're not going to have the factory cranked up entirely throughout the first quarter because we are still reducing inventories. Once we get that behind us then we'll be in good shape. So we're looking probably in the low 50s, 53 or so for the first quarter.

So you think it's going to be a slow ramp up in Q1, Q2, Q3, etc.?

It'll improve in Q2, 3 and 4. It's all due to overhead absorption.

We're looking at 55 by the end of the year.

Okay. And then, George, I know that you said on the Q3 call you were ready to go with the Tego launch with the 510(k) approval in hand and I was wondering if you could quantify the potential revenue opportunity for us in terms of what the expectations are for the product in '05 and beyond?

First of all, we put no revenue numbers in for these expectations. We've launched the product, but whenever you launch a medical product like this you launch it in low-volume, you get feedback from the marketplace, you tweak the product, you get it as perfect as you can. The product, I say as we speak, is being used in a number of hospitals, its seen trials, good response to the product. The market potential is -- there's no competition so the price of this product is in terms of what we sell a Clave to Hospira for is in multiples and multiples and multiples of that. It's significantly higher priced.

The market potential is about -- if we launched it in dialysis, about 35 percent of dialysis patients have catheters of which they have two ports on each catheter. So that is a market we're going after. It's a fairly large market. Worldwide it's a fairly large market. Anything over -- I consider anything over 50, 60, 70, 80, 90 million to be a large market. So without competition -- so as we ramp up this product we expect to take the higher volumes by summer with our big cavity (ph) tools kicking in and should have some revenue in the last two quarters of the year.

The Y (ph) valve is done, complete, it has passed at Hospira and we're first going to consume the product ourselves to spread our margin, then we'll help (indiscernible) to Hospira to spread their margin.

Okay, that's helpful. And --.

Understand that Tego will come back and attack Clave in the future because the reason we're launching in dialysis is because no product has a flow rate (indiscernible) it has the quality the customer wants. So -- but this idea to launch in dialysis in this empty market, come back, get volumes up, come back and attach Clave, CLC and competitors with the Tego because the cost of goods sold for Tego is going to be much smaller, much lower than a Clave or ultimately the prices drop.

Frank, I apologize if I missed this, but I was wondering if you could tell us how we should be thinking about R&D and sales and marketing expense looking forward into CY '05 as you look to launch the new products at Tego and then of course the new products in the summer? Thanks.

We didn't talk about it. Let's see. We look to the R&D spending to be a bit higher in '05 than it was in '04. We're not stopping with the products that we're launching that we talked about, we're working on a bunch of other things, too. Plus our venture investment will be spending more on R&D in '05.

Great, thanks.

Ari Cole (ph), Eaton Best (ph).

Good afternoon, gentlemen.

Who's going to win on Sunday?

Actually we're so spoiled we expect to win. But we shall see. Enjoy the game. But don't come here to visit, there's too much snow. Two questions. Can you just give us a little commentary on the actual sell through in 2004 versus 2003 for Clave custom sets and Punctur-Guard? Because obviously your reported revenues last year did not reflect what was really going on at the hospitals.

Ari, could you repeat the question?

Sure. Do you have data kind of showing what your sell through -- this is consumption by the end market, was by your products in 2004 versus '03? A number that would ignore the inventory disruption.

You're talking about total product or you mentioned Punctur-Guard and --?

If you have it down to the product line the way you report, like Clave and custom sets and Punctur-Guard, that would be great. If it's just one number that's fine too.

We do have the data on the sell through. It's something that we are not really at liberty to share. It's given to us in confidence (indiscernible) Hospira sell through on every product they sell, like the Clave for instance. But I can say that the sell through was up on a year-over-year basis but we just can't give you much more specifics.

Can you give us numbers without giving away specific customers? I'm just asking about it by category as opposed to by clients?

The Clave category is up.

Right.

We can't give you the number for Hospira or even the total marketplace.

Okay. But '04 on a sell through basis was higher than '03?

Absolutely.

And then on the new product side then, approximately what sort of costs are you budgeting to incur here in '05 for the launch of these products you mentioned earlier?

Not much. The product -- we expensed most of the cooling and the R&D work was done in earlier year, so most of that's been done. We do have bigger cavity tools arriving in -- as I say, in June of this year for mass production. But the expense won't be much. We already have our existing sales force and we have a distribution channel set up. So we don't expect to expense a material amount of money for it this year. It should be profitable.

Okay. And then the last thing -- on the custom set business can you give us an update in terms of traction you're getting there? I think if one looks at maybe the number of surgeons you have and maybe the percentage of them that are doing repeat purchases, I'm sure there are a couple metrics you look at in-house that gives you a sense for how that business is doing and if any of those metrics are doing poorly, just kind of curious how you're trying to rectify the situation.

We gave you custom set business by set source and total and we think that we've spent a lot of attention on Bio-Plexus in 2004, a lot of time, our sales force did. We're moving the sales force back onto custom sets. The custom sets were growing in the double-digits category. I think set source year-to-year was 20 percent from '03 to '04.

But as I say, we're moving our sales force back and getting them focused on what we do best and that's custom sets. And that's where most of our emphasis is going to be, not in Tego and international sales. So, I think custom sets, we can clearly tell you it's going healthy. We do have toll-free numbers for our distributors and it's certainly growing at double-digits. We expect it to continue in that category.

Thank you.

Linda McDonough (ph), Manchester (ph) Management.

I wondered -- I didn't get the -- could you give us just the absolute dollar breakdown for Hospira and for Clave and custom set source for the fourth quarter?

Yes, the Hospira total revenue for the quarter was 6.5 million, of that set source was 3.2 and the Clave was 2.8.

Okay. And what was total Clave and total set source for the fourth quarter?

Total Clave -- well set source is just the Hospira program, so that's everything. Total Clave for the quarter -- looks like 5.8 and customs were about 6.5.

Okay. And when you look at the first quarter, the revenue growth from December into the March quarter, can you give us a sense -- is that mostly Hospira coming back into the picture?

That's a good bit of it, Linda.

Okay. So I should assume the bulk of that is in domestic?

Yes, it would be.

Okay. And the last question is on the gross margin. Do you think you can give me sense -- I know that part of the gross margin pressure has been from lower production capacity so that that overhead isn't covered there. Any pricing changes or cost of good changes that would impact the March quarter gross margins?

No.

So that's all just producing more product per factory?

All absorption.

Absorption. Pricing has been pretty firm.

Okay, great. Thank you.

Todd Sennik (ph), (indiscernible).

Real quick, I'm just curious about the international business. You said that more of the international business is going to come from non Hospira distributors. If you were to break that down, what would be the percentage of Hospira international business versus the other distributors?

I believe I said if would be a combination of both. Where Hospira is strong we'll (indiscernible) for the direct we'll go with Hospira. Where they're not direct or they're established direct sales force, rather than start with them we use independent distributors. So it's about 50-50.

So it's that evenly distributed?

We expect international to be strong and continue to grow. Our internal numbers are very strong.

What kind of expectations, without getting real specific, do you have for your international growth overall?

In terms of percentage?

Percentage, year-over-year percentage, or even if you can get year-over-year. Because it looks like it only grew about 10 percent this most recent quarter on the international side. Is that something that we should expect into the year?

No, there was some timing involved there. It will be a lot bigger next year.

Say 20 percent?

No, no. I'd say a lot more than that. I don't have the number right here with me, Todd, but it's going to be big.

Go-ahead.

We're looking at stronger than 20 percent.

Interesting. Then just on the gross margin side, what is your degree of confidence or level of confidence in getting those margins back up to that 51, 52, 53 percent?

We'd say it is our very, very best estimate, 53 first quarter to 55 fourth quarter.

What would throw a wrench into all of that?

Our seasonality could affect it somewhat.

It's basically going to be at production levels, Todd. We're dealing with -- our principal factories are two factories that have been running very effectively for a long period of time. The kinks are all worked out. So it's going to be volume related.

Even that, we have been working very, very closely with Hospira. We know what they're going to be buying in each month of each quarter of the year. We know exactly what their inventory levels are and we know what their finished goods are, we know what their days on hand of inventory is in terms of finished goods. We know exactly how many weeks they have and I think it's pretty much -- you can pretty much count on those numbers being pretty accurate.

It's possible to be off by a percentage point, but that's our best guess -- our best estimate going forward. And our margin business has been pretty consistent except for when we -- the last 6 months of inventory reduction.

Okay. Just one other quick question. Just on Sarbanes-Oxley, how much did you guys spend on that for the year?

Too much, way too much. Who are these guys anyway?

2 million, 3 million, 4 million?

No, it's close to 1 million.

A million plus would net all the -- we're not counting in management's time.

Those are the hard costs and there are a lot of headaches to go with it.

I understand. Good, thanks a lot, guys.

Alex Chaucer (ph), Scott & Chapman (ph).

On the guidance for 2005, I think -- I'm sure I'm missing something. So 90 million in revenue and 90 cents in EPS. I guess in 2002 was when you did 90 million in revenue, so that seems to be beyond that point is when Abbott started ordering too much product. But I think your EPS in '02 on that revenue base was $1.28. So are these the international and R&D initiatives that are eating into the EPS or can you just go over the delta between the $1.28 and the 90 cents?

A couple things are affecting us and I don't have all this in front of me. But we've got on the G&A side -- '02 was a relatively light year for patent litigation, '05 is going to be a lot heavier year. We're going to have the continuing costs of Sarbanes-Oxley and we've got a larger sales force now than what they've been and we're bringing on more. Our IT spending is up quite a bit, too. We've had to invest a lot in infrastructure since then and it's affecting us on an ongoing basis.

And R&D.

So that's an extra $5.5 million I guess, after-tax.

You put them all together it's going to be in that range.

So --.

Keep in mind, too, Hospira's been ordering at a pace -- at an accelerated pace for a few years. It just didn't happen last year. They've been ramping up for their sales pretty fast and it didn't happen just in 2004. I think all along they've been ordering at a very stiff pace in terms of -- remember their supply chain is extremely long and for them to react to the marketplace when they were growing at -- at one time they were growing it at tremendous rates. For them to react to that required a long, long cycle time for us by the time it got back to us, so their orders would be fairly heavy compared to their growth rate.

So it's been going on for a while. So I think we've shaken all the inventory out. In fact, I won't say that. I'm going to say we have guaranteed we have shaken all the inventory out. There is no room there for any -- in fact, what we've done is we've certified ourselves to be, as far as I know, one of the only companies that would ship directly to Costa Rica saving weeks and weeks in their inventory chain.

But I guess my question is, using this revenue base and what happened in '02, the 5.5 million incremental dollars that you're going to spend, is there a return associated with that or is there no real return? Can we see some -- I guess if it's patent litigation and Sarbanes-Oxley, there's not really a whole lot we can, in terms of return, expect from that?

Well, in time we should have a return on it, particularly the patent litigation. and on the R&D.

R&D you can -- one thing I can tell you that we have not been successful at, when we acquired Bio-Plexus we acquired another product line -- by developing the products ourselves at R&D. We're good at making connectors, we're very good at that, and there's a high probability those will succeed. A high probability Tego will succeed as a product, let's say higher probability. So I think the R&D dollars are well spent. And look for a ramp up in that because we've got 87 million in cash, by June we'll have over 100 million in cash. Look for money to be spent and maybe it'll cost us short term a little on their earnings but long-term it will pay off.

Okay. And just on the 100 million in cash given that --.

It's 87 million today.

Right, 100 million in 6 months. What is the buyback authorization and would there be any look into using that cash to buyback stock?

Anytime the stock goes on sale we buy it. Number two, anytime we can buy the stock we buy it. We have an open authorization to buy as much as we want.

Is it your opinion that the stock is for sale?

My personal opinion, it's on sale, yes.

And are you allowed to buy stock now?

No.

You're not allowed to buy stock even after earnings?

No.

Our trading window is closed right now.

Why is that?

No comment.

Great, thanks very much.

Alex, just (indiscernible) out the answer to your first question. Our gross margin is a little lower right now than it was in '02 as well.

Okay, great.

We can talk about that, but it's down.

Okay, great. Thanks.

We have no further questions. Back over to Dr. Lopez for any closing remarks.

Thank you all for joining this conference call. We'll look forward so seeing you next quarter at the end of the first quarter. Thank you very much for joining us.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect.