ICU Medical Inc (ICUI) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2005 ICU Medical, incorporated, earnings conference call. I would now like to turn the presentation over to your host for today's conference, Mr. Frank O'Brien, Chief Financial Officer. Please proceed, sir.

Thank you. Good afternoon, and thank you for joining us for our review of ICU Medical's first quarter ended March 31, 2005. I am Frank O'Brien, Chief Financial Officer of ICU and with me today is Scott Lamb, our Controller. Dr. Lopez, our President and CEO, is unable to join us today due to a court appearance he is attending on behalf of ICU. It involves a patent matter and he is the inventor and we could not avoid the timing.

On today's call I will provide an overview of our operational results, and then Scott will provide detailed financial information for the first quarter of 2005. I will wrap up our prepared remarks with a discussion of the outlook for the remainder of 2005 and a discussion of current business trends before we go to the Q&A. As usual we will limit the length of the call to about 45 minutes. Before we begin, in the event we touch on forward-looking statements on this call please be aware that they are based upon 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 the 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 Securities and Exchange Commission for a more detailed discussion of the risks that may have direct bearing on our operating results, performance, and financial condition.

Now to review our first quarter. The first quarter of 2005 is the best quarter we've had in a year and a clear sign that the effect of Hospira's inventory reduction in 2004 is behind us. We are back in a positive trend with revenue and income up over last year and we returned to profitability. First quarter revenue and earnings exceeded our expectations due to stronger sales in many of our product lines and channels both domestically and internationally. Our CLAVE product sales were up 41% over the first quarter of 2004 led by a good recovery of CLAVE products sales to Hospira and our international sales grew by over 28% -- 26% compared to last year.

Perhaps the biggest event for us in the first quarter is something that's not even in the numbers yet. On February 25, 2005 we entered into a 20-year manufacturing, commercialization, and development agreement with Hospira. I will refer to that as the MCDA as we talk more. Under the MCDA and related agreements we will acquire Hospira's Salt Lake City, Utah manufacturing facility, related capital equipment, and certain inventories for approximately $35 million in cash and produce for sale to Hospira on an exclusive basis substantially all of the products manufactured at that plant. Hospira will retain commercial responsibility for the products we will be producing, including sales, marketing, distribution, customer contracts, customer service and billing.

The majority of the products we will be producing under the MCDA are Hospira's critical care products which include medical devices such as catheters and geography kits and cardiac monitoring systems. We have also committed to fund certain research and development to improve critical care products and develop new products for sale to Hospira and have committed to provide certain sales specialist support. Our prices and our gross margins on the product for sale to Hospira under the MCDA are based on cost savings that we are able to achieve in producing those products over Hospira's current costs to manufacture these same products. We expect to move much of the production to our current facilities or other lower cost locations over the next several years. Initially we expect our gross margin under the MCDA to be small but we expect them to expand as we achieve cost savings. We estimate that our sales under this agreement will approximate $50 million in '05 with only small profits in 2005 and increasing sales and profits in future years. We expect to close the transaction on May 1, 2005.

Once closed, this acquisition will be expanding on a strong 10-year relationship between Hospira and ICU Medical and we believe this deal will make sure both companies are using their expertise to deliver leading critical care products to domestic and international markets for years to come. We will utilize our core competencies, our world-class manufacturing expertise with the production of innovative custom IV systems and Hospira will focus on their sales, marketing, and customer contracting and distribution of the products. We expect to greatly benefit from more diversification of our product line and increased revenue and earnings over the long term by lowering costs associated with the manufacturing of these lines and increase overall market penetration as we work together with Hospira to deliver the leading critical care products both domestically and internationally. Remember that this acquisition over time will be very accretive but it will take us at least 18 months to 2 years to begin to achieve the real synergies and efficiencies that we believe we can achieve.

Overall we are very excited about the remainder of 2005 and beyond as we return our Company to solid top and bottom line growth. In addition to the Hospira acquisition we also expect some of our new products to add revenue dollars and bottom line dollars in 2005 but we will not build these into our projections for 2005 at this time. Now I'd like to turn the call over to Scott Lamb to discuss our first quarter 2005 financial results. Scott.

Thanks, Frank. First quarter revenue was 27.1 million. This represents a 22% increase from 22.2 million recorded in the same period last year. The net income for the quarter was 4.4 million versus net income of 4.1 million in 2004, which on a diluted earnings per share basis equates to $0.30 in the first quarter of 2005 versus $0.28 last year. Some of the effects of the top-line growth was offset by an increase in operating expenses which I will explain in greater detail in a moment.

First quarter results were driven across many of our product lines both domestically and internationally and with all of our channel partners including Hospira, where our sales increased by 25% compared to the same period last year. During the first quarter we continued to diversify our revenue by product offerings and the break down by product line was as follows. CLAVE products, excluding custom sets, were 58%. Custom sets, 25%. Punctur-Guard, 4%. CLC, 4%, and other nonproduct revenue was 5%.

Our total custom IV set sales continue to be a solid performer, growing by approximately 9% compared to the same period last year. The custom IV set sales were led by the custom set business with Hospira which increased approximately 19% from the first quarter of 2004. CLAVE sales were the strongest performance for the quarter as demand for products, particularly from Hospira continued to improve. CLAVE sales were 15.7 million in the first quarter an approximately 4% improvement from 11.1 million in the same period last year. CLAVE and custom IV sets including a CLAVE were 20.4 million for the quarter versus 15.4 million in the first quarter of 2004. Again, this is a clear evidence that the inventory management issues have been resolved and we look forward to posting strong growth in our CLAVE product throughout the year.

International sales for the quarter increased approximately 26% to 2.6 million from 2.1 million in the same period last year. Europe continues to perform well, reflecting the success of our efforts to improve production and distribution in the plant that we bought in mid-2003 in Italy. We expect to see continuous growth in our international division for the remainder of 2005 and beyond. Punctur-Guard appears to be stabilizing and sales slightly improved compared to the third and fourth quarter of 2004. We continue to focus on improving market penetration with outpatient provider contracts and in the lab market and these efforts have at least managed to stabilize this line.

Our gross margin on product sales was 54%, about the same for the first quarter last year, but up significantly from the fourth quarter of 2004. On our last call we indicated that the reduction in production volume to deal with the Hospira inventory issues led to reduced overhead absorption in the later half of 2004. With this issue behind us we are once again ramping up production levels resulting in a better than expected gross margin for the quarter. Production in the first quarter was somewhat higher than expected leading to the gross margin, also being slightly better than expected. As our production normalizes and returns to historical levels in 2005 we expect to see gross margins on product sales in the 53 to 55% range when you take into account some of the normal seasonality in our business.

While our revenue and gross profit showed improvements in the quarter these positive gains were partially offset by increased operating expenses. SG&A expenses were up approximately 2.4 million to 8 million in the first quarter. Approximately two-thirds of the increase was expenses associated with patent lawsuits we brought against two companies we allege infringe our patents, with most of the balance accounted for by increased use of outside professional services. As a percent of revenue SG&A was 30% in the first quarter up from 25% in the same period last year. Our research and development in investment expenses were 674,000 in the first quarter of 2005 versus 451,000 last year. This reflects increased spending at the start-up Company we invested in last year.

Our balance sheet remains strong and we ended the quarter with 96 million in cash and liquid investments. An increase of 8.7 million from the end of 2004. As a matter of fact, as of a few days ago, we surpassed 100 million in cash for the first time. Our capital expenditures for the first quarter were approximately 1.2 million, down from 1.4 million in the same period last year. Receivables at the end of the first quarter were 11.8 million, up from 8.9 million at December 31, 2004.

Our DSO continue to improve and were 41 days at March 31, 2005, down from 56 days at the end of the year. Inventory at March 31, 2005 was down to 7.4 million from 8.4 million at the end of the year. We expect our inventory to continue to decrease throughout 2005 and are striving to maintain an inventory level of about 4 to 5 million towards the end of 2005 to avoid the inefficient production spikes that we have had in previous years. Remember, this excludes the effect of the Salt Lake City agreement with Hospira. Now I would like to turn the call back over to Frank to discuss the ongoing business trends and our outlook for 2005.

Thanks, Scott. I'd like to point out a few of the financial facts that we were able to achieve during the first quarter of 2005. Operating cash flow, 7.858, free cash flow 6.6 million. Cash and investments at the end of March 96.1 million, CapEx in the quarter was 1.2 million, the gross margin based upon product sales only was 54%, if you base it on old revenue it would come out to 56%. Operating revenue as a percentage of revenue 24%, net income as a percent of revenue 16%. Accounts receivable, 11.8 million. DSOs, 41 days. That's been coming down pretty steadily for a while now. Finished goods 2.1 million. Inventory, total including left 7.4 million. Finished goods turns 13 up from where it was at the end of last year. Day sales in inventory 45, again, coming down. We are very encouraged by the long-term growth opportunities at ICU. Our leading diversified product line which we will be adding to in '05 combined with our proprietary manufacturing processes and our recently announced acquisition agreement with Hospira will enable ICU to deliver shareholder value for years to come.

Let me dwell for a moment on new products. We launched the Tego valve during the first quarter and have initiated long-term studies in the United States, Brazil, Canada, Spain, and other European countries. It is early but the feedback from the market for this product has us excited. Feedback from the customers is very, very positive and there is no competition for this product that we are aware of. The connector can fill a longstanding need to reduce infection in dialysis therapy. It will take some time to ramp up production, but we will keep you posted. We are introducing, in fact have introduced the new Y CLAVE connector with the integral check valve.

First we'll put it into our products that we make ourselves to increase our gross margin and work out any kinks, then we will sell this to other companies. This is an OEM product and an integral check valve will give them very high margin. The product has passed trials with our partner and we expect to see sales from this product beginning in the second half of '05. In addition we are excited about the new Orbit diabetes set for which we also have the 5-10 K and which we will be launching in the summer of '05. We also expect to see marketing approval in Europe for a new connection device later this year.

International growth. International growth has been exciting in the first quarter. Was up approximately 26% compared to last year. This is on top of our full year international sales in 2004 increasing by over 55% compared to 2003. We believe our international sales will be about 12% of our overall revenue in 2005. We'll continue to invest in our international infrastructure as we are seeing strong results from these investments.

I will spend a minute on operations. Due to our stronger than expected first quarter we are increasing revenue and earnings targets for the existing business. Again, not included -- including the effect of the new Hospira agreement, to approximately 95 to $98 million in revenue in 2005 with corresponding diluted earnings per share of approximately $0.95 to $0.98. We believe our gross margins on product sale will approximate 53 to 55% for the next three quarters. We continue to expect our operating expenses in 2005 to be approximately 28% to 32% of revenue in 2005 with the first quarter obviously falling at the high end of the range.

For the entire year it looks like they will be equal to or somewhat above the 2004 level with a lot of this depending on legal and other outside professional services. We believe net income will be between 14 and 18% of revenue in the remaining quarters of '05. With -- coming in at about 15% of revenue for the entire year. For the remainder of '05 we expect our capital expenditures to be approximately $5 million. Let me emphasize all of these numbers exclude the effect of the Salt Lake City agreement with Hospira. As I mentioned in my opening remarks we expect to close the Hospira transaction on May 1. For the remainder of the year we expect to see a normal seasonality with the second quarter down somewhat from the first quarter and the third quarter down from the second quarter and fourth quarter being our best quarter of the year.

In summary we're excited to be back on a growth mode and look forward to closing the Hospira transaction in the second quarter. We continue to see overall growth for our core CLAVE products and 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, Hospira. We also believe our positioning in the market will enable us to introduce new products to drive long-term growth for the years to come. Now I'd like to turn the call open for questions. Operator.

[OPERATOR INSTRUCTIONS] Your first question will come from Bruce Cranna with Leerink Swann. Please proceed.

Good afternoon, guys.

Hi, Bruce. How are you doing?

Fine, thank you. How are you, Frank?

Good. Things are looking better for the red Sox, I'm sad to say.

Yes. Let's not go there. However, can we just go through some of the revenue detail, and can you just do the math for me by channel? I think you said OUS is 2.6, is that right?

Let me give you the pieces. The OEM piece in total is 18.5. The domestic distributors are 6 million right there.

Okay.

International is --.

2.6, right?

No, 1.2, it looks like. That should come out to 27.1.

OEM is 18.5, independents 6.0?

Yes.

So OUS is about 2.6, right? Right? You still there?

Yes, 2.6. I'm sorry.

I just wanted to sort of nail that down. And can you just -- I know that we all want to get a better feel for what's going on with HSP, and the fact that you're the snap-back today, or in this quarter versus certainly second half of last year. When you talk to the folks at HSP do they give you a sense -- and I know you would say that they're probably fairly happy with their inventory levels today. Do you know how many days they're carrying, and I assume that's where they want to be -- where they are currently is where they want to be.

Bruce, I can tell you the days that they're carrying are roughly where they want to be. I don't want to get into the details of how many days that is. They've shared with us a lot of information which they've asked us not to pass on.

Okay. Because if you look at it -- in general if you look at HSP they've probably only taken out two or three days broadly across all their inventory over the past quarter so I'm just wondering, your impression is that with respect to your products and their set business they're right-sized at current?

Yes.

Okay. And then if you could just spend a little time just so -- I want to make sure I heard you right on litigation. The component in SG&A was two thirds for this quarter; is that right?

It was two-thirds of the increase.

And what was your -- the number for the year was what?

Bruce, we haven't given that number out as a separate number. I can tell you it was sizeable.

And then I guess the last thing, and I'll get back in queue is, can you -- looking at the critical -- I guess you're calling it MCDA, the critical care business.

Yes.

Your comment was 50 million in '05. I assume that's obviously on an eight-month basis, correct?

Right.

Can you just give us a sense as to, I guess -- how much cost you see coming out of that, that enterprise, on an annual basis, to the extent you can kind of ballpark to that, what I'm trying to figure out is the state of the capital equipment there at that facility in Utah. I know your standards are fairly high. What is the state of affairs there, and how do you get -- whatever your cost assumption is you can take out, is there all sorts of CapEx you'd have to infuse into this facility, or is that not a fair way to look at it?

Bruce, we're looking at that now, and trying to match the equipment with the actual production needs. There is a lot of equipment at that facility, and there's some redundancies on the equipment side as well. The estimates that we've made so far are purely labor savings. So we have not gotten into any savings on any equipment changes or other efficiencies. And we'll have more on this later, but I think we said earlier that we see modest -- have a very small modest effect in '05, be about $0.20 a share on '06, and we've got numbers internally that we're fussing with, but we really haven't said anything beyond that. Obviously the numbers beyond '06 are going to be a lot better.

How was Bio-Plexus in the quarter? Is it still moving the right way there in terms of margins?

In terms of what?

In terms of margins, is it still moving the right way?

Let's put it this way. It's not great, but it's not getting any worse. The thing we've been chasing at Bio-Plexus, is that we've been taking a fair bit of cost out of the production expenses which is good. We've had to drop the prices, so our margins never do quite get that much better because of the price drop. It's doing about as well as could be expected.

So is that a lift to GAAP earnings?

Yes.

And cash flow positive?

Yes.

Have you talked about what your option expense might be this year? I know it seems like we've been given a reprieve to '06. But can you give us any sense as to what that might look like on a pro forma basis?

It's not going to be much. I don't have the number, Bruce. It's purely pro forma. It's not going to affect the income statement.

Okay. Thank you.

Okay.

And your next question will come from Mitra Ramgopal with Sidoti. Please proceed.

Couple of questions. With regards to the increase in SG&A stemming from the two lawsuits are those separate from the B. Braun and Alaris?

It is the B. Braun and Alaris.

It is those same two?

Yes.

I know you ended the quarter with 95 million in cash. The 35 million involved with the Hospira transaction, none of that has been paid out yet?

No.

So I guess we have to back that out from the balance?

We'll back up and start going up again.

And in terms of acquisitions, is that something still on your plate, given your cash balance, or is the Hospira transaction going to pretty much take up your time?

No, we are still actively looking at acquisitions Mitra, as I think you know we've had one person doing nothing other than look at acquisitions for the past, oh, year and a half. That takes a while to get that pipeline started and built up and get involved with the opportunities, and he's been successful in doing that so we're not going to stop now.

One final question. In terms of the quarterly variations you've seen in previous years, now that Hospira has kind of brought their inventory level down, do you see the quarters being more smooth or still skewed towards the first and the fourth?

I think they'll be probably less choppy than they have been in the past, and probably return to more akin to the seasonal variation that we had, which was kind of indigenous to the industry where the second quarter is down a little bit from the first and the third quarter is down a little bit further and the fourth quarter is usually historically been our best quarter of the year. The reason that is, is June, July, and August, in healthcare, as you know, is in relative terms, somewhat slower than the rest of the years. People don't get as sick in the summer and postpone electric procedures but we expect to see a bit of that. We'll see how it turns out.

Thanks.

[OPERATOR INSTRUCTIONS] And your next question will come from Daniel Owczarski with Belmont Harbor Capital.

Wanted to talk just a little bit about the new products. You said the 95 to 98 million for '05, that target does not include any new product?

Yes.

Could you give us some thoughts or some idea on what really the market opportunities are for the dialysis or the diabetes or some of the other products? How should we think of these? Are these niche product? Are they potentially $5 million opportunities, or 50 million? Just some sense of what kind of market they could be serving.

I don't have all the specific numbers on this, Dan. Tego, just in the dialysis market alone that's a fairly large potential market. You're talking tens of millions there. How far the scale goes I'm not sure. But, funny thing and Tego eventually will probably replace the CLAVE, so you're dealing with something fairly large in potential. The diabetes set you're talking, a very large market there. If we capture a 5 or 10% of it that will be a very successful product. Again, I don't have specific numbers. The Y CLAVE, not huge sales but it's going to be all margin. So the added value of the integral check valve, it's going to help our margins. Sales-wise, it's not going to be, I wouldn't say it's going to be huge, huge.

Okay. Then the international business where you're seeing the improvements on. Is that coming through Hospira or through your other relationships, and has Hospira's international efforts even kind of kicked in yet?

It's mostly through channels other than Hospira. We are working with Hospira in Europe now, but it's going a little more slowly than we had thought originally. I think if you'll take a look what Hospira's been saying, you'll see some of that -- same type pattern. Most of the growth -- Europe has done very well for us in the first quarter but we've been growing a lot through our, what you might call our, historical distribution channel, or historical distributors.

Not to beat up the legal question, but were there any court appearances or anything that drove -- that spiked those up, or is this going to kind of continue at these levels going forward?

There's been some activity on the court side that will continue on and off up through the scheduled trial date over the summer on the B. Braun case. Alaris just kind of, it heats up and cools off just depending on exactly what's going on. It's in discovery now. So we are looking for a continuance of these expenses but anything can happen to slow it down or accelerate them.

Thanks.

And your last question will come from Mr. Bruce Cranna with Leerink Swann. Please proceed.

Hi again, Frank. Just a couple of follow-ons, if you don't mind. Can you just give us a sense for -- I know to the extent you want to answer this question, I'm just trying to make my model work, frankly. The CLAVE sales, which I have as, I guess, almost 16 million, not including custom, 15.7, can you give us a sense what that number was bulk sterile to Hospira in the quarter? Is that possible.

I don't have the bulk sterile number for Hospira. If you go the total CLAVE sales to Hospira were 14.2. That's bulk as well as packaged.

So that's not including custom?

Not including custom.

That's helpful number. That's --.

What is it 12.4, right? Not 14.2. 12.4, yes. A little dyslexia here, I'm seeing small numbers on a piece of paper.

That helps. Last question is I apologize, I didn't -- if you mentioned this in your opening time I apologize but the other line which I assume is all the payments you received on your IP was a bit I above what I was looking for. On a going forward basis is that kind of run rate now for you guys the 1.4 million or was there a bit of a blip there in the quarter?

No, there was a bit of a blip in the first quarter. That would normally be about 700,000.

So that's sort of the number we should be thinking of going forward?

Yes.

Okay, thank you.

And there are no further questions at this time. I would like to turn the conference back to Mr. Frank O'Brien for closing remarks.

Okay. Well, thank you all for joining us, and we'll talk again at the end of the second quarter. Operator, could you give them the replay information, please?

Absolutely. For replay information, ladies and gentlemen, the number you're going to want to call is 888-286-8010. And for international callers, that's 617-801-6888. Your replay passcode is going to be 28448132. Again, the replay number will be 888-286-8010. And for those calling internationally the number is 617-801-6888, with replay passcode being 28448132. Ladies and gentlemen, this does conclude your conference. Have a great day.