ICU Medical Inc (ICUI) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ICU medical, Inc. 2005 third quarter earnings conference call. My name is Letitia [PH] and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes. I would like to turn the call over to Dr. Lopez, Chief Executive Officer. Please proceed.

Good afternoon. Thank you for joining us for our review of IC Medical's results for the third quarter and nine months ending September 30, 2005. I am Dr. Lopez, Chairman and President of IC Medical. And with me today is Frank O'Brien, our CFO. On today's call, I will provide an overview of our operation results and Frank will provide detailed financial information for the third quarter and the nine months ending September 30. I will wrap up with our prepared remarks with an update on targets for the remainder of the year and a discussion of current business trends before we go to the Q-and-A.

As always, we will limit the length of the call to about 45 minutes. Before we begin, in the event that we touch on forward-looking statements for 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 a representation of 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 more detailed information on the risks that have a direct bearing on our operating results, performance, and financial condition.

I am pleased to report such a strong third quarter with revenue and earnings per share significantly ahead of expectations. But before I get into that, let me give you some insight on where we expect to be next year. We see good sustainable growth out at least several years. As you know, we usually wait until after the fourth quarter to give guidance for the following year. But we have developed a very stable, growing, diversified business which is becoming more predictable. Because of that, we are comfortable in providing guidance for 2006 at this time.

For 2005, we expect revenue of approximately 158 to 160 million, and per share earnings of $1.27 to $1.30. We see a continuation of good, sustainable growth through 2006 and 2007. For 2006, we see a very good year with revenue targets in the range of 176 million to 180 million and earnings per share in the range of $1.46 to $1.49. 2006 does not include any new products.

These 2006 numbers do not include any upside from new products which we expect to fully launch during the year. We also see a very good year for 2007 and we will have more to say about 2007 at a later date. We will cover this in more detail later on in the call. Now back to our historical results for the third quarter of '05. All of our sales channels performed very well.

We improved gross margins and operating margins in the third quarter and continued to position our Company for long-term sustainable revenue and earnings growth. The longer term sales channel insight we are receiving on our core product line continues to improve and our business model of low-cost custom manufacturing provides us the ability to drive growth and profitability organically and through acquisitions. To highlight a few of the financial and operational aspects of third quarter, that we are excited about, we reported a 183% increase in revenue to $46.5 million compared to $16.5 million the same period last year.

Approximately $16.6 million of the increase was attributed to product sales from our recently acquired manufacturing facility in Salt Lake City. Gross margins and operating margins for existing business and the newly acquired Salt Lake City business improved, and this is reflected in our strong earnings for the quarter. Salt Lake City operations are moving in the right direction and doing quite well.

Cash flow for operations was $12 million for the quarter and our cash position at the end of the quarter was approximately $78 million with the portion of debt. Demand for innovative CLAVE product remains strong and our custom I.V. systems products continues to grow in all of our channels. Business with Hospira was very strong in the third quarter. We also continue to expand our international sales and distribution. For the quarter international sales grew approximately 108%.

The transition plans for a newly acquired Salt Lake City plant are ahead of schedule and we continue to be pleased with the progress and outlook for these critical product lines. We expect to greatly benefit from the avid diversification this acquisition brings our Company, and the increased revenue [inaudible] we will receive over the long-term by lowering cost associated with the manufacture of these lines and increase overall market penetration with more critical care custom products.

Before I get into greater detail about the current business trend, I will turn the conversation over to Frank to discuss the numbers in more detail.

Okay, thanks, Doctor. As Dr. Lopez mentioned, revenue for the third quarter was $46.5 million. This represents a 183% increase from the $16.5 recorded in the same period last year and is better than expectations. The income for the quarter was $5.8 million versus net loss of $1 million in third quarter of 2004, which on a diluted earnings per share basis equates to $0.38 in the third quarter of '05 versus a loss of $0.08 in the third quarter of '04. For the nine-month period, revenue was $114.3 million versus $60.4 million last year. Net income improved 130% to $15 million versus $6.5 million in 2004, an EPS was $1.00 for the first nine months versus $0.43 for the first nine months of 2004.

Some detail to help you understand these numbers. The $46.5million revenue number for the quarter includes $16.6 million from our newly acquired Salt Lake City plant. This is the first full quarter since we bought it on May 1, 2005. Without that revenue on what I would refer to as our legacy business was $29.9 million. This $29.9 million is up $13.4 million, or 81% from the third quarter of 2004, and is the best third quarter ever for the Company's legacy business.

The normal seasonal downturn in the third quarter had very little effect, if any, this year. The $114.3 million revenue number for the first nine months of 2005 includes $30.2 million for the five months we had the Salt Lake City plant. Without that revenue, for our legacy business was $84.1 million, up $23.7 million, or 39% from last year. That $84.1 million for the first three quarters of 2005 is the best first three quarters of any year of our legacy business, and is ahead of where we were for the first three quarters of 2003, which as you may recall was a very strong revenue year.

During the third quarter, our product revenue mix continued to show more diversity, reflecting the revenue generated in Salt Lake City. CLAVE products, excluding custom I.V. systems, with 37% of total revenue; custom products, which is CLAVE and non-CLAVE, and including critical care custom, was 27%. Critical care, excluding custom products, was 23%; Punctur-Guard was 2%; CLC2000 product line was 3%; other products 7%; and other non-product revenue was 1%. Salt Lake City products in total was 36% of revenue.

During the same period last year, CLAVE products, excluding custom I.V. systems, was 47% of revenue, and custom I.V. systems were 39%. So we have a fair amount of diversity here. Custom products performed very well. The legacy custom business had revenues of $8.7 million for the quarter as compared with $6.4 million for the third quarter last year, or a 36% increase. For the nine months, the numbers were $23.4 million, up from the $20 million number last year.

There are many custom products in the critical care product line manufactured in Salt Lake City. Those sales were $3.7 million for the third quarter and $6.9 million for the five months we were producing in 2005. So our total custom product sales were $12.4 million for the quarter, and $30.3 million year-to-date.

CLAVE sales were the strongest performer for the quarter as demand for products, particularly from Hospira, continued to improve. CLAVE sales were $17.4 million in the third quarter. CLAVE and custom I.V. sets, including a CLAVE, were $23.9 million for the quarter versus $12.1 million in the third quarter of 2004. By the way, all the numbers we are covering as usual will be available on our website before this call is over.

CLC sales were $1.4 million for the quarter, up 151% from the $568,000 in the third quarter of 2005. Sales were up in all channels, with the largest increase being sales to Hospira. Overall, all sales channels showed improvement. Sales to OEMs were $36.4 million in the third quarter of '05, up from the depressed level of $9.2 million in 2004. Hospira accounted for $35.7 million of the OEM sales in the third quarter of 2005.

For the first nine months of 2005, sales to OEMs were $84.1 million, up from the $34.5 million in 2004. Hospira accounted for $82.6 million in the first nine months of '05 including Salt Lake City product of $30.2 million. And Hospira was $33.3 million in 2004.

Domestic distributors accounted for $6.7 million of revenue in the third quarter of '05 versus $5.1 million in the third quarter of 2004. International sales for the quarter increased approximately 108% to $3.3 million, from the $1.6 million in the same period last year. This increase was due to increased penetration in Europe, Latin America, Asia and South Africa. Our gross margin on product sales was about 41%, which compares to 37% in the same period last year, and 39% in the second quarter of 2005.

The gross margins for our legacy product lines, not including the Salt Lake City facility, improved to 53%, from 51% in the second quarter. The majority of the improvement was due to higher plant utilization. We believe our gross margins on legacy products will settle into range of 53% to 55% for the next several years. Gross margins at our Salt Lake City facility improved to 23%, from 15% in the second quarter of this year. We are obviously very early in the process of improving margins at this facility, but we are very encouraged by the improvements.

SG&A expenses were $9.6 million, which is up approximately 42% compared to the same period last year. This increase was primarily due to an increase in patent litigation expenses, sales and marketing costs for both domestic and international locations, including our new sales force for critical care products and increased administrative costs, including the administrative costs that came on through the Salt Lake City plant.

As percent of revenue, SG&A was 21% in the third quarter, down from 41% in the same period last year due to an increase in sales. Our research and development expenses were $1.4 million in the third quarter of 2005, compared to $0.5 million last year, excluding the $1.2 million of in process R&D write off in 2004, which actually brought the third quarter '04 expense to $1.7 million. We will continue to invest in our evolutionary and revolutionary next generation products, and this will increase in the fourth quarter and into 2006.

Our balance sheet continues to be very strong. We entered the quarter with $78.1 million in cash and liquid investments, even after the acquisition of Salt Lake City facility in the second quarter. We expect our capital expenditures for the remainder of 2005 to be approximately $4.6 million, bringing our total for the year to approximately $8 million.

Receivables at the end of the third quarter decreased to $25.7 million, from the $26.8 million at the end of June 2005. Our DSOs decreased 10 days to 51, compared to 61 at June 30, 2005. We expect receivables and day sales outstanding to continue to improve during the fourth quarter. We also experienced a drop in our inventory levels, which ended the quarter at $13.5 million, compared to $16.2 million at the end of the second quarter, and $8.4 million at the end of 2004. Of the $13.5million, though, over $7 million of this was related to inventory from Salt Lake City.

We continue to strike a good balance between minimizing inventory levels and having enough to meet production needs. We do expect to build a safety stock of CLAVE products in preparation for the transfer of production to Salt Lake City and this will impact the fourth quarter. To date we have not had any -- today we have only minor supply disruptions because of the tragic hurricane damage in the southeast. There have been some price increases and we expect more, but we expect them all to be manageable.

Concerning cash flow, our operating cash flow was $12.1 million for the quarter, and $19.5 million for the first nine months of 2005. Doc mentioned our revenue earnings targets earlier in the call. For 2005, the increase in targeted revenue is $258 million to $260 million. This is significantly higher than the earlier targets. Substantially, all of this increase from the earlier number is in our legacy business. This leaves fourth quarter revenue at $44 million to $46 million, slightly lower than the third quarter.

We did not experience the expected seasonal softness of the third quarter, but we currently expect see some of it in the fourth quarter. We expect gross margins to be at the same, or slightly better level in the fourth quarter, as compared with the third quarter, and operating expenses to be about 26% to 28% of revenue in the fourth quarter.

In 2006, we will have Salt Lake City products for the full year versus eight months of 2005. That, plus growth in our legacy business, leads us to target revenues in the range of $176 million to $180 million. Gross margin is estimated to be approximately 43% to 45% of revenue. Operating expenses are estimated between 26% to 28% of revenue, and approximately 5 percentage points of that, 26% to 28% with the R&D.

Investment income should increase and the tax rate will return to about 38%. Of course, none of this includes the effect of any potential acquisitions and we have conservatively included virtually nothing for new products. Now I would like to turn the call back over to Dr. Lopez to discuss ongoing business trends and the remaining outlook for '05.

Thanks, Frank. Let's take a moment and go back over these numbers. The quarter operating cash flow $12.3 million. Same quarter last year $2 million.

Free cash flow $11.3 million. Last year 565,000. Cash and investments $78 million versus $81.5 million prior to the acquisition. CapEx total 946,000. CapEx maintenance 946. Gross margin product percentage, 41%. Last year, 37%. Gross margin total percentage, 41%, as opposed to 40% last year.

SG&A as a percent of revenue 21% versus 41%. Operating expenses of percent of revenue 24% versus 52%. Operating income percent, 18% versus a minus 12%. Net income percent of revenue, 12% versus a minus 6%.

Income tax rate 35.2% versus 37.5% last year. Accounts receivable $25.7 million, last year 14.4. Last quarter $26.8 million. Total inventory 17.2 million versus 10.1 million. Second quarter of '05 19.7 million. Finished good turns, 44 versus nine last year.

DSI is 63 versus 95. Now let's break down the products by sales by product group. Custom sets are 3.7 million, up from $3 million last year. Custom total 12.3 million versus 6.3 million. CLAVE and custom with CLAVE, 23.9, almost 24 million versus 12.1 million. CLAVE only 17.3 million versus 7.7 million. Punctur-Guard 918,000 versus 449,000 last year.

Critical care Salt Lake City, 16.5 million. Sales by Hospira, CLAVE 13.8 million versus 5.3 million. CLAVE and custom with CLAVE 16.7 million versus 7.5 million a year ago. Sales by channel, Hospira, 15.4 million versus 5.6 million last year. Royalty 403,000 versus 574,000 last year. [Inaudible] 3.7 versus 3.1.

Distributors domestic 6.7 this year, 50 last year. International distributors 2 million versus 1 million. Distributors in Europe 1.3 million versus 582,000. Critical care 16.5 million.

We are very excited about our revenue and earnings results for the first nine months of the year. And the growth in our business we expect going forward. As we look into the fourth quarter of '05, and the upcoming year in '06, and out into '07, we see good sustainable growth in earnings and cash flow. We believe our CLAVE and custom CLAVE business will continue to expand for years to come in the domestic and international markets.

We will use the strong cash flow from our core products to improve efficiencies in our low-cost custom manufacturing processes, and to create the next generation of custom medical devices, either organically, or through acquisitions. Let me talk for a minute about our strategy for the Salt Lake City facility. This is an exciting opportunity for us. Keep in mind that we just bought this facility into our Company about five months ago, and we believe it will take us at least 18 months to two years to begin to achieve the most of the synergies and efficiencies that we believe we can expect.

We have accomplished a lot already and we can expect to see a steady stream of improvements over this transition period. We have also begun to evaluate and implement some additional cost saving initiatives to improve the gross margins. As Frank mentioned, our gross margins at Salt Lake City grew from 15% during the second quarter to 23% in the third quarter. In addition, we have hired new sales people to work with Hospira in critical care products in order to expand the reach of those products.

We see success in Salt Lake City coming from four key areas. One, customization. Establish a competitive advantage by being the best at meeting customer's needs. Two, order fulfillment. Three, cost savings. Four, new products. One of the hidden opportunities we uncovered in our review of the Salt Lake City plant was the ability to move all of our high end manufacturing from San Clemente, California to Salt Lake City. This will create future cost savings for us due to the lower cost of manufacturing as we add the two plants together and take advantage of Salt Lake's skilled work force and greater fixed overhead absorption.

We continue to work on internal innovative new products and to actively look for companies or product lines to acquire in order to diversify our product offerings and utilize our manufacturing expertise; more product lines that are not reaching their full potential. We have several products that we will be moving into full scale production in the beginning of 2006. Initial feedback on our controlled launch of the TEGO has been very positive. The addressable U.S. market side is approximately 40 million dialysis therapy alone. We are ramping up production as we speak.

Our international sales also continue to be an area of focus for ICU. We believe that one of our largest opportunities for market expansion is abroad and we continue to make inroads with international distributors and to increase our sales. In the first nine months of '05, international sales represented approximately 8% of the sales and grew 41% compared to the same period last year.

Our core product line, CLAVE and custom CLAVE have strong growth opportunities and we have not even scratched the surface of this opportunity. In summary, we just reported a strong quarter and are pleased with our prospects for the remainder of the year and beyond.

We continue to see overall growth for our core CLAVE products and we are the market leader in the growing custom product market, and we were moving into a large and relatively untapped international market with the leading marketer of medical devices, Hospira. We will use our strong balance sheet and cash flow to continue to build our product pipeline and increase our distribution of existing products. At the same time, we believe we can improve operating efficiencies in 2006. Now I'd like to turn the call open to questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Bruce Cranna with Leerink Swann. Please proceed.

Good afternoon, it's Bruce Cranna at Leerink Swann. How are you guys doing?

Good.

This is a big revenue number. Can you just quickly walk through a couple things with us, and earnings, as well. I'm a little bit confused. The guidance on the last quarter, it looks like this is a much bigger revenue number. Can you just quickly discuss what happened vis-a-vis your prior expectations? Was it just stronger than expected, sell through at Hospira. Do you think they did a little stocking, was there some seasonality you'd planned for that didn't appear in the quarter?

Bruce, this is Doc. Clearly it was sales in all channels were up. Not just Hospira but every distribution channel was up; distributors, SetSource, Hospira, international, everything was up. It was across board. It was a little unexpected somewhat, we didn't expect a strong quarter. And we also were more conservative in our legal expenses. We, our legal expenses are high, but we were little more conservative than we should have been. But pretty much all sales channels were up, pretty much across the board. Nothing was down.

I guess that was my next --

Something the distributors are up, everything.

So I guess that was my next question, too, Doc, was on the SG&A line you had kind of, I think, foreshadowed a bigger number. When we think about modeling going forward, is this sort of level of SG&A , as a percent of sales, say 21% or something, is the way we should think about your business model, or is that going to turn around?

Let me turn that to Frank. I would go a little higher on the SG&A.

I think what we said, Bruce, on the SG&A is a higher number, I'm looking for what I said on the call? I think 26 to 28% of revenue.

And so you think that is what it would revert to in Q4?

Yes.

Okay. So that's, kind of leads me to my next question. If I run the numbers on the guidance it looks like Q4, as you mentioned, Frank, is sort of 45ish, or so, million on the sales line. And then backing into the earnings looks like $0.30, or so, which would imply a different piece of margin on the quarter. So what would give or what is changing there would be the SG&A expense line between Q3 and Q4?

Yes, we are looking for that to be up a bit and the gross margin might be down a little bit in terms of percentage. And R&D will be higher, as well.

Okay. And just a couple of follow-ons, if I could. Just one.

Anything you want, Bruce.

I beg your pardon?

Anything you want.

We have all afternoon, right? Just on the Salt Lake City side, can you give us some sense as to what has been moved physically between San Clemente and Salt Lake City? Whether or not your still doing head count reductions there in Salt Lake? And kind of in general, are there milestones we should be looking for in terms of your transition between those two facilities?

Bruce, we moved some production from Salt Lake to Mexico. The manual assembly and that will be more or less of a ongoing process for the entire period of transition/integration. We have not yet moved any machinery from San Clemente to Salt Lake and that will likely not occur until next year. There is a fair of bit of work we need to do in terms of rearranging Salt Lake just to make room for everything here in San Clemente. But it will start no later than the second quarter of '06. We are hoping to have everything done by the spring of '07. But you will see a constant stream of improvement over this period of time. Hard to point to any specific benchmarks. Obviously, the major one would be when we're out of San Clemente. But moving the manual assembly is going to be an ongoing process from Salt Lake City to Mexico.

Bruce, one other thing, our plans, we are ahead of plan in terms of where we are with the numbers. As you can see, it's contributing to our numbers already. We didn't expect to -- our efficiencies to pick up so quickly. Part of it is the head count reduction, but a lot of it has to do with the reduction in transaction cost. As we start moving product, even the transaction cost in Salt Lake City because as we move products, our transaction costs are so low compared to what they were before, where there would be very high transaction costs, it's very low now. You will see a continually shift of profitability and the margin should continue to go northward for at least two years, 18 months to two years.

Doctor, are you where you want to be in terms of head count now?

Almost. But what we found there, what we found there is that some very, very good people. In fact, I had a molding of this guy named Steve Anderson, he is in charge of all of molding but we acquired them. We just found some very, very good people there. Very good managers and very good people, very good workers there. So the combination of work force is very efficient. What they required is to bring our systems in place. Put our low cost transaction systems in place and that's made a huge difference. We are way ahead of plan. Integration is going extremely well. It couldn't go any better than it is. We will continue to make more and more money. If you look at our cash flow, I'm at $78 million, and a year ago I was $81 million after a $32 million acquisition, which means that we are going very, very well for us. We are very happy with it.

Bruce, on the head count, the indirects, we've made a deep cut on it -- more cutting on the direct side.

Okay, thanks, Frank. And then just quickly in terms of housekeeping, I am a bit confused on the custom number in the quarter. You said the total was 12.3, or 5 million on custom sales. Is that right?

Product group? Total custom was 12.3 versus 6.3 a year ago.

And how am I think being that? What am I missing? That type of gap? I guess I had it at 6 million.

Bruce, there's another 3.7 of critical care custom on top of that.

That's what I'm missing. So I guess apples to apples.

Remember why we acquired Salt Lake City. We acquired Salt Lake City because we believed we could convert everything to custom. Already one-third of the business, one-third of the three different businesses, one-third of one of the business was custom, and not by choice because the margins were probably negative on the custom business at the time. And two-thirds of another business, another part of the business was custom. Again, those margins were very narrow, if not non-existent. We see that as a tremendous opportunity to switch everything over to custom and create a barrier to entry that nobody can compete with us because nobody wants custom business because it's not a, normally it's not a profitable business by the time you do all of the upfront cost to make one box of a set, of a set and the upfront costs are just too high. That's the business that we want. Our transaction costs are very low, very, very low. All of this is custom business. You will see our custom number climb and continue to climb each year.

Just trying to reconcile that number.

You get lost in the cuts because it's all going to be custom. It's, trying to separate it from what it was before, and what it was in the future. It's all going to be custom. That's why we bought the business. We see a tremendous opportunity here. And remember, the barrier to entry is nobody wants to make one box of 50 because nobody can make money at it. The only Company I know in the world that can make money at it is ICU and we are probably three times bigger than the next biggest competitor and the next one after that, five times, six times bigger. Even though we were small still, we are not huge, but still a tremendous opportunity and that is why we have that Salt Lake City acquisition in place.

Okay, thanks, guys.

Your next question comes from the line of Mitra Ramgopal with Sidoti.

Yes, good afternoon, guys. Just a few questions. In terms of looking out to '06 and the guidance you provided, I think you mentioned the third quarter was historically the best ever. Do you see stabilization for '06 and beyond in terms of your quarterly historicals?

We still expect to see some seasonal fluctuation and that's why we are conservative with the fourth quarter because we didn't see in the third quarter, and we should see it in the fourth quarter, especially given the weather and conditions and such. We expect that seasonality. It's been there forever. If you remember, that slide we showed, the spaghetti slide. So we just think it will happen in the fourth quarter and not the third quarter.

And then into next year the third quarter being weak again --

We will bet on the third quarter. It could occur in the second quarter, it could occur in the fourth quarter. Year-to-year is how you measure this Company. Not by the quarter.

In terms of guidance you provide, does that include stock options expense?

Yes.

How much are we talking roughly?

Very little.

We don't give stock options any more. They stopped. They made it intolerable.

Final question, I'm just off a couple million in terms of the Salt Lake business. On the critical care line it was 23% of the revenue for the quarter. And another 8% was included in custom. So about 31% of the revenue in the quarter was Salt Lake? Is that correct?

The quarter, all in Salt Lake, was 36%.

And I think in the table it says critical care 23. And in custom --

Oh, Mitra, there is some stuff down below in other products that is 7%.

Okay. That would have the remainder. That's fine. Thanks.

Okay.

Your next question comes from the line of Sean McKenna with Global Crown Capital. Please proceed.

Hi, guys. Just a couple of questions about capacity. What capacity are you guys at now in Salt Lake? Hello?

Yes, we were here.

Plenty of excess capacity. Plenty of space, plenty of excess capacity. We have -- in fact, we will be selling some of our machines here when we move to Salt Lake City because the machines [inaudible] this capacity is double the business.

Do you think you guys are -- are you running in the 90s and how exactly would the moves affect that if you are moving stuff to that facility?

The move won't make any impact on us, whatsoever. We have never had a capacity issue, ever. Normally, it's my philosophy to keep an excess capacity of 40%, as a rule of thumb, in molding and machines and equipment. Just to handle upside and give us time to order new equipment and such. But we usually keep a 40%, probably higher than that now. Remember, two things that are affecting our earnings right now. The earnings would be higher.

One is we are operating two full facilities right now. That will change when we close down San Clemente, and we will only be operating Salt Lake City and we have plenty of capacity. It's a huge facility. And the second thing is our legal expenses are very high. If you back out our legal expenses you could probably add around $0.20 for this year, year-to-date. And legal expenses don't last forever. They eventually do go away. Those are the two big factors on our earnings, otherwise we would report higher earnings.

Okay, great, and just a related question, you had mentioned moving manual assembly to Mexico. How much -- is that correct?

Go ahead.

How much of, sort of, costs is that? Does that represent? Is it half? I mean, give us an idea.

The rule of thumb is you have to really get into our business, which nobody really seems to understand. The custom set business is very expensive to make one box of 50. It's easy to spread that upfront cost over 100,000 units but very hard over 50. What we do is we -- our software and our patented processes here at the manufacturer allow us to make that transaction cost virtually go away. It doesn't cost us anything, anything different. Every time we move something we have two advantages. One, the transaction costs which goes from maximum at Salt Lake City to negligible, and, in Mexico, and we get the labor advantages. The labor advantages alone are about one-third. Fully burdened labor is about one-third the same of the rate. And most of the cost of this product, the majority of it, or high percentage, maybe 45% of it is in the labor. Somebody says it could be more than that, 55% to 60% is possible.

That's fantastic.

It's about a third. Figure how much revenue we are doing in Salt Lake City. Move it down to Mexico and you can calculate the cost savings right there. We've only moved a small amount. We will move as we talk. Every day we are moving more and more sets. That's why we expect our margins to continue to climb.

So about 45% is the manual labor and that's the part you are moving to Mexico? Did I get that correctly?

Just in the product line.

Yes, roughly, just to get an idea.

-- 40-45%, somewhere in there.

Great. Thanks a lot. I will get back in the queue.

You're welcome.

Again, ladies and gentlemen, to ask a question, please press star-one on your touchtone telephone. Your next question comes from the line of Dan Owczarski with Belmont Harbor Capital. Please proceed.

Yes, good afternoon, and congratulations. Outstanding quarter.

Thanks, Dan, how are you doing?

Good.

How about the White Sox?

Well, tickets went on sale. You won't believe the prices for them.

I can imagine.

You talked about adding sales head count. It was on the custom side or the custom business. Is that for the critical care, or for the legacy?

Yes it is. Critical care.

It's all critical care. It's all new. Just started them and we will continue to expand that sales force. That's where a lot of the SG&A dollars are going. We haven't got a return on that yet, but we will.

Have you seen any of that, could you attribute any of the strength in that critical care business to that head count? Or has Hospira been adding, as well?

No, it takes about, to ramp up sales, and ramp up sales force like that in a new one it takes about six months to get them going. We won't see the impact of that. We will continually add people, but we won't see an impact for quite awhile.

But has Hospira --

Oh, Hospira has ramped up. Instead of [inaudible] their sales force, which they didn't do before, we hear, they have a great leader, it's Pat Moran, so they will do very well.

Where are you seeing the international growth coming from, either geographically, or by product line, and have you done anything even in the Pacific rim yet?

We continue to grow steady in Japan and that area there and we are doing quite well. But we look at Europe as being a big opportunity for us. Remember, that Europe is already custom because they do their bids on tenders. If you can make a set and tell them within 24 hours redesign the set, most competitors can't respond that quickly and even come back with a price, let alone a price and a guaranteed delivery date within three days. Look at our turns.

Look at our finished good turns of 44, then look at any company in the medical field and I challenge you to find one company who can turn their inventory even a fraction of ours just so they can come close to us. There is no such thing. And that kind of advantage with our plant in Italy and such is going to be a huge advantage. That's why you see our European numbers going up so healthily. They are so healthy right now.

I would imagine finished good turns for a good company would be six, would be very good. Ours were 44 for the quarter. I think we aren't there. I think we can take that number way up. I think, I'm not happy with that number.

What about, it sounds like there is still some opportunity to grow, or to penetrate further into Hospira accounts domestically.

Absolutely. Absolutely.

Do you have any kind of penetration rate or how we should think about that?

We just gave the number recently. I can't remember what the number was.

We are, more or less, about 75% penetrated in the U.S. It's been going off about 10 percentage points a year, Dan, since 1997. And it will continue to go up, more or less, at that rate until we get the saturation.

That's CLAVE.

Custom, sky is the limit.

That's our guess.

And then I don't know if you mentioned this but did you buy back any shares during the quarter?

No we didn't.

Thanks, great job.

That was your final question. I would like to turn the call back over to Dr. Lopez for final remarks.

Thank you very much for joining us on this conference call. We will see you again in January, or our next conference call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.