ICU Medical Inc (ICUI) 2005 Q4 法說會逐字稿

Ladies and gentlemen, welcome to your fourth quarter 2005 ICU Medical earnings conference call. My name is Liz and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will, however, be facilitating a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]. I would now like to turn the call over to your host for today's presentation, Dr. Lopez. Please go ahead, sir.

Good afternoon. Thank you for joining us for our review of ICU Medical's results for the fourth quarter and year ending December 31, 2005. I am Dr. Lopez, Chairman and President of ICU Medical. And today with me 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 fourth quarter and year ending December 31st. I will wrap-up with our prepared remarks with an update on our 2006 targets and in 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, in the event that we touch on forward-looking statements during 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.

Before we get into the specifics of '05 results, let me preface my remarks to point out two things you will hear several times today. First, we are ending what we feel is a period of sustainable growth in 2006 and beyond. Second, things are going very well with the plant we purchased from Hospira in Salt Lake City last May. Now, for 2005 I am very proud of our fourth quarter and year ending December 31, 2005 results which exceeded our expectations. You might say it was a boomer year. Our focus for 2005 and at the beginning of 2006 had been on putting the pieces in place that would enable us to meet our strategic long-term goals by expanding our sales force domestically and internationally, increasing our R&D investment and continuing to work to lower our already very attractive manufacturing costs. We added a total of 34 sales people in 2005, mostly in the third and fourth quarters which will support increased sales in all of our distribution channels. Our core CLAVE product lines continue to deliver strong growth and were up 148% for the fourth quarter and 76% for the year. The profitability of our custom medical products continued to improve as we posted expanded gross and operating margins in both the fourth quarter and full year 2005. We are starting to see initial improvements in our Salt Lake City facility where we see very encouraging long-term opportunities for the Critical Care products. I will discuss this more in a moment.

Fourth quarter revenue was 43.2 million, a 185% increase as compared to 15.2 million in the same period last year and 16.9 million of the increase was attributed to product sales from our Salt Lake City facility. For the year, we generated revenues of $157.5 million, up from 75.6 million for 2004 and approximately 46.7 million of which was attributed to Salt Lake City. The Salt Lake City planned integration is going very well and we can believe it will continue to get better as we lower the cost associated with manufacturing of our Critical Care product lines and increase overall market penetration with more Critical Care custom products. Already in 2005 it added about 24% per share to our bottom line. We're still in the early preparation stages of moving our high-end manufacturing from San Clemente to the Salt Lake City plant. But we expect to have this step well under way by mid-year. We're looking forward to realizing significant future cost savings as we add the two plants together and take advantage of Salt Lake City's skilled work force and greater fixed overhead absorption. As part of this plan, we have also begun moving certain of our manual assembly for operations in Salt Lake City to Ensenada, Mexico where we can benefit from lower labor costs.

Our cash flow from operations was 7 million for the quarter, and our cash position at the end of the year was approximately 87 million. In fact, we are almost back to our cash position before we bought Hospira Salt Lake City facility in mid-2005 and, of course, we have no debt. Our plans to continue to reinvest our free cash flow into developing new products; mainly, customizable I.V. Therapy products in areas, such as, Oncology, Angiography and Critical Care. We will also continue to improve our manufacturing efficiencies as we look for strategic acquisitions that will complement our existing I.V. and Critical Care lines. We have plenty of manufacturing capacity giving us more than adequate room for growth. We remain excited about 2006 and our prospects for growth based on our strong cash flow, diversified product line, manufacturing and expertise, and excess capacity. We think we have a lot of opportunity for top and bottom line growth as we continue to expand our customizable product base and increase our international distribution channels. Before I get into greater detail about our plans for 2006 and review the guidance we provided in our last call, I would like to turn the call over to Frank to discuss the numbers in more detail.

Okay thanks, Doc. And good afternoon, everybody. Why I have some significant numbers to go through let me focus our participants one statistic that I think is especially meaningful. Our gross margin has shown steady improvement since we bought the Salt Lake City plant. The plant had a very low gross margin when we bought it. The Salt Lake City gross margins have moved from 15% in the second quarter of '05 to 23% in the third quarter and to 27% in the fourth quarter. Our consolidated gross product margins have made similar progress from 39% to 41% to 42%. And we expect continued improvement. Now, we'll go to the results.

As Dr. Lopez mentioned revenue for the fourth quarter was 43.2 million up 185% from 15.2 million in the same period last year. The net income for the quarter was 5.3 million versus a loss of 1.5 million in the fourth quarter of 2004. On an earnings per diluted share basis this amounts to $0.35 in Q4 '05 and a loss of $0.11 in the fourth quarter of '04. As we expected it might occur we experienced some seasonal softness in the quarter after the very strong third quarter, but our overall results were very strong due to the demand for our legacy products and contributions from our new Salt Lake City facility. For the year revenue was 157.5 million versus 75.6 million last year and 47. -- or 46.7 million of this was from Salt Lake City. Even if we exclude Salt Lake revenue was up 46.6% on our Legacy products alone, which is a very exciting turn of events. 2005 net income was 20.3 million, compared to 5 million in '04. On an EPS basis the Company earned $1.35 per share in '05, compared with $0.33 per share in '04.

I am not going to provide the breakdown by product line as a percentage of sales for the year as it doesn't really reflect the contribution from Salt Lake City and it's not a meaningful tool for analysis. However, I am going to provide the mix for the fourth quarter to show how our revenue mix continues to diversify away from solely CLAVE with the addition of the Critical Care line and the strength of our custom products and, of course, I will give the dollar numbers as well. Before I begin, let me remind you that all of the sales numbers we are covering, as well as our condensed financial statements will as usual be available on or website before this call is over.

During the fourth quarter our product revenue mix was as follows: CLAVE products excluding custom I.V. systems were 33% of revenue versus 38% during the fourth quarter of last year. Revenue dollars were 14.3 million for the fourth quarter and 62.5 million for the year. CLAVE and CLAVE Custom I.V. sets were 20.8 million for the quarter and 85.9 million for the year 2005, both up substantially. Custom products, which are CLAVE and non-CLAVE and including Critical Care Custom were 29% of total sales versus 43% for the fourth quarter last year. Critical Care, excluding custom products were 27% of revenues versus nothing last year. Other products and non-product revenue was 11% versus 19% in the fourth quarter of '04. And total Salt Lake City products accounted for 39% of revenue in the fourth quarter of '05.

On a dollar basis, custom products performed very well and grew 90% in the fourth quarter to $12.4 million and 64% for the full year 2005 to $42.6 million. Those numbers include Critical Care Custom products. The Legacy Custom business generated revenues of 8.4 million for the quarter as compared to 6.5 million for the fourth quarter last year. For the entire year Legacy Custom products did 31.8 million up from $25.9 million last year. There are many custom products in the Critical Care product line manufactured in Salt Lake City. Those sales were 3.9 million for the fourth quarter and 10.8 million for the eight months that we were producing in 2005. And we see custom Critical Care products as an excellent opportunity. Overall all sales channels showed improvement with the largest increase by far being sales to Hospira. Sales to Hospira were 32.9 million in the fourth quarter of '05 up from 6.8 million in the fourth quarter of '04 when we were experiencing the tail end of Hospira's inventory issues. For 2005 sales to Hospira were $115 million up from 46.7 million in '04, including Salt Lake City product of 46.7 million in '05. For the year Hospira's sales increased 189%. I would like to note that this will probably be the last quarter that we will highlight the Salt Lake City plant separately given that we are now manufacturing some of the critical care products in Mexico and relocating much of our production in 2006 it will no longer make sense to try to discuss Salt Lake City's activities separately as our Legacy and Salt Lake City production become combined.

As to our distribution channels, the other ones, domestic distributors accounted for 5.8 million of revenue in the fourth quarter and 24.4 million for the year, both up about 9% from the prior year periods. International sales for the quarter increased approximately 52% to 3.9 million from the $2.6 million in the same period last year. For the year international sales improved 45% to $13 million from $9 million in 2004 as we successfully increased market penetration in Europe, Latin America, the Pacific Rim and South Africa. For the fourth quarter our gross margin on product sales was about 42%, which compares to 28% in the same period last year and 41% in the third quarter of '05. The gross margins for our Legacy products included -- not including the Salt Lake City facility were 53% the same as in the third quarter. We expect our gross margins on legacy products will sell into the 53 to 55% range for the next few years. Also we expect our overall gross margin to continue to improve throughout '06 because of [reprovements] in Salt Lake City. Gross margins at our Salt Lake City facility improved to 27% from 23% in the third quarter of this year. We're still in the very early stages of improving margins at this facility, but we are very encouraged by the improvements and look forward to expanding margins as we move our San Clemente manufacturing to Salt Lake City and the manual processes to our lower cost facility in Mexico. But by the way, as to the manual processes we are moving to Mexico, we are looking at maintaining some highly skilled processes in Salt Lake City because we are finding that maybe it's more efficient to maintain them there.

A fourth quarter SG&A expenses were 9.7 million, which is up approximately 32% compared to the same period last year. SG&A expenses were 37% for the year up 40% from 2004. The increase year-over-year was primarily due to higher patent litigations, which were about $6.1 million for the entire year. And as Doc mentioned, we really began ramping up our sales force in the third and fourth quarters, so we have increased sales and marketing costs for both domestic and international locations, including our new sales force for critical care products and a modest increase in administrative costs, including administrative costs that came on with the addition of the Salt Lake City plant. As a percent of revenue SG&A was 23% in the fourth quarter, down from 48% in the same period last year, which was mainly due to an increase of sales. For 2005 SG&A dropped to 23% of sales from 35% of sales in 2004. Our research and development expenses were $1.8 million in the fourth quarter of '05, compared to 0.8 million in the same period last year. Included in the 1.8 million is a write-off of $400,000 of acquired and processed R&D that came from an additional investment in a start-up operation. For the year R&D was up over 100% to 4.8 million from 2.2 million in 2004, and we expect to continue to increase spending in 2006 as we continue to invest in critical care products and next-generation products.

We continue to manage our balance sheet very well. At year end we had cash and investments of 86.7 million and no debt. So we actually had about $6.14 per share in cash and liquid investments. As Doc mentioned we are nearly back to our cash position where we were in the beginning -- prior to spending the $32 million for the Salt Lake City facility and after investing 5.5 million in capital expenditures this year. Other balance sheet numbers receivables at the end of 2005 decreased to 23.6 [million] from 25.7 million at the end of the September quarter. Our DSOs were flat with the third quarter at 51 days and down from 56 days in the same period last year. We expect receivables and DSO to improve throughout 2006. Our inventory levels increased during the fourth quarter as we began to stock pile CLAVE products in preparation for the transfer of production to Salt Lake City as we had anticipated. We ended the quarter with inventory of $15.4 million up from 13.5 million at the end of third quarter and $8.4 million at the end of 2004. Of the 15.4 million over $8 million was related to inventory from Salt Lake City.

Our operating cash flow was $7 million for the quarter and 26.5 million for 2005 positioning us nicely for continued growth in 2006. Doc will give you more detail on 2006 in a moment. But we continue to expect that revenue will be driven by a combination of legacy products and a full year of sales from our Salt Lake City facility. In 2006 we were targeting revenue of 176 to $180 million and gross margin of 46 to 40 -- or 45 to 46%. 2006 operating expenses are estimated to be between 26 and 28% of revenue of which approximately 5 percentage points is for research and development. And our tax rate will return to about 37.5% from 34.5% in 2005. Doc will elaborate on our plans for 2006 in a minute. Of course, none of these numbers include the effect of any potential acquisitions and have conservatively not included upside for new products.

Let me go through a few key numbers. Revenue for '05, 157.5 versus 75.6 million in 2004. Operating cash flow, excluding tax benefit from stock options the quarter was [4.9] million versus 6.6 million last year for the year, 22.2 million versus 23.3 million last year. Free cash flow for the year, 2.1 million versus 18.2 million last year. Operating income 27% in Q4 '05 versus 22% in Q4 '04. For the year 2005 18% versus 8% for the year '04. DSO receivables 51 days at the end of -- for 12/31/05 the same as last quarter, but down from 56 last December. Days sales and inventory 72 at December 31, '05 versus 63 at '04 -- at September 30, '05 reflecting the buildup of CLAVE inventory in preparation for the move, but at the end of '04 we were at 95 days. Finished good turns 49 in the fourth quarter of '05 versus 44 in the third quarter of '05, which is [technical difficulty] nine in the fourth quarter of '04. Cash and investments 86.7 at December 31, '05 versus 78.1 at September 30, '05 and 87.3 at December 31, '04. Now, I will turn the call back over to Dr. Lopez to discuss ongoing business trends in more detail on the outlook for 2006.

Thanks, Frank. Last quarter we mentioned that as our business becomes more stable and more diversified, we solidified our sustainable growth and our business becomes more predictable. I am pleased to say that the guidance we provided on our last call still holds true with good sustainable growth in earnings and cash flow. For 2006 we continued to see a very good year with revenue targets in the range of 176 to $180 million and earnings per share in the range of 146 to 149. We expect the first quarter to represent approximately 23 to 24% of the revenue for the year and 20 to 22% of [technical difficulty] the revenue for 2006. These 2006 numbers do not include any upside for new products and we have several products that we will be moving into full scale production in early 2006. As for new products we launched [SofLaunch,] the TEGO connector in late 2005 and we have experienced very positive feedback. The Orbit 90 Diabetes Infusion set is almost ready and we are in production -- [technical difficulty] we are on production for the integrated white check valve and we'll have a line of oncology I.V. therapy products ready for launch later in 2006. As to critical care there's a lot going on, but we will hold off on discussing anything here until the actual launch.

While we are projecting strong growth topline, the bottom line is growing at a slightly lower pace in 2006 due to a combination of strategic investments, including research and development, manufacturing and sales and marketing, and relocating the San Clemente facility to Salt Lake City. This investment will have a temporary effect on operating margins in 2006, but are necessary as we look into 2007 and beyond at our many different growth opportunities. But we expect the gross margin to actually continue to improve as it did in the third and fourth quarters of '05. As I mentioned earlier, we are moving our high-end manufacturing from San Clemente to Salt Lake City and some of our manual assembly processes to Ensenada in Mexico and the costs associated with this will temporarily impact operating margins. We believe this is strategically a smart move, but we do not expect to realize the full benefits until 2007 and beyond. Apart from this shift from San Clemente to Salt Lake City and Salt Lake City to Mexico we are also looking to expand our operations with a plant in the Far East in order to move closer to our end-users in this area of the world.

We are investing more in research and development in 2006 to fulfill our commitment to sell the leading custom critical care products and next-generation products. In addition, we've invested in sales and marketing hiring approximately 34 new sales people worldwide in '05; mostly late in the third and fourth quarter. So sales and marketing expenses will be higher in '06. The new sales people will be concentrating on selling our TEGO, oncology, and angiography product lines and expanding our domestic and international sales channels. We appreciate the continued willingness of our investors to see us make significant investments in the future. In some respects this may be looked at as the year of the investment and we will firmly believe these investments will pay off many times over in future years.

We continue to see overall growth for our core CLAVE products and we are the market leader in the growing custom product market. We believe that one of our largest opportunities for market expansion is abroad and we continue to make end roads with international distributors and increase our sales. In 2005 the national sales represented approximately 8% of sales and grew 45% from 2004. We expect the international to continue to grow 40% per year year-over-year. While I'm leading this charge with our core CLAVE product line and once we have firmly established our international distribution channels then we plan to drive our custom and new connector business throughout our distribution network. We continue to work with Hospira and expect them to be an important part of our international business.

In summary, we think we're in a really good place. We have a strong balance sheet and cash flow that will enable us to continue to build our product pipeline of next-generation of custom medical devices organically or through acquisitions and increase our distribution of existing products. At the same time we've made end roads and think there is plenty of more opportunity to improve operating efficiencies in our already low-cost custom manufacturing processes. We look forward to driving sustainable and profitable growth and reporting back to you in the coming months. Now, I would like to turn the call open to questions.

[OPERATOR INSTRUCTIONS]. And your first question comes from the line of Dan Owczarski of Belmont Harbor Capital.

Yes, good afternoon, Dr. Lopez and Frank.

Hey, Dan, how are you doing?

Good. Can you explain or remind us how the sales of the critical care products are handled? Because it sounds like you're hiring sales people but are we to believe that Hospira also has a sales staff dedicated to those critical care lines and --?

That is correct.

And then so how --?

Hospira has the dedicated sales force. They use their general line sales force and they've hired a fairly large number of people, and we have -- we amplify that with our direct sales force also which works with the Hospira sales force to sell the product.

Okay. So do they have -- could you give us an idea of like the size of theirs or do they have minimum commitments that they have to dedicate those sales people or how many sales people they have to dedicate to that line?

Well, that's contractual. Frank, do you want to take that?

Yes, Dan, I can tell you we know the number, but it is something that Hospira has asked us to maintain in confidence. It is a significant number though.

It is a much bigger number than we have.

Yes, our sales force is similar to what we do with the rest of our products where we have product specialists in the field working with the actual sales force from Hospira.

Right, they sell the product. We make the sales calls with them. And our guys specialize in having the intimate knowledge or in-depth knowledge on a narrow field and that combination has worked very well in the CLAVE days and certainly in the custom set business that Hospira -- so, it is more of the same, just expanding a working formula. Does that help you?

Yes, that does. That helps. And as far as this critical care -- the relationship just from a global perspective, are you receiving -- I know that you get a big kick from operational efficiencies and squeezing cost out of the manufacturing. Are you getting dollar for dollar like from here on out or is there a certain gross margin where Hospira starts getting some of the benefit of your efficiencies?

We're sharing a small piece of the benefit with them initially and the sharing of the savings will go to a more even basis as time goes on. Eventually we'll probably get to a fixed transfer price mechanism, but that will be when we get most of the cost out.

Okay. And then as far as Hospira I think you've shared some numbers in the past as far as Hospira's penetration in domestic accounts with the CLAVE. Could you -- do you have any numbers to share there, where they're at?

Yes, they're roughly three quarters, maybe slightly higher than that penetrated within their existing accounts. So -- and they also see a significant possibility of better penetration of CLAVE even within their existing accounts. So we've got a ways to go.

Okay. And then as far as just to switch to the TEGO, I mean is the TEGO business going to be incremental or should we think of that as replacing some of the CLAVE business going, [multiple speakers] a year or two out?

No, that's a totally new market, no competitors, wide open, and it will be incremental.

Okay. Thank you.

[multiple speakers]. It's still early in that product life cycle though. We need to make them by the millions to have great knowledge about how the product is going to do. It's still early but we're -- early results are very positive.

Great. That's all I had. Thank you.

Okay, thanks.

And your next question comes from the line of Mitra Ramgopal of Sidoti.

Yes, hi. Good afternoon, guys. Just a few questions. When will the move from San Clemente to Salt Lake be completed, roughly?

July, August, it depends.

So by the second half?

I think it is safe to say September. We would like to get it done faster. But it's probably going to take awhile.

Okay. And what is roughly CapEx for 2006?

Frank, give him that number.

Do we have it? I don't think we've given it. It's roughly -- it is going to be north of 12, Mitra.

Okay. So much higher this year?

Yes, some of that stuff that we approved in '05 but the stuff didn't fall in '05 it's falling in '06. We had a big spike in activity in the fourth quarter but a lot of that didn't get finished.

Okay. And in terms of the gross margin I know you talked for '06 it will be about 45, 46%, I believe. I don't know if you can help us in terms of where you see the Salt Lake gross margin going given there is about 27% in the fourth quarter. Where do you see that say by the end of '06?

Significantly better, Mitra, but we are losing our -- we're losing our ability to identify that separately, which is why we're not going to be doing it in the future.

Okay. And in terms of -- I don't know if you can give us an update on the lawyer's medication costs we might see in '06?

I don't want to get specific on that, but they are in our numbers.

Okay, they are in the guidance?

We are pretty -- we pretty much gave you a number, an existing number for -- we gave you 6.1 for '05.

Okay.

So you can probably plug that number back in.

Okay. And then in terms of, I guess maybe when you release the interim we will get a breakout with regards to say how Punctur-Guard is doing or --?

It was over 3% of revenue in '05, Mitra. [Laughter].

Okay, well, the reason I was asking I mean given the -- this is really the last acquisition you made and I know you sort of talked of acquisitions going forward. Given the experience with Punctur-Guard and how that worked out, are you keen on the acquisition front with regard to doing something?

Let me answer that, Mitra. This is Doc. Punctur-Guard taught us quite a bit. It taught us that we were very good in making I.V. sets, but we're not as good at making needles and also taking on a funnel approach to a large competitor is not what we want to do. So we're going to -- the acquisitions we're going to do is like the critical care acquisition. This acquisition is going extremely well. Plugging these I.V. sets, custom I.V. sets into our model doesn't cost us anything, and the leverage we get is tremendous in terms of revenue. So we're going to stick with that model, and what we're going to do is we're going to pick up custom I.V. companies. There is many, many mom and pop custom I.V. sets. We're probably right now five times larger than the nearest competitor.

So we're going to roll-up all of those and do the business that we know how to do well, which is make custom I.V. sets. We'll roll those up in Europe, there is some promising companies -- and also on oncology. Oncology we believe will be all custom and we're going to be focusing on that narrow segment of the market acquiring oncology companies or niche proprietary products that can be made into a system into an I.V. system that we can sale the system. So that's where we're going to stick the acquisitions to stick with what we know how to do very well. And I think Salt Lake City is the perfect example of how -- what we've done we've turned -- in less than two quarters we've turned a very unprofitable plan into a very profitable plan.

Okay. Thanks.

Okay, Mitra.

[OPERATOR INSTRUCTIONS]. And your next question comes from the line of Bruce Cranna.

Hi, guys, can you hear me?

Yes, just fine, Bruce. How are you doing?

Oh, good, thanks. I had some technical problems there. Again a couple things. First on the CLAVE, I guess by that I mean to the extent you can breakout the CLAVE to HSP. I am just curious, Frank, you mentioned I think seasonal weakness in this quarter, which historically I think of you guys as being maybe a little lighter in Q3 and last quarter you had a, obviously, a very strong quarter. So was there some seasonality in this quarter that maybe was a bit different than you had seen in years past and, if not, or if -- I guess if there was, did you fill in CLAVE more than any other product line or can you give us some color there?

Nothing specific on it Bruce. Coming out of the third quarter we had thought that the third quarter was unusually strong and we might have a bit of a payback in the fourth quarter and we did. But it wasn't -- I mean -- dealing with it relatively small -- I mean just generally the Hospira CLAVE number was down a little bit, but it wasn't much. And the distributor numbers were down a little bit, again, not much.

The reality is, Bruce, it was just a strong third quarter. A very strong third quarter.

It was.

And it moves around. Sometimes it is a four -- most of the time it is a fourth quarter, but it can shift one quarter simply by the market, the weather, a lot of things can shift it.

We're dealing with a week or two worth of sales here. So it is not too huge.

Yes, maybe what? two weeks of sales, a week and a half?

No, net range. No more than that.

Yes, some are between one and two weeks of sales can shift from one to the other. So that's all it is.

Okay. And then I just -- I want to go down the road here on the sales force ads because I am not sure I quite understand it. So the 35 individuals you've hired there, I guess from outside of ICU/HSP they came in from The Street, if you will?

Yes, we hired -- they didn't come from The Street. We hired them from our more experienced competitive partner. They came from different -- Boston Scientific, Merit. They've only -- they've come with a pretty extensive background of experience with multiple companies. But we've basically I think, not quite but must be approaching doubling the size of our sales force. Just about doubling it.

Almost, yes.

Yes, almost doubling it. So as I said in 2006 this is the year with this tremendous cash flow and the tremendous profitability, this is the year to invest for the future. So by doubling the sale forces we think and having these new product lines coming out, especially, the -- what we're seeing in customization and critical care and geography we're going to -- this is the year to invest.

So right now you guys have 30 full-time reps that are ICU --?

No. No, no we used to have about -- we had about 40 before. Now we added 35 so our total is up to about 90.

Including international.

Yes, worldwide but up to 90.

But what I guess I am getting at is in the old days, if you will, Doc, there was sort of -- I used to think of them as hand holders, they're kind of making the sales call, if you will, when Abbott was your partner. And so what I am trying to figure out is, is that 90 or maybe it is just a 35 that are new, are those folks really being targeted or turned on or directed at a specific segment? I know you mentioned cardiology and oncology, I am trying to figure out if they're making the same point-of-sale sort of on a med surge floor or if they're really going at the cath labs or what they're doing that's different from what was happening before.

Let's take the angiography. In angiography they are making direct sales calls going right to the angiography -- of course, they work with Hospira, but they're making the sales calls right to angiography. That's all they do when they get up in the morning. Is really believe in a focus sales force. We're spinning off -- part of the guys are going straight towards oncology and then another group are going towards TEGO.

So they're dedicated sales force. Dedicated and, yes, are they hand holders? Yes, in a way. In some of the markets they are. But they're specialists because they know more because the general line Hospira rep might have 2000 products in its bag. Our guy will have one product line in its bag. So we'll know a lot more about the competitors and about how to sell the product. But I think with the -- the important part is, Bruce, is we're just absolutely doubling our size with salesmen and it is a numbers game. The more salesmen you have, the higher the sales. It's just usually the way it works. I think Hospira with 500 will beat any company with 100 salespeople.

Okay, and then OUS, I know all of us are trying to figure out exactly where the Hospira business can go outside of the U.S. Can you give us some sense -- we kind of go through this every quarter, I know, but when you look at 2006 you threw out some expectations. Are there minimums involved in that business or how do we get some level of comfort that, in fact, that U.S. business can grow at that rate?

I gave you a number that we're very comfortable with and that's 40% year-over-year regardless of whether Hospira -- regardless of what minimums are or if there is minimums. But the way we setup international distribution is where Hospira is strong, we go with Hospira when they're strong. Other countries or other distributors where Hospira is starting and they're not as strong, so we have independent distributors there. So we have a combination across - in the world as far as distribution goes. So it is not just Hospira. It is Hospira plus independent distributors.

And one thing to bear in mind, Bruce, is that a lot of these distribution arrangements are relatively new and still very much in the ramp-up stage. So -- I mean we've got these in almost every country in the world, many of them relatively new and, of course, they start small and grow. So we've got good ramp-ups in front of us. Bear in mind this market has potential. I'ts many times as high as the U.S.

Right. But you guys have sort of been clicking along, but I would not call the growth OUS stellar, I guess. So I am just trying to figure out if --.

No, you wouldn't have a sell out and how many sales people do we have? I think we have international that are selling?

I think it's about eight.

Eight product specialists through outside the U.S. versus 90 in the U.S. I think that the ratio, if we took 90 people outside that ratio would not be as -- but I think 40% growth is not insignificant.

No, not at all. I am just trying to figure out who is doing the heavy lifting, if it's HSP or at your end.

Both. Remember they're extremely -- keep in mind they very strong in certain countries like Spain, extremely strong, they're -- and they're taking on new countries like France and such and I think they're going to be successful. It's going to -- for a big company like that it's going to take them a little bit longer. That's all. It is not as quick as we would like, but it is just going to take them a little longer, a little more patience.

Yes, Bruce, I don't have the exact number but the majority of our sales internationally are not through Hospira right now.

Okay, that's helpful. And then just the last kind of housekeeping thing for you, Frank, again, tell me the tax rate in this quarter exactly, what happened there and going forward we're back in 375; is that right?

No, we had some credits this year and some of the usual year end fine tuning of the tax rate in the our fourth quarter. Nothing beyond that.

It's cash?

It is going to go up 3%. The credits, we will not have to nearly the same amount next year.

Now, there is an investment with a great ROI, Bruce.

What's that? I missed that.

[multiple speakers]. Paying taxes.

Oh, okay. And, Frank, what was the FAS 123 guidance for the year? Did I miss that?

No, we didn't give any. But the options that we have mechanically, Bruce, are virtually all vested and we have no pending new option grants of any significance.

Okay, so the CPS guidance includes option expense as it were?

Yes, a very, very minor amount.

Great. Thank you.

Okay, Bruce.

Your final question comes from the line of Doug DeMuth of Green River Fund Management.

Hello.

Hello, Doug, how are you doing?

Good. Thank you. I had a quick question, on the Salt Lake City plan I know it is becoming kind of more integrated into the whole Company's picture. My understanding at the time of the announcement of the transaction was we bought an asset in a revenue stream and we're going to move some things around, but the way this deal really works is we cut costs. And I guess could you tell me specifically what or give me a few examples anyway of product lines that it maybe moved around the Company's various facilities? And as to why these business lines are now muddled enough where we can't get a -- we can't track the gross margin improvement which is obviously been quite strong since you bought the asset.

What's going to happen we've already moved some of our custom work, custom product work from Salt Lake to Mexico. Okay, but we've been able to -- so far we've been able to track that, it's not a huge amount. But come '06 between now and June, we are moving a lot of the custom work that's going to be moving to Mexico, okay? And that's just going to be integrated with everything else we do down there, the jobs will just be jobs interspersed with our legacy work.

At the same time we are terminating -- closing our manufacturing here in San Clemente and moving all of the manufacturing to Salt Lake, that's going to be occurring mostly in the second or third quarters next year. Sooner if we can get it done faster, and that's really going to muddy up the waters in terms of doing anything -- any separate metrics on Salt Lake. We will have some ability to measure critical care products as a separate product line, but the numbers below that are going to be just going to be mixture of legacy and critical care products.

Yes, let me add one point to that. We didn't buy Salt Lake City because of the cost savings. That has a finite shelf life in itself. We didn't buy -- we bought it because what we see and what the existing market was is for custom sets, they weren't able to get custom sets out of Salt Lake City or only a percentage of them, a minority percentage of them were custom sets because of the high cost. And for us to do them we see it as an opportunity for customization, for making angiography sets and [transsuture] sets and high pressure monitoring sets all in a custom format. So we see it as an opportunity for growth, not for an opportunity for just cutting costs.

One of the things we're doing is the sales slide that was occurring before because of lack of support has stopped. That is gone and it's going in the other direction. So keep in mind that we see this as a matching of skills here. What Hospira is very good at when they focus on it is selling. They're extremely good at it. There is just nobody equal. So and what we're good at is manufacturing. We're probably not the best in something else but we're great at manufacturing.

So a combination gave us an opportunity, but it is really custom that we're looking for. And look at my custom. Watch our custom number. It is going to continue to climb. And I think it's going to be impossible to separate that out. So to see Salt Lake City as it existed before with all our machines in there molding parts, it's going to be absorbing like a son of a gun and so that that cost will drop per part -- per piece part it will drop substantially. So we see it as an opportunity not just as a cost savings deal.

Okay. Fair enough.

Fair enough.

Okay. Sir, this concludes the Q&A portion of your conference. You may conclude with your concluding remarks.

Well, nothing -- thank you very much for joining us. We'll see you next quarter.

Ladies and gentlemen, this concludes your conference call for today. We thank you for your participation. You may now disconnect. Have a good day.