ICU Medical Inc (ICUI) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2006 ICU Medical Incorporated earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. -- Dr. George Lopez, CEO and Chair of ICU Medical. Please proceed.

Good afternoon. Thank you for joining us on a review of ICU Medical's results for the third quarter and nine months ending September 30, 2006. I'm Dr. Lopez, Chairman and President of ICU Medical; and with me is Frank O'Brien our CFO; and Scott Lamb our Controller. On today's call, I will provide an overview of our operating results and Frank will provide detailed financial information for the third quarter and an update on our 2006 revenue and earnings targets. I will wrap up with prepared remarks with a discussion of the current business trends before we go to the Q&A. As always we will limit the length of the call to about 45 minutes.

But first, in the event that we touch on forward-looking statements during this call, please be aware that they are based on the best information 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 and uncertainties that have a direct bearing on our operating results, performance, and financial condition. With that said I will begin.

We are pleased with our continued strong financial results we achieved in the quarter for the first nine months of 2006 and we are on track to grow revenue and earnings per share by over 22% this year and are very well positioned for continued sustainable growth. We were able to achieve these results even as we relocated an entire factory to Salt Lake City from San Clemente, California in the third quarter of 2006. Also during the quarter all of our lines performed as we expected, led by our custom products which were up over 12% and our international sales increased by 51%. We are particularly pleased that our sales for the third quarter of 2006 exceeded those in the third quarter of '05. '05 third quarter was unusually strong whereas in 2006 we encountered our normal seasonal dip.

Our bottom line held up even though we had a one-time net 3% -- $0.03 per share hit because of the move to Salt Lake City. A number of years ago, we identified the custom medical device market as a long term growth opportunity for our company. We believe that we have significant additional growth opportunities both with additional customers and additional customizable therapy products. The potential market is big and so far, no one is effectively competing with us.

We ended the quarter with over 105 million in cash and no debt. even as we continued to increase our investments in property and equipment. Also, we bought back approximately $4 million of stock during the third quarter as part of our previously announced plan under which we will purchase 1 million per month through next July for a total of 14 million. This is subject to market conditions but right now we expect to continue to execute this buyback plan.

In manufacturing, I'm pleased to report we have fully completed the move of all molding and automated assembly from our San Clemente facility to the Salt Lake facility, and we have sold our San Clemente manufacturing facility. All costs of this move are behind us and there will be no additional costs in the fourth quarter or thereafter.

In addition, we have completed the majority of the manual assembly transfer to Mexico from Salt Lake City. This move is going as planned and we expect the entire move to be completed in the first half of '07 where we believe consolidating our automated products to Salt Lake City and moving our manual assembly lines to Mexico will improve our manufacturer efficiencies and help improve our margins in the future.

Before I get into more detail about our plans moving forward, I'd like to turn the call over to Frank to discuss our quarterly financial results in more detail. Frank?

Well, thank you, George and good afternoon, everyone. Before I begin, let me remind you that all of the sales numbers that we are covering as well as our condensed financial statements will, as usual, be available on our website before this call is over.

As Dr. Lopez mentioned, our third quarter revenue and earnings results were as we expected and we are pleased with our operating results. Our revenue in the third quarter increased 4% over third quarter of '05 to $48.6 million. This year we experienced our normal seasonal dip in revenue.

As you'll recall we did not experience a similar dip in the third quarter of '05 so the year to year comparison is somewhat distorted. Net income for the quarter increased 6% to $6.1 million or $0.39 per diluted share compared to $5.8 million in the third quarter of 2005. For the first nine months of 2006, revenue increased 30% to $149 million as compared to $114 million for the same period last year. Net income for the first nine months of 2006 increased 26% to $18.8 million or $1.21 per diluted share compared to $15 million or $1 per diluted share for the same period last year.

Now, let me discuss our sales mix. Product diversification is one of the key elements of our growth strategy and here is what our product mix was at the end of the third quarter. Sales from CLAVE products excluding Custom IV systems decreased 5% to $16.6 million. This decrease was because of a small fluctuation in deliveries to Hospira due to the timing of shipments. Year-to-date CLAVE product shipments to Hospira have increased. When you add together CLAVE and CLAVE Custom IV sets, combined sales were $24.1 million in the third quarter of 2006 up from $23.9 million in the third quarter of 2005. Sales from Custom products which include CLAVE, non-CLAVE and Critical Care Custom products were 12% -- or increased 12% to $13.7 million compared to $12.3 million in the third quarter a year ago. We continue to see a huge growth potential in the custom market and believe that we are well positioned to capitalize on this opportunity.

Sales from critical care products excluding custom products increased 13% to $12.1 million or 25% of total revenues compared to $10.7 million or 23% of total revenue for the comparable period -- comparable quarter a year ago. Now let's move to sales by distribution channels.

Sales to Hospira decreased 1% to 35.2 million in the third quarter of 2006 compared to 35.7 million in the third quarter of 2005 as increases from sales of critical care and custom products were offset by decreases in sales of CLAVE and other product categories. Domestic distributors generated $7.3 million of revenue in the third quarter of 2006, up 9% from last year. This increase was primarily due to robust sales from custom products.

International sales for the third quarter increased 51% to $5 million year-over-year. The increase in international sales was primarily driven by growing demand in Europe for our CLAVE and custom products. We will continue to establish the Company's foot print in the international markets to support our future growth.

Now let me get to some of our key operating metrics. Gross margin on product sales was 38% compared to 44% in the second quarter of 2006 and 41% in the third quarter of 2005. A decrease in gross margins was due to approximately $3 million of one-time costs associated with moving our San Clemente manufacturing to Salt Lake City. These costs include transportation of the machinery, severance cost in San Clemente and unabsorbed overhead as the San Clemente plant was shut down and production commenced in Salt Lake City. Without these costs, our gross product margins would have been 45%. As Dr. Lopez mentioned earlier, the move has been completed and the costs are all behind us. This move and the move of our manual processes to our low cost facility in Mexico should significantly improve our manufacturing efficiencies and translate into better margins in the future.

We expect our gross margin on existing products to increase quarterly by 0.5% to 1% each quarter until they approach 50% in late 2007 or early 2008. We think they can go higher, perhaps into the mid 50s in a few years, if the new products we are launching are successful.

SG&A expenses for the third quarter increased 15% to $11.1 million. This compared to $9.6 million in the same period last year. This increase was primarily due to expanding our salesforce. As a percentage of total revenue SG&A expenses were 23% in the third quarter of 2006 compared to 21% in the third quarter last year. We believe we will begin to experience more leverage from our recent investments in SG&A as a percentage of revenue and SG&A as a percent of revenue will decline next year.

Research and development expenses totaled $1.6 million in the third quarter of 2006 compared to 1.4 million in the same quarter last year. We will continue to use our strong cash flow to develop innovative critical care and next generation products. It is important to note that our earnings per share of $0.39 was affected by approximately $3 million or $0.12 per share in one-time moving costs and they were positively affected by a one-time gain on the sale of our San Clemente manufacturing facility for approximately 2. -- the gain was approximately $2.1 million or $0.09 per share. So net we were negatively impacted by $0.03 per share on moving and related items.

During the third quarter we continued to improve our balance sheet. As of September 30, 2006 we have 105.5 million in cash and investments and $149 million in working capital and no debt. As Dr. Lopez mentioned, this was after buying approximately $4 million of common stock in the quarter.

Accounts receivable at the end of the third quarter increased 20% compared to the second quarter of 2006. DSO's were 62 days up from 48 days at the end of the previous quarter. This was caused by the timing of shipments this quarter that came later in the quarter than the last quarter. The aging is about the same as it was in June. We expect our DSO's to be in the mid 50 range for the fourth quarter.

Our inventory levels increased 5% during the third quarter to $19.4 million compared to $18.5 million in the previous quarter. This included some brokerage stock for the move to Salt Lake City. Since we have completed our relocation to Salt Lake City we should see our inventory levels begin to slightly decrease in the fourth quarter and into 2007. Our operating cash flow was $2.9 million for the third quarter despite the temporary increase in receivable day sales outstanding and in inventory.

Now let me briefly review our guidance for 2006. Based on financial results to date and our expectations for the remainder of 2006, we are confident in restating our previously announced revenue and earnings targets. For fiscal 2006 our target sales remain at approximately $195 million and diluted earnings per share of $1.65.

Before I conclude my section here, I'd like to quickly recap a few key numbers for the third quarter. For the first nine months revenue increased 30%. For the first nine months of 2006 free cash flow totaled $11.8 million. Operating margin for the third quarter was 17%. We bought back approximately $4 million in common stock during the quarter. Finished good turns were 29 times during the quarter about the same as the 31 times in the second quarter and low by our standards because we carried the buffer inventory for the move to Salt Lake City. Cash and investments were $105.5 million up from 86.7 million at the end of 2005.

Now, let me turn the call over back to Dr. Lopez to discuss ongoing business trends and more detail on the outlook for the rest of 2006.

Thanks, Frank. We are very encouraged by our third quarter results and we expect to deliver strong revenue and earnings performance for the fourth quarter. We see improving efficiencies and continued demand for all of our product lines including our Custom IV systems and Critical Care product lines and increasing strength in our international markets.

One of the reasons we're particularly pleased with our operating performance during the first nine months of this year is that even as we build for the future with large investments in sales and marketing and R&D, our bottom line results continue to improve. We've ramped up our salesforce and doubled our R&D spending. We will continue to expand our salesforce as needed for the next few quarters and continue to focus our efforts on continued improvement of productivity within our sales and marketing departments. We believe we will continue to see increasing operating margins in the fourth quarter and continue to experience improvement throughout 2007.

We expanded our salesforce over the past year to prepare for our more diversified product line and also to be in a strong position for the launching of several new products that will expand our overall market share domestically and internationally in such areas as oncology and angiography and critical care. Although sales of these new products are still small, we are very excited about the potential these products offer in the coming years.

One of the new products we're very excited about is TEGO. As a reminder this product is a new connector which we're selling as an infection control device for use with dialysis catheters. Another new product is the Orbit 90. This product is a diabetes infusion set which has many features for patient comfort and ease-of-use. We're currently shipping small quantities of this product and tuning up for large scale production.

We also see large opportunities in the area of oncology. One product in cancer care is a closed male lure which eliminates a drip at the tip of that lure on a syringe or IV line when it is disconnected. Another is a drug vial access device that eliminates any chance of drugs escaping into the air when a viral is accessed. Both of them are important to contain toxic, chemotherapy drugs and keep them out of contact with health care workers. The reaction to our oncology products has been excellent.

Our existing lines continue to perform very well and generate strong cash flow. CLAVE is still viewed as the best IV connector on the market. Infection control continues to be an increasing issue in healthcare today. The CLAVE's patented design feature has significantly lowered rates of catheter related infections over other connectors on the market. ICU was the first with a swabable connector and we believe CLAVE is still the best the market has to offer.

Now, I'd like to spend a few moments on the relocation of the automated manufacturing from Salt Lake -- from San Clemente to Salt Lake City and the manual processes from Salt Lake City to our facility in Ensenada Mexico as we believe this will truly position the Company for long term growth. As we mentioned in our first quarter call, both moves were preceded by construction. The initial expansion in Mexico and the construction in Salt Lake City are both complete and we have moved the majority of Salt Lake City manual assembly to Mexico with completion on schedule for the first half of '07.

Also, as I mentioned earlier, we have completed this move from San Clemente to Salt Lake City and we should have no costs associated with the relocation in the Fourth Quarter or moving forward. I might add that the logistics of the move went very well. The planning effort was extensive. Most machines were up and running in Salt Lake City within days of their arrival. I am very pleased that we have encountered minimum disruption with this move and which is behind us and we look forward to the long term benefits we will experience in coming years.

As Frank indicated earlier, we are reiterating our targets for the full year 2006, 195 million in revenue and $1.65 per share in earnings. We're very optimistic for 2007. We were holding off telling you our targets until the next call. New products will be significant and we will need to get another quarter's visibility on launch progress so we can give you more accurate numbers or targets.

In summary, we are in a very good position to expand our top line and make a strong -- make strong improvements in our operating efficiencies during the fourth quarter and beyond. Looking forward, we're very excited about the new products and the long term growth of our existing lines. Now, I'd like to turn the call over to any questions if I may.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Daniel Owczarski with Belmont Harbor Capital. Please proceed.

Yes, thanks, good afternoon. Can you talk a little bit about the TEGO as far as reimbursement goes? I thought the last time you had said that maybe we were coming up to a window when you had to apply for reimbursement maybe in November. Is that still planned?

It's perfect memory. November is the only time of the year we can apply for reimbursement.

And so what do you have to do? I mean how does that process go along?

We have to fill out an application and it goes to the government and we don't know, Frank and I don't know much more than that other than we have hired consultants and we have done a lot of work and invested a lot of money in the application itself.

So what kind of data do you have to show that this should be reimbursed?

You really don't need to show data. Just show -- it's not like you can -- you need studies and such. It's just an application and it's not -- they don't want studies first. They just want the intended use, what the effect would be on infection rates and such. But I was real surprised that we don't need to include studies.

So you do -- but you do make the argument that the infection rates will come down with the TEGO?

Yes, and the cost will come down too. They're not -- we don't know a lot more than that. It's really done by marketing and consultants. So the application, all we've done is free up resources to make sure that our best foot is put forward.

So the application window starts in November and then do they have a time when they have to get back to you by or make a decision?

No, we've been asked that question and we don't have that answer either. Is it 30 days, 90 days, 60 days we don't know that answer either.

But in the meantime you still think that you can ship TEGO to customers that will pay for it out of their pocket?

We are right now. We're getting the early adopters right now and that's increasing every month.

Okay. And then you had talked about adding to the salesforce again. Can you just give us an idea of headcount, where you were, where you are, where you want to be?

Scott, you want to take that?

Yes. We currently have about 75 feet on the street so to speak in North America or domestic and we'll, as Dr. Lopez and Frank mentioned, we'll add as we go along. We are looking to add some new sales reps to help in launching some of these new products and we'll just take that one quarter at a time.

The reason why is because we think there is a huge opportunity with the new products but I'm really optimistic about the oncology line. We're waiting to hear from the FDA on the Genie, the vial access device. And we've launched the oncology line with good reception, so I think we're going to need more salesmen to sell our product line in addition to our other existing product lines.

But if you had 75 today, I mean, six months ago where were you at? Or a year ago just for comparison purposes?

Pretty close to where we're at today to be honest.

Okay.

We've added as we've gone, but most of the addition was done towards the later half of next year, but we did add some in the first quarter as well.

And we're putting on 15 more though, Scott.

Yes, going forward, we're looking on to put some additional ones.

15 in addition to the 75?

Correct.

And then as far as the R&D, it looked like that line item was down sequentially. Any reason for that? I guess it was up in the second quarter. Any trends going on there?

No, no trends going on. We just been -- based on activity in the R&D department in terms of new products. All the efforts have been up to and the efforts are completed on Genie, we're just waiting to hear from the FDA. We've got molds ordered and we're ready for shipments. Just waiting for FDA.

Okay, thank you.

We expect it any day.

Great. Thanks.

Your next question comes from the line of [Genard Hussein] with Leerink Swann. Please proceed.

Good afternoon, guys.

Good how are you doing?

Very good. Frank, if I could just to push you on the gross margin front just a little bit, I think I understand what's going on, what was going on in the third quarter. But as you move out looking out to April, 2007, when you expect the completion of the transition of the Critical Care manual assembly to Ensenada, how do you expect the gross margin line to behave? I know you said you expect gross margins increasing on average about 50 to 100 basis points, so what are your thoughts there?

Yes. I think you'll see a pretty steady increase. In addition to the move, there's a lot of, if you will, additional efficiencies that we expect to achieve over the six quarters or so, and that will be part of what's driving the increase. Some of it will be driven by additional transfers of production to Mexico as well. We have got a lot we can do in the Salt Lake City plant that we haven't quite gotten to yet, and we're constantly working on improving things in Mexico as well. So it will be a pretty steady 50 or 100 basis points a quarter. As I think I said in the past, there may be some flutter where it may be a little higher, a little lower some quarters but directionally, take a straight line and we'll probably be pretty close to it.

You're talking about basically drawing a straight line to 50% margins at the end of '07; correct, Frank?

'07, maybe '08.

And then trying to figure out where you're at from today to there. So that's probably the best answer. Okay.

Now, just to round out the story here, beyond that, we would expect some significantly favorable impact from our new products. And if these things hit in sufficient volume we would look to get up into the practical operational mid-50s sometime down the road.

Okay, fair enough. And then just to confirm on the SG&A font, did you say you did 11.1 million?

Let me find the number here. Yes, 11.1.

And then R&D was 1.6?

1.6, yes.

And just a little bit of housekeeping here. Could you give up the CLC and the Punctur-Guard numbers?

The sales for the quarter?

Correct.

We got CLC of 1.2 million. I'm sorry, yes, 1.3 million, and the Punctur-Guard numbers were 1.3 million.

Okay, great. And then Frank, if memory serves me correctly, in Q3 '05, you provided 2007 guidance and I guess you haven't given us any 2007 guidance here. I'm just wondering why the departure from offering up this guidance and if there's anything that we can read into this? Maybe difficulty predicting what the new product launches could be for 2007 from a P&L impact perspective?

Well, I think we want to get a little more visibility on how the new products are doing. They are all out there in small quantities right now. We would feel a lot more comfortable on giving you our targets for '07 with another quarter behind us so we can be more accurate on what numbers we give.

It's strictly an issue of accuracy because as I said, we expect to get domestic approvals, we expect some other things that we'll know by January or the first quarter.

Sure.

Look at it as good news, not bad.

And then finally, just given the fact that your partner Hospira is having -- just recently launched the Symbiq infusion pump and has won some PPO contracts from the HealthTrust and then with Premier, I'm wondering when we could potentially see a P&L impact on that line moving forward on CLAVE and custom, or are you starting to see an impact even now?

Yes. It should start showing up a little bit now and then in the fourth quarter and then from there on out. The Hospira numbers at this point are so big that the impact, it will be favorable but it's hard to say, how noticeable it's really going to be.

Great. Thank you, gentlemen.

Great.

Your next question comes from the line of Gregory Macosko with Lord Abbett. Please proceed.

Yes, thank you very much.

How are you doing?

Fine. Hi, Frank. Just you mentioned the gain on the sale of San Clemente of 2.1 million?

Yes.

Correct.

And where do we see that in the P&L?

It will be in operating expenses which is where we're required to put it under the latest interpretations of GAAP. So in the release it's buried in the operating expense line, it will be, when you get to the 10-Q it's a separate line item, and it's an offset number.

So it's an offset $0.09 or so, 2.1 million; okay. And have you quantified kind of the additional cost that you're expecting with regard to the move to Mexico?

Greg, they are very, very small. We're not dealing with any equipment, we're not dealing with any people, so I mean, we're absorbing these things, it's almost not noticeable.

No severance.

And no severance or anything like that? Okay, that's very good. And then Hospira, again, the minus 5% I guess was because of the delivery timing and the like and you expect that kind of to smooth out going forward?

Yes, we are up year to date, and we would expect it would smooth out again in the fourth quarter. The difference we're talking about is not even a week's worth of sales. It's really small.

Yes. Well, very good. Thank you.

Okay, Greg,

There are no further questions at this time.

Okay, then everybody, thank you for joining us and we'll talk to you in January.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Good day.