ICU Medical Inc (ICUI) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first-quarter 2007 ICU Medical Inc. earnings conference call. My name is Melanie and I will be your coordinator today. At this time, all participants are in listen-only mode. We will conduct a question and answer session at the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Dr. Lopez, CEO of ICU Medical. Please proceed, sir.

Good afternoon. Thank you for joining us in our review of ICU Medical's results for the first quarter ended March 31, 2007. I'm Dr. Lopez, Chairman and President of ICU Medical. With me today is Frank O'Brien, our CFO and Scott Lamb, our Corporate Controller.

On today's call, I will provide an overview of our operating results and Frank will provide detailed financial information for the first quarter and provide 2007 revenue and earnings targets. I will wrap up our prepared remarks with a discussion of current business trends before we go to the Q&A.

Before we begin in, the event we touch upon any forward-looking statements during this call, please be aware that they're based on the best available information to management and assumptions that management believes are reasonable. Such statements are not intended to be a representation of future results and are subject to the risk 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 and performance and the financial condition.

With that said, I will begin. We're pleased with our results this quarter and are on plan to achieve our revenue and earning targets for the full year 2007. In a word, everything is on track towards a very good 2008. During the first quarter, all of our lines performed well, led by our custom products, which were up 28% and our international sales, which increased by 33% as well. We continued to improve the efficiencies of our Salt Lake City and Mexico factories and this helped to contribute to a gross margin improvement of 6 percentage points to 39% in the first quarter from 33% in the fourth quarter of 2006. We believe our margins will continue to improve throughout this year and will approach 45% margins in the fourth quarter of 2007. Based on continued improvements and efficiencies in our two plants, we believe we will continue to improve margins in 2008.

We continue to strengthen our balance sheet and operating cash flow in 2007. Operating cash flows were $16.4 million for the first quarter. Cash investments totaled $119.1 million and we continue to have no debt. We're nearly complete with our expansion of our plant in Mexico and have in-house or on order production tooling for all of our new products.

In addition, we continue to buy back stock and during the first quarter we spent $8.6 million to purchase 217,121 shares at an average price of $39.67. We will continue to purchase up to at least an additional 13 million of our shares. However, additional share purchases may be made as we deem appropriate, based on the stock price, prevailing market and business conditions and other considerations.

As we look down the road, we're very excited about the major launch of our new product and the transition to a very strong 2008.

Now I would like to turn the call back over to Frank to discuss our quarterly financial results in a little more detail. Frank?

Thanks, Doc. Before I begin, let me remind you that all of the sales numbers that we are covering as well as our financial statements will as usual be available on our web site before this call is over.

As discussed in the latter half of 2006, we discontinued the production of two lower-margin product lines -- Punctur-Guard and a low-margin product under our Hospira Salt Lake City agreement that we anticipate discontinuing when we bought the plant. The sales of these two discontinued lines totaled $5.3 million in the first quarter of 2006 and $0.2 million in the first quarter of 2007. These lines had no significant contribution to our margins in 2006.

Today, we will be discussing sales on a pro forma basis to help you understand how well our businesses did in the first quarter, excluding these two discontinued lines. The reconciliation of the actual GAAP numbers to -- is on our web site, along with the other sales numbers.

Our pro forma revenue in the first quarter met our expectations and increased 12% to $48.8 million. Net income for the quarter increased 54% to $9.8 million, or $0.63 per diluted share, compared to $6.3 million, or $0.41 per diluted share in the first quarter of 2006. Net income for the first quarter includes $0.34, or $5.3 million net of tax from a legal settlement in our favor.

Our CLAVE sales, including custom I.V. [sets] for CLAVEs, were $26.1 million in the first quarter of 2007, up 16% compared to the same period in 2006. Sales from custom products which include CLAVE, non-CLAVE and critical care custom products, increased 28% to $15.3 million, compared to the same period a year ago. We continue to see a huge growth potential in the custom market and believe that through our patented manufacturing processes we're well positioned to capitalize on this long-term growth opportunity.

Sales from critical care products, excluding custom products, increased 3% to $12.2 million compared to the same period a year ago. On a pro forma revenue basis, domestic distributors were up 27% for the first quarter as our distributors continued to make strong gains with our custom product line.

On a pro forma revenue basis, international sales for the first quarter increased to $1.5 million, or 36% on a -- year-over-year, to $5.6 million. Approximately 81% of this increase in international sales was driven by growing demand in Europe, principally for our custom oncology and CLAVE products. Dr. Lopez will touch on this more in a moment.

We will continue to establish the company's footprint in the international markets to support our future growth. For the first quarter, international sales as a percentage of overall sales increased to 12% from 9% of sales in the first quarter of 2006.

Let me get into some of our key operating metrics. Gross margin on revenue was 39% compared to 33% in the fourth quarter of 2006 and 44% in the first quarter of 2006. The improvement in gross margin compared to the fourth quarter of 2006 was due to improving efficiencies in our two manufacturing facilities, as Dr. Lopez mentioned earlier. Expect our margins to continue improving and to approach 45% during the fourth quarter of 2007 which will bring it to an average of 41% to 42% gross margin for the full year.

SG&A expenses for the first quarter increased 13% to $12 million compared to $10.5 million in the same period last year. This increase was primarily due to expanding our sales and marketing force in 2007 and increased pay rates. We expect our SG&A to be in the 21% to 23% range for the full year.

Research and development expenses totaled $1.8 million in the first quarter of 2007, compared to $1.5 million in the same quarter last year. We will continue to use or strong cash flow to develop innovative critical care on next-generation products.

During the fourth quarter -- during the first quarter, we continued to improve our balance sheet, and as of March 31 we had $19.3 million in cash, or approximately $8.00 a share; that's in cash and investments. Our operating cash flow continued to be very strong and we generated $16.4 million of operating cash flow in the first quarter, which included $8 million pretax, equal to $5.3 million net of taxes that we received in a legal settlement. We believe we're on track to reach our revenue and earnings targets of $206 million and the $1.97 per share for the year 2007 which will include the $0.34 per share from the legal settlement from the first quarter.

As we mentioned in our fourth quarter 2006 call, some of our new products have taken a little longer to launch than anticipated and we did not see much contribution from them until the second half of 2007. To be conservative, we have excluded virtually all new product sales from our 2007 targets. To be clear, however, we do expect some sales of those products, particularly in the second half of 2007.

Now let me to the call back over to Dr. Lopez to discuss ongoing business trends and more detail about the outlook for 2007.

Thanks, Frank. For the remainder of 2007, we believe we will experience continued strong growth domestically and internationally. We continue to invest in our international channel and demand for our specialized products; that is, our custom products, is gaining ground throughout Europe, South Africa and the Pacific Rim. We believe our international sales are in the very early stages and will be a large contributor to our growth in years to come. In particular, we have been testing our oncology product in Europe and it is proving to be a great opportunity for our custom products. All of our new oncology products that we will be introducing over the next year will be perfect for the oncology field in Europe and in the United States as well.

We expanded our sales force over the past year to prepare for a more diversified product line and also be in a strong position for launching of several new products that will expand our overall market share domestically and internationally in areas such as oncology and dialysis. Although sales of our new products will not be a large percent of sales in 2007, we are very excited about the potential these products offer beginning in 2008.

Where are we in this process? Oncology sets -- the basic sets are extensions of our customer I.V. sets which have been long well accepted, so this will go very well. Our Closed Male [lure] Spiros, an important element in keeping the oncology I.V. set in the closed system, was no escape of toxic oncology drugs into the environment -- we have done a complete redesign of this product that we launched originally and began shipping this new product last week. We now have capacity to support $5 million in annual sales and we will have capacity by the end of the year to support $13 million in annual sales.

Genie, our revolutionary new vial access device, eliminates leakage on accessing drug vials, is still awaiting FDA approval before it can be sold. We now have tooling to support $12 million in annual sales and we're manufacturing this product today.

Orbit 90 -- we have made numerous design improvements and now have locked down the design and are working on fine-tuning the production process. We're now manufacturing and selling this product and we will soon have capacity for $14 million in annual sales. As of today, we now have Spiros, Orbit 90 and Genie in production. We expect to hear from Genie from the FDA any day now.

TEGO, our new connector designed to control infection in dialysis catheters. After almost two years, we have a stable design and are currently selling in small amounts. Response so far has been positive and we now have tooling to support $12 million in annual sales. We should not expect that we will sell out of these capacities in 2007. None of this tooling includes automated assembly equipment. Initially, all products will be hand-assembled. We do not expect production volumes to warrant automation until 2008, so we'll have plenty of time to get there and as sales increase will be ordering more production molds.

We finished the addition of a 136,000 square foot expansion in Mexico which will give plenty of capacity for these new products as well as anticipated growth of our custom set products. We also currently have more than enough capacity in our Salt Lake City facility to handle the molding and the eventual automation of these new products. And production control continues to be an increasing issue in health care today. It is one of the reasons we're so excited about the international opportunity for CLAVE and custom CLAVE. CLAVE's patented design feature has a significantly lower infection rate than other connectors on the market. We were the first with the swabbable connector and we believe that the CLAVE is still the best the market has to offer.

We expect a very strong 2008. Overall, 2007 is progressing as expected and will be a decent year and serve as a transition to a very strong 2008. We will continue to use our strong cash flow from marketing of new products, potential acquisitions and repurchasing stock, when appropriate. We expect to generate a cash flow of over $40 million in 2007.

Now, I'd like to turn the call over to any questions if I may.

(OPERATOR INSTRUCTIONS). Mitra Ramgopal, Sidoti & Company.

Doc, I believe you mentioned that by the end of '07, we should get to 45% gross margin, and I believe the last call, you were hinting more at mid-year, we should see the 45%. I'm just wondering what might have changed?

It's taking us a little bit longer to -- and the margins are coming from efficiencies that we're picking up and it's just taking us a little longer to do than expected. We're talking about one quarter one way or another. So by fourth quarter, we should be there.

And then you expect the 50 to 100 basis point improvement?

Still do, yes.

And could you give us an update regarding litigation expense? Obviously, it is a big hit for you.

Litigation expense will drop remarkably, but I will let Frank answer as he writes the checks.

Mitra, they are coming down. We're still working them down. They're going to drop in the second, third and fourth quarter -- the level of litigation, activity on litigation, will go down substantially.

And is that included in the guidance?

Yes.

Quickly, if you could just again give us a sense with regards to -- I know it's still early in the stage for new products, but your expectations as you hint that '08 will be a fairly big year. What are you looking for in terms of contributions?

Let me talk about 2007, the last half of 2007. I expect to -- we don't put anything in our numbers as you know because we don't count our chickens until we have our chickens. But I am looking at generating millions of dollars in revenue in the second half of 2007 on our profit. It won't be less than $1 million, it will be in the millions. Remember, it's (inaudible) I'm waiting every day on the Genie. I think the Genie is going to be a blockbuster product and Spiros I think is the same way. With Spiros, we just launched the product so we're getting immediate feedback. If the feedback is good for the next 12 weeks, then we move to the next step. But I'm looking at generating millions of dollars in revenue and I think they will contribute significantly in 2008. So that, and our basic business, our custom set business, which is very healthy, should get us to where we want to go. Does that help you?

Sure, thanks.

Dan Owczarski, Belmont Harbor Research.

(MULTIPLE SPEAKERS). As far as -- okay, so the Spiros is FDA cleared?

(MULTIPLE SPEAKERS) cleared and has a CE mark for Europe -- we just launched it.

So I always thought of that kind of in concert with the Genie, but that product can stand on its own and -- or is it really waiting for the Genie to really kick off?

It can stand on its own. In fact, here's what we did. We tested the oncology -- this market that we're entering into, which I've been so positive about, is broken into three pieces. One is the accessing vials. How you get oncology drugs which you don't want any exposure to vapors or moisture, exposure to the health care worker -- how do you get them out of the vial? That you do with the Genie. You don't it without vapors, any contact whatsoever. From the vial, how do you get it to the patient? You do that with an I.V. set, and the I.V. sets normally are open and when you disconnect them, they leak out the medication. The Spiros on the end of the I.V. set closes it all off, and in fact will go the other way. Fluid will move the other way when you disconnect so that now that when you disconnect, there is not a chance of fluid; in fact, fluid will go back into the I.V. set. The third part of the factor is custom I.V. set. The market we tested in Europe, which we've had significant growth, I believe my numbers -- correct me if I'm wrong, Scott, what did we do last year in Europe, about 5?

For the entire year?

Yes.

No, we were about 9-10 million. (MULTIPLE SPEAKERS)

Just Europe, just oncology in Europe.

Yes, Europe was 9 or 10 million.

I think it was smaller than that. And what do we think they will do this year?

They should do at least 12 million this year.

I think my number is a little bit lower than that for last year, but Scott --.

That's everything, oncology and (MULTIPLE SPEAKERS).

Oh, I'm only Including oncology.

Oncology is about 60%-70% of that.

So somewhere in that neighborhood. You're seeing pretty great growth. That was just the custom sets, Dan, the custom ecology sets. The market is -- wants sets that are built specific for their administration, the way they give oncology drugs, and every unit, every hospital, does it slightly different. They are not the same. So there's three parts to that. So as we get the Spiros now, we add Spiros to our custom sets, that generates our two parts of the equation. The Genie is the third part. So all of them go together hand-in-hand, and I think you can actually sell any one of them by themselves, also. But as a package, it's a very beneficial thing. Does that help you?

Yes, no, definitely.

And Spiros is in the market, Genie any day. We normally don't do press releases when we get FDA approval. This one, we'll do a press release because it will be one of the first ones we have ever done, one of the first ones.

And is there any update on the TEGO? I thought you were waiting for reimbursement decision on that for dialysis.

Still waiting. Sales are over $1 million on that product, but we virtually have a very small sales force selling it. But we're still awaiting from the government. Although we did land a nice contract, so (inaudible) contract.

And that's not included in the million?

No, that's not included in the million.

So that would be incremental to that million?

Just think of our numbers as being accurate for the year and I anticipated to generate a few million dollars in new products sales (inaudible). We have molding production, but what we have to catch up is how do we assemble them fast enough, that's the thing -- without automation, it's pretty hard to [hand the symbol] at the velocity we need to get in the millions of sets.

Can you share -- I know you have talked about expanding sales capacity or your sales force -- anything you can give us qualitatively there on headcount or --?

I think we're where we want to be with our sales force. We have some holes to fill in, some areas to fill in for oncology until we can cover the market, but I think where we want to be. We need a few more people in Europe, but not material.

Great, thank you.

We spent about $12 million on the sales force per year.

That does conclude our time for question-and-answer today. I would like to turn the call back over to Dr. Lopez for any closing remarks. Please proceed, sir.

Thank you very much for joining us. I appreciate the questions and see you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation, you may now disconnect.