ICU Medical Inc (ICUI) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2007 ICU Medical Incorporated Earnings Conference Call. My name is Katina and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's call, Dr. George Lopez, CEO of ICU Medical. Please proceed.

Good afternoon, everybody. Thank you for joining us today to review ICU Medical's Financial results for the second quarter ended June 30th, 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. I will start the call by highlighting our operating achievements during the second quarter, then Frank will discuss in more detail our financial results and update you on our 2007 revenue and earnings targets. I will wrap up the call with a discussion of current business trends, and then we will open the call to your questions.

Before we start, I want to touch upon any forward-looking statements during this call. Please be aware that they are 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, but are subject to risk and uncertainties. Future results may differ materially from management's current expectation, we refer all of you to the SEC for more current-- for more detailed information on the risks and uncertainties that have a direct bearing on our operating results and performance and financial conditions.

With that said, I would like to begin our conference call. We are pleased with the majority of our business results for the second quarter, as the overall performance of our business remains strong. Remember, our primary business is manufacturing custom IV sets. During the quarter, we continued our sales improvements in the custom IV products, which increased 14% year-over-year. Additionally, our international sales grew an impressive 31%. As a result of our continuous focus on efficiencies of the Salt Lake City and Mexico factories, gross margins improved three percentage points to 42% in the second quarter, compared to 39% in the previous quarter.

We believe our margins will continue to steadily improve throughout the year and approach 45% by the end of the fourth quarter of 2007. Our sales of critical care products that we supplied Hospira declined 1.6 million in the quarter, as compared to the second quarter of last year, and we anticipate steeper declines for the balance of 2007. We manufacture these products and Hospira handles the sale of these products. And there is little we can do in the near term to stem these declines. The declines are a disappointment to us and we are seeking ways to rectify this situation. We ended the quarter with a strong balance sheet and for the first half of 2007 our operating cash flows totaled $17.5 million.

As of June 30 our cash in investments were $110 million and we continue to have no debt. We consider 2007 to be a transitional year and are very excited about the opportunities lying ahead of us. By the end of this month, we will have completed the addition of 135,000 square feet of production space in our plant in Mexico, bringing in the total to Mexico to 240,000 square feet. We have entered the second half of 2007 with a strong product pipeline, and will have production modes for all of our new products in the second half of this year.

For the rest of the fiscal year we will continue to focus on our growth strategy and operating efficiencies, and utilize our strong positive cash flow to position our Company for continued growth into 2008 and beyond. Now I'd like to turn the call back over to Frank to discuss our quarterly financial results in more detail. Frank?

Yes, thanks George. Before I begin, let me remind all of you that the sales numbers that we're covering, as well as our financial statements will, as usual, be available on our website before this call is over. As discussed on earlier calls, in the latter half of 2006 we discontinued the production of two low-margin product lines, Puncture Guard and a little larger product under our Hospira/Salt Lake City agreement that we anticipated discontinuing when we bought the plant.

The sales of these two discontinued lines totaled approximately $3.9 million in the second quarter of 2006, and $9.3 million in the first half of 2006. These lines had no significant contribution to our margins in 2006. Today we will be discussing sales in a pro forma basis, excluding our discontinued lines, to help you better understand our second quarter results. The reconciliation of the actual GAAP numbers is available on our website, along with the other sales numbers.

Our revenue in the second quarter increased 3% to $48.9 million, compared to pro forma revenue of $47.5 million in the second quarter a year ago. Net income for the quarter totaled $2.5 million, or $0.16 per diluted share, compared to net income of $6.3 million or $0.40 per diluted share in the second quarter of 2006. Net income for the second quarter of 2007 includes $3.2 million or $0.21 per diluted share, net of tax, related to a judgment against us in our lawsuit with Alaris. Excluding this one-time charge, earnings per share would have been $0.37 cents per diluted share.

For the first six months of 2007, pro forma revenue increased 7% to $97.4 million, compared to pro forma revenue of $90.9 million in the same period last year. Net income for the first six months decreased 2% to $12.4 million, or $0.79 per diluted share. This compared to $12.7 million, or $0.82 per diluted share in the same period last year. Net income for the first half was favorably impacted by a net gain of $3.2 million, or $0.13 per share, net of tax, resulting from the favorable litigation settlement with a law firm partially offset by the judgment against us in our lawsuit with Alaris.

Now let me provide you with the sales mix for the second quarter. CLAVE sales increased 7% from $18.1 million to $19.3 million. Our CLAVE sales, including custom IV sets with CLAVEs on them increased 8% to $27.7 million in the second quarter of 2007, compared to $25.5 million in the second quarter of 2006. Sales from all custom products, which include CLAVE, non-CLAVE and critical care custom products increased 5% to $14.9 million, compared to $14.1 million in the same period a year ago. The increase for non-critical care custom products went to 14% versus the 15% increase critical custom products in the second quarter.

Sales from our critical care products that we sell to Hospira, and including custom products, decreased 9.6% to $14.9 million, compared to $16.4 million in the same period a year ago. A significant portion of that decrease was because of decreased unit volumes. The U.S. market for most of the critical care products that we sell to Hospira has been declining in recent years. Under our contract with Hospira, we manufacturer the products and Hospira is responsible for sales to the end customers, and we have little ability to directly influence what they do and our sales of critical care products to Hospira are subject to fluctuations over which we have little control.

While we're disappointed with the critical care sales during the second quarter, we are optimistic about the opportunities in critical care. Dr. Lopez will discuss this in more detail shortly.

Now let's move to sales by distribution channel. Our pro forma revenue basis domestic distributors were up 17% to $7.1 million in the second quarter of 2007. This increase was led by strong demand for CLAVE and custom IV products. On a pro forma revenue basis, international sales for the second quarter increased 39% to $6.9 million year-over-year. Approximately 74% of this increase was in international sales driven by growing demand in Europe, principally for our CLAVE and custom IV products.

For the second quarter international sales as a percentage of total sales increased to 14%, from 10% in the second quarter of 2006. International markets represent a significant growth opportunity, and we believe we are well-positioned to continue to capitalize on this are going forward. Now let me touch on some of our key operating metrics. Gross margin was 42% compared to 39% in the first quarter of 2007. This increase in gross margin on a sequential basis was due to improved manufacturing efficiencies. We expect our margins to continue improving and to approach 45% by the end of the fourth quarter of 2007, which will bring our overall of gross margin for the year, for the full year, to 42%.

SG&A expenses for the second quarter decreased 6% to 11.5 million compared to $12.2 million in the same period last year. We expect our SG&A to be approximately 24% of total sales for the full year. Research and development expenses totaled $2.2 million in the second quarter of 2007, compared to $2.3 million in the same period last year. We will continue to use our strong cash flow to develop integrative next generation products.

As of June 30, 2007 our balance sheet remained healthy, with $110 million or approximately $7 per share in cash and investments. Our operating cash flow continued to be very strong, and we generated $17.5 million of operating cash flow during the first six months of 2007. We're in the middle of a $20 million stock repurchase authorization. In the first quarter we purchased $8.6 million of stock; however, we did not purchase any shares during the second quarter. Additional share repurchases may be made as we deem appropriate based on stock price, prevailing market and business conditions and other considerations.

Now turning to our targets for 2007. Due to the softer performance of the critical care products we are now projecting our 2000 (sic) revenue to be $190 million compared to the previous target of $206 million. This reduction is primarily due to an expected decrease in critical care products, as the other areas of our business are performing to plan. Our earnings per diluted share are now targeted to be $1.50 per share, compared to our earlier target of $1.62 per share. This includes the net positive impact of $0.13 per share related to litigation matters mentioned earlier. Now let me turn the call back over to Dr. Lopez to discuss ongoing business trends and more detail about the outlook for 2007.

Thanks, Frank. As I mentioned earlier, we view 2007 as a transition year, as we focus on establishing a solid foundation to support our growth in 2008. For the remainder of 2007 we will stay focused on investing in R&D, developing our product portfolio, wrapping up production of new products and expanding our outreach both domestically and internationally. Our core business performed as expected in the second quarter, except the critical care business did not meet our expectations. We are disappointed in the performance of this business and have reduced our critical care sales expectations for the remainder of 2007.

But as you know, under our contract with Hospira, Hospira has commercial responsibility for critical care products, including sales. And we produce the products that Hospira sells. The recent purchases from us have not met our expectations. We remain believers in the long-term opportunity critical care offers us, including new products such as a Dipod to major contrast media for radiology, and some recent improvements in the catheter line.

Our demand for our specialized custom products in Europe, South Africa, Latin America and Pacific Rim - we believe these areas will continue driving our international sales in the future. We're especially pleased with the rapidly growing acceptance of our oncology product in Europe. Over the next year we plan to introduce several new oncology products, which we believe, due to their innovative features, represent great value propositions to both Europe and to the United States.

To date we assembled a highly-trained sales force to drive sales of our current product line, to support new product introductions and to further pursue our market expansion in the oncology and dialysis field.

Now, let me briefly discuss where we currently stand in regards to our product development. Receiving clearance from the U.S. Drug-- Food and Drug Administration through the mark of the Genie, our first closed vial access device was a further step towards protecting healthcare workers from the dangerous effects of working with and handling chemotherapy drugs.

Genie is the only cost-effective and easy-to-use device that greatly reduces aerosols, vapors and leaks caused by pressurization when accessing drug vials. We are very excited about Genie's potential, and expect to have production in place by the end of this year to support $12 million in annual sales. We have just started to manufacture the Genie.

We have now started manufacturing and began shipping the Spiros, a closed male connector in the line of IV therapy products used primarily for the delivery of hazardous medications such as chemotherapy, which, if released, can have harmful effects to the healthcare worker and the environment. We now have capacity to support $5 million in annual sales and we are working on expanding this capacity by the end of the year to support $13 million in annual sales. The reception to this product has been very strong, and we look forward to strong sales from this product in 2008.

We also completed redesign into the Orbit 90 diabetes set and made significant progress on fine tuning its production process through the second quarter and have started sales. We plan to have capacity for $14 million in annual sales from Orbit by the end of 2007. TEGO, our new connector designed to control infection in dialysis catheters, continued to gain market recognition during the quarter, and we now have tooling to support $12 million in annual sales.

None of this tooling includes automated assembly equipment. Initially all parts will be hand-assembled. We do not expect production volumes to warrant automation until 2008, so we will have plenty of time to get there and if sales increase, we will be ordering more production molds and automation. We believe that our expanded manufacturing facility in Mexico provides us with sufficient production capacity for these new products, as well as continued growth of our custom products.

We also currently have more than enough capacity in our Salt Lake City facility to handle the molding and eventual automation of these products. In conclusion, I would like to add that 2007 is progressing well. This year should enable us to transition to a very successful 2008. We will continue to use our strong cash flow to pursue marketing strategy and potential acquisitions and repurchase our stock when appropriate. We expect to generate cash flow of over $35 million in 2007. Now, I'd like to turn the call over to any questions, if I may.

Thank you, and thank you, gentlemen, for that presentation. (OPERATOR INSTRUCTIONS). Mitra Ramgopal, Sidoti.

Yes, hi, good afternoon, guys. Just a first question, just coming back to the Hospira issue with the critical care line, and give us a little more color, if you could, in terms of your anticipated steeper declines in the second half of the year. Was it sort of back-ended in terms of your expectations for delivery? And also, you know, if you have any degree of confidence that you could rectify the situation?

You take half and I'll take half. You take the first half and I'll take the first half. The first half is the decline.

The expected decline - if you recall, the second half last year was pretty strong sales half, so the decline kind of gets accentuated because, you know, we're down sequentially compared to being up sequentially in the second half last year. Beyond that, I'm not sure what we can say. It's consistent with the trends that we're seeing this year.

But I guess it clearly had to be something that you weren't expecting as your taking the guidance down, I mean, pretty significantly as a result of.

No, we were not expecting it. It is something that showed up this quarter.

Remember that we do not have salesmen in the field for this specific-- for all other product lines we sell with Hospira we have salesmen in the field. But on the catheter business, the transfusion business, the critical care business, we do not have a direct sales force or product specialists in the field. So this came as a surprise to us.

Is there anything you're going to do differently-- ?

We basically manufacture the product for them and they sell it.

And is there any way you can just kind of change this so you can have a little visibility, or is it just-- just not possible?

We are talking to Hospira about getting a better understanding as to what's going on. We can get better visibility, I think, through more conversation with them. But in terms of what we do with that, they still have responsibility for the commercial side of this and so they control the sales.

Okay. Moving on to the SG&A, I think you said you expect it to be about 24% of revenue for '07. I think on the last call it was going to be more like 21, 23. Is this increase just a function of the revenue decreasing or -- ?

Basically, that's right.

Yes, yes.

Okay. And again, just coming back to some of the production capacity you have now for the new products, do you expect to be pushing that amount of product next year?

Do I expect what?

To be selling that amount of product, and that's why you're bidding-- ramping that kind of capacity up? Or just building excess?

Oh, no. We expect to sell what we make.

Beginning in '08. Okay.

But we're not giving any numbers for '08 yet. We're ramping our capacity because we're in early-- we're in small [cavity] tools right now. Big capacity tools come in in October, November, December. That should set us up for '08. But we expect to sell, in the oncology field especially, sell a significant amount of product. Remember, we tested the waters in Europe, and without Spiros and without Genie, just the custom oncology sets, you see their sales are up 31%. They're going gangbusters in Europe. It's testing the waters for where we're going in the U.S. The U.S. market is equivalent, for the most part, as-- same as Europe. So we expect to have significant sales in oncology. We're betting on it.

Another aspect of that, Mitra, is that as the demand for the products increase we'll be out there ordering more tooling as well.

A lot of tooling is already in place. For Spiros, that's in place. That arrives in October through December and the same goes with Genie. So we have most of that in place, Frank.

Okay, and then just finally on the litigation front. I think, you know, you'd indicated your expect clearly a (inaudible) decision. If you can give us an update in terms of what we should expect on the litigation front?

Minimal expenses, the appeal will be relatively inexpensive compared to what we're used to paying. So it should be a small amount.

Okay. Thanks. I'll get back in the queue.

(OPERATOR INSTRUCTIONS). Dan Owczarski, Belmont Harbor Capital.

Yes, thanks and good afternoon. Just to dig a little bit more on the critical care. I mean, are you able to tell if it's a specific issue? I mean, is Hospira winding down inventory, are they losing share? Is end-user demand like market just slowing down? And even is it a-- could you tell us if it's a specific product line that's impacting it more than something else?

I can take that question. From my-- you'd really have to ask Hospira what the-- to get to the truth, because remember we don't have salesmen in the field. But on that particular product line, remember on set source and every other product play we have-- we worked side by side. This one is Hospira alone. From my point of view, that the market is declining at a slow pace, catheters specifically are being used less and less. Specifically more sophisticated catheters that you feed into the right heart, into the pulmonary artery and into the lungs. Those specifically are decreasing at a-- not a rapid rate but a slow, progressive rate. There was a pretty big inventory build in the fourth quarter of --

Well, some. We don't know how much but it was apparently --

We believe there was pretty good inventory build in the fourth quarter of last year, so that would have some impact on it. But really the best people to ask this question would be Hospira. They would know more than we would know. Whereas I say, we just manufacture the specific product line; they sell it.

Okay. And then just to confirm the decline in your target from the 206 to the 190, that's almost all critical care?

Most all critical care.

And the --

We're just taking the numbers that have dropped and extrapolating them out.

Okay, I mean, and is there-- can you help us even think about in 2008, how does this fall into next year. I mean, should we assume these lower levels or is there a chance for pickup?

It's a tough question, because we don't have an answer for you. I think the conservative answer would be a slow decline in business. As we sit here today we can expect unless there's some changes made. I do have-- I do have some new products that roll out. We're launching a new product within this week and we have a new product coming on in the second half-- second quarter of '08, which I think has some significant promise to the catheter line. But you can't-- we can't bet on those products right now unless-- I think the first thing to do is reverse the trend that we see occurring. New products will help, but as you know, there are new products and until they get market acceptance we don't-- you can't bet on them.

Okay. And then can you give us any kind of additional update on the Mexico operations itself, now that you've had a little bit of experience down there in ramping it up? I mean, have your expectations changed as far as what the margins could be or what the head count's going to be necessary down there?

We told you that we'd get our margins up to this quarter-- I think we probably told you 42%, 39%. And we're right at where we said we'd be. We think there's room for the margin expansions. Remember, we're manufacturing an entirely different way than traditional manufacturing. But Mexico is going well; we're doing our job as far as manufacturing goes, getting better and better and better. So Mexico is going well; the expansion-- we have room for another 400 people down there. So we're anticipating using those-- using those bodies and using those people to manufacture for 2008.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Ron Gutfleish, Elm Ridge Capital.

Hi, guys. I just have question, and I might have gotten the math wrong on this. But it also looks that, given your other numbers, that regular sales to Hospira were down as well in the quarter. Did I get that right? And if that is right, what was going on there? Was there an inventory issue or-- and do you expect that to continue?

They were off just a little bit in the quarter, and nothing really notable there, Ron. It was off a little bit in CLAVE and a little bit in some of the other products, and that could very easily just have been the timing of deliveries. It's just a small decline.

SetSource?

SetSource's actually was up.

No, I understand that piece was up, but it looked like the core [clay] was down. Okay, I just wanted to check that piece. Oh, matter of fact, can you just give me-- I missed that number. What was CLAVE?

CLAVE overall was up, because Spiro CLAVE number-- just CLAVE by itself was 13.7; it was down 400,000 from last year.

Okay.

I mean, that's a small number on that kind of volume.

Okay. Thank you very much.

There are no further questions at this time. I would now like to turn the presentation back to Mr. Frank O'Brien for closing remarks.

Okay, well thank you all for joining us and that will conclude the call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation; you may now disconnect. Good day.