ICU Medical Inc (ICUI) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2007 ICU Medical, Inc. earnings conference call. My name is Eric, and I'll be your coordinator for today. (OPERATOR INSTRUCTIONS)

I would now like to turn your 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 our ICU Medical financial results for the third quarter ending September 30, 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 third quarter. Then Frank will discuss in more detail our financial results. I will wrap up with a call with a discussion of current business trends, update you on our 2007 revenue and range targets, and then we will open the call for your questions.

Before I start, I want to touch upon any forward statements. 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 representation of future results but are subject to risk and uncertainty. Future results may differ materially from management's current expectations. We refer all of you to our SEC filings 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 will begin.

We are pleased with the overall business fundamentals during the third quarter. Our core products performed very well. CLAVE product sales were up 7 percent during the quarter. Custom IV sets performed very well (inaudible) sales from this product line, excluding custom critical care products, increased 13 percent year over year.

International sales continued to grow at double-digit rate and were up 21 percent during the quarter.

Operating cash flow for the first nine months of this year was approximately $30 million, and our improved efficiencies of Salt Lake City and Mexico factories resulted in a 4 percentage point gross margin expansion to 43% since the third quarter 2006.

Sales of my new products were very encouraging. Our oncology line looks like a real winner already. The other new products, Orbit 90 and TEGO, are being received very well, although volumes are small because of curbed production constraint.

Turning to our critical-care business, as we expected, we experienced a 21% decline in sales from critical-care products, including custom critical-care products distributed by Hospira. Hospira handles the sales of these products and has recently committed more focus and resources on selling our critical-care products. Hospira now has dedicated a significant number of full-time salespeople and other resources to focus on just selling critical-care products, which was not previously the case. Further, we believe that their reduction of new critical-care products, such as the latex-free catheter, should help Hospira regain market share in the critical-care market.

As of September 30, we had a very strong balance sheet with $103 million in cash and investments and $138 million in working capital. Also, during the first nine months of '07, we generated $30 million in operating cash flow.

During the third quarter, we bought back 450,000 shares in the open market at a cost of $17.1 million. On September 11, 2007, our board of directors offered the new program to purchase up to an additional $20 million of our common stock, and we have $6.2 million remaining on this authorization as of today.

I would like to conclude by saying that we are optimistic about our business prospects the remainder of the year and beyond. Our efforts to invest in product innovation and expand our market presence continue to pay off.

Now I'd like to turn the call over to Frank to discuss our quarterly results in more detail. Frank.

Thank you, Doc.

Before I begin, let me remind all of you that the sales numbers that we will be covering, as well as our financial statements and certain other financial data will, as usual, be available on our Web site before this call is over.

As discussed in earlier calls, in the latter half of 2006, we discontinued a production of two low-margin product lines, Punctur-Guard and a 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 $3.2 million in the third quarter of 2006 and $12.4 million in the first nine months of 2006. These lines have no significant contribution to our margins in 2006.

Today we will be discussing sales on a pro forma basis, excluding our discontinued lines, to help you better understand our third-quarter results. The reconciliation to the actual GAAP numbers is available on our Web site, along with the other sales numbers.

Our revenue in the third quarter of 2007 was essentially flat at $44.9 million, compared to pro forma revenue of $45.4 million in the third quarter a year ago. That income for this quarter totaled $4.7 million, or $0.31 per diluted share, compared to net income of $6.1 million, or $0.39 per diluted share in the third quarter of 2006.

Net income for the third quarter of 2006 includes a one-time gain on sale of a building for $1.3 million net of tax, or $0.08 per share. Excluding this one-time gain, earnings per share would have been $0.31 in the third quarter of 2006. So earnings per share of $0.31 in both years is essentially flat.

While revenue was essentially flat, this masks the fact that all of our channels and all products did very well in the third quarter except for the critical-care and custom critical-care products that we sell to Hospira. Sales there were down $4.1 million, excluding the discontinued products.

Offsetting this was a $3.6 million, or 12%, increase in our other products. Principally, a $1.7 million increase in custom IV system sold to Hospira, a $1 million increase in international sales, a $700,000 increase in domestic distributors, and a $500,000 increase in sales of other products to OEM's.

The increase in international was primarily driven by growing demand for CLAVE and custom IV products in Europe, Latin America, and South Africa. For the third quarter, international sales as a percentage of total sales increased to 13%, up from 11% in the third quarter of 2006. We view international markets as a significant growth opportunity for both IV therapy and oncology products and will continue to expand our footprint worldwide.

For the first nine months of 2007, revenue increased 5% to $142.6 million, compared to pro forma revenue of $136.4 in the same period last year.

All products combined for the first nine months, excluding critical care and custom critical care, increased $10.3 million, or 12%, partially offset by the $4.1 million decrease in critical care.

Net income for the first nine months totaled $17.1 million, or $1.10 per share. This compares to $18.8 million, or $1.21 per share in the same period last year.

Our sales mix for the third quarter was as follows:

Sales from CLAVE products, excluding custom IV systems, increased 7% from $16.6 million to $17.8 million year over year.

Sales of custom IV systems increased 13% to $11.4 million in the third quarter of '07, compared to $10 million in the third quarter of '06.

Sales of our critical-care products that we sell to Hospira, including custom products, decreased 21% to $12.4 million, compared to $15.9 million in the third quarter 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 manufacture the products, and Hospira is responsible for sales to end customers, and our sales of our critical-care products to Hospira are subject to fluctuations over which we have little control.

As Dr. Lopez mentioned earlier, in spite of the decline in sales of our critical products, we remain optimistic about the opportunities lying ahead and look forward to returning the product to positive growth in 2008. Hospira has told us they recently redeployed a significant number of full-time salespeople and other resources to focus on just selling critical-care products, which is a major change.

Further, we believe that the introduction of new critical-care products, such as the latex-free catheters, will help us regain market share in the critical-care market.

Also, it is worth noting that critical care is profitable to ICU, and we expect it will continue to be profitable for the life of the contract.

Let me just add one note on the profitability of the contract with Hospira on the critical-care products. Our profits are based on a portion of the savings with reference to benchmark costs on May 1, 2005, the day we bought the Salt Lake City plant. The portion of the savings passed through to Hospira increases over the first five years of the contract through 2009 but will never exceed more than approximately half of the savings. Based on current volume and costs, prices to Hospira will decrease approximately 5% in 2008 and another 5% in 2009 with no other adjustments, none. The profitability for ICU is and will continue to be significant, as are the cost savings for Hospira.

Now let me touch on some of our key operating metrics.

Gross margin was 43%, compared to 42% in the second quarter of 2007 and 39% in the third quarter of 2006. This expansion in gross margins is attributable to our continued improvement in manufacturing efficiencies and productivity gains at our Salt Lake City and Mexico manufacturing facilities.

SG&A expenses for the third quarter increased 4% to $11.5 million, compared to $11.1 million in the same period last year, due in part to the hiring of new salespeople for our new product introductions, which offset a decrease in our patent litigation expenses. We expect our SG&A to be approximately 24% of total sales for the full year.

Research and development expenses increased 39% to $2.2 million in the third quarter of 2007, compared to $1.6 million in the same period last year, as our new products move rapidly through development.

As of September 30, 2007, our balance sheet remained very strong with approximately $103 million in cash and investments. Our cash flow continued to be very strong, as well as regenerated $30 million of cash flow from operating activities during the first nine months of 2007.

Additionally, during the third quarter we bought back 450,000 shares of our stock in the open market at a cost of $17.1 million and in October have bought an additional 236,000 shares at a cost of $9.1 million. We have $6.2 million remaining on our authorization to buy back stock. Actual purchases, of course, will depend on the stock price, prevailing market, and business conditions and other considerations.

Receivables are still very current.

DSO's, days sales outstanding, are at 58, down from 60 at June 30, 2007.

Inventories are up $1.4 million since December 2006 because we have increased our raw materials to keep our deliveries on time.

Finished goods are down a bit since December, and turns are good at five times, the same as it was in the third quarter last year.

Now I'd like to turn the call back over to Dr. Lopez. Doc.

Thank you, Frank.

As I already mentioned earlier at the beginning of this call, we are very encouraged by our current business trend and how our core business performed in the third quarter. So far this year, we have made a significant investment in our research and development initiatives. We continue to stress product innovation and diversification as pivotal drivers of our future growth. We've assembled a premiere portfolio of next-generation oncology products that strongly position us for further expansion of our market share and the (inaudible) of our growth both domestically and internationally.

International sales continue to make a strong contribution to our top- and bottom-line results as our focus on oncology continues to produce strong results. We are confident that our sales in many countries will continue to grow with our custom set and our CLAVE products, along with our new line of oncology products.

I would like to include in my part by updating you on our financial targets for '07.

Based on the current state of our business, we continue to target 2007 revenue at approximately $190 million and diluted earnings per share at $1.50 per share.

We'll be providing 2008 targets on our next conference call.

Now let me update your briefly on our new product development.

Genie is our new closed vial access device. We expect to have a capacity of producing this product by early 2008 with a potential of $12 million in annual sales.

We also have started manufacturing and shipping Spiros, a closed male connector primarily for use in oncology for the delivery of hazardous medications, such as chemotherapy. We are currently working on expanding our capacity of support production of this product by early 2008 with a potential $24 million in annual sales. We are very encouraged by the initial reception of this product.

Orbit 90 diabetes set has been completely redesigned, and initial sales were in line with our expectations. We plan on establishing the production at the and of '07 for a potential $14 million in annual sales.

TEGO, our new connector designed to control infection in dialysis catheters, continued to gain market recognition during the quarter. We will have (inaudible) the support production of this product by the end of 2007 with an annual sales volume of about $12 million.

We think we are on the right track for continued long-term growth. For example, oncology. We have the right products, the right distribution, an empty market, and now it's all about execution.

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

(OPERATOR INSTRUCTIONS)

The next question comes from the line of Mitra Ramgopal with Sidoti. Please proceed.

Yes. Hi. Good afternoon, guys. Just a few questions. First, we did see some nice improvement in the gross margin. I don't know if you can give a sense as to what we should expect heading into '08?

Well, we expect -- we'll give better guidance or better targets in January, but we expect the margin to expand with new products. That's our expectation. Expect the margins on the new products to be pretty healthy. So the margins should move north. We're right on track for what we told you earlier in the year, that we'd be at about this place by the end of the year third quarter, 43%.

But most of the improvement from margins we should see now from new products, as opposed to any deficiencies from Salt Lake or Mexico?

Some have more efficiencies. We're getting incredible efficiencies productivity out of Mexico right now. And we're actually doing our ICU production system in Salt Lake City. We're implementing that. So we expect to get more improvement on existing facilities, but we also think that '08 will add and '09 will add margin opportunities for us based on new products also.

Okay.

We don't expect them to go the other way.

Okay. And I know you did break out Genie, Spiros, etc., the kind of production capacity you expecting for on an annual basis. Now, should we assume those numbers would sort of kick in next year, or is it a more gradual process?

Gradual process. It takes us about five months to make -- to increase our capacity significantly. So it would be a (inaudible). But those numbers are numbers that we're comfortable for the year.

Okay. And I know you're in particular excited about the oncology and international space. I don't know if you can give us a little more color in terms of what you're seeing there to make you feel very bullish about it?

Oncology -- remember, my philosophy is always to go into empty markets, and I'm -- it's good to compete, but when you have competition, you get bloody noses. And I think that oncology is wide-open market, it's anybody's game, and I think our products -- continually make upgrades to the product and change them, but I think we got the right products for this market, and I think we got the right distribution. I think Hospira is a powerful distributor, including our independent distributor. So I think we're in the right place. And so far I've witnessed the feedback myself, and the feedback's been outstanding. So I think -- I'm very high on this market, and I think it's a great opportunity. I think it's a very big market opportunity. I had no indicators to tell me any differently so far. Now maybe we'll stumble or trip somewhere along the line, but as far as I can see right now, it's just about execution, can we execute.

Okay. And, finally, I guess, you're clearly active in terms of share repurchases and even into October, given where the stock's trading at right now and the cash you have on hand, I guess it's fair to assume at these levels you will probably still be in the market?

Mitra, we normally don't comment on our future trading plans.

Whenever it goes on sale.

Okay. Thanks, guys.

Your next question comes from the line of Dan Ozczarski with Belmont Harbor Research. Please proceed.

Yes. Good afternoon. Hi, Doc. Hi, Frank.

Hi, Dan. How you doing?

Good. On the last conference call with this whole Hospira critical-care issue, it sounded like you were still kind of in a fact-finding mode and you didn't have all the pieces and you weren't quite sure exactly what was going on there, but now it sounds like it's a resource issue, that they took away head counts? Is that the case? Is that the primary driver behind this?

They're very close, Dan. What happened is they folded the product line into their general sales force, and the product line is a fairly complex product. So what they've done is they've made an about-face, 180-degree change, and what they've done is they've taken the specialists back out of the sales force and have them just selling critical-care products. Before that, it was the general-line sales force was selling the product. They were spending -- supposed to spend 5% of their time on the product line. That was the theory, and it would save a lot of money to do that, but it didn't seem to work out as well as having specialists sell it every day. Now, they've dedicated a certain number of people, which we think is enough to cover United States -- district managers, specialists -- and it's about a 180-degree turn from what they were doing before.

Okay. So is the number of specialists similar to what they had? Is it more? Is it less?

They didn't have any specialists working on the product line.

Okay. Before they rolled it into the general?

Right.

Okay.

They had nobody working the line. The general line -- remember, they carry thousands of products in their bag. So it's one of many products, and this product line requires -- it's an ICU product. It's about leading pulmonary artery pressures and wedge pressures and such from -- doctors have very tough questions, and unless you really know the answers, you really don't want to be there. So what they've done is they've pulled out the specialists again. We think it's the same move that we would have made. It's exactly the same thing that we would have done. So we think it's the right move, but let's see, and let's let time tell. The answer's in the result.

Yeah. So that's my next question. Timewise, do we have to give this a couple of quarters to see the results, or what's your feeling for when you would see this is the way to go?

Dan, hard to say exactly when we would see the results. Normally these things take three to six months, and I wouldn't expect this one to be any different, which means it would be next year, but I very definitely would anticipate that they would at least stop sliding domestically.

Okay.

The good part is we've developed -- we quickly have developed new products for them. For example, complete line of latex-free catheters, the probes, and such, without competition, but nobody was selling the part. Now that we have a sales force that's going to sell the product -- the new products, then we think there's some great opportunities there. So we've already built it in our numbers what we've -- conservative aspects of our critical care. We're being pretty conservative.

Okay. And my other question was about the custom-set business. Is this kind of where we're going to see it stabilize in this, maybe, I don't know, 13%, 14% growth rate, or what can you accelerate into that into the higher double digits?

I don't that answer just sitting here today. I can tell you that the custom-set business is going to expand because of oncology. The formula is customize everything in oncology. It'll be hocked to every department, every clinic. So I think that's going to offer opportunities, but I don't know really what that number's going to be. I just think it's going to be a healthy number, Dan. Can't pin it down right now.

Okay. Have you sold any of the Genie, or does that have to wait till you're already in early '08 for the manufacturing?

Genie has to wait till early '08 because we have very small cavity tool, and we've made an adjustment to the Genie to make it fit all the different vial sizes instead of having multiple Genies. So it's going to wait till '08 -- early '08. But it should be ready by no later than February of '08.

All right. Thank you.

We show no more questions in queue. I would now like to turn the call over to Mr. Lopez for closing remarks.

Thank you very much for joining this call. We'll see you next quarter. We'll give you targets for '08 on the next conference call, and we appreciate your time.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect, and have a good day.