ICU Medical Inc (ICUI) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the year-end 2007 ICU Medical Incorporated Earnings Conference Call. My name is Eric, and I'll be your coordinator for today. At this time, all participants are in a listen only mode. We will facilitate the question and answer session towards the end of the conference. (OPERATOR INSTRUCTIONS) I would now like to turn your presentation over to your host for today's call, Dr. George Lopez, President and CEO. Please proceed.

Good afternoon, everybody. Thank you for joining us today to review ICU Medical's financial results for the Fourth Quarter and Fiscal Year ending December 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.

I will start the call by highlighting our operating achievements in Fourth Quarter. Then Frank will discuss in more detail our financial results for the Fourth Quarter and Fiscal Year 2007 as well as our revenue and earnings targets for Fiscal 2008. I will wrap up the call with a discussion of current business trends and then we will open the call for your questions. Before we start, I want to touch upon any forward-looking statements during this call. Please be aware 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 and are subject to risks and uncertainties. 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, let me begin.

We are pleased with the overall performance we achieved during the Fiscal Year in the Fourth Quarter inasmuch as sales and earnings were in line with our expectations. 2007 was a year of investment and positioning us for growth in 2008 and beyond. Even though we face challenges during the year in Critical Care, our other product offerings continue to do well in all channels and we are in a very strong position for continued revenue growth and earnings growth in 2008. We're looking at sales excluding Critical Care increasing approximately 16% in 2008.

In 2007, we invested in our salesforce and infrastructure for the rollout of many of our new products. We improved manufacturing efficiencies of Salt Lake City and Mexico and in the Fourth Quarter, our gross margins expanded almost 9 percentage points to 42% year-over-year. Our operating income for the Fourth Quarter increased approximately 35% compared to the same quarter a year ago because of the improvement in the gross margin. As expected, sales of our Critical Care products distributed by Hospira continued to be sluggish during the Fourth Quarter and declined 36% from the relatively strong numbers in the Fourth Quarter of 2006. They're relatively flat from Third Quarter of 2007. Hospira controls the Sales and Marketing of the Critical Care products that we manufacture. While we don't foresee any improvements in our Critical Care of sales to Hospira during 2008, Hospira now has a significant number of full time salespeople who have been specially trained and are dedicated to sell Critical Care products.

During 2007, we generated strong cash flow from our operating activities, exceeding $41 million. As of December 1, we have $96 million in cash and investments, no debt, and $132 million in working capital. And this is after buying back a total of 1,062,922 shares for $41 million during 2007. This solid financial condition provides the proper resources for our growth initiatives going forward, including the continued development of new products, strengthening of our Sales and Marketing team, and funding ongoing improvements at our manufacturing facility. Looking ahead in '08, we're very excited about the many opportunities for new and existing product lines as well as cost savings we believe we will continue to achieve.

Turning to our product offerings, we are particularly encouraged by the recent positive trends in our oncology, CLAVE, and Custom CLAVE product lines. Based on current demands, we believe our new oncology product will generate in excess of $10 million in sales in 2008, compared to less than $1 million in 2007. I can also tell you that in December we signed a contract with Hospira to distribute our oncology products and this should increase sales once we get production volumes up. Our other new products, Genie, TEGO, and Orbit, should generate in excess of $3 million in 2008. The feedback and demand we are receiving for our new patented products is very exciting. You should consider these numbers as preliminary since our sales to date are relatively small. But before I go into more detail on the opportunities in '08 and beyond, I'd like to turn the call over to Frank to discuss our quarterly and annual financial results. Frank?

Thanks, Doctor. Before I begin, let me remind all of you that the sales numbers that we are covering as well as our financial statements will as usual be available on our website as I am speaking. As discussed on earlier calls, in the latter half of 2006 we discontinued the production of two low margin product lines, Punctur-Guard and the product line under our Hospira Salt Lake City Arrangement that we anticipated discontinuing when we bought the plant. The sales of these two discontinued volumes totaled $2.2 million in the Fourth Quarter of 2006 and $14.6 million in the Fiscal Year 2006. Today, we will be discussing sales on a pro forma basis excluding our discontinued lines. To help you better understand our Fourth Quarter and annual results. We have not isolated margins on these products, but they are negligible. The reconciliation of the actual GAAP numbers is available on our website along with the other sales numbers. As these product lines were discontinued in 2006, this is the last time we are going to be discussing our sales on a pro forma basis.

Our revenue in the Fourth Quarter of 2007 decreased 10% to $45.5 million compared to pro forma revenue of $50.6 million in the Fourth Quarter a year ago. Net income for the quarter totaled $6.0 million or $0.41 per diluted share compared with net income of $6.9 million or $0.44 per diluted share in the Fourth Quarter 2006. For the Fiscal Year of 2007, we achieved revenue of $188.1 million compared to pro forma revenue of $187 million last year. Net income for the Fiscal Year of 2007 totaled $23.1 million or $1.51 per diluted share. The 2007 income includes a net $2 million or $0.13 per share amount on favorable litigation settlement offset by a legal judgment against us. Without this, we would have earned $1.38 per share in 2007. This compares to net income of $25.7 million or $1.64 per diluted share in 2006.

Our CLAVE business passed a notable milestone in 2007. CLAVE and Custom sets with CLAVE, our total CLAVE line exceeded $100 million annually for the first time, coming in at over $106 million for the year. This was an $8.9 million or 9% year-over-year increase. The CLAVE is still the best connector in the market and has the lowest infection rates of any connector and we continue to be excited about its future growth.

Now let me discuss our sales mix for the Fourth Quarter. Sales from CLAVE products excluding Custom IV systems increased 3% from $17.7 million to $18.2 million year-over-year. CLAVE sales including Custom IV sets with CLAVEs on them increased 4% to $26.8 million in the Fourth Quarter of 2007 compared to $25.7 million in the Fourth Quarter of 2006. Sales from Custom products which include CLAVE, and non-CLAVE but excluding Custom Critical Care products increased 5% year-over-year. However, the decrease in Custom Critical Care products caused an overall 18% decrease to $14.2 million compared to $16.7 million in the same quarter a year ago. This was driven primarily by a decrease in Custom Critical Care products. Excluding the decrease in Custom Critical Care products, as I said, Custom products increased 5% year-over-year.

Sales from our Critical Care products that were sold to Hospira including Custom products decreased 31% to $12.5 million in the Fourth Quarter as compared to $19.5 million in the Fourth Quarter a year ago. As Dr. Lopez already mentioned, we do not expect improvement in our sales in Critical Care products to Hospira in 2008. However, we are encouraged by the recent Sales and Marketing initiatives of Hospira, which now has a dedicated team to sell our Critical Care products, and we have some of the new Critical Care products. So we believe our sales in Critical Care products to Hospira can increase in the future.

Our Fourth Quarter sales by distribution channel are as follows: Despite poor performance in Critical Care on a pro forma revenue basis, domestic sales by distributors increased 25% to $8.2 million year-over-year, due to a very strong sales contribution from our Custom sets and CLAVEs. On a pro forma revenue basis, the financial sales for the Fourth Quarter decreased 11% to $5.1 million year-over-year. This decrease was primarily attributable to the timing of orders for Custom sales. As a percentage of total sales, Fourth Quarter international sales were 11% of total sales compared to 12% in Fourth Quarter 2006. We believe international markets represent a tremendous growth opportunity for CLAVE and our new oncology products and we will continue to introduce current and new products in these markets.

Now let me touch upon some of our key operating metrics. In the Fourth Quarter of 2007 gross margin was 42% as compared to 43% in the third quarter of 2007 and 33% in the Fourth Quarter of 2006. The margin expansion on a year-over-year basis is attributable to our improved efficiencies and productivity gains in our Salt Lake City and Mexico manufacturing facilities. The decrease in gross margin on a sequential basis, the Fourth Quarter of '07 versus Third Quarter of '07, was primarily due to sales volume and product mix. We believe that once fully deployed, our efforts will significantly enhance our production efficiencies through process improvements will result in improved gross margins in 2008 and beyond.

Additionally, we are very excited about our decision to begin building a manufacturing facility in China in 2008. We believe this factory will be operational in early 2009 and will enable us to significantly reduce our costs on multiple components. We target gross margin to be 45% of revenue in 2008. SG&A expenses for the Fourth Quarter were $12.4 million, essentially unchanged as compared with $12.5 million for the same period last year. We will continue to focus on controlling our operating expenses during 2008. In addition, we will make significant investments in sales and sales support targeting sales of our new products, particularly oncology, and target SG&A expense to be 26% of sales in 2008 as compared with 24% in 2007.

Research and Development expenses decreased 13% to $1.9 million in the Fourth Quarter of 2007, compared to $2.1 million in the same period last year. We will continue to use our strong cash flow to invest in development of new and innovative products for open Markets, and target R&D at 5% of revenue for 2008, the same as in 2007.

As of December 31, 2007, our Balance Sheet remained very strong with approximately $96 million in cash and investments. Our cash flow continued to be very strong as well, and we generated more than $41 million in cash flow from operating activities during 2007. Additionally during 2007, we bought back over 1 million shares at a cost of $41 million. We spent just under $24 million on Capital Expenditures for maintenance and increased capacity. In 2008 we expect to spend approximately $20 million in Capital Expenditures, which includes our initial investment in the plant in China. Now I'd like to turn the call back over to Dr. Lopez.

Thanks, Frank. Based on our strong business fundamentals, and our market's current trends, we're excited about our prospects for 2008 and beyond. Let me share with you a few of my thoughts about some developments going on at ICU Medical and in our industry and how we believe our future performance will benefit from these trends. I will start with our existing product line.

CLAVE has always been a low -- has always had a lower hospital infection rate compared to other connectors. More attention is being focused on this issue and federal funding for hospital acquired infections is going away, so hospitals are more keenly aware of this issue. Our CLAVE and Custom CLAVE products are proven to be the most efficient and safest device perfectly designed for minimizing this problem. We have recently expanded CLAVE within the VA hospital and other hospital systems for this particular reason. As I already discussed earlier, in spite of disappointing sales of our Critical Care products, we remain optimistic about the future of this business. We believe our Critical Care products have a tremendous value proposition for healthcare professionals around the world. As we enter 2008, Hospira's decision to focus dedicated salespeople on Critical Care and introduction of new products to this market such as latex-free balloon catheters and should in our view produce the results we know this product portfolio is capable of achieving. We are enthusiastic about the future results that our manufacturing capabilities combined with Hospira sales team are capable of delivering.

Now let me update you briefly on our new Product Development. In 2007, we told you about the development of our new oncology products and now we are positioned to begin expanding our sales reach within these products. As a reminder, Genie, our first closed vial access device and Spiros, our closed nail connector in the line of IV therapy products, are being used primarily for the delivery of hazardous medication such as oncology drugs. Initial demand for oncology products has been extremely strong and is rapidly growing. We expect our oncology products to increase tenfold and generate at least $10 million in total sales in 2008. Right now, we have a capacity to support production of product with a potential $14 million in annual sales of Genie and $24 million in annual sales of Spiros. In 2007 we made the upfront investments necessary for the expansion of these products in '08 and are very well positioned for growth. The market response from these two products has been very strong and we fully expect these products to be significant part of our offerings for many years to come. In addition, we continue to develop and market our Orbit 90 diabetes set and TEGO, our new connector designed to control infection in dialysis catheters. Both of these products are steadily gaining market recognition and we're pleased with initial sales. In addition, we'll officially initiate a full scale launch of our oncology portfolio by the end of the First Quarter.

In total, we expect our sales from these new products to exceed $13 million in '08, but obviously we have capacity to sell more. So what are our financial targets for 2008? For the full year of 2008 excluding Critical Care, we expect our revenue to be up 16%. This growth is being offset by an expected decline in Critical Care. Overall, we expect to generate revenue approximately $200 million in '08. Based on the sales number we are seeing, we see earnings of approximately $1.50 per share, up from $1.38 in 2007 excluding the one-time legal items. We have not historically provided quarterly targets but I would like to point out something that may be obvious. The impact of our new products will become more significant as the year progresses. So our First Quarter of 2008 will probably be our weakest quarter of the year.

In conclusion, I'd like to say that we are well positioned to expand our new portfolio of patented products addressing some of the most important issues in the healthcare industry today and in the future. Now I'd like to turn the call over for any questions, if I may.

(OPERATOR INSTRUCTIONS) First question comes from the line of Mitra Ramgopal with Sidoti. Please proceed.

Yes, hi, good afternoon, guys. Just a few questions.

Hi.

Just getting back to the guidance, I think you're saying revenue was $200 million excluding Critical Care?

No. Including Critical Care.

Including Critical Care. Okay, and the gross margin, I think your goal is 45%?

Yes. For the year.

And I thought at some point last year, you would have been -- I think the goal in '07 was to sort of get to 45% and by '08 so it's at 50%. Clearly in '07 we were closer to 40%. Any reason why we can't get more quicker expansion on the margins, now that the move is complete and you're pretty much going to be rolling out the new products and getting more capacity?

Mitra, we made a lot of progress there. One of the things that's happened is our volume of Critical Care is down and it's just tough to make that up but we are continuing to make progress in the margins. And I think over time, once we get the new products in there, we'll forget about the 45% because we'll be way past that.

And it just seems like you're having a really significant bump up in SG&A compared to --

Mitra, that's all salesforce. That's that addition of at least 20 new salesmen focusing in on oncology for launching the product at the end of this quarter.

Because I think last time I talked to you, you were looking at SG&A closer to 23 to 24% range and this seems a little high here.

Might be a little low for us, 23.

Yes, we've made a decision to significantly increase our sales and marketing support for the new products.

That's heavily focused with the new salesforce.

Right, I think sort of looking, I was sort of expecting '08 in terms of the guidance, I mean if we look back at what we did in two years ago in 06, 08's guidance is still well below where you were two years ago. Is this a conservative guidance or is this just a lot of headwind you're facing?

Well, it's Critical Care certainly hasn't helped, it was reasonable in '05, it's down in '06 and down again in '07, tough to make all of that up.

Right, in fact, I'm going back to '03 and you did $1.48, so the $1.50 in '08 just seems five years later, we're not much along the road.

Back to your question on margins, because margins determine bottom line, we don't want to leave you with the impression we don't think we'll get our margins up. We think that all we said in the past was that margins would to get them above in the classical range that we're used to before the Critical Care acquisition, in the 55, mid 50 range, it's going to take new products and we're just launching the new products now. We've tested the product. We're comfortable with it. We're rolling out and we have our national sales meeting next week and for the alternate site and same thing goes for the hospital and followed by Hospira salesforce gets trained in I believe in the first of March. So we're expecting the contribution to the margins to be new products, but as all new products they take a while to get established, they don't take off right away. It takes a little bit of time. But that should be a contributor to our margin expansion as that number gets bigger and bigger. Remember it's a big market, Mitra.

Right, thanks. And just one quick question, just looking at the tax rate again in the Fourth Quarter, it looks like more a 25% rate. I don't know what we should expect going forward for '08.

For '08, we're looking at approximately 31% tax rate, which is in line with 2007 by the way, for the year.

Okay, thanks.

(OPERATOR INSTRUCTIONS) We're showing no more questions in queue at this time. I'd like to turn the call over to Management for closing remarks.

Okay. Well, thank you very much for joining us on this call. We'll see you next quarter.

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