ICU Medical Inc (ICUI) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2008 ICU Medical earnings conference call. My name is [Sylvana]; I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Dr. George Lopez, President and CEO. You may proceed, sir.

Good afternoon, everybody. Thank you for joining us today to review ICU Medical's financial results for the first quarter ended March 31, 2008. I'm Dr. Lopez, Chairman and President of ICU Medical. With me on the call today is Scott Lamb, our CFO.

I will start the call by reviewing our operating highlights for the first quarter. Then Scott will discuss in more detail our financial results our revenue and our revenue and earnings target 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 that, 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 condition.

With that said, let me begin. First-quarter results were right in line with our expectations, and we're pleased with the overall business performance. Our results were primarily driven by strong growth in the new oncology line, as well as sales of CLAVE. Excluding our critical-care and custom critical-care line, sales grew 5% year-over-year.

In the later half of the first quarter of 2008, we initiated full launch of our oncology portfolio, including the Spiros and a limited release of Genie, and we're very pleased with the early results from this launch. This line generated $1.3 million during first quarter of 2008, and we're on track to increase our oncology sales tenfold in 2008 compared to 2007.

Even though we are pleased with the overall first-quarter results, critical care continued to offset the gains we experienced in other parts of our business. We factored in reduced critical-care sales in our guidance. Even though we expected the decline during first quarter in the critical-care line during the first quarter, the critical-care line is profitable. We are certainly not satisfied with this line's performance. As you remember, we manufacture this line but Hospira is responsible for the sales.

During the later part of the first quarter, Hospira deployed a dedicated sales team to focus on improving sales and increasing the penetration of this product line. We believe, by combining their expanded focus on the selling of the current portfolio product as well as the new latex-free balloon catheters and the many future products in our R&D pipeline, we will eventually experience better results from the critical-care business.

We entered 2008 with improved manufacturing efficiencies at our Salt Lake City and Mexico plants as we continued to distance ourselves from competition as a leading low-cost manufacturer. Our efficiencies and speed to market enable us to take advantage of the opportunity in custom systems which now make up over 30% of our overall revenue. We are excited about our opportunities in 2008 and believe our patented portfolio of leading safe medical connectors, custom systems, new products and patented low-cost manufacturing processes have us positioned for long-term profitable growth.

Now, I will turn the call over to our new CFO, Scott Lamb, to discuss our first-quarter results in greater detail. Scott?

Thanks, Doc. Before I begin, let me remind all of you that the sales numbers we are covering, as well as our financial statements, are available on our Web site as well.

Our revenue in the first quarter of 2008 decreased 9% to $44.7 million compared to revenue of $48.8 million in the first quarter a year ago. This decline was due to our critical-care and custom critical-care businesses. Excluding these product lines, our revenue was up 5% compared to last year.

Net income for the first quarter of 2008 was $2.9 million or $0.20 per diluted share, as compared to net income of $4.5 million or $0.29 per diluted share for the first quarter of 2007. The first quarter of 2007 results exclude the one-time after-tax benefit from a legal settlement of $5.3 million or $0.34 per share.

To make our reporting of revenue by category easier to understand, we will be reporting revenue by four categories now and in the future. First of all, CLAVE sales, which represents approximately 40% of sales; critical care represents approximately 20%; custom systems represents approximately 30% of sales; and the remainder is primarily new products sales consisting of TEGO, Orbit and new oncology products.

Sales from CLAVE products increased 7% from $17.1 million to $18.3 million year-over-year. Sales from Critical Care, which exclude custom critical care, decreased 40% year-over-year to $7.4 million compared to $12.4 million last year. Custom systems, which includes custom oncology, custom infusions sets and custom critical care, decreased 2% to $14.9 million, primarily due to a 23% decrease in custom critical care. Excluding custom critical care, custom systems would have grown by 4% for the quarter.

New products, consisting of TEGO, Orbit and our new oncology products, increased $1.7 million compared to minimal sales in the same period last year.

Our first-quarter sales by distribution channel were as follows. Sales to Hospira decreased 19%, primarily due to the decrease in critical care and custom critical care products. Domestic distributor sales were up 12% to $7.7 million year-over-year and were driven by strong contributions from our custom sets and CLAVE. International revenues increased 9% to $6.2 million year-over-year. First-quarter 2008 international sales represented 14% of total sales compared to 12% in the first quarter of 2007.

We continue to expand our footprint in international markets and identify additional growth opportunities for our current products as well as our new oncology products.

Now let me review a few of our key operating metrics. In the first quarter of 2008, gross margin was 40% as compared to 42% in the fourth quarter of 2007 and 39% a year ago. The margin improvement on a year-over-year basis was attributable to improved efficiencies and productivity gains in our Salt Lake City and Mexico manufacturing facilities. The decrease in gross margin on a sequential basis was primarily due to reduced plant operations in the last ten days of December and early January in order to perform planned, preventative maintenance. This affected our gross margins by 3.5 percentage points. Excluding this preventative maintenance, we would have achieved gross margins of 43% compared to 39% for the comparable period last year. We believe our gross margins will improve throughout 2008 and we will achieve total gross margins of 44% to 45% for the full year of 2008.

Additionally, this year, we have begun plans to build a manufacturing facility in China. We plan to begin construction in early July and we expect to start production at this factory in early 2009. This plant will initially be used to reduce the cost of our components used in our custom systems by moving our smaller cavity tooling to China, which should lead to further improvement in our gross margins.

SG&A expenses for the first quarter were $13.1 million as compared with $12 million for the same period last year. The increase in SG&A was primarily attributable to higher compensation and salary expenses as we made investments in our sales force to support targeting sales of our new products, particularly oncology. Continuing to control operating expenses remains one of our key goals for this year. We target SG&A expenses to be 26% of sales in 2008.

Research and development expenses increased 9% to $2 million in the first quarter of 2008, compared to $1.9 million in the same period last year. We will continue to invest in product development and innovation and target R&D of 5% of revenue for 2008.

Finally, moving to our balance sheet and cash flow, as of March 31, 2008, our balance sheet remained very strong with approximately $99 million in cash and marketable securities. Additionally, we generated about $5 million in cash flow from operating activities during the first quarter. We spent $3.6 million on capital expenditures during first quarter and expect our capital expenditures, including our investment in the plant in China, to total $20 million for the full year of 2008. We expect to generate operating cash flow of approximately $20 million this year as we increase our working capital later in the year to support our expected new products sales.

Now, turning to guidance, we are reiterating our revenue target of $200 million, which is a 17% increase year-over-year, excluding critical care, and earnings per share of approximately $1.50. In addition, we expect gross margins to be 44% to 45% for the year.

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

Thank you, Scott.

We are optimistic about our company's future, as our business fundamentals remain strong will and we're well positioned to take advantage of current market trends with our patented products, including CLAVE, custom systems' new oncology products, and our low-cost manufacturing processes.

Hospital-acquired bloodstream infection is a major problem in the healthcare community. Medicare has announced that it will soon eliminate the reimbursement to hospitals for the cost to treat catheter-related bloodstream infections acquired by patients while in the hospital.

Our expanding portfolio of products has proven to not only protect the healthcare community from infections and dangerous chemicals but also reduce the costs associated with patient infections. We believe our CLAVEs our well positioned to expand our market share due to growing recognition of these products as the safest devices which guarantee the best protection from hospital-acquired bloodstream infections. We have begun converting some hospitals to our CLAVE for particularly this reason. Recently, Hospira announced they awarded a contract with HPG, a major GPO which has the potential, over time, for increased CLAVE business.

Custom systems now account for 30% of our overall revenue, and we believe this will continue to be a strong growth area for us for many years to come. We are by far the leader in custom systems in our industry, and we are constantly striving to expand our leading position.

The reason our custom systems have experienced such growth over the past five years is due to a number of attributes. Number one, we created a low-cost and efficient manufacturing process that enables us to deliver custom products sales to healthcare professionals in 14 to 21 days. It usually takes our competition over two months to provide a similar product.

Number two, we reduce costs for the hospitals and healthcare facilities because, with our custom systems, doctors and nurses will often use two or more IV sets to accomplish what one custom design set can do, thus eliminating wasted components and tubing.

Three, and most important, the nurse or doctor is able to design a set around their specific procedures, which improves their efficiency and reduces costs.

Four, lastly, many of the components and systems are using our patented products. As already mentioned at the beginning of this call, we are extremely excited about the new product opportunity. In 2007 we made significant investments in manufacturing and distributing these products, including signing a contract with Hospira to distribute our oncology products and increasing our own sales force to work with Hospira and our specialty distributors.

As demand for our oncology products is growing, we believe that Genie, our first closed bio-access device, and Spiros, our closed male connector used to protect healthcare workers from toxic chemicals, will begin to rapidly gain market share.

During the first quarter, we officially initiated a full-scale launch of our oncology portfolio, and expect it to generate approximately $2 million in total sales in 2008, compared to minimal sales in 2007.

Looking forward, we believe we will improve margins, reduce the decline in critical care products, and continue to generate strong growth in CLAVE, custom systems, and all of our new products, including oncology.

Now, I'd like to turn the call over for any of your questions.

(OPERATOR INSTRUCTIONS). Mitra Ramgopal.

Good afternoon, guys. Just a few questions, starting first with the maintenance work that was done -- if you can just give us a sense of what was being accomplish there. Should we expect any of that again by the end of the year looking out to '09?

This was planned preventative maintenance. This was maintenance that a lot of it in the past we've been unable to or haven't taken the opportunity to do the maintenance throughout the year, and so this was something that we had to do at the end of the year on a lot of our machinery and equipment, the clean rooms and so forth.

He was asking if we are going to do it this year.

We're looking at ways to reduce shutting the plant down to do preventive maintenance so that we can do it throughout the year. So we're looking at that right now.

We're looking at other options other than shutting down and not absorbing any overhead for that period of time, Mitra.

Okay. I believe you said, towards the end of the first quarter, Hospira is obviously committing more effort in terms of turning the critical-care business around. What's your feeling so far? I don't know if you could say. Are you encouraged that (multiple speakers)?

Mitra, I've actually checked on it again yesterday, talking to our anesthesia or our angio sales force, and they confirm that they are working together. They have a specialty sales force. They are targeting accounts. It looks like they are actually working and working the line. So we believe that they are actually putting a good amount of effort, compared to zero effort before. So we think it's a sizable difference. They have 18 people that were critical-care specialists before, know the product line. There is evidence that they're starting to see results with conversions. But it's still early to say anything other than it's going to take them -- we think it's going to take them a couple of quarters to reverse this.

Right. Your guidance of $1.50 is assuming a decline for the year. Is that correct?

Right, yes, absolutely.

Okay. I guess, if we have to look at a gross margin, you're saying it's going to be 43% absent the shutdowns, so starting the second quarter, we should be seeing some improvement of the 43%? Is that a good way of looking at it?

Well, certainly improvement over the first quarter. In order to get to the 44% to 45%, we will start to see improvements beginning in the second quarter over the first quarter.

Okay. I guess you really -- I mean, it has to be a pretty strong second half to kind of get to the $1.50 of guidance in light of the numbers you put up in the first quarter?

Yes it will, Mitra. It definitely will have to be a strong second half for us.

Again, just China, you said you're going to -- how much are you investing in that facility?

We are planning on investing $6 million this year. It should be complete with the first quarter of '09, we should be complete; the facility should be up and operational if all goes well. We are completing -- we purchased the land, worked everything out with the government. The architects, the design is done. We are ready to go. So we should break ground on the construction in July.

Okay. Again, hopefully it's not going to prove to be any distraction from what you have going on in Salt Lake City and Mexico?

We don't think so. We think -- but we also think it has a sizable contribution to margins if we are successful.

Okay, thanks again, guys.

(OPERATOR INSTRUCTIONS). Junaid Husain.

Good afternoon, gentlemen. Relative to gross margins, for the balance of the year, where is the gross margin expansion coming from? Is this primarily from the new products, or is it from cost savings, or is it both and if you could quantify that for me.

Sure, absolutely. It's coming from a combination of those two, the new products which have an average margin greater than the company average margin. It's coming from increased production efficiencies. Third will be increased absorption at our factories as we continue to ramp up on our new products sales, particularly oncology, which the bulk of our new oncology sales will be in the second half of the year.

Okay. If I could push you just a little bit on your guidance then, how should we be thinking about guidance for the balance of the year? On the sales and earnings front in terms of the quarterly progression, is it going be back-half weighted or is it kind of a steady increase to the end of the year?

It's our third and fourth quarter; it's back half waited. What you see a new product is you see market acceptance in the category that we're at -- $1 million, $2 million in terms of sales. It just means the product is working and the customers like it. Then once there is acceptance by the market, then it takes off. So we're looking at third and fourth quarters as most of our sales of new products.

Okay, that's helpful. And then you know, I think I might have missed this. Doc, did you quantify the number of reps that you have dedicated to critical care?

I can tell you how many reps that Hospira has dedicated. Before, they had 0 reps dedicated to the sales force. Now they have 18, and we have 11. Our 11 guys are working with their 18 people.

Their 18 reps started when?

About mid-February, probably. Mid-February would be about right. They were up and running by March, yes. So it's going to take a little while for them to reverse the slide, but we think it's better. We think it's possible.

Are these brand-spanking new sales reps on the Hospira side, or are these folks that they brought in (multiple speakers)?

This is just in critical care we're talking about. For the Spiro side, on the Spiro side, it goes to the general line reps, which they have about 450.

Okay. Then, Scott, relative to your sales guidance for 2008, how much of that is dependent on a solid roll-out of Hospira's Symbiq infusion pump?

Of the Spiros, you mean?

No, the Symbiq infusion pump from Hospira that they are launching in --?

None of it is, none of it is.

We don't have any of that baked into the numbers.

We're just looking at our numbers, as we see them with our -- with the sell-through. No, none of it is, although we are hearing good things about the pump.

We are.

Okay, and then the last question for you on the legal side of things, relative to your appeal with Alaris, anything new to report?

Nope, just going through the process.

Okay, good enough, guys. Thanks so much.

There is no further questions in the queue. I will turn the call back to George Lopez.

Thank you all, we will see you next quarter.

Thank you, ladies and gentlemen. This will conclude the presentation for today's conference. You may now disconnect.