ICU Medical Inc (ICUI) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter of 2008 ICU Medical, Inc. earnings conference call. My name is Eric and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a 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, the 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 30, 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 of the second quarter. Then Scott will discuss in more detail our financial results 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 they are based on the best available information to management and assumptions that management believes are reasonable. Such statements are not intended to be representations 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's begin.

We are pleased with the overall performance of our business and profitability during the second quarter. Contrary to the continued weakness in our critical care sales to , our core and new product lines performed in line with our expectations. Our growth during the quarter was driven by a 12% year-over-year increase in sales from Customs systems as well as strong contributions from our new products, including ontology. On a sequential basis, sales from our new products increased 64% to $2.8 million. Excluding our critical care and custom critical care line our total sales increased 9% per year -- year-over-year.

As we continue to benefit from improved manufacturing efficiencies at our Salt Lake City and Mexico plants, our second quarter gross margin increased 100 basis points to 43% year-over-year, validating improved operating efficiencies of our business. During the quarter we continued to forge industry relationships as we position ourselves for long-term growth.

Recently we extended a minimum of three years, three additional years our current agreement for CLEAVE and custom [IV] sets with MedAssets supply chain systems in MedAssets Company. Additionally MedAssets will begin offering our safe handling ontology product line. MedAssets' agreement strongly validates our reputation as a low-cost and quality leader in the industry and provides considerable growth opportunities for years to come.

As I mentioned earlier, performance of our critical care sales to continue to be disappointing. At the end of the first quarter, was primarily responsible for the sales of the Critical Care Products and manufacture, deployed a dedicated sales team to focus on our critical care products. Given experience and the great value proposition in these products, we expect the business eventually to stabilize. However, this product line continues to be the most difficult one to predict.

We will continue to work with Hospira as well as pursue all options to create the best possible outcome for ICU Medical.

Despite the current softness in critical care, we continue to maintain the leading position in the industry due to our premier portfolio of core and new products and believe each of our core products has very promising, long-term, domestic and international growth opportunities. Additionally, our patented low-cost manufacturing processes well position us to maintain our future profitability and to continue to build value for our shareholders.

Now I would like to turn the call over to our CFO, Scott Lamb, to discuss our second quarter financial results in greater detail.

Thanks, Doc. Before I begin let me remind all of you that the sales numbers we are covering, as well as our financial statement, are available on the investor portion of our website as we speak.

Our revenue for the second quarter of 2008 was $48.6 million, compared to the revenue of $48.9 million for the second quarter a year ago. The slight decrease was primarily attributable to double-digit declines in our critical care and custom critical care businesses. Excluding these product lines, our revenue increased 9% year-over-year, and on a sequential basis our total revenue, including critical care, grew almost 9% as well.

Net income for the second quarter of 2008 increased approximately 88% to $4.8 million or $0.33 per diluted share, compared to net income of $2.5 million or $0.16 per diluted share for the second quarter of 2007.

Now let me discuss our second quarter sales by product category. As you remember, to improve the transparency of our business, starting last quarter we decided to discuss revenue in the following four categories. CLAVE, Critical Care, Custom Systems and New Products which include oncology.

Sales from CLAVE products represented 38% of our second quarter total sales and decreased 4% from $19.3 million to $18.4 million year-over-year. The decrease was primarily attributable to timing of product shipments to Hospira. As you know, our sales will vary from quarter to quarter and that is why we have always provided annual guidance instead of quarterly guidance. CLAVE remains one of our strongest product lines, and based on the current demand and strong open orders, we believe it will return to positive growth in the third quarter.

Critical Care Products represented 18% of our total sales for the second quarter. Excluding Custom Critical Care, sales from this product line decreased 21% to $8.9 million compared to $11.3 million a year ago. Customs Systems, which include Custom Oncology, Custom Infusion Sets and Custom Critical Care comprised 35% of our total revenue. Sales from Customs Systems increased 14% to $17.1 million compared to $15 million a year ago. The growth was driven by strong performance of Custom Infusion Sets and Custom Oncology Products which was substantially offset by a 26% decrease in Custom Critical Care. Excluding Custom Critical Care, sales from Customs Systems would have grown by 27% year-over-year.

Sales from our new products which include TEGO, Orbit and Oncology Products sequentially increased more than 50% to $2.8 million compared to $1.7 million for the first quarter of 2008 and we are are more than four times sales reported for the same period last year.

New Products represented about 6% of our total sales for the second quarter 2008.

Now moving to our second quarter sales by distribution channel, sales to Hospira decreased 8%, primarily due to the decrease in critical care and Custom Critical Care products. Domestic distributors in direct sales increased 31% to $9.3 million year-over-year and were driven by strong contributions from our custom sets and CLAVE.

International revenues increased 6% to $7.3 million year-over-year. Second quarter 2008 international sales represented 15% of total sales compared to 14% in the second quarter of last year.

Now let me review our key operating metrics. In the second quarter of 2008, gross margin expanded 1 percentage point year-over-year and 3 percentage points on a sequential basis to 43%. Gross margin expansion is attributable to improved efficiencies and productivity gains at our Salt Lake City and Mexico manufacturing facilities, which were slightly offset by a decrease in volume and pricing for Critical Care. We decided to temporary put on hold our plans to build a manufacturing facility in China. Right now, our Salt Lake City and Mexico manufacturing facilities provide necessary capacity and cost savings benefits to support our profitable growth in the near future and we want to ensure the quality of our rapidly expanding line of New Products by continuing the manufacturing of these products in our existing facility.

SG&A expenses for the second quarter were $13.7 million as compared with $11.5 million for the same period last year. The increase in SG&A was primarily attributable to moderate increases in sales and marketing promotional costs, higher compensation and salary expenses associated with new hires in sales and marketing as we continued to expand our sales and marketing team to support growth momentum some of our new products.

We continued to tightly control our operating costs and target SG&A expenses to be 27% to 28% of sales for 2008.

Research and development expenses decreased to $1.5 million in the second quarter of 2008 compared to $2.2 million in the same period last year. As we focus more on core projects during the quarter, we expect our R&D expenses to be approximately 3% of total revenue for 2008.

Our operating income for the second quarter totaled $5.7 million compared to $7 million for the same quarter a year ago due to the increase in SG&A expenses I just mentioned. However, sequentially, our operating income was up more than 114%.

Now finally moving to our balance sheet and cash flow, as of June 30, 2008, our balance sheet remains very strong with approximately $109 million in cash and marketable securities. Additionally we generated about $11 million in cash flow from operating activities during the first half of 2008. Our capital expenditures totaled $3.5 million during the second quarter and we expect our capital expenditures to total $14 million for the full year of 2008. This is less than we projected during the first conference call due to our decision not to pursue building a plant in China of this year. We expect to generate operating cash flow of approximately $25 million this year.

Taking into account the increased softness in our Critical Care products, we expect 2008 revenue of $190 million to $200 million due to continued weakness of Critical Care and higher commodity prices affecting shipping and raw material costs, including resin. We expect annual growth margins to be approximately 43%; SG&A, 27% to 28%; R&D 3% of sales, and a tax rate of approximately 31%; and diluted earnings per share to be in the range of $1.35 to $1.45 per share.

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

Thank you, Scott. Despite some obvious challenges in Critical Care during the second quarter, our business fundamentals remain very strong. We continued to generate positive cash flow. Our core product lines are performing very well and we are very well-positioned for long-term growth in all of our core and new products.

Let me talk a little bit more about the exciting recent developments for our CLAVE, Custom and Oncology products. As I mentioned earlier we recently expanded our relationship with MedAssets Supply Chain Systems, one of the nation's largest group purchasing organizations. MedAssets provides innovated solutions to help health care providers to improve their margins and cash flow.

This expanded agreement will continue to offer MedAssets customers our products which were chosen for several reasons including high-quality; better patient outcome; and cost reduction, as well as cost avoidance. As we mentioned last quarter, Hospira was awarded a contract with HPG, a major GPO which has the potential over time to increase CLAVE Custom Set and oncology business. They started converting their solution and [like] set in the second quarter to meet conversion deadlines.

Now moving forward we are beginning to see those customers with custom CLAVE as a needle-free choice due to its clinical superiority which is recognized across the market. Demand for our Oncology Products continues to be -- to grow rapidly in both domestic and international markets as they are designed to provide safety for both health care professionals and the patient by reducing exposure to hazardous drugs, and by reducing blood stream infection, which are costing the health care industry billions of dollars a year.

Our agreement with MedAssets ideally helps position Genie and Spiros for success. We expect our oncology product to generate approximately $10 million in total sales in 2008 compared to minimum sales in 2007.

Going forward, we continue to focus on improving sales and marketing strategies across all of our product lines and building value for our shareholders. Our core product lines of CLAVE, Custom and Oncology are all performing very well. Based on our strong balance sheet, low-cost manufacturing facility and strong management team, we look forward to many years of strong and profitable growth.

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

(Operator Instructions). Junaid Husain with Soleil Securities.

Doc or Scott, could you help me out on the guidance front on sales? In terms of the range you provided I guess I'm trying to understand if just to be clear, the sales softness that you potentially expect in the back half of the year, that is predominantly off of Critical Care, then?

Yes, that's correct.

And then with regards to the new product sales, Genie, Spiros, Orbit 90, etc., could you break that out for us? That $2.8 million?

Sure. The majority of it obviously is Oncology. For the quarter we had $1.8 million in -- sorry, not $1.8 million. $2.8 million and -- or $2.4 million in oncology.

And how does that split between Genie and Spiros?

We don't split that out.

Got you. And then, relative to the premier GPO contract for the IV Therapy bid, it's supposed to come up for renewal imminently. Any additional color that you can provide us here?

We don't know one way or the other and we haven't announced yet and I understand they delayed the announcement again. So we don't know yet; and so, we have nothing to say about it.

Okay and you are saying that they have delayed it again. Do you have a date? Or is it just kind of wide open? Doc? Scott? Are you there?

Yes we're here. We have to check with [Premier]. We don't do (inaudible) do not know. They've announced dates before and not kept them, so --.

Sure. Okay and then in terms of the [sum] costs associated with the Chinese manufacturing facility, how much have you already put into that initiative?

It wasn't that significant. Not enough to talk about, but the good news is going forward there, there should be little to no expense associated with that.

Scott, on your option rate securities, can you tell me how much you've got leveraged to these instruments at the end of the quarter?

Sure. $26 million. Keep in mind that we started with about $85 million. We had about $61 million at the end of March and now we are down to $26 million.

85 million was tied up.

Right. And as you know yesterday UBS announced that they are buying back all of their preferreds and so that represents some additional for us. (multiple speakers) need the cash so --.

Good enough. That's all I've got, guys. Thanks so much.

(Operator Instructions). Mitra Ramgopal with Sidoti.

Just a couple of questions. I noticed for R&D it's come down quite a bit. I think you are shooting for 3% of revenue for the year. Was any of that tied to China and given that you are no longer doing that, that's the reason for the (multiple speakers).

No, just -- we are just focusing on Oncology. We are focusing on our core products and we also are no longer subsidizing or paying for Medscan, the cardiology product that we were pursuing. We stopped pursuing that project (inaudible) so that will save us about $0.25 million a quarter in the future so it is coming down.

And is this sort of our reasonable number to use going forward? (multiple speakers) be able to look out for next year?

I mean to go up next year.

And I know you talked about increased resin prices, etc., and the impact on margins. Are you having success with regards to price increases?

You know we are always looking at the market and we will continue to look at market potential.

Okay. And again, just coming back on the margins, I think we talked about a nice improvement off the first quarter almost at 43%, but the guidance for the year again at 43 just because you had a slow start in 1Q?

Certainly Q1 [weights] it. I think for the year we are at 41% and so we expect to continue to do well and see productivity improvements helping the bottom line.

Finally just coming back to China, really on the last call it sounded as though that was a good opportunity. Any reason for the change?

It still is. It still is a good opportunity. We still think we are going to pursue it and we still think it is a great opportunity to lower cost, but right now we can't afford to split my manufacturing people in half. And we, in terms of relaunching these new products, we are ramping up, they're getting traction. For us to take a gamble right now and split up our resources would be risky and I would have to hire a complete new staff and it would be difficult to do and not risk.

Why risk when we have such opportunity in front of us? Orders are coming in and we are getting good repeat back from the market, so I just don't want to risk it at this particular point.

Right and, finally, on Critical Care. I know you said it's difficult to get the kind of visibility you would like on that line and I know how Spiros committed some salespeople to try and turn things around. But what you've seen so far are you sort of happy with the progress? Or is there something still down the road as if it doesn't turn just look at (multiple speakers) --?

We are not happy with the progress. Happy was the wrong word. Scott might say he's been looking at following the numbers closely. You might want to see how the numbers are looking and maybe it's the best to slow down.

Yes, I think still at this point in time they -- these sales reps of Hospira have only been in place for 100 days. It's certainly going to continue to take some time I think for them to turn this around and we just have -- we will just see what happens in the next (technical difficulties).

The sales cycle has got to the three to four months for these types of products. Four months, so they've only been there for 100 days. So it's kind of early, but so far we are seeing better indicators, but not what we want to see.

Thanks again.

For the change in our guidance, the reason.

(Operator Instructions). It appears we have no more audio questions in queue at this time.

Thank you, everyone.

Thank you.

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