ICU Medical Inc (ICUI) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2008 ICU Medical Incorporated earnings conference call. My name is Angela and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

Now, I would like to turn the presentation over to your host for today's event, Dr. Lopez. Please proceed, sir.

Good afternoon, everybody, and sorry for the technical problems we've had, but I want to thank you all for joining us today to review ICU Medical's financial results for the third quarter ended September 30, 2008.

I'm Dr. Lopez, Chairman and President of ICU Medical. With me today is Scott Lamb, our CFO.

I will start the call by reviewing our key operating and financial achievements for the third quarter, and Scott will discuss in more detail our financial results and our increased 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 made 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 a 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. We are very pleased with our overall results we achieved in the third quarter, as both topline performance and profitability exceeded our expectation. Each of our core product lines posted double-digit growth, resulting in total sales of $54.7 million, a 22% increase year-over-year. Our third-quarter net income improved almost 63% to $7.6 million or $0.52 per diluted share, compared to the same quarter last year. International sales were up 37%, while domestic sales to specialty distributors and direct increased 30%.

The primary growth drivers for the third quarter were CLAVE and Custom Systems, which increased 15% and 36%, respectively. Our new oncology products continue to gain worldwide momentum and were up more than 71% on a sequential basis.

Additionally, during the third quarter, we saw some encouraging signs of improvement in our Critical Care division. Although it's too early to make any definite conclusions about the near-term performance of this product line, we were encouraged to see positive developments. We will continue to work with our partner, Hospira.

As a testament to our strong portfolio of products, we recently entered into our first, first-ever five-year agreement with Premier Inc., operator of one of the nation's largest healthcare purchasing networks. We believe this contract, which begins in 2009, combined with our recently expanded distribution agreement with MedAssets, will enable us to continue to diversify our revenue by partners in the coming years.

During the third quarter, 35% of our sales were generated by our distributors and direct sales force, compared to 32% last year, while 65% of third-quarter revenue was attributed to Hospira. We greatly value these industry-leading relationships and look forward to capitalizing on additional growth opportunities these relationships may create.

We have entered the last quarter of the fiscal year as a very strong and financially sound company. As of September 30, we had $117 million in cash and investments and $158 million in working capital. Our operating cash flow for the first nine months of the year totaled $21 million.

Additionally, during the quarter, our Board of Directors authorized a new program to purchase up to an additional $40 million of our common stock. We have not yet purchased any stock under this plan as of today, and (inaudible) stock purchases open in two days from today. We are optimistic about our business prospects for the remainder of the year and beyond. Our efforts to invest in product innovation and to expand our market footprint continues to pay off. We believe our company is on the right track to continue to improve sales growth and profitability over the long term.

Now, I will turn the call over to our CFO, Scott Lamb, to discuss our third-quarter financial results in more detail. Scott?

Thank you, 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 the investor portion of our Web site as well.

Our revenue for the third quarter of 2008 increased 22% to $54.7 million, compared to revenue of $44.9 million for the third quarter a year ago. The strong growth was driven by double-digit increases in our core businesses, including CLAVE and custom systems as well as positive contributions from critical care.

Net income for the third quarter of 2008 increased almost 63% to $7.6 million, or $0.52 per diluted share, compared to net income of $4.7 million or $0.31 per diluted share for the third quarter of 2007.

Now, let me discuss our third-quarter sales by product category, consisting of CLAVE, custom systems, critical care, and new products, including oncology. Sales from CLAVE products represented 37% of our third-quarter total revenue and grew 15% from $17.7 million to $20.5 million year over year.

As we mentioned on the second-quarter call, we had a few shipments, due to timing, that would occur early in the third quarter. This, along with increased demand, contributed to the strong third-quarter increase in sales.

Year-to-date CLAVE products sales increased 6% to $57.1 million from $54.1 million a year ago. CLAVE continues to enjoy market share growth, and we believe the expanded relationship with MedAssets and the new relationship with Premier beginning in 2009 will help drive long-term growth.

Excluding custom, critical care products represented 19% of our total sales for the third quarter. Sales from this product line increased 7% to $10.4 million compared to $9.7 million a year ago.

As Doc already mentioned earlier, we are pleased to see signs of improvement in Critical Care. On a year-over-year basis, Critical Care was down 20%. While we still have a lot of room for improvement in Critical Care, we are working closely with Hospira on establishing a solid foundation to return Critical Care to positive growth.

Custom systems, which include custom oncology, custom infusion sets, and custom critical care, comprised 35% of our total revenue. Sales from custom systems increased 36% to $19.1 million, compared to $14 million a year ago.

Sales from our new products, which include TEGO, Orbit, and oncology products, increased over 64% to $4.6 million in the third quarter of 2008, compared to $2.8 million for the second quarter of this year, and were more than ten times sales reported for the same quarter last year. New products represented about 8% of our total sales for the third quarter of 2008.

Now, our third-quarter sales by distribution channel were as follows. Sales to Australia were up 18%, primarily due to strong contributions from CLAVE and Critical Care. Domestic distributors and direct sales grew 30% to EUR9.5 million year-over-year and were driven by robust increases in Custom Systems and CLAVE. International revenues increased 37% to $8.2 million year-over-year, as our core and new products continue to gain momentum in different parts of the world, led by strong growth in both Europe and the Pacific Rim. Third-quarter 2008 international sales represented 15% of total sales, compared to just 13% in the third quarter of 2007.

Now, let me review our key operating metrics. In the third quarter of 2008, our gross margin was 46%, compared to 43% for the same quarter last year. The margin improvement is attributable to a favorable product mix and improved efficiencies at our manufacturing facility in Mexico, which were offset by increased costs in raw material and transportation.

SG&A expenses totaled $13.6 million as compared with $11.5 million for the same period last year. The increase in SG&A was primarily attributable to continuous investments in our sales and marketing initiatives to support growth momentum of our new and existing products, and higher compensation and benefits costs. We expect our SG&A expenses to be flat or slightly down in the fourth quarter, representing 26% to 27% of total annual sales.

Research and development expenses decreased to $857,000 in the third quarter of 2008, compared to $2.2 million in the same period last year. The decrease was primarily attributable to our increased focus on our core projects during the quarter. We expect our R&D expenses to be at approximately 3% of total revenue for 2008. Next year, we expect to gradually increase our investments in research and development initiatives to bolster our core and new product development.

Our operating income for the third quarter increased 86% to $10.5 million, compared to $5.6 million for the same quarter a year ago. This is due to stronger sales and improved gross margins.

Finally, moving to our balance sheet and cash flow, as of September 30, 2008, our balance sheet remained very strong with approximately $117.4 million in cash and marketable securities, and $158.4 million of working capital. Additionally, we generated about $21.3 million in cash flow from operating activities during the first nine months of 2008. Our capital expenditures totaled $2.6 million during the third quarter, and we expect our capital expenditures to be approximately $14 million for the full year of 2008. We expect to generate operating cash flow of approximately $25 million this year.

Before I turn the call back to Dr. Lopez, let me update you on our guidance for the fiscal year. Based on recent results and our fourth-quarter outlook, we are increasing our revenue guidance for the full year of 2008 to $199 million to $203 million, compared to the previously announced $190 million to $200 million. In addition, we are increasing our diluted earnings per share for full-year 2008 to $1.48 to $1.53, compared to the previously announced $1.35 to $1.45 per diluted share.

Diluted earnings per share guidance does not include an additional $0.13 to $0.16 related to estimated tax benefits to be realized in the fourth quarter of 2008. The majority of the estimated tax benefits will be attributable to tax credits for investments in research and development. The remainder of the benefits will be attributable to a nonrecurring, realization of tax benefits related to intangible assets. By including these benefits in guidance, full-year 2008 diluted earnings per share are expected to be in the range of $1.61 to $1.69.

Our annual gross margins are expected to be approximately 43%, which is in line with the previously issued guidance. SG&A expenses are expected to be 26% to 27% of revenue, and R&D at 3% of revenue. We expect our full-year effective tax rate, before the Q4 discrete tax benefits I already mentioned, to be approximately 32% for the full year.

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

Thanks, Scott.

Our operational and financial achievements during the third quarter strongly validate our strategy and market leadership and position us for continuous progress for the remainder of this year and beyond.

Before I conclude the call, let me very briefly discuss some recent developments which position us well for further improvements and growth. As I mentioned earlier (technical difficulty) needleless connectors, our valued custom IV set program, as well as our new line of safe handling products for oncology. Premieres members consist of approximately 2000 hospitals and more than 50,000 other healthcare sites.

We look forward to building a mutually beneficial and long-term relationship with both Premier and its members. As with any new relationship like this, it will take time to increase revenue through this agreement, but we are optimistic about the long-term opportunities this represents for ICU.

We will continue to leverage our just recently expanded partnership with MedAssets. Under this expanded agreement, MedAssets will continue to co-market our CLAVE and MicroCLAVE needleless connectors along with custom sets for a minimum of three additional years through September 30, 2011. Also, MedAssets will begin offering our new full line of safe handling oncology products -- Spiros, [Genie] and custom oncology sets -- to its extensive network of oncology service customers.

As Scott mentioned earlier, we showed strong growth in all of our sales channels. Specialty distributors and direct sales grew 33% or $4.6 million over last year. Coupled with this, sales to our valued customer, Hospira, grew 18% over last year.

Turning to our products, our new oncology products continue to grow at a very robust pace, both domestically and internationally. We continue to expect our oncology products to generate approximately $10 million in total sales in 2008, compared to less than $1 million for all of 2007.

In conclusion, I would like to say that we are confident in our Company's future and foresee further improvements in growth across each of our core product lines. We have a proven sales and marketing strategy in CLAVE, as well as sufficient cash flow to invest in R&D and finance future business activities. We continue to strive to be the low-cost manufacturer in our space and are always looking for ways to improve efficiency.

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

Thank you, sir. (Operator Instructions). Mitra Ramgopal, Sidoti & Co.

Good morning, guys. A few questions -- first, the Critical Care business really came back strongly. I don't know if you could give us a little more color as to anything specific that was done to get it back on track.

The biggest change was, in February, they put on 18 direct salespeople on a full-time basis. That's the biggest change. We think we are seeing the effects of that. It's too early to call whether it's a trend or not. It's just one quarter, so we are still guarded and guardedly optimistic.

Okay. I know, looking at the gross margin, again this is probably the best quarter we've seen in about four years. Again, I know a look at the guidance for the rest of the year. But if you go a little further out to '09, etc., it seems like a lot of things are working now in your favor, including Critical Care and the product mix and (multiple speakers) right, the efficiencies, et cetera.

Do you think it's fair to say now we've kind of turned the corner on margins also?

Well, just reiterating, we think we will do 43% for the year, and we are seeing some efficiency gains, particularly in our Mexico facility, in addition to our new products.

I think he's really asking are margins going to go up next year.

Well, we will tell you more about that in --

We can give him the short answer. We think they will be higher than this year.

Okay, that's fair. Then I guess just looking broadly in terms of the nature of your products and the end user, and just looking at the overall economy and what's happening out there. Again, are you seeing any concern in any way that could impact you?

I was asked this question earlier this morning. I believe, Mitra, that we are absolutely recession-prove, because our products are not like other medical companies that have elective surgeries, elective products. I think the medical companies that have Botox, companies that have durable medical equipment, they are going to see a contraction in that market. But our products are basically like the name says, ICU products; they are not elective. You have to get chemotherapy, and you have to get it through an IV set, you have to get drugs, so it's really -- I see us as pretty much recession-proof and I don't see any discussion or more likely depression hurting us in any way whatsoever. I think we'll -- and as you know our cash flow and our balance sheet is so strong that we don't require any banking or lines of credit, so I think we are as bulletproof as far as we can be, as far as a recession goes, Mitra.

Okay, thanks. Again, looking at the balance sheet and cash flow you are throwing off, I know you mentioned the share buyback program in place and other uses of cash. Are you tempted to be more aggressive now in terms of growing the business via adding more salespeople or international expansion, or are you prepared to kind of just see how it goes and build the cash?

Do you want to take this?

Sure. We are always looking for opportunities that will help grow the business, whether it is in strategic acquisitions. Certainly, as opportunities continue to arise in our sales and distribution channels and in the markets, we will add accordingly. As you can see in the third quarter and this year, we have been willing to and have invested in our sales and marketing initiatives and (multiple speakers) --

(multiple speakers) -- specifically a lot of our focus, Mitra, is going to move towards international. You see international, it's growing very strongly. We think we have a lot of opportunities in international, and we will be spending money for a sales force in international and investing in a sales force and companies in international, specifically in the oncology field.

Okay, last question, tying into the oncology products, again it seems to be ramping nicely into this quarter. Would you say it's ahead of your expectations at this stage, or they're still --?

I think we gave pretty accurate numbers earlier in the year. I think we said $9 million for the year is what I remember.

$9 million to $10 million.

Yes, and we are right on schedule. I think we said, I think if you look at our guidance from January, it was pretty much spot-on for the third quarter and fourth quarter, and first and second quarter.

Okay, so again, you are very encouraged I guess. Going ahead we should only continue to see that, given the size of the market and you are the only player there?

Yes.

Okay, thanks again, guys.

(Operator Instructions). [James Hefner], SkyStone Capital.

Just a couple of quick detail questions -- what was currency benefit to revenue in the quarter?

It was negligible.

Negligible? Can you give us an idea of what the custom growth was, ex-custom critical care?

Yes, hold on just a second.

It's usually in your Q.

35%.

I got it. Okay, so that picked up as well. Was most of that be custom oncology sets?

It was across the board. That was strictly, it's all across the board (multiple speakers) domestic distributors, non-oncology, and oncology.

I got it. As you are adding new distributor customers to the network, are they filling much pipeline inventory, or is this (multiple speakers)?

We are really not (multiple speakers) many distributors, we haven't added any new distributors that I'm aware of.

No, this is just more new customer accounts.

I got it. I had thought that some -- a lot of your international went through a distribution channel.

No, no.

No? Okay. That's all my questions.

A lot of it does go through distributors, but we've added no new distributors. In fact, we've contracted distributors.

Yes again, most of the growth is just through new customers.

Dr. Lopez, at this time, I show no further questions within the queue. I would like to turn to call back over to the management for any closing comments.

Well, thank you all for joining us. We will see you next quarter.

Ladies and gentlemen, we thank you for your participation in today's conference. This now concludes your presentation and you may now disconnect. Have a wonderful day.