ICU Medical Inc (ICUI) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter and year end 2008 ICU Medical Incorporated earnings conference call. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session at the end of this conference. (Operator Instructions). As a reminder, today's call is being recorded for replay purposes. I would now like to turn the call over to Dr. Lopez, President. 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 ended December 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 key operating and financial achievements for the past year, and Scott will discuss our financial results for the fourth quarter. I will wrap up the call and provide our revenue entering targets for fiscal 2009 and finish with a discussion of the current business trends. And then we will open the call for questions.

Before we start, I want to touch upon any forward-looking statements made within this call. Please be aware this will be 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 me begin.

During 2008, we achieved record fourth quarter and full-year results and continue to successfully execute our business strategy of developing, manufacturing and selling the leading products designed to protect patients and healthcare workers from infectious diseases, as well as harmful chemicals encountered in everyday routines at hospitals and outpatient centers.

Our total annual sales were up approximately 9% to $205 million. And our net income increased 5% to $24 .3 million or $1.67 per diluted share. Our strong top line performance during the year was attributed to continuous improvements in our core product lines as evidenced by a 20% increase in our custom systems and an 11% increase in CLAVEs.

Our new oncology products, which we fully launched in 2008, grew at a very robust place, both domestically and internationally, and contributed almost $12 million to our total sales in 2008. That compares to less than $1 million in 2007. The success of our oncology business validates our investments in R&D, which are grounded in our Company's philosophy of creating products for empty markets.

We continue to see improvements in critical care during latter half of 2008. Even though our overall 2008 gross was partially offset by a decline in this product line, total critical care sales in the second half of 2008 were up 22% compared with the first half of 2008. Fourth quarter non-custom critical care sales were up 2% year-over-year. We will continue to work closely with Hospira who distributes our critical care products on establishing the best possible sales and new product development strategies to revitalize this important line of products.

In terms of our growth by region, in 2008, our international and domestic distributor and direct sales were up 30% and 22% from 2007, respectively, as our products continue to demonstrate strong growing demand worldwide. During the year, we signed our first agreement with Premier, an operator of one of the nation's largest healthcare purchasing networks and expanded our existing agreement with MedAssets for three additional years and to include our new [front] line of oncology products.

These two industry leading relationships are a strong endorsement of our product offerings and open many long-term growth opportunities for our Company. Specifically, they considerably expand the distribution network for our CLAVE, custom and non-custom, oncology products, positioning them for further domestic market penetration. We will not receive meaningful revenue from the new Premier relationship immediately, but we are very excited about the long long-term opportunity it represents in the later half of 2009.

With approximately $130 million in cash, cash equivalents and marketable securities, no debt and strong cash flow, we're well positioned to fund our growing initiatives going forward, such as adding more professionals to our direct sales team, investing in our manufacturing processes, and continuing our leading research and development of innovative new products.

Before I get into more details about 2009 plans, I'd like to turn the call over to our CFO, Scott Lamb, to discuss our fourth quarter and year end 2008 financial results. 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 fourth quarter of 2008 increased 25% to $56.7 million compared to revenue of $45.5 million for the fourth quarter a year ago.

As Doc already mentioned, for the fiscal year our revenue increased 9% to $204.7 million compared to $188.1 million a year ago. Net income for the fourth quarter of 2008 increased almost 50% to $9 million, or $0.61 per diluted share compared to net income of $6 million, or $0.41 per diluted share for the fourth quarter of 2007.

For the fiscal year, our earnings were up 5% to $24.3 million, or $1.67 per diluted share compared to $23.1 million, or $1.51 per diluted share in 2007. Included in the 2008 earnings are discrete tax benefits of $0.14 per diluted share. Included in the 2007 earnings are legal settlements of $0.13 per diluted share. Excluding the tax benefits of $0.14 our earnings were $1.53 per diluted share for the full year of 2008 compared to 2007, excluding the legal settlement earnings per share were $1.38.

Now let me go into more detail on our fourth quarter results. I will start with discussing sales by product category. Sales from CLAVEs represented 41% of our fourth quarter total revenue and grew 29% from $18.2 million to $23.5 million year-over-year.

We expect that in 2009 as we hire additional salespeople CLAVE sales will directly benefit from our agreement with Premier, and we believe this product line's growth momentum will begin to benefit in the second half of 2009 from the new Premier agreement. We expect this product line to continue to grow in the mid to high-single digits through the foreseeable future.

Custom systems, which include custom oncology, custom infusion, [seth] and custom critical care, comprised 33% of our total revenue. Sales from custom systems increased 33% to $19 million compared to $14.2 million for the fourth quarter a year ago. The increase was in both custom oncology and custom infusion sets. We expect this product line to continue to grow in the mid to high-teens through the foreseeable future.

Excluding custom, sales from critical care products grew 2% to $9.8 million compared to $9.6 million a year ago and contributed 17% to our total sales for the fourth quarter. Although we are pleased to see signs of improvement in critical care for the second consecutive quarter, it is still too early to say that sales have stabilized and can be sustained in 2009.

As Doc mentioned earlier, we are pleased with the performance of our new products, which include TEGO, Orbit, and all oncology products. Sales from new products increased more than four times sales reported for the fourth quarter last year. New products, including custom oncology, represented approximately 8% of our total sales for the fourth quarter of 2008.

Our fourth quarter sales by distribution channel were as follows: Sales to Hospira U.S. were up 19% primarily due to strong contributions from CLAVE and some customs; Sales by domestic distributors and our direct sales force grew 14% to $9.4 million year-over-year and were driven by custom sets; International revenues increased 76% to $9.1 million year-over-year as our CLAVE, custom sets and non-custom oncology products enjoyed robust growth in the Pacific rim, Latin America, and particularly in Europe.

Fourth quarter 2008 international sales represented approximately 16% of total sales compared to just 11% in the same quarter a year ago. Now let me review our key operating metrics. In the fourth quarter of 2008, our gross margin was 46% compared to 42% for the fourth quarter last year. The margin increase was primarily attributable to a favorable product mix and our improved manufacturing efficiencies.

SG&A expenses totaled $13.2 million as compared to $10.5 million for the same quarter last year. The planned increase in SG&A was primarily attributable to our continuous investments in sales and marketing initiatives and higher compensation and benefit costs. Research and development expenses were $500,000 in the fourth quarter of 2008, compared to $1.9 million in the same period last year. The decrease was primarily attributable to our increased focus on core projects during the quarter.

In 2009, we plan to gradually increase our investments in research and development initiatives to bolster our product development and expect our R&D expenses to be approximately 1% to 2% of total revenue for the full year of 2009. Our operating income for the fourth quarter nearly doubled to $12.6 million compared to $6.7 million for the same quarter a year ago. This was primarily due to stronger sales and improved gross margins.

Now moving to our balance sheet and cash flow. As of December 31, 2008, our balance sheet remained very strong with approximately $130 million in cash, cash equivalents and marketable securities. This equates to approximately $9 per share. In addition, we had $163 million in working capital. We also generated $30.2 million in cash flow from operating activities for the year.

Our capital expenditures totaled $11.4 million during 2008. In the fourth quarter of 2008, we bought back $5.9 million of stock at an average price of $32.54. Now I'd like to turn the call back over to Dr. Lopez.

Thank you, Scott. Before I provide our sales and earnings targets for the new fiscal year, I would like to address the current economic environment. Although our business has experienced no effect from the current economy, it is not easy to fully estimate the magnitude the current environment will have on our customers.

We expect a deepening recession will have some effect on our Company's performance in 2009, and we have tried to take that into account with our 2009 revenue and earnings estimates. Based on our current business trends, we believe our Company is well positioned for continuous strong top line growth, and we forecast our revenues for the full year for 2009 to be in the range of $215 million to $225 million.

We expect all product lines except critical care to achieve growth in 2009 over 2008. On the operational side of our business in 2009, we will be expanding our sales force and reinvesting in our manufacturing processes as we position ourselves for continued growth and improved efficiencies for years to come.

We'll be adding at least 20 new direct salespeople during the first half of 2009, and they will focus on new opportunities with Premier and new products, such as oncology, in order to leverage these opportunities over the coming years. In our industry it takes approximately nine months for new salespeople to become effective.

We have a positive track record of realizing a strong ROI on our direct sales expansion efforts, and we are confident, even though this expansion will temporarily affect earnings in 2009, this move will favorably position us for years of growth with these new opportunities. In addition adding new salespeople, we will be investing and improving our manufacturing processes throughout 2009 to expand our capabilities and increase our manufacturing efficiencies while maintaining our high-quality standards.

Taking into account these additional investments during 2009, we expect our gross margins to be in the range of 43% to 44% for the full year. The first quarter will be down from this range by approximately 200 basis points due to our scheduled plant closures in December and early January. We expect full-year SG&A expenses to be in the range of 26% to 27% of total sales.

We expect 2009 diluted earnings per share in the range of $1.58 to $1.70. For modeling purposes, we expect our full-year effective tax rate to be approximately 36%. We believe capital expenditures will be approximately $15 million in 2009. Our operating cash flow is expected to total approximately $35 million to $40 million in 2009.

Our record fourth quarter and fiscal year results underscores the success of our research and development initiatives and validate our market leadership. Based on our solid financial condition and strong demand for our products, we are well positioned for continued operational and financial progress in 2009 and beyond.

At the end of 2008, we forged a new partnership with Premier and expanded our contract with MedAssets, which will greatly increase our distribution network for CLAVEs and custom systems. Premier's members consist of approximately 2,000 U.S. hospitals and more than 50 ,000 other healthcare facilities that will now have the opportunity to purchase CLAVE and MicroCLAVE needleless connectors in our valued custom IV sets.

We are also excited that we'll be able to distribute a new line of safe handling products for oncology to members of both Premier and MedAssets. Looking forward, a growing amount of attention is being placed on the need to provide safety for both healthcare professionals and the patient by reducing exposure to hazardous drugs and by reducing bloodstream infections, which are costing the healthcare industry billions of dollars per year.

Due to our dedicated focused on innovation, manufacturing efficiencies and quality, we remain the leading preferred provider for our growing customer base both in the U.S. and abroad. We are committed to bringing our Company to the next level of success and enhanced value for you as shareholders. Now I'd like to turn the call over to questions. Thank you for your time today. And as a reminder, we will be attending a number of conferences for the year and hope to see you during one of these events.

(Operator Instructions). Please stand by as we compile the list. And our first question comes from the line of Mitra Ramgopal with Sidoti. Go ahead.

Yes. Good afternoon, guys. Just a few questions. First, if you could just sort of help me with the CLAVE sales. It was a lot stronger than I was expecting. I don't know if there was anything in there that was driving it?

Well, we mentioned earlier on in the beginning of 2008 Hospira's HPG and HCA contract, we certainly started to see those conversions start to take place in the second half of the year and those continued into the fourth quarter.

Okay. And, again, if you sort of look at the -- I think you mentioned you want to increase the sales force. If you can give us a sense of where you are today with the salespeople you have and you're adding 20 in the first half. Is the plan to keep going, or would that get you to where you need to be?

We think that's enough, Mitra. Twenty people is enough to cover -- we need to cover the Premier accounts, and open opportunities for us to take advantage of, so of the 20, at least 12 of them have already been hired and are being trained as we speak in Florida.

Okay. And would any of these salespeople be also working on selling the critical care products, or just strictly --

No.

Okay.

The main focus, oncology.

Okay. And with regards to both Premier and MedAssets, as you sort of look to provide the guidance, I know it's a little early yet in the game, but what are your expectations really -- or how much are you sort of building in in that guidance? Are you being pretty conservative?

It takes the salesman about nine to 12 months to become productive. We're going to do what we've done in the past and we're going to say that the first two quarters, very little new business. Second, third and fourth quarter is where all the business will come in.

And that's baked into the guidance that we gave.

Heavily loaded third and fourth quarter.

Okay. So that will be sort of a little similar to last year we were -- or where we saw the first half barely, accelerating in the second?

Yes.

And it came out to be so.

Okay. And on the international front, clearly, you're picking up more business there. I don't know if you've sort of -- can give us some color? What's left for that?

Oncology.

Okay. So --

All oncology.

All oncology and --

And CLAVE, but mainly oncology. CLAVE (inaudible) and oncology custom sets.

Okay. And with regards to the gross margin, again, the guidance seems to suggest almost a flat gross margin for 2009.

Go ahead and ask your question.

Yes, with the increase in terms of the oncology or the higher higher-margin products, increased efficiencies, et cetera, are you being a little conservative there?

No, I don't think so. I think the first quarter we're definitely going to drop a couple -- 200 basis points because of the shutdown for Christmas for maintenance and repair in early January. So we lose a few weeks there. But that is -- that is a definite -- but we don't think we're being too conservative.

The only thing, Mitra, the only thing that can stop us now -- the only thing that can stop us from becoming a large Company in my opinion is a quality problem. So we're investing heavily in our manufacturing processes, we call IPS. And that will have an effect on our margins, and we believe the margins will continue to go up after that. So up to where we think they all should be above 50%.

Okay. And I noticed that the DSO spiked up a little at the end of the year. Should we expect that to start coming back down in the first quarter?

Yes. As I mentioned, you will see a couple hundred basis point reduction from the 43% to 44% range that we gave for the entire year. And, yes, we should see those start to come back down some, especially in the first half of the year.

Okay. Thanks again.

(Operator Instructions). And our next question comes from the line of Junaid Husain with Soleil Securities. Go ahead.

Good afternoon, guys.

Hello, Junaid.

Scott, in terms of the plant shutdowns that you had in the fourth quarter, was the shut down only in Salt Lake City, or does it include Mexico as well?

It includes Mexico as well.

So, obviously, the shutdowns bled into the first quarter. By how many days did it bleed into the first quarter, and if you compare it to last year, how would it compare?

I think the best way to look at it is, we shut down the plants for less period this year than we did the previous year, and so that's why -- I believe last year had about a 300-basis-point drop on it. This year we expect about a 200-basis-point drop.

Got it. And then maybe a question for Doc. Could you give us a sense of the comfort level that you have with Hospira and their infusion pump business relative to consumable sales for CLAVE and custom sets?

The challenge is that hospitals are having relative to CapEx issues, I think, is fairly well known. But I was wondering if there might be a trickle-down effect on your CLAVE business? Certainly, we didn't see it this quarter, but do you -- do you expect any out quarters that this is something that could be impactful?

Well, I really shouldn't comment on Hospira's business, but as a general rule in the environment we're in, I suspect that hospitals -- expect hospitals will delay purchases of durable medical equipment, because if they already have existing pumps and MRIs, they can delay those decisions to upgrade. So as a general rule, I think that's true. Now what effect it's going to have on Hospira, Hospira's got a very good pump. So I don't really have anything else to say other than that.

Well, I was just asking, the trickle-down effect to you guys in terms of how it could affect CLAVE and customs.

So much of our business is custom business now. So much of it is custom. Those all incorporate CLAVEs or other connectors that we make. We don't expect much of an effect.

Okay.

With all the new business coming on with Premier, and so far what we've been seen is HPG contracts it's done nothing but generate more business. So in our model, we don't expect any significant changes.

Okay. Fair enough. And then any updates to report in your case with Medegen? I realize it's been remanded to the District Court, but anything else to report here?

Really nothing more to report. It's really an immaterial case.

And, then, Scott, can you remind me what your total legal expenses were in '08, and moving forward in '09, what would you expect the legal expenses to be?

Legal expenses were down in '08 versus '07, although still higher than we'd like. But going forward, it's, there's somewhat of a variable just depending on how the cases are going. That's always been sort of a variable number for us.

You mean a number to build into your model?

Yes, that would be helpful.

It was about -- you know, I'd have to -- I can't tell you that exact number right now.

All right, we'll get back to you.

Okay. Sure. Great. That's all I've got, guys. Thanks so much.

And we have a follow-up question from Mitra Ramgopal. Go ahead.

Yes, hi, guys. Just going back to the share buyback this last quarter. It's an open authorization you have, right?

Right.

And I guess given the cash you continue to build, any plans on doing something on the acquisition front?

Well, we're definitely going to be buying back stock. We think that, like all CEOs we think it's underpriced. But we're definitely buying back stock.

But we're also going to keep our eyes open for companies that leverage themselves -- good companies that leverage themselves in our field, and the opportunity might come up. We don't know. But that's the only two options that we have for our cash -- the only two uses for our cash.

Okay. And finally on R&D, I think you said it would be about 1% to 2% of revenue for '09. Is that a case where you're pretty much -- you have enough products to sort of work with, and this is something you are just not going to invest as much in until maybe down the road?

Traditionally, Mitra, no, because we've actually got more products in the pipeline, two new big products that we have in the pipeline. But it's just traditionally we don't spend a lot on R&D. I keep saying the reason why is because we seem to have the right instincts for what product the customers want before they even ask for it.

We've never launched a product ever that we've spent any money on R&D on that didn't make us millions of dollars, not one. That's been over a 20-year span. So it's -- we're just efficient with our dollars. It's not -- I think other companies have to have big R&D departments because they don't know what the customers want.

I think we have more -- we're lucky and have more of an instinct in terms of what the customers want, especially in empty markets where there's no product to fill that market yet. So I think you can expect R&D to stay traditionally very, very low as a percentage of our gross income. But very effective.

Okay. Thanks again, guys.

You're welcome.

(Operator Instructions). And stand by. And, ladies and gentlemen, I show no further questions in queue.

Okay. Well, thank you very much. We'll see you in the next quarter earnings call.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may now disconnect. Have a wonderful day.