ICU Medical Inc (ICUI) 2009 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2009 ICU Medical, Inc., earnings conference call. My name is Shamika, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. John Mills, Senior Managing Director for ICR Inc. Please proceed sir.

Good afternoon everyone. Thank you for joining us today to review ICU Medical's financial results for the third quarter ended September 30, 2009. On the call today representing ICU Medical is Dr. George Lopez, Chairman and President; and Scott Lamb, Chief Financial Officer.

We will start the call by reviewing key operating and financial achievements for the quarter. Scott will discuss financial results. Dr. Lopez will wrap up the call with an update on the company's revenue and earnings targets for fiscal 2009 and a discussion of current business trends. Then the company will open the call for your questions.

Before we start, I want to touch upon any forward-looking statements made during the 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 risk and uncertainties. Future results may differ materially from management's current expectations. We refer all of you to the company's SEC filings for more detailed information on the risks and uncertainties that have a direct bearing on operating results and performance and financial conditions.

With that I will now turn the call over to Dr. Lopez.

Good afternoon everybody. Thank you for joining us today. Third quarter results were in line with our expectations, and we are pleased with our financial and operational accomplishments through the first nine months of this year as our market leadership and unbeatable value proposition continued to drive strong demand for our products around the world.

We reported third quarter sales at $54 million. Sales were driven by double-digit improvements in custom sets and new products. International revenue was up at 53% while sales from domestic distributors and direct sales posted an increase of 98%. We also reported solid net income of $6.3 million or $0.42 per diluted share. We ended the third quarter with $123,400,000 in cash, cash equivalents and investments securities, no debt, and generated $38.5 million of operating cash flow for the first nine months of this year.

On August 31 we completed the purchase of the commercial rights and physical assets of Hospira's critical care product line. Upon closing we entered into a -- multiple transitional service agreements with Hospira for distribution and light manufacturing support, which will take 18 months or less to transition all critical care operations to ICU. Overall, the entire transition is going as planned, and we are excited about the opportunities ahead of us for the critical care pipeline.

During the third quarter we started adding more sales force to handle critical care, and our goal is to hire up to 25 direct salespeople and additional and marketing support staff to expand critical care operations. We expect that by completely controlling worldwide commercial responsibility for the product lines, we are now in a much better position to leverage our network of customers and strategic partnerships to regain market share for our now full line of critical care products.

Because the transition is going as planned, we believe that during 2010 we will begin to utilize our product innovation and marketing advantages to identify areas in this market that have been ignored or underserved in the past.

We continue to diversify our sales channels and when looking at our sales after the acquisition, revenue through Hospira was 45% of overall sales for the third quarter compared to 71% a year ago. Hospira has been and will continue to be a very important distribution partner for our company for many years to come. We are comfortable with the current percentage of sales through our direct sales force and outside distributors and the opportunities we see in the future with Hospira.

Before I go into more details about our future outlook, I would like to turn the call over to our CFO, Scott Lamb.

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 website as well.

As we discussed on our second quarter conference call, critical care sales to Hospira from July 8, 2009 to August 31, 2009 were deferred, and revenue was not recognized for these shipments. The deferred revenue of $1.9 million on the balance sheet as of September 30, 2009 represents the gross profit associated with the critical care and custom critical care sales to Hospira from the time of signing to closing the asset purchase agreement. The company will recognize the gross profit on the deferred revenue when the inventory is sold to the end customer, the majority of which should happen over the next two quarters.

Our total revenue for the third quarter of 2009 was $54.0 million compared to revenue of $54.7 million for the first quarter a year ago. Net income totaled $6.3 million or $0.42 per diluted share compared to net income of $7.6 million or $0.52 per diluted share for the third quarter of 2008. We received an additional $0.08 per diluted share due to a favorable tax rate of 21% during the quarter. This decrease in tax rate was primarily attributable to additional tax credits recognized in the third quarter. Excluding the additional tax rate benefit, we would have achieved earnings-per-share of $0.34 for the third quarter, which was in line with our expectations.

For the nine months ended September 30, 2009, our revenue increased over 9% to $161.7 million compared to revenue of $148.0 million in the same period last year. Our net income for the first nine months of 2009 grew 25% to $19.1 million or $1.27 per diluted share compared to net income of $15.3 million or $1.06 per diluted share for the first nine months of 2008.

Additionally, we generated $11.9 million in cash flow from operating activities during the third quarter and $38.5 million for the first nine months of 2009.

Our third quarter sales by product category were as follows. Totaling $20.5 million, sales from CLAVE comprised 38% of our third quarter total revenue and were basically flat year-over-year. CLAVE's performance was in line with our expectations as some of our customers conservatively managed their inventory and Hospira implemented their inventory management strategy due to their previously announced Project Fuel initiative. We expect CLAVE to achieve year-over-year growth of mid to high single digits for the foreseeable future.

Custom sets, which include custom oncology, custom infusion and custom critical care represented 36% of our total third quarter revenue and increased 2% to $19.4 million compared to $18.9 million a year ago. Sales of custom sets during the quarter were driven by custom infusion sets, which increased 25% year-over-year. This strong upside trend was largely offset by a 49% decrease in custom critical care, due mostly to the two months of deferred revenue from the critical care transaction and a 25% decrease in custom oncology as sell-through caught up with sell-in for that product line.

Last year, as with any successful product launch, we experienced a sell-in period which increased overall sales for 2008. As we look into 2010, we expect our sales from these products to achieve stronger year-over-year growth.

Standard critical care products decreased 29% to $7.4 million compared to $10.4 million for the third quarter a year ago. Again, this decline was mostly attributable to the transaction of purchasing the critical care product line from Hospira. Standard critical care products contributed 14% to our total sales, yet we expect this ratio to be greater as we fully recognize these sales going forward.

Standard oncology products grew 75% in the third quarter to $1.6 million compared to the same quarter a year ago.

Now moving to our third quarter sales by distribution channel. US sales to Hospira were down 40% to $21.4 million, primarily due to the acquisition of critical care, which resulted in a 95% year-over-year decrease in critical care to Hospira. Excluding critical care, sales to Hospira declined by 6% due to a decrease in CLAVE, CLC and oncology.

Sales by domestic distributors and direct sales grew 98% to $18.8 million year-over-year due to critical care as well as strong contributions from custom sets, CLAVE, and new products.

International sales were up 53% to $12.6 million and were driven by CLAVE, custom infusion sets, and oncology products, as well as critical care. During the quarter we enjoyed strong demand for our products in Europe and the Pacific Rim. Third quarter 2009 international sales represented 23% of our total sales compared to 15% a year ago.

In the third quarter of 2009 our gross margins were 46.4% compared to 45.6% a year ago. Favorable exchange rates contributed 2 percentage points in our gross margin in the third quarter of 2009 compared to the third quarter of 2008. This was offset by expenses in our Salt Lake City manufacturing facility related to our investments in new manufacturing processes related to our IPS initiative.

SG&A expenses totaled $16.8 million compared with $13.6 million for the third quarter last year. The increase in SG&A was primarily attribute to our investments in sales and marketing initiatives with higher compensation and benefit costs and higher legal patent costs. To take the full advantage of the critical care -- to take full advantage of the critical care acquisition, we've hired 13 additional direct sales employees with additional sales support and marketing and customer service professionals. The SG&A increase during the third quarter was in line with our previous estimate, and we continue to expect our SG&A expenses for the full year of 2009 to be approximately 29% to 30% of total revenue.

Research and development expenses were $700,000 for the third quarter of 2009 compared to $900,000 a year ago and $600,000 in the second quarter. As planned, we started to gradually increase our investments in research and development in the second half of the year to support our innovative strategy. This year-over-year decrease was primarily attributable to our focus on core projects during the quarter and the elimination of development work on a device for detecting coronary artery disease. We expect our R&D expense to be approximately 1% to 2% of total revenues for the full year of 2009.

Our third quarter operating income totaled $7.6 million compared to $10.5 million for the same quarter a year ago. On a year-to-date basis, our operating income increased 43.5% to $27 million or 16.7% of sales compared to $18.8 million or 12.7% of sales a year ago.

Finally, moving to our balance sheet and cash flow. As of September 30, 2009 our balance sheet remained very strong with $123.4 million in cash, cash equivalents and investment securities. This equates to approximately $8.33 per share. We also had over $188 million in working capital. Our capital expenditures totaled $3.3 million during the quarter of 2009. And lastly, as of today, we were down to less than $1 million from $81 million in auction rate securities.

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

Thank you Scott. We are very proud of our accomplishments to date and are confident in our company's future, and now we'll provide updated guidance for the full year 2009 and discuss a few metrics for 2010.

Due to strong demand for our core products both domestically and internationally and the transition of our critical care acquisition, progressing as expected, we are narrowing our previously announced revenue guidance to the range of $223 million to $228 million for the full year 2009. We also continue to estimate our gross margin to be in the range of 46% to 47% for the full year 2009.

Beginning in 2010, as we communicated to you on our second quarter conference call, we expect the new critical care revenue to put downward pressure on our overall gross margins in 2010 but increase our gross profit dollars.

On the operating expense front, we will continue to incur additional expenses related to the critical care sales force. However, we should be able to leverage this investment over the longer term and increase our operating margins.

Turning to the earnings per share guidance for the full year of 2009, we are increasing our diluted earnings per share guidance for the fiscal year of 2009 to a range of $1.74 to $1.79 compared to the previously announced guidance of $1.62 to $1.71. This increase is due to improved operating results and the additional $0.08 related to a more favorable tax rate of approximately 21% in the third quarter of 2009. For modeling purposes we expect our tax rate for the full year to be 33%.

We believe capital expenditures, including the additional investment in our facility in Slovakia, to be approximately $19 million in 2009. We have begun construction on our new plant in Slovakia and expect to have it operational in the second half of next year.

Our operating cash flow is expected to total approximately $45 million in 2009.

In conclusion, I would like to say that we are pleased with the progress we've made so far and believe our company is well-positioned to capitalize on our market leadership, Premier industry relationships, and our critical care acquisition.

Now I would like to turn the call over to you for questions.

(Operator Instructions). Matt Dolan, Roth Capital.

Good afternoon, congrats on a good quarter.

First question on the Hospira transition and specifically looking at the critical care line. That number came in still pretty strong despite the transition for a month and a half. So Scott, maybe you could break out that $7.4 million as to when those sales came through and then touch on the rest of the business in terms of how we really derive kind of an underlying growth figure for the quarter.

Well, we completed the transaction on August 31. So as of September 1, we started recognizing sales for the critical care product line. Those sales would have been what Hospira previously would have recognized on their sales to their end user -- or to the end customer. So we have a full month of sales for critical care.

At the end-user price?

At the end-user price, that's correct.

Okay. And then looking at the rest of the business, it looks like CLAVE was flat again sequentially although up pretty nicely year-over-year. Maybe just walk us through, especially as we look into Q4, if it's going to require a double digit growth both sequentially and year-over-year, and clearly the transition will help, but what are you hearing just generally that gives you confidence that some of the inventory issues that we saw earlier in the year aren't going to come back and that you'll return to some more normalized growth rates? Outside of obviously the critical care piece that's in the middle of a transition?

Sure. Outside of critical care, we still believe that CLAVE, for example, will continue in the foreseeable future to grow in the mid to high single digits. As we look at our sell-through data, it -- the sell-through data is up where we expect it to be and is doing very well, is still going very strong. So this is mainly due to Hospira's Project Fuel, and as we announced in our second quarter conference call, expect the Hospira CLAVE sales to be flat to slightly down for the second half of this year. But sell-through is still going very strong.

One thing you didn't mention in the prepared remarks is Premier. Have you any updates for us there. Any traction that you've seen? And what are you expecting to be able to bring under the -- or sell-through ICU products in 2010 because of that relationship?

It's going very well. We saw some low hanging fruit in the third quarter, but as we've mentioned in the past, the fourth quarter is when we should start to see some significant growth coming from the Premier relationship, and we are still bullish on that relationship and the opportunity that represents.

To put some color on the CLAVE number, as Scott mentioned, that we actually see the sales tracings to the hospital. And our sales tracing, we know exactly what Hospira is selling, to whom, and in what quantities. We see the actual shipments. And those are going strong at the high single digits. So (multiple speakers)

So that's what gives you confidence that the growth you saw in Q3 is on the low end of things?

Right. It's really Hospira reducing inventory with Project Fuel, and -- the really -- number that really counts is how many customers are buying the products. Is number increasing? Or is that number flat? The number's increasing so we are -- we actually -- that's what we -- the numbers we saw in oncology versus the sell-through are two different numbers, what you sell to the distributor and what customers are buying.

Sure. Okay, great. Last one, on the strategic side it looks like the Hospira transition is tracking well. Any concept of what other uses of cash might be out there, whether it be acquisition possibilities, products or distribution, or a buyback?

Stock purchase. Open-market stock purchase.

Is that in the works, or --?

In the works.

Okay guys, thanks a lot.

Junaid Husain, Soleil Securities.

Good afternoon gentlemen. Scott, just so I have this clear in my head then, the $7 million or so that you saw in the quarter on critical care, that's all in the month of September?

That's correct.

And the, doc, more high-level, as we head into what could be a very nasty flu season, there've been some interesting reports out there suggesting that the critical care wards could become overwhelmed with swine flu patients. So when you look at your critical care product lines, in which of the product lines have you seen or do you expect to see the greatest purchasing behavior?

Custom sets. Custom sets that are just -- most of our custom sets are designed around -- for the ICU. And the intensive care units are where you're going to see most of the patients. The sickest patients will be admitted, and they'll end up in the ICUs. So we expect to see custom set business increase.

And as you have been talking to hospitals, or your sales guys have been talking to hospitals in the month of September, what's the sense as we get into this very nasty flu season? Do you expect the orders to start to pick up heading into the back half of the year?

We expect to -- the fourth quarter is usually our busiest season anyway, so we can almost count on that, because that's when the -- most people end up in the ICU with flu season, etc., just the standard flu. I don't know if enough vaccine is going to make it -- for H1N1 to make it out to the clinics fast enough. So the bottom line is we expect some pretty much of an uptick in the fourth quarter in mostly custom sets.

And then just ex swine flu, help us understand how you grow out the critical care business. Is it through product development? Is it through geographic expansion? Is it through greater channel access? What are you looking at over the horizon?

We would like to stall that until the next earnings conference call because we've got some things in place right now, but we would like to postpone that question to the first quarter of January. We'll give you very specific rollout and specific numbers and what we think it could do, but it's really early.

Right now the most important thing is to make sure that the acquisition and merger goes smoothly. It's lucky for us that we are not having to merge in the manufacturing process. All we have to do is merge in the distribution process. And that alone is enough. But it's going very, very well. Very, very well.

Good enough. And then if we could talk a bit about your relationship with Hospira, obviously Hospira is in the midst of its efficiency initiatives through Project Fuel. If we look beyond Hospira's divestment of critical care, how else has Project Fuel impacted you guys? Obviously on the CLAVE just a little bit in this quarter, but as you look out beyond critical care and beyond CLAVE, how does it affect you guys?

Well you know, the initiative as far as better management of their inventory and then the divestiture of critical care, that's how it affects us. I think this -- Project Fuel is going to make Hospira even stronger, and that will only benefit us as we go forward in our partnership with them.

One way it benefits us is that as they -- as Hospira moves to reduce the number of SKUs, the number of product lines, to be more efficient and increase their profitability, that allows more opportunity to us for customization. As they reduce the number of sets, the customers still will want the different configurations. That gives us opportunities to manufacture them for them. So we think that's -- it works hand in hand. They become very, very -- very profitable by narrowing their product lines. We expand our market share by making custom sets that are -- fill those small niches.

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

Stephen Simpson, Northland Securities.

Thanks. I was curious, now that the Hospira deal is done, can you give us a sense of what you think the new normal is going to be on your inventory levels going forward?

No. I think it's too early to tell on that. Obviously we will, as we transition from Hospira's distribution to our own distribution model, we look to bring inventory levels down. But at this point it's too soon to say by what amount.

Could you give us any more information on customer accounts? Can you for example quantify the number of customers you've gained just from your own direct sales efforts or from these distribution relationships, like with Premier and MedAssets?

No, we -- I can't give you an exact number for that. But obviously as our sales grow through not only the Premier opportunity but also through critical care and MedAssets as well, those -- the increase in customers will obviously show through in increasing revenue. But I don't have an exact customer count for you.

My last question, I know you've been talking about hiring up to 25 people dedicated to critical care. Did I hear correctly that 13 of those are hired already?

Correct. Correct. And one thing I'd like to say about the acquisition of critical care. Our call point for ICU is the intensive care unit. It is a natural for us to take over that call point, and it allows us to sell our other products while we are in the ICU. So it just makes it much more efficient for us to do. And we have a full line of critical care products to sell now, as opposed to just custom sets in place (multiple speakers)

And if I could actually slip in one last question, are you getting any pushback from customers for some of these new oncology products like the Genie just because of the overall hospital environment? Has the door for new products somewhat shut because of the environment? Or do you think that's not a factor at this point?

I think it's yes and no. I think there is initial pushback in some places, in some institutions there is none. But that product line is growing at a pace of about 48%, 50% base right now. So we are very happy with the growth of oncology. But there is some pushback because of the general conditions in the market. But we expect that product line to do very, very, very well.

Thank you very much.

(Operator Instructions). James Terwilliger, Duncan Williams.

Congratulations on a nice quarter. I got a couple of quick questions. The first one is, could you talk a little bit about the growth opportunities outside of the US? You've put up a very nice growth in your international markets. Can you talk a little bit about what's driving that growth?

Oncology. In one word, oncology. The oncology products, we launched them earlier in Europe, for example, and they -- so they have a head start on our launch in the US. And they are doing very, very well. So one word, oncology.

And the second word is oncology custom sets. In fact we are building the plant in Slovakia, which will be operational in the second half of next year, just specifically to build custom sets, mainly custom oncology sets, for Europe.

So then if I would look in -- is it in mostly Europe? Is that where the majority of this growth is coming from?

For a lot of it is -- the answer is yes.

All right. And then when you -- is there anything -- when you picked up the critical care business line, is there anything of note that you can talk about in the R&D pipeline in that particular business? Or in any of the other businesses?

As I said earlier, on critical care let us do a formal presentation in the next earnings release. We will give you various specifics of what we are going to do and what our planned investments are and what areas. At this time it's -- the most important thing is to make sure we don't lose any revenue, we make the transition smoothly without affecting our earnings-per-share -- the highest priority.

And when you acquired the critical care business and during this transition, can you talk about the behavior of your competitors? And when you talked about the 13 salespeople that came over, did you lose any salespeople in that transition as well?

We got everybody we wanted. We didn't want everybody, but we got everybody we wanted.

Okay. And then what -- how did the competitors behave during that transition?

Couldn't really tell you.

Don't have an answer for that one. Keep in mind that the competitors -- there's only really one large competitor to critical care in the US, and that Edwards. And Edwards is a very, very good, very well-managed company. Outnumber our sales force by a large magnitude. You can bet that we will not do a frontal attack on Edwards. It will come from a flanking maneuver, which we will talk about, but we will not do a frontal attack. I always say God is on the side of the numerically superior.

The critical care products you've picked up, do they have any exposure on these Premier contracts?

The answer to that -- maybe ask the -- I'm not quite sure I understand the -- yes, we are on -- our products are on Premier, if that's what you're asking.

Critical care is on Premier now.

Okay. Good. Thanks guys. A nice quarter.

Mitra Ramgopal, Sidoti.

Just a few questions. Going back to the sales force expansion, is it fair to assume that end of '09 you pretty much have the numbers you want in place, and so 2010 is more or less seeing that investment pay off?

We are still short.

Yes. By the end of the year we hope to hire all of our -- all the additional critical care salespeople. As far as the other product lines go, that's always the case where we look at the opportunities versus who we have out there selling, and we could adjust accordingly.

In terms of the tax rate, I believe you said at 33% for '09. If you had to sort of model out 2010, what would be a reasonable number?

35%, 36% -- barring no changes by (multiple speakers)

Tax rate. Yes. Okay. And just to come back to the guidance, actually when it was raised today, is it just the overall business that you're encouraged on? Or is it something in the Premier agreement in the fourth quarter that you're now factoring in?

No, we're just closer to the fourth quarter. We have (inaudible - microphone inaccessible) our numbers.

Finally, anything out of the healthcare reform that you think could have an impact on the business (technical difficulty) [I'm hearing] as maybe the medical device tax for example?

We don't know any more than you do, this niche. We've heard they're going to be exempt, a certain size, and -- but we don't know any more than you do.

Okay. Thanks again.

The good thing is if we're -- medical companies (technical difficulty) [taxed], we will all be in the same boat together.

Are your products more (technical difficulty) example, to be exempt you think than others? Or it doesn't matter (multiple speakers)

I would hope.

It depends on what changes are made, what the final tax bill looks like.

We raised our guidance because we are very confident that we can get these numbers. That's the only reason we raised them.

Okay, thanks again.

Matt Dolan, Roth Capital.

Just one follow-up. On the transition you've indicated that the critical care operation is tracking in line with your expectations. I think you've characterized maybe $30 million to $35 million in added revenue [next year] (technical difficulty) another way to ask some of the questions that were prodded earlier is, what percent of conversion (technical difficulty) anticipate, given that sales number for next year, out of [critical] (technical difficulty) meaning what percent of the accounts do you expect to keep versus loose?

We expected to keep the majority (multiple speakers) of -- but there's certainly a loss built into next year. We don't expect to keep all of them.

Okay. So more than 50%, less than 100%?

Yes.

Okay, thanks guys.

There are no further questions at this time. I would like to turn the call back over to management for closing remarks.

Great. Thanks everyone for participating in today's call, and we look forward to updating you on our 2009 progress on the fourth quarter call in early February. As a reminder, management will be marketing a number of cities towards the end of October and attending a number of investor conferences this quarter, and we certainly hope to (technical difficulty)

Thank you for your participation in today's conference. This [concludes] (technical difficulty) [presentation]. You may now disconnect. Good day.