ICU Medical Inc (ICUI) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2009 ICU Medical, Inc. earnings conference call. My name is Keith and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). I would now like to turn the conference over to your host for today, 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 fourth quarter fiscal year ended December 31, 2009. On the call today representing ICU Medical is Dr. Lopez, Chairman and President; and Scott Lamb, Chief Financial Officer. We will start the call by reviewing key operating and financial achievements for the year. Then Scott will discuss fourth quarter and full year financial results. Dr. Lopez will wrap up the call with a review of current business trends and the Company's revenue and earnings targets for fiscal 2010. Then we will open the call for your questions. Before we start, I would like to touch upon any forward-looking statements made during today's 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 the Company's SEC filings for more detailed information on the risk and uncertainties that have a direct bearing on operating results and performance and financial conditions. With that said, I'll now turn the call over to Dr. Lopez. Go ahead, Doc.

Good afternoon, everybody, and thank you for joining us today. We are pleased with our operational and financial accomplishments in 2009, as we achieved record revenue and profitability. In addition, we increased our competitor advantage by enhancing our quality and cost structure, as we continue to make investments in our production processes and manufacturing efficiencies. In August, we closed the acquisition of the commercial rights and physical assets of Hospira's Critical Care product line. The transition process is proceeding in line with our expectations and we look forward to accomplishing complete control over the critical care operations and return this product line to stable, positive growth. In November, we extended our relationship with MedAssets Supply Chain Systems by signing two new contracts for our Invasive Hemodynamic monitoring critical care products, including the next generation Select agreement. These contracts offered MedAssets customers our leading line of disposal transfusers, thermodilution catheters and inline blood sampling devices which provide better patient outcomes and cost reduction, as well as cost avoidance.

Now let me review our strategic investment program for the operations during the fiscal year. First, we continued to focus on our manufacturing processes to improve our product quality and cost structure. And we implemented several important initiatives at our Mexico and Salt Lake City facilities. This ongoing program is designed to increase our system capability, improve manufacturing efficiencies, reduce labor costs, decrease the time needed to produce an order and minimize investment in the inventory. Specifically, we've installed automated assembly equipment for new and existing products, began utilizing larger molds and molding machines and implemented [times] and manufacturing principals. Secondly, to support growth of our custom products in the European markets, we purchased land and started to build a manufacturing plant in Slovakia. Centrally located in Europe, the plant provides us with a very favorable strategic location, creating significant distribution advantages. It is expected to shorten supply chain lead time and as a result, eliminate large transportation and custom duty costs. A highly educated work force located in Slovakia, as well as low tax rate and labor costs will lead to further operating efficiencies. We plan to have the plant up and running before the end of 2010.

Finally, to capitalize on the critical care opportunity, in 2009, we added 22 direct sales people and additional sales and marketing support staff to handle the expanding critical care operations. Additionally, we added 32 direct sales people to support our growing relationships with CPOs, the direct sales efforts for our new oncology line and additional market opportunities. These hires in 2009 complete the majority of our sales force expansion for the foreseeable future, as we expect to have only approximately five more sales people in 2010. Based on fourth quarter results, our relationship with Premier is adding approximately $5 million to our annual sales on a run rate basis, and we believe we will continue to achieve annual growth with Premier for years to come. Before I go into more details on our future outlook, I would like to turn the call over to our CFO, Scott Lamb.

Thanks, Doc. Before I begin, let me remind all of you that the sales numbers we are covering, as well as our financial statements, are available on the Investor portion of our website. For the full fiscal year, our total revenue increased 13.1% to $231.5 million, compared to $204.7 million a year ago. Our revenue for the fourth quarter of 2009 was up 23% to $69.8 million, compared to revenue of $56.7 million for the fourth quarter of 2008. Our earnings for the fiscal year totaled $26.6 million or $1.77 per diluted share, compared to $24.3 million or $1.67 per diluted share in the previous year. For the fourth quarter of 2009, we earned $7.3 million, or $0.50 per diluted share, compared to $9 million, or $0.61 per diluted share for the fourth quarter of 2008. Now, let me discuss financial results for the fourth quarter in more detail.

Our sales by product category were as follows -- CLAVE generated $22.3 million, or approximately 32% of our fourth quarter total revenue. As we already discussed on previous calls, we anticipated that during 2009, some customers would manage their inventory more conservatively, and Hospira implemented a more cautious inventory management strategy due to their Project Fuel initiative. As we expected, fourth quarter sales from CLAVE decreased 5% year-over-year. Entering 2010, we are well positioned to capitalize on our distribution agreement, as well as our existing relationships, and expect these products to achieve year-over-year growth in the mid-single digits. Custom sets, which include custom oncology, custom infusion and custom critical care, represented 32% of our total fourth quarter revenue and improved 18%, to $22.3 million compared to $18.9 million a year ago. Custom sets growth during the quarter was attributable to double-digit increases in custom critical care and custom infusion sets, which were up 63% and 24% year-over-year respectively. In 2010, we expect custom sets to continue to make strong contributions to our top line. We have stated for a number of years, that our business continues to move towards custom solutions. In 2010, we forecast our overall custom sales to be approximately the same as our CLAVE sales, which equates to growth in the low- to mid-teens.

Standard critical care products increased 91% to $17.6 million, compared to $9.2 million for the fourth quarter a year ago, and represented 25% of our total revenue. This increase was attributable to our recent acquisition of Hospira's critical care line. Additionally, it is important to note that we expect our critical care sales to have a strong increase through 2010 compared to 2009, but not at the same run rate as during the fourth quarter. Some customers have built up stock during the third and fourth quarter, and we anticipate some destocking to occur with our customers now that we are through the majority of our integration process. Standard oncology products more than doubled in the fourth quarter to $1.7 million year-over-year. This growth was due to strong recognition of these revolutionary products worldwide. Sales from standard oncology were up 115% internationally and more than doubled domestically, which includes sales to Hospira. We expect our oncology products to approximately double in sales for 2010, compared to 2009 sales of $5.1 million.

Now moving to our fourth quarter sales by distribution channel, US sales to Hospira were down 34% to $24.4 million, as critical care products are no longer sold to Hospira and are now sold direct and through our distributors. Excluding critical care, sales to Hospira declined by 5%, as strong performance of custom infusion sets was more than offset by the expected decrease in CLAVE. For the fourth quarter, US sales to Hospira were 35% of revenue compared to 66% in 2008. Our domestic direct sales, coupled with our distributors, grew over 200% to $28.2 million year-over-year due to critical care, as well as strong contributions from custom sets, CLAVE, and new products. As you can see from these results, we are diversifying our sales channels.

International sales grew 81% to $16.4 million year-over-year and were also driven by critical care, custom sets, and new products. During the quarter, we experienced solid double-digit growth in Europe and the Pacific Rim. In the fourth quarter 2009, international sales represented 23.5% of our total revenue, compared to 16% a year ago. In the fourth quarter of 2009, our gross margins were 45% compared to 46.3% a year ago and 46.4% in the previous quarter. The sequential decrease was attributable to the increased sales of our lower margin critical care product line. As we discussed earlier, critical care products have lower margins than our corporate average. These sales will increase our gross profit, but decrease our overall gross margin. We expect gross margins to be approximately 43% in 2010. SG&A expenses totaled $19.8 million compared with $13.2 million for the fourth quarter last year. The increase was in line with our expectations, as we continued to make additional investments in sales and marketing initiatives to fully capitalize on our critical care acquisition and other market opportunities.

During the fourth quarter, we hired 14 direct sales employees with additional sales support, marketing, and customer service professionals. The total number of our global direct sales force at the end of 2009 was 127. Also, during 2009 we incurred higher legal costs. Our SG&A expense for the full year of 2009 was 29.5% of total revenue, in line with our previous guidance. For 2010, we expect our SG&A to decrease to approximately 27% to 28% of sales. During the fourth quarter, our research and development expense increased to $0.6 million, compared to $0.5 million a year ago, as we started to increase our investments in new product initiatives. As we projected for the full year of 2009, our R&D expense was approximately 1% of total revenue. We will be increasing R&D in 2010 to a range of 1% to 2% of sales.

Now moving to our balance sheet and cash flow, as of December 31, 2009, our balance sheet remained very strong with $108.1 million in cash, cash equivalents and investment securities. This equates to approximately $7.59 per outstanding share. We also had over $174 million in working capital. Additionally, we generated $48.6 million in cash flow from operating activities for the fiscal year 2009, which exceeded our expectations. Our capital expenditures totaled $16.7 million during the full year. This included $5.2 million we have invested to date on our new plant that we are building in Slovakia. We purchased $20.4 million of stock during 2009 with approximately $28 million still available as of January 1, 2010 under our $55 million stock repurchase purchase program. And we do plan to purchase additional shares in 2010. Now, I would like to turn the call back to Dr. Lopez.

Thank you, Scott. As we enter 2010, we are confident that our strengthening worldwide market leadership, industry partnerships, constant focus on innovation and proven cost controls have our Company well positioned for increased sales and profitability, even as we continue to invest in our sales force and expand our manufacturing capacity. Scott already discussed trends in our core product line. I would like to provide some additional detail on critical care. The transition following the acquisition is progressing in line with our expectations, and we are very excited about the opportunities ahead for these new products. After reviewing market feedback regarding our critical care products, we are repositioning this line as providing solutions for the healthcare industry.

Our customers view these products as tools necessary to interpret data from patients in intensive care units and offering doctors answers to the patients' issues. We capitalized on this new direction. We will continue to expand our custom critical care line with less invasive monitoring products, with a focus on the intensive care unit. In addition, approximately one out of 10 patients are allergic to latex. With the recent launch of our full line of latex-free catheters in January, we are the only Company to be able to offer a full line of latex-free products in critical care. Outside of our new critical care products, we are also working on additional new product launches, which address the IV therapy and oncology market. We will not be providing specific information right now because of competitive reasons. However, we expect to provide more information on these new products once they are closer to commercial launch this year.

And now I would like to provide our guidance for the fiscal year 2010. We expect our fiscal year 2010 revenue to be in the range of $265 million to $275 million, driven by all of our main product lines. We estimate our gross margins to be approximately 43% for the full year, while we expect to continue to benefit from improving manufacturing efficiencies. And our new critical care revenue will increase our gross profit, as lower margins will put downward pressure on overall gross margin in 2010. On the operating expense front, we will continue to incur additional expenses related to critical care and other sales and marketing initiatives. However, we expect to leverage this investment and improve on our operating margins. We anticipate our SG&A for fiscal year 2010 to be 27% to 28% of total sales. As a result of the new products I discussed earlier, we expect higher R&D expenses compared to 2009, which are projected to be 1% to 2% out of total sales for the full year.

Turning to our bottom line, for the full year 2010, we expect to achieve diluted earnings per share in the range of $1.80 to $1.90. When comparing this range to actual results for 2009 results, it is important to note that our tax rate in 2009 was 32%, and we expect our tax rate for the full year 2010 to be 35%. Also keep in mind we are increasing our investment in sales force and R&D, as well as expanding our manufacturing capacity during 2010. We believe capital expenditures, including the additional investment in our facility in Slovakia, to be $15 million to $20 million in 2010. Our operating cash flow is expected to be approximately $35 million to $40 million in 2010. Now, I would like to turn the call over for your questions.

Certainly. (Operator Instructions). Your first question comes from the line of Stephen Simpson of Northland Securities. Please proceed.

Thank you. My first question is regarding gross margin and critical care. As time goes on, do you have a sense at this point of where you think you're going to be able to raise the margins on this business? Or do you think this is something that is going to be permanently below the prior Company average?

Stephen, eventually we'll get there. Eventually we look to see improvements in the gross margin on this product line. But right now, our main focus is on integrating the customers into ICU Medical. We've gotten a lot of the cost improvements out already, as we have been manufacturing these products since 2005, so we're really looking at more -- pricing-wise, what we can do in the future. But that's not our focus at the moment.

Okay, thanks. And one question in follow-up, I guess a two-part question. Could you tell us what the share count was exiting the quarter, and does your EPS guidance for the next year present any additional buybacks?

The answer to your second question is, yes, it does. As we mentioned on the call, we do intend to continue to buy back shares under our $55 million authorization. And going out of the quarter, the diluted for the year was $14.8. The diluted -- I'm sorry, for the quarter, it was $14.8 million.The diluted for the year was almost $15 million.

Thank you very much.

You're welcome.

Your next question comes from the line of Matt Dolan with Roth Capital Partners. Please proceed.

Hi, guys. Good afternoon.

Hi, Matt.

Question on the revenue guidance. You just put up a quarter that's closing in on $70 million, and, Scott, I know you talked about some inventory build-ups in Q4 that might need to be worked through early in the year. But on an annualized basis, you're almost already to the midpoint of your guidance, or above your midpoint of the guidance for 2010. Can you just help us through the logic there, how much -- what type of underlying growth are you thinking about for 2010? And how much was kind of a one-timer in Q4?

Sure. As we mentioned, we'll start off with critical care. As you can see, the run rate for the fourth quarter critical care, we do expect some destocking to occur in 2010. Critical care should be down from that run rate at least 10% or more. CLAVE, we expect that to grow at approximately 5%, maybe seeing a little bit of a slowdown there. And same with custom. We expect that to now be in the low- to mid-teens. So again, we're seeing a little bit of a slowdown there. And then with critical care, we, we should see a doubling there, from $5.1 million in 2009.

Right, so a little bit slower than previously, and I think if we back into it, we get about a mid, single-digit underlying growth rate. Is that fair?

Yes.

Okay. If we look at SG&A, the run rate in Q4, again, is higher than your 2010 projection. Same sort of exercise there. Can you walk us through what the legal expenses were? And now that you have these new sales hires on board, can you expand on how you get leverage that you're guiding to in this SG&A line?

That's a good question, and you're right, Matt. And we do expect lower legal costs in 2010 compared to 2009, and that's why the run rate does come down somewhat. In 2009, in legal --

That number goes up

Yes. So in 2009 we spent approximately $7 million in legal, and we do expect that to come back down in 2010 to more normalized numbers.

Okay. How much in Q4?

In Q4, we spent about -- just under $3 million.

Okay, and last question on the transition. You've given us kind of an assumption for what type of incremental revenue the Hospira transition will generate on an annualized basis. Can you update on that? Is that still $30 million to $35 million, or how much of their account base are you hoping to retain? Thanks.

Well, we do expect some decrease over the current run rate. So that $30 million to $35 million might come down a few million from what we've discussed in the past.

Great. Thanks, guys.

You're welcome.

Your next question comes from the line of Jayson Bedford with Raymond James. Please proceed.

Good afternoon, and thanks for taking the question. I would just like to go back to the gross margin commentary. Looks like you did 45% gross margin this quarter, with a full contribution of critical care, which I thought you still had some Hospira inventory in there, which would have depressed margins. The guidance for 2010 is 43%. I'm just trying to reconcile the big difference between what you put up in the fourth quarter and what you're guiding to for 2010, just on the gross margin line.

That's a good question, Jayson. So it basically comes down to a few items. The main items are we do expect a less favorable [FX] between the US dollar and the peso in 2010 over 2009. Second, the startup costs associated with the new factory in Slovakia will put some slight downward pressure on the margins. And then third, as far as critical care goes in the fourth quarter, there wasn't any significant amount of Hospira inventory in there that, that would deflate the margins in the fourth quarter.

Okay, so you're finished the Hospira inventory on the critical care side?

For the most part, yes.

[Mainly] the plant --

In the FX. Yes.

Probably mainly the plant in Slovakia that we have ongoing expenses and no production out of. We've hired a number of employees and that comes off of our cogs.

Production in Slovakia will occur in the back half of 2010?

Yes.

Probably about the third quarter of 2010.

Okay. I guess just a revenue question. On the growth in the custom products, do you think that growth is coming from a stable account base? Or are you seeing orders from an expanding installed base of accounts?

Expanding. Expanding base of accounts, no question about it.

Yes, as we mentioned, on an annual run rate, as Doc mentioned, Premier added $5 million in new business.

Okay, and then in terms of CLAVE, you talked about mid-single. I think historically you've kind of talked about mid- to upper-single. Is that just market slowdown, competitive share losses, pricing, or does that factor in kind of additional drawdowns at Hospira?

I would say the market -- the market is getting pretty saturated, and it's harder to grow the market. There's still a lot of market to grow, in Premier accounts and such. But the -- it's -- at the end of the lifecycle of a product, near the end of the lifecycle of the product. So the next stage is to move to the new product.

Okay, thank you.

Your next question comes from the line of Junaid Husain with Soleil Securities. Please proceed.

Good afternoon, everyone.

Hi, Junaid.

Scott, just to be clear, relative to the inventory adjustments that Hospira made as part of Fuel, do you figure that we're mostly done on CLAVE inventory adjustments for 2010?

With Hospira, yes.

Okay, and then, Doc, relative to Hospira, they announced back in December that they are making an acquisition of a bunch of infectious disease agents to supplement their specialty injectables portfolio. Is there anything in Hospira's latest acquisition that makes you think that there might be some opportunities here to sell more of your products?

I'm not really up to date on Hospira. I had dinner with Chris Begly about a month ago. We didn't -- He discussed some of his most recent acquisitions, but I'm really not up to date on their acquisitions and how they fit in.

Okay, fair enough. And then, Scott, just a few odds and ends here. Could you tell me what the DSOs were in the quarter and how it compares to last quarter and the previous year?

Sure, I can. Give me one second here.

Or maybe if you just have the DSOs for this quarter, I can look back in my notes.

They were 63 this quarter and 56 the last quarter. Obviously, as we continued to sell more direct and our sales OUS continue to grow, the DSOs will get extended somewhat. But still, even at 63, that's not too shabby.

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

You're welcome.

Your final question comes from the line of Mitra Ramgopal with Sidoti. Please proceed.

Hi, guys. If you can recap again the sales force expansion. I believe you added about 25 sales people in the second half of the year. What are the plans for 2010, again?

No more than five people.

No more than five.

Additional people.

Okay, and I don't know if you can give us a sense as to how much Premier contributed in the quarter.

I don't have that number for you, Mitra.

Okay, but so far the agreement is, would you say, in line with expectations? Exceeding it?

Yes, I would say it's meeting our expectations.

Very much in line.

Okay. And on the growth we are seeing on the international front, is it just primarily on the oncology side you're seeing that?

Well, certainly oncology and critical care obviously, as we move that distribution from Hospira to our own direct and distributors.

[In Europe], custom sets.

Okay. And then finally, just coming back to the guidance. Obviously 2009 was just -- your products really withstood the recession, et cetera. Are you assuming any pickup in the economy in hospital spending, et cetera, in the guidance?

No, we're not making any assumptions at all.

Okay. Thanks again.

You're welcome.

Gentlemen, you have no other questions at this time.

Great. Thank you for participating in today's call, and we look forward to updating you on our 2010 progress on our first quarter call, which we expect to be in April. Also, as a reminder, we will be marketing a number of cities in February and March and attending investor conferences in the near future. And we certainly hope to see you at those events. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.