ICU Medical Inc (ICUI) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ICU Medical first quarter 2010 earnings conference call. My name is Christopher and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to Mr. John Mills of ICR.

Good afternoon, everyone. Thank you for joining us today to review ICU Medical's financial results for first quarter ended March 31, 2010.

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 quarter, then Scott will discuss first-quarter results in more detail. 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 the Company will open the call for your questions.

Before we begin, I want to touch upon any forward-looking statements made during the call, including management's belief and expectations about future results. Please be aware they're 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 the operating results and performance and financial conditions. With that, I will turn the call over to to Dr. Lopez.

Good afternoon, everybody, and thank you for joining us today. Our first-quarter results represent a solid start for 2010. Our total sales increased 18.5% to $64.4 million year over year and we earned $4.3 million or $0.30 per diluted share for the first quarter of 2010.

Industry-leading, high-quality products continued to drive strong demand for all of our core products worldwide. As a result, our domestic distributors and direct sales were up 184%, while international sales grew 53% year over year.

Now let me update you briefly on our key operating initiatives during the quarter. We made substantial progress with transitioning the Critical Care operations from Hospira [in construction] our production facility in Slovakia. Even though these investments negatively affected our operating margins in the first quarter, we expect these margins to improve as the year progresses.

For Critical Care, the additional 22 salespeople we hired in the third and fourth quarter are progressing as expected and even though we do not expected them to be fully productive for about nine months, these new hires will enable us to capitalize on the Critical Care opportunity we believe is ahead of us. Also, the construction of our European manufacturing plant in Slovakia is going as planned and is scheduled to be operational in the later portion of the second half of this year.

We look forward to capitalizing on the plant's favorable Central European location which provides us with enhanced distribution capabilities and cost efficiencies. Our strong topline performance also benefited from our distribution partnership with Premier and MedAssets.

Based on our first-quarter results, Premiere is already adding approximately $7 million to our annual sales on a run rate basis compared to $5 million in the fourth quarter of 2009. We believe this number will grow as our products continue to gain wider recognition due to Premier and MedAssets' extensive customer base and as we start to benefit from our expanded sales force to support these relationships. Now I would like to turn the call over to to our CFO, Scott Lamb.

Thank you, Doc. Before I begin, let me remind all of you that the sales numbers we're covering as well as our financial statements are available on the investor portion of our website for your review.

For the first quarter of 2010, our total revenue increased 18.5% to $64.4 million compared to revenue of $54.3 million a year ago. Excluding Critical Care, revenue grew $5.7 million or 13%.

Growth during the quarter was attributable to strong performance of our CLAVE custom sets and Critical Care products. Our earnings for the first quarter of 2010 totaled $4.3 million or $0.30 per diluted share compared to $7.1 million or $0.47 per diluted share in the first quarter a year ago.

Our sales by product category were as follows. Sales from CLAVE increased 10% to $23.4 million, comprising approximately 36% of our first-quarter total revenue. We continue to believe this product line will grow due to our solid existing relationships in the industry as well as our distribution agreements.

We expect CLAVE this year to achieve year-over-year growth in the mid-single digits. Custom sets which includes custom oncology, custom infusion and custom critical care; represented almost 32% of our total first-quarter revenue and improved 8% to $20.4 million compared to $18.9 million a year ago.

The increase in custom sets was attributable to strong growth in custom critical care and custom infusion sets which were up 35% and 13% year over year respectively. This strong upside was offset by a temporary decrease in custom oncology, primarily in Europe. This was due to minimal destocking by Hospira Europe.

We believe the completion of our custom set manufacturing facility will give us the competitive advantage we need to support custom set revenue growth in Europe. As our business continues to move towards custom solutions, combined with the completion of our production plant in Slovakia, we believe that in 2010, the overall custom product sales will grow in the low to mid-teens, contributing approximately the same as CLAVE. Sales from standard critical care products were up 38% to $12.4 million compared to $9 million for the first quarter one year ago and represented 19% of our total revenue.

As we already noted on our previous conference calls, Critical Care sales were expected to post substantial increases through the first three quarters of 2010 versus 2009 due to our acquisition of Hospira's Critical Care line. At the same time during the first quarter, we saw some destocking which we believe will be over by the end of the second quarter.

Standard oncology sales more than doubled year over year in the first quarter to $1.4 million. Sales from standard oncology were up 128% internationally and 84% domestically which includes sales to Hospira.

Based on the strong global demand as well as an expected and highly trained sales force of 16 people dedicated specifically to our oncology business, we continue to expect sales from our oncology products will double to approximately $10 million for the full-year of fiscal 2010. Now, moving to our first-quarter sales by distribution channel, as expected, US sales from Hospira were down 31% to $24 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 increased by 2% as strong performance of CLAVE and oncology products was offset by a decline in custom sets. For the first quarter of 2010, US sales to Hospira were 37% of revenue compared to 64% for the same quarter of 2009.

Our domestic direct sales coupled with our distributors grew 184% to $23.5 million year over year due to Critical Care as well as strong contributions from custom sets and CLAVE. International sales were up 53% to $15.7 million year over year due primarily to strong performance of CLAVE and Critical Care products.

During the quarter, we experienced robust growth in all of our international markets led by Europe, the Pacific Rim and Latin America. In the first quarter 2010, international sales represented 24% of our total revenue compared to 19% a year ago.

In the first quarter of 2010, our gross margins were 41.8% compared to 48.9% a year ago. The decrease was primarily attributable to increased sales of our lower margin Critical Care product line.

As we discussed earlier, Critical Care products have lower margins than our corporate average. In addition, some of these products included higher temporary costs associated with transitioning the manufacturing from Hospira to us during the quarter.

Additionally, lower gross margins were due to higher freight and unfavorable foreign exchange rates between the peso and the US dollar. We expect gross margins to gradually improve the rest of this year and expect gross margins to be approximately 43% for fiscal year 2010.

SG&A expenses totaled $19.7 million compared with $15.1 million for the first quarter last year. The increase was primarily attributable to our investments in sales and marketing initiatives to build our direct sales force.

To help you better understand our expenses for the upcoming quarters, I would like to provide additional detail on some expenses that occurred in the first quarter that are not expected to recur for the remainder of fiscal 2010 and some costs that are being leveraged at this time due to utilization ramp-up.

During the first quarter, there were additional nonrecurring and temporary costs associated with the Critical Care transition from Hospira's reported distribution as well as patent and legal costs and start-up costs for the Slovakia plant. While we expect to continue to incur some of these expenses through 2010, based on what we know now, they should be lower in the second half of the year compared to the first half. So, as revenue increases this year, we should see a decrease in our SG&A costs in absolute dollars during the second half of this year. We still believe we will spend 27 to 28% of our 2010 revenue on SG&A.

Our research and development expenses during the first quarter increased to $0.9 million compared to $0.7 million a year ago as we started to increase our investments in new product initiatives. We intend to increase R&D in 2010 to a range of 1 to 2% of sales.

Moving to our balance sheet and cash flow, as of March 31, 2010; our balance sheet remains very strong with $84.9 million in cash, cash equivalents and investment securities. This equates to approximately $6.25 per outstanding share.

We also have $150.8 million in working capital. Additionally we generated $9.6 million in cash flow from operating activities for the first quarter of 2010. Our capital expenditures totaled $10.4 million during the quarter. This included $8.4 million that we invested in our new plant in Slovakia.

During the first quarter, we repurchased 686,000 shares or approximately $24 million of our stock. By March 31 we bought back $50.3 million of our stock under our $55 million stock repurchase program. Now I would like to turn the call back over to Dr. Lopez.

Thanks, Scott. Looking forward, we're confident that our proven track record of innovation, operating efficiencies, product quality and customer satisfaction will continue to drive our profitable growth throughout 2010 and beyond.

We believe we have sufficient financial and human resources to capitalize on market opportunities and maintain our industry leadership. Based on our accomplishments during the first quarter and current business trends, we're reaffirming our guidance for the fiscal year 2010 as follows.

We expect our fiscal 2010 revenue to be in the range of $265 million to $275 million, driven by all of our main product lines. We foresee gradual improvement on our gross margins starting in the second quarter and estimate or gross margins to be approximately 43% for the full year. In regards to our operating expenses, we believe the majority of the increased investments in marketing and our sales force is complete.

For the remainder of the year, we will focus on leveraging our investments and increasing our operating margins and anticipating our SG&A for 2010 to be 27 to 28% of sales. Turning to our bottom line, for the full-year 2010, we continue to expect to achieve fully diluted earnings per share in the range of $1.80 to $1.90.

We believe capital expenditures, including the additional investment of our facility in Slovakia, could be $18 million to $22 million ub 2010. Our operating cash flow is expected be approximately $35 million to $40 million in 2010. Now I would like to turn the call over for your questions.

(Operator Instructions) Matt Dolan.

First question, Scott, on gross margin, you talked a little bit about some of the factors that were impacting in the first quarter. I was wondering, you're still comfortable with the 43% level for the year.

I was wondering if you could kind of walk us through how you look at that on a second quarter. Is it due to some of the Critical Care transition? Is it going to remain kind of in this level and kind of work up from there or is it just going to kind of lineally ramp from here? What should we be expecting?

Look for more of a gradual improvement. The majority of it does come from Critical Care as we get through and obviously product mix is a big piece of it, about 460 points. That includes some of the transactional costs moving from Hospira to ICU Medical. Along with that, freight made up about 150 basis points difference and the US-peso difference made up about 100 basis points. Look for a gradual improvement throughout the rest of this year.

Kind of along the same lines with SG&A, assuming your revenue picks up here on a quarterly basis, what does it look like kind of in the second quarter? You mentioned it would be going down on an absolute dollar basis. Is that kind of really just kind of a lag down and kind of is flat in the second quarter and then goes down in the third and more down in forth? Or how should we be looking at that?

It's certainly in absolute dollars, look at it to be a little bit more flat than the second and then coming down in the third and fourth quarter. Obviously as revenue continues to increase as a relevant or as a percentage of revenue, you'll see that decrease even more.

Last question, in the past, you've talked about a couple new products, less invasive Critical Care products; IV therapy, oncology markets. Can you tell us a little bit about what they are or when we might be able to know a little bit more about the nature of the products. And if you could characterize the significance in terms of relevance to your current revenue base.

We basically have two newer products (inaudible) products that are pretty important to our Company. But we really don't comment on these products until we have the market acceptance. One of the products is cleared to go with the FDA. The other one is awaiting FDA approval. But until we obtain meaningful revenues and we're absolutely sure, we really won't be talking about them.

Thanks, guys.

Junaid Husain.

Scott, if I could push you just a bit on your earnings guidance. You missed the Street's numbers by I think it was about $0.11 but you're digging in your heels on the earnings guidance front. So it sounds like you have got earnings weighted for the back half of the year. How should we be thinking about the pacing?

Certainly the back half of the year is going to have better operational earnings than the first half of the year. But look for gradual improvement both in the growth and operating margin as revenues increase and we complete our transition from Hospira to us in Critical Care and the plant in Slovakia starts to get operational in the later portion of the second half of this year.

So could you give us a sense for the wildcards that in your mind could make earnings wabble up or down for the balance of 2010? Is it Slovakia, is it higher marketing spend, is it R&D, is it litigation? Which one of these buckets should we be paying attention to?

All of the above. Those are all variables that I think we've been fairly vocal about. Based on the best information that we have today, we still feel very comfortable with this year's guidance.

And if I could ask a couple questions relative to Slovakia, it sounds like you're looking for the facility to be up and running by, call it the back half of 2010, first half of 2011. I know from years past that anytime you've moved your manufacturing operations around, we've seen some wobbliness on the gross margin line. So, how should we be thinking about gross margins relative to Slovakia as you do a little bit of manufacturing transition from (inaudible) to Slovakia?

That's a very good question. First of all, we're moving a portion of our [Insonata] facility to Europe and it is only the custom sets that we currently manufacture in Mexico for Europe. So once we move those sets to Slovakia, we should start to see some efficiency improvement in our facility in Slovakia.

The amount of product that we're moving is not as significant as in years past on some of the products we've moved around. I think we've also learned from some of those integrations in the past. So while -- don't look for any great improvements to the margins from the plant in Slovakia, do look for 2011 and beyond for it to be mainly cost neutral.

Gotcha. As you work through the transition for custom sets that is going to happen for your European customers, will you be building up some inventory ahead of time?

Well today we can ship from Mexico without -- let me put it this way, nothing changes on day one when you start up manufacturing in Slovakia. So we can either ship out of Mexico or we can ship out of Slovakia. So there shouldn't be any supply chain interruption due to the migration.

Gotcha. Thanks so much, guys.

(Operator Instructions) Jeffrey Cohen.

Just a couple, firstly on the Critical Care side, I guess, Scott, you had mentioned that 22 were hired in Q3 and Q4. Could you go through the total headcount then as it stands now?

For Critical Care, we stand at 22.

Okay and for the balance of the Company on the sales force?

We have approximately a total of 150 direct salespeople and just over -- I'm sorry, 125. We have about 100 in the US and about 25 OUS.

Could you go back to the facility in Slovakia? You had said back half of 2010, where do things stand now as far as construction or equipment?

We should be getting the keys any day now and once we get the keys to the facility, we will start loading it up with our equipment and our inventory. There are still permits left to acquire. There's other necessary items that have to take place before that as well. So, we are on schedule.

One more short one. Just to back up, we're talking about some new products, were there two or were there three?

Really three products that are new. One product is in a different direction. It's used for oncology but it's a different direction for ICU Medical.

And then the other two are the ones that you had mentioned about cleared the FDA and the other being -- awaiting FDA approval.

Yes.

Jayson Bedford, Raymond James.

I apologize if this is redundant, I dropped off for a second. Can you just maybe quantify the impact of Slovakia in the quarter, both on the cost of goods as well as the OpEx line?

Certainly. It was all in the SG&A. It was about $300,000 in the first quarter that impacted SG&A. Expect that to be flat to up a bit in the second quarter, sometime in the third as well. Until we get the factory up and operational, then those costs will go down to the cost of manufacturing.

Okay. So it didn't seem like there were any type of excessive one-time costs related to Slovakia in the first quarter. Is that fair?

Yes, that's correct. Other than just to -- we planned on startup costs.

Right now, the employees that we have over there are not producing product (inaudible) in our SG&A line. That will change. That will move over to COGS. We have about 20 people -- don't quote me -- but approximately 20 people that we've hired for the plant at Slovakia. That's been hurting our SG&A line. We expensed it now, but it will move over to COGS once we start producing product which is the second half of this year.

Okay. On the gross margin line, you also mentioned higher costs related to the transition of the Critical Care inventory. Is there any way you can kind of quantify the impact in this first quarter and then going forward, do you expect similar costs?

The way to quantify it is to group it all into product mix i.e. Critical Care. That total was about 460 basis points. That will improve -- that will gradually improve as we transition from Hospira to ICU Medical.

And the other two areas were of freight which was about 150 basis points and the peso-US dollar translation which was about 100 basis points. But just look for gradual improvement for the rest of this year.

Okay. On the Critical Care business, you mentioned some destocking, I believe. Have you been able to take an inventory of your accounts and have you lost any accounts out there?

For Critical Care?

Correct.

We've probably lost a couple, gained a couple. Just in any transitional process, I think this one has gone as well as could be expected and we're fairly comfortable in looking at the rest of this year. But obviously we still have a lot of work left to do.

Lastly for me, I may have had the numbers incorrect here. But it looked like you had about $5 million left on the current buyback. Are there plans to renew that buyback at any time? Thanks.

You are correct. We have about $5 million left to buy back. There's no plans as we sit here today. Of course when the stock goes on sale, we always look at it, go back to the board and reassess our position. But right now we are (inaudible).

On the $55 million authorization. Those.

That's about 686,000 shares so far.

Gregory Macosko.

Just another question about the expenses. You said the expenses look to be flat in second quarter on a dollar basis, I believe. So is there still some Hospira expenses, dollar expenses, there?

At the SG&A line?

Yes. It sounded as if those were done in the first quarter but I guess they're going to continue to some extent in the second quarter. Is that correct?

That is correct. You will see some of the same transitional costs in the second quarter as well. But there are some non-recurring costs in the first quarter that eventually will go away in the second half of this year. In absolute dollars, look for SG&A expenses to come down in the second half of big year.

Okay. And then the freight costs of 150 basis points and 100 basis points on the peso, I'm assuming that's year over year and how much of that are you figuring to get back throughout the year?

Well, on the peso, first of all it is year over year. On the peso, as we mentioned on our fourth-quarter call, we did expect the peso to rebound somewhat to the US dollar and we did on a year-over-year basis so far.

On the freight, we do expect to get the majority of that back going forward, especially once we have finished with the transition from Hospira distribution to ICU Medical distribution for Critical Care. Look for that. Some of that to begin in the second quarter, but really you'll see the largest benefits in the third and fourth quarters.

I see, okay. And then the R&D was a bit up. I'm assuming then you are spending some money and time on those three new products. Is that where a lot of that increase has come from?

That's absolutely correct.

You mentioned one product is cleared. When do you expect that product to be on the market or you would be selling it?

We just finished trials in two hospitals in Germany, two hospitals in Spain, two hospitals in Italy. It looks like it is all go. So we're wrapping up the cassette that it uses, wrapping that up, and then it's a launch. But we really don't talk about (inaudible) significant revenues from it.

So at least not until the third quarter, I'm sensing then?

It will be immaterial in the third and fourth quarters. Remember, like all of our products, we develop products for empty markets. So it's not like you can take an existing market. These are empty markets, no competitor in that market space. It has to be a big market, it has to be an obvious market and it has to be proprietary. I think we have all of that.

You've hired in the sales force, and I'm assuming they are ramping up, learning, you expect them to be more productive going forward. Have you had much turnover or are those people pretty good and you're there in place?

We haven't had much turnover but the economy has not been great either. And as they continue to learn and ramp up, it's probably a better question in the fourth quarter of this year. In Critical Care, you didn't ask this question, but in Critical Care, rather than have them promote all the products, we're having them focus on a very narrow front, two different products within Critical Care and we think that's going to be more successful than representing all of the different products.

Okay and then finally, I believe you said CLAVE grew 10% and yet you're expecting mid-single digits for the year. Is that correct?

That's correct Gregory. Based on sell-through that we're getting and talking to some of our customers, that's what we believe is the right amount.

So was there inventory stocking in the first quarter or something?

Certainly not that. The year-over-year comparisons have a little bit to do with it and those year-over-year comparisons and just looking at the sell-through data. I wouldn't look at it in any alarming fashion or anything that we're concerned about. Keep in mind as well that our quarters do have some fluctuation.

Say that again?

Keep in mind that our quarters do have some fluctuation in our revenue recognition.

Like we said, we're a year-over-year company, not a quarter-over-quarter. We're not sequential.

Mitra Ramgopal, Sidoti & Co.

Just a few follow-up questions. Scott, I believe you had mentioned there was some nonrecurring or one-time expenses in the quarter. I don't know if you could quantify that for us.

The vast majority of it had to do with both our ramped-up sales force, national sales meeting and then the transitional expenses related to moving Hospira's distribution over to us. But sales and marketing.

Is there a rough idea in terms of the impact to earnings?

No, I couldn't tell you that off the top of my head. But expect as we mentioned, those non-recurring to go away. And I think if you just focus on the SG&A guidance for the year based on the absolute dollar amount coming down, revenue coming up, we should be fine.

Okay and Doc, I believe you mentioned you added about 22 salespeople in the third and fourth quarters. Did you add any in the first quarter?

Not that I know of.

So it's fair to assume that (multiple speakers)

I think at the end of the fourth quarter, I think we had a total of 50 total people.

So we're at about 125 total as we mentioned and we haven't changed that count more than one or two either way.

Again, coming back to Premier, it seems like you've seen somewhat of a pickup off of the fourth quarter. Would you say the numbers -- you talked about $7 million. Is that pretty much in line with expectations or is it exceeding what your (multiple speakers)

In line with expectations.

Finally on Critical Care, I know you had mentioned there was some destocking going on, etc. But are you having success in terms of new penetration, either Premier or MedAssets, etc.?

Yes we are. We're having reasonable success. We're meeting our expectations is probably the best way to look at it.

Thanks again.

At this time, I would like to turn the presentation over to Mr. John Mills for closing remarks.

Thanks, Christopher. Thanks for participating in today's call. We look forward to updating you on our 2010 progress in the second-quarter call which will be in the latter half of July. As a reminder, we will be marketing in a number of cities in May and June and attending investor conferences in the near future as well and we certainly hope to see you at these events. Thank you.

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