ICU Medical Inc (ICUI) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2010 ICU Medical earnings conference call. My name is Jennifer 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).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, John Mills, Senior Managing Director of ICR. Please proceed.

Good afternoon, everyone. Thank you for joining us for today to review ICU Medical's financial results for the second quarter ended June 30, 2010. On the call today representing ICU Medical is Dr. George Lopez, Chairman and Chief Executive Officer; and Scott Lamb, Chief Financial Officer.

We will start the call by reviewing key operating and financial achievements, then Scott will discuss second-quarter financial performance. 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 start, I want to touch upon any forward-looking statements made during the call including management's beliefs and expectations about our future results. 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 risks and uncertainties that have a direct bearing on operating results and performance and financial conditions. With that said, I will now turn the call over to Dr. Lopez. Go ahead, doc.

Good afternoon, everybody, and thank you for joining us today. We are pleased to report a strong second quarter, highlighted by double-digit growth in all of our major product lines, improved earnings and positive cash flow.

For the three months ended June 30, 2010 our total sales increased 29% to $68.9 million year over year and our net income was up 34% to $7.7 million or $0.56 per diluted share. Low cost and high quality continued to drive demand for our proprietary products worldwide.

As a result, our domestic distributors and direct sales increased 136% while international sales were up 65% year over year. These results combined with our outlook for the second half of the year have us positioned to raise our revenue and earnings per share guidance range for the full year 2010.

During the second quarter we continued to focus on executing our strategic milestones such as transitioning of critical care operations from Hospira, building a plant in Slovakia, leveraging our distribution agreements with Premier and MedAssets and investing in our current manufacturing facilities. Let me briefly review our progress to date.

The transition of critical care operations acquired from Hospira is progressing according to our original plan. It's worth noting that almost all of the critical care sales in the second quarter were done through our direct sales and distribution.

We are also proud to report that we are nearing completion of our new production facility in Slovakia. Despite a temporary setback due to a once-in-a-generation flood that occurred in the same area as our plant, we are on track to commence operations at the plant in the fourth quarter of this year.

We are also taking steps to help protect our plant if this were to ever occur again. As our business continues to improve to move towards custom solutions, we look forward to manufacturing custom sets in Europe to meet strong demand for these products in that part of the world.

As we discussed in our previous calls, we have an ongoing program to improve manufacturing efficiencies and reduce labor costs. As part of the program during the second quarter, we started to expand our manufacturing facility in Ensenada, Mexico where most of our manual assembly is done.

We are increasing this [cleaning] production space by 22,000 square feet. The plant is already operating in three shifts.

We believe this investment will further improve our cost structure and boost our production volumes. Once this is complete, we expect expansion along with our new factory in Slovakia will be sufficient for our manufacturing needs for the foreseeable future. Now I would like to turn the call over to CFO, Scott lamb.

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 website for your review.

For the second quarter of 2010, as doc just mentioned, our total revenue increased 29% to $68.9 million compared to revenue of $53.4 million a year ago. This strong growth was fueled by double-digit improvements across all of our major product lines. Our earnings for the second quarter of 2010 totaled $7.7 million or $0.56 per diluted share compared to $5.7 million or $0.38 per diluted share in the second quarter a year ago.

For the six months ended June 30, 2010, our revenue increased 23.7% to $133.2 million compared to $107.7 million in the same period last year. Net income for the six months ended June 30, 2010 was $12 million or $0.86 per diluted share compared to net income of $12.8 million or $0.85 per diluted share for the same period last year.

Second-quarter sales by product category were as follows. CLAVE represented 34% of our second-quarter total revenue and grew 11% to $23.7 million from $21.3 million a year ago. Hospira has increased orders of our CLAVE product in order to prepare for potential additional business due to market conditions.

We believe that CLAVEs are positioned to achieve year-over-year growth in the mid- to high-single digits for the full fiscal year as the product line will benefit from our distribution agreements and our long-standing industry relationships. Custom sets which include custom oncology, custom infusion and custom critical care represented 34% of our total second-quarter revenue and increased 28% to $23.1 million compared to $18 million a year ago. The strong performance of custom sets was driven by double-digit improvement in custom critical care and custom infusion which were up 72% and 24% year over year.

Sales from custom oncology also posted a 6% increase, totaling $2 million for the second quarter. As we are approaching the completion of our plant construction in Slovakia, we look forward to capitalizing on strong demand for our custom sets in Europe and we continue to believe that in 2010, sales from all custom products will grow in mid teens, contributing approximately the same as CLAVE.

Sales from standard critical care products increased 72% to $13.9 million compared to $8.1 million for the second quarter a year ago and represented 20% of our total revenues. As expected, critical care sales posted substantial increases through the first two quarters of 2010 versus 2009 due to our acquisition of Hospira's critical care line.

Based on the second-quarter results, we believe the critical care product line is stabilizing and we expect it to make solid contributions to our top and bottom line in the near future. While we lost some customers during the transition process of operations from Hospira, we gained several important relationships as well. We look forward to growing critical care in the future and capitalizing on investments in this business.

Standard oncology sales totaled $2.2 million, representing a 79% year-over-year increase. Demand for these products remains very strong around the globe as demonstrated by a 48% growth in standard oncology sales internationally and a 32% increase domestically.

This includes sales to Hospira. We continue to expect these products will contribute approximately $10 million to sales for the full fiscal year of 2010. We believe we have made timely investments in this business and now we are well prepared to capitalize on many market opportunities ahead.

Now moving to our second-quarter sales by distribution channel, US sales to Hospira were down 18% to $26.2 million. The decrease was attributable to no critical care sales to Hospira as they are now mainly being handled by our direct sales force.

For the second quarter of 2010, US sales to Hospira represented 38% of our total revenue compared to almost 60% for the same quarter of 2009 and were driven by strong contributions from CLAVE, custom sets and oncology products. Our domestic drug sales coupled with our specialty distributors grew 136% to $25.2 million year over year mainly due to critical care followed by robust contributions from custom sets and new products. Excluding critical care, sales grew 14% year over year.

International sales increased 65% to $16.3 million compared to the same period last year as a result of strong performance of CLAVE, custom sets and new products as well as the addition of critical care to product mix. Excluding critical care, sales grew 24% year over year.

On a geographic basis, strong sales in Europe were followed by Pacific Rim, Latin America and Mid East region. In the second quarter of 2010, international sales represented 23.6% of our total revenue compared to 18.5% a year ago.

Sequentially, our gross margins for the second quarter of 2010 expanded 490 basis points to 46.7% compared to 41.8% in the first quarter of this year. The improvement in gross margins on a sequential basis was primarily attributable to the transfer of critical care finished goods manufacturing from Hospira to us and improvements in manufacturing efficiencies of our factories.

Year over year, our gross margins decreased during the second quarter to 46.7% from 48.3%. This was primarily due to product mix as critical care products have lower margins than our corporate average, higher freight costs associated with higher direct sales and unfavorable foreign exchange rates between the peso and the US dollar.

We expect gross margins to be in the range of 44 to 45% for the full fiscal year of 2010 as factory startup costs in Slovakia during the fourth quarter will keep gross margin improvements to a minimum for the rest of this year. SG&A expenses totaled $19.4 million compared with $16.5 million for the second quarter last year. The increase was primarily attributable to our investments in sales and marketing initiatives and building our direct sales force which is now beginning to pay dividends.

We also continue to incur some temporary legal costs and preproduction startup costs for the Slovakia plant. We expect these expenses to be lower in the second half of the year and we expect SG&A costs for the full fiscal year to be the range of 28 to 28.5% of total revenue.

Our research and development expenses during the second quarter increased to approximately $1 million compared to $600,000 a year ago. We are committed to investing in our R&D to continue to build our new product pipeline and diversify our overall product offering.

We expect our R&D to be approximately 1.5% of total sales for the full fiscal year of 2010. For the second quarter of 2010, our operating income increased 36% to $11.8 million or 17% of total sales compared to $8.7 million or 16% of total sales a year ago.

Moving to our balance sheet and cash flow, as of June 30, 2010 our balance sheet remains very strong with $83.1 million in cash, cash equivalents and investment securities. This equates to approximately $6.18 per outstanding share. We also had $153 million in working capital and no long-term debt or any debt at all.

Additionally, we generated $7.9 million in cash flow from operating activities for the second quarter of 2010. Our capital expenditures totaled $1 million during the quarter which primarily included our investments in the Slovakia plant. Additionally, last week, our Board of Directors approved a new stock buyback program for $40 million. Now I would like to turn the call back over to Dr. Lopez.

Thank you, Scott. Given our continued positive cash flow and proven track record of financial resource management, we will continue to invest in our immediate growth initiative, our new product portfolio and enhanced returns for our shareholders through our newly authorized stock buyback. I am pleased with the progress in a number of our new product offerings and will be providing more specific information on these products.

As you know, we usually do not talk about these products until we reach $1 million in sales. Based on our strong performance during the second quarter and current business trends, we are increasing our guidance ranges for the full year 2010 as follows.

We are raising our revenue guidance and now expect our fiscal year 2010 revenue to be in the range of $270 million to $275 million compared to our previous outlook of $265 million to $275 million. We believe our main product lines will remain robust due to our distribution partnerships and increased direct sales force.

As we continue to focus on improving our manufacturing efficiencies as well as lower expenses associated with critical care transition the second half of the year, we now estimate our gross margin to be in the range of 44 to 45% for the full year. Looking down to the SG&A line, we believe that the second half of the year, we will be well positioned to leverage our expenses and improve our operating margins.

However, we do take into consideration additional expenses we will continue to incur due to the ongoing transition of critical care distribution from Hospira, pre-startup costs for our Slovakia plant and some legal costs. As a result, we anticipate our SG&A for the fiscal year 2010 to be 28 to 28.5% of total sales. Now for the full year 2010, we expect to achieve diluted earnings per share in the range of $1.85 to $1.92 compared to our previous guidance of $1.80 to $1.90.

We believe capital expenditures including the additional investment in our facility in Slovakia and our manufacturing facility in New Mexico to be 18 to $22 million in 2010. Our operating cash flow is expected to be approximately 40 to $45 million in 2010. Now I'd like to turn the call over to questions.

(Operator Instructions) Jayson Bedford, Raymond James.

Just a couple. Just on the gross margin, outside of the costs associated with the buildout of the Slovakian facility, what brings gross margin down over the next couple quarters from the level you saw in the second quarter?

Well a lot of it has to do with the startup costs in the Slovakia facility. In addition, we still do have some temporary costs associated with the final transition of critical care from Hospira to us.

We should be complete with that by the end of the third quarter. So any improvements from critical care will be offset slightly from the increased startup costs from the Slovakia facility once we turn that factory on.

And then it looks like assumed in the guidance, you are reinvesting a little more, basically spending a little more in SG&A that you had guided previously. Can you give us any indication as to where those dollars are going from a cost side of things?

Yes, to our direct sales force and to some GPO fees.

Okay, so are you adding headcount?

Not adding, maybe a few here or there, but not a lot of add. It's just that in addition to the additional direct sales of critical care.

Okay, then lastly for me, I'll jump back in queue, but just in terms of -- I think you kind of alluded to I think it was 11% growth in CLAVE sales. You alluded to some buy-in related to market conditions. I guess when you look at your guidance going forward, does that contemplate any type of share gains from Baxter?

Well, you would have to ask Hospira that question. We did mention that we are seeing some uptick in orders coming from Hospira and that's due to market conditions. You'd have to ask Hospira what that really means.

Okay, I will do that. Thanks for taking the questions.

Matt Dolan, ROTH Capital Partners.

Congrats on the numbers.

Thank you.

Scott or doc, can you just talk about -- first more of a general question about the Company's performance in the quarter relative to your expectations. I think the Street had a little trouble modeling Q1 and now this result is clearly well ahead of what the market's expectations were.

Are there any specific items you think account for the upside here in the period or is this kind of a more sustainable base to build off of here? Just your commentary on how this quarter tracked relative to expectations.

Well it's pretty much in line with our expectations as we mentioned already. We do believe that we can sustain or come close to sustaining these type of gross margins. There will be some additional nonrecurring expenses associated with the final transition from Hospira to us in the critical care product line and obviously in the fourth quarter there will be some downward pressure on gross margins as we start up the factory in Slovakia.

Right now those costs are flowing through the SG&A line. They will begin to move through COGS beginning sometime in the fourth quarter.

When we are producing product.

When we are producing product.

Okay and then when we think a little bit further out on the gross margin side, once Slovakia is up and running and you're running most of your international products through there, what type of gross margin improvement should we anticipate on a corporate level?

Well we should see some continuous improvement and we will talk more about that for next year.

We're just giving guidance for 2010 at this time.

Can you quantify what the duplicate costs are now?

No, not at this time.

Okay, and then finally a follow-up on the recall. Is there -- have you seen anything yet in terms of some of your pull-through data that you received that would suggest that Hospira has been more aggressive or when would you anticipate potentially seeing something of a benefit out of that competitive situation?

I would expect it's going to take a few more quarters for us to see which way the market is going in regards to (multiple speakers)

Okay and last one, on the Premier piece, could you give us what the run rate was in Q2 relative to the prior two quarters?

For which, I'm sorry?

For what you are generating through Premier, I think it was $7 million in Q1 on a run rate basis.

You're right and we have improved upon that. For obvious reasons, we are going to stop breaking that out. But you're right. In the first quarter we had mentioned $7 million on an annual run rate and it has improved from there.

Jeffrey Cohen, CK Cooper.

I just had one question. If you could talk about on the R&D front any of the new products or product areas that you've been working on and we can expect, say, in 2010.

We have got -- we have a product that just received a 510K last week. We think it's going to be a great product. It will basically replace CLAVE as a medical connector. But we don't talk about these products until we get momentum and revenue stream from them.

The second product we have launched in Europe, Italy, Spain and Germany, it's very early but the feedback is very good and I expect that product to be a dominant product in this Company three to five years from now. But as I say, we don't talk about them until we get actual revenue. I should be able to report revenue next quarter but we really keep it close to our vest until we hit the $1 million in sales.

Mitra Ramgopal, Sidoti.

First I was wondering if it was possible to sort of break out the gross margin, the 490 basis points improvement. I think you mentioned critical care and improved efficiencies were sort of the big drivers. Is there any way of sort of giving us a little more color?

(multiple speakers) looking. We're moving the critical care production in Costa Rica to Mexico. It was a big factor. And we continue to meet that margin advantage for the future.

So most of the improvement really was from critical care?

Yes, it was from the transition from Hospira to us, so their manufacturing towers.

Okay, and I think you mentioned, in terms of the growth, what we saw from CLAVE, that I guess some of it was due to stocking by Hospira. Was that just for CLAVE or any other lines?

That was primarily in the CLAVE.

It looks like you used some cash to buy back stock in the quarter. Am I correct on that?

Approximately $5 million.

$5 million.

Which nears (inaudible) completion of the original $55 million buyback authorization.

Is there a rough share repurchase price you have on that?

I don't have it in front of me but it's easy to get for you, Mitra, if you [go back into it] as well.

Okay, no problem. Again, it just looks like overall things are pretty much back on track versus what we saw the last quarter.

We are not a quarter-to-quarter company, and you just have to look at us year to year. And it's just another example of that, first quarter versus second quarter. But we have come close -- we do well on our guidance usually.

Right and then the final question, again you are sitting on a lot of cash and I know you are using using it for investments and share repurchase etc. but any other ways of sort of boosting the investment income?

You are you talking about dividends?

Potential -- or just in terms of trying to seek a higher return for the cash you are sitting on.

As far as if you're talking about direct investment of the cash, capital preservation is our number one goal. So I don't see us getting any more aggressive from an investment strategy as far as the other uses of our cash (multiple speakers)

We got a $40 million buyback authorization last Friday. So that's one thing is to buy back $40 million in stock. I believe that is a form of a dividend. [It's not a double tax] dividend.

Okay, thanks again, guys.

(Operator Instructions) James Terwilliger, Duncan Williams.

First of all, congratulations on a great quarter. A couple quick questions. From a critical care perspective, and more importantly from your salesforce, from your internal salesforce perspective, would you say that you are fully staffed at this time and can you talk to anything about what's going on with the salesforce regarding your acquired critical care business?

The simple answer is, we think we are fully staffed We think we will get a continued return on investment as we leverage our sales up.

Has the salesforce -- I mean they are on board, they have been trained, you had in the beginning of the year you had kind of a launch meeting, correct? And they're out there in the field moving forward, is that how we should look at it?

Yes, absolutely.

Are you comfortable in giving a kind of range of what that internal salesforce looks like in terms of the number of FTEs?

Yes, as we mentioned in our last call actually, in real rough numbers we have approximately 100 in the US and 30 OUS.

That pretty much puts you pretty much where you want to be, Scott. So there could be some movements around the fringe, but those are good numbers to go forward?

Yes.

Okay, and in terms of critical care internal revenue growth, right now you have a very nice number. I believe it was up 72% year over year. There's a lot of moving parts.

Should we see this as kind of a mid-single-digit type of internal growth?

If you exclude critical care through the first six months, we were up 16%.

Okay so maybe a little bit more than that. Another area that did very well was the custom products, up 28%. Is that correct?

Correct.

Can you talk a little bit about what drove that strong growth there in the custom products?

I can give you an example. Hospira is in the process of decreasing SKUs in terms of for the hospital and that opens opportunities for us to pick up more custom business that way. We picked up quite a bit of custom business through the streamlining. They're doing absolutely the right thing but there are customers that have specific needs that need to be met. That business is going very well.

So, one could say if Hospira is kind of walking away from this business, this is excellent place for you to go direct and pick up that business. Is that fair? Am I thinking about that correctly?

We have an agreement with Hospira (inaudible) so they benefit and we benefit, making custom sets.

Don't think of it as Hospira walking away, but a change in product offering.

Okay, great. I will jump back in queue. Congratulations on a nice quarter.

Gregory Macosko, Lord Abbett.

Could you talk a little bit about inventory? I didn't look very closely, but could you give us some color on that and where that stands?

Sure. We are flat from year end. We turn our inventory about four times per year and nothing has changed since we've taken on critical care.

Keep in mind that we have to carry more in finished goods as our direct sales model expands. So we have been able to keep our inventory levels flat even though we have been expanding on direct sales.

Where should we expect the turns to get to longer term?

Keep in mind that [floor] is pretty good, especially the fact that we were turning them four times per year last year and we have added that direct sales force. So expect them to stay in that four times range.

Okay, good. And then one of the things last quarter you talked about was freight. I think it was 150 basis points in terms of an increase in gross margins. Where does that stand now and has it stabilized or what do you expect there?

It meant about 130 basis points for the second quarter. We are starting to see -- we have some distribution models that we are starting to implement that should help to reduce that, the freight cost as a percent of our overall revenue. We continue to expect that to get more in line with our traditional costs.

With regard to R&D, should we look at that 1.5% as an ongoing number? I think what you've guided for the whole year, is that something you should consider longer term?

As you know, it is a low number.

Pardon?

I know it is a low number. I'm just asking, do you to expect that -- in other words, over time do you expect that percentage to ramp up slowly?

No, we don't think it's necessary to ramp it up. 1.5% is probably a good number (multiple speakers)

Room in absolute dollars but obviously in that 1.5% range.

Remember, Greg, we've never launched a product here that failed in the marketplace. It just failed to make us millions of dollars. We tend to have a very efficient R&D department here.

I believe you. So the point being, it will grow with sales going forward from this point kind of?

In absolute dollars, yes.

That's what I was asking. And then you did tantalize us with that CLAVE replacement, that 510K. Should we expect something there within the next six months?

No, product launch, we're in the process of launching that product. As you know, we don't do press releases when we get 510K approvals.

Okay, so in the current quarter we should be expecting that to be rolling out?

Expect it to be starting to launch but there's a long ways from launch to being meaningful dollars (multiple speakers) dollars.

Okay, but it's as you said a replacement for the CLAVE, something better, I am assuming.

Long term.

Okay, good. And you did say that Ensenada and Slovakia are now at capacity levels that are adequate for, say, the medium term looking out in terms of your capacity?

Adequate capacity, we're running three shifts in Mexico, three shifts, and we are expanding by 22,000 square feet, our [cleaning room] space. But we have enough to keep up right now. And Slovakia will be up and operational [in the last quarter].

Okay, but I would assume then that capacity would shift from Ensenada to Slovakia over time and so the point being that -- I mean, do you expect another -- do you have any plans at this point, at some point to expand out of those facilities again?

We are currently -- as we mentioned on the call, we're currently expanding Mexico [clean room] 22,000 square feet which should be complete by the end of this year.

And so with the combination of that expansion in Mexico and the Slovakia plant coming online at the end of the year, we will have sufficient production capacity for the foreseeable future as well as we currently have that -- a lot of that expansion is for anticipated growth.

We'll probably go back from three shifts to two shifts in Mexico.

So back to two in Mexico, good. And then Slovakia will start at two, I assume?

It will start at one shift.

One shift, okay.

We will just go from there.

Thank you.

There are no further questions. We'll turn the call back over to John Mills for closing remarks.

Great, thank you for participating in today's call and we look forward to updating you on our 2010 progress on the third-quarter call which will be in October. And as a reminder to everyone, we will be marketing in a number of cities in July and August and attending investor conferences during the third quarter and we hope to see you at these events.

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