ICU Medical Inc (ICUI) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the first quarter 2011 ICU Medical Inc. earnings conference call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)

As a reminder, this conference is being recorded. And now I will turn the program over to John Mills. Sir, the floor is yours.

Thank you. Good afternoon, everyone. Thank you for joining us today to review ICU Medical's financial results for the first quarter ended March 31, 2011. 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 first quarter financial performance.

Dr. Lopez will wrap up the call by reviewing our revenue and increased earnings targets for fiscal 2011 and discuss current business trends. Then the Company will open the call for your questions. Before we start, I would like to touch upon any forward-looking statements made during the call including management's beliefs and expectations about the Company's 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.

Thank you, John. Good afternoon, everybody. We're pleased to start the new fiscal year with a strong quarter across many facets of our business. Our total sales increased 11% year-over-year to $71.5 million and were driven by increased demand for Custom Sets, CLAVEs, oncology, and TEGO products. Favorable product mix as well and better than expected manufacturing efficiencies translated into a 670-basis-point year-over-year expansion of gross margins to 48.5%.

Our net income increased approximately 90% to $8.1 million or $0.57 per diluted share. As demonstrated by our progress to date, recent investments in our strategic initiatives continue to serve us well, positioning all of our product lines for solid growth and market expansion. As an example, we're excited about the growth opportunities for Custom Sets and look forward to capitalizing on our new central European location, enhanced distribution capabilities and cost benefits. Now let me turn the call over to our CFO, Scott Lamb, to review our financial results for the quarter. Scott?

Thanks, 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. As Doc already mentioned, our total revenue for the first fiscal quarter increased 11% to $71.5 million compared to revenue of $64.4 million for the same quarter a year ago. This growth was attributable to strong performance of Custom Sets, CLAVE, oncology products and TEGO. Our net income for the first quarter of 2011 was $8.1 million or $0.57 per diluted share as compared to net income of $4.3 million or $0.30 per diluted share for the first quarter of 2010.

Our sales by product category were as follows. CLAVE comprised 35% of our first quarter total revenue and increased 7% to $25 million from $23.4 million a year ago. As we expected, at the beginning of the fiscal year Hospira's orders returned to normal and we believe CLAVE are well positioned for continued growth levels in the mid- to high-single-digits. With the recent launch of MicroCLAVE Clear these products continue to represent a great value proposition for our customers and we should continue to benefit from our distribution agreements and relationships.

Custom Sets, which include custom oncology, infusion and critical care, represented 34% of our total first quarter revenue and increased 18% to $24.1 million compared to $20.4 million a year ago. The increase was due to solid performance of custom infusion sets and custom oncology which were up 27% and 10% each year-over-year. This growth was partially offset by an 11% decline in custom critical care. Similar to CLAVE, Hospira's orders for Custom Sets returned to normal and we believe our custom products in the foreseeable future should grow in the 10% to 15% range.

Sales from our standard critical care products increased modestly by 3% to $12.7 million compared to $12.4 million for the first quarter a year ago which is in line with our expectations. These products represented 18% of our total revenue. For the foreseeable future we expect critical care to grow 2% to 3%. Standard oncology grew 60% to $2.2 million year-over-year representing 3% of our total sales. This growth was attributable to certain performance improvements we implemented into our oncology products during the second half of 2010.

On a sequential basis, standard oncology decreased 11% due to ordering patterns of existing customers. We believe this is a temporary decrease and based on the current business trend, continued strong demand, backlog and a number of conversions in place we still expect oncology sales in 2011 to be approximately $15 million. Now moving to our first quarter sales by distribution channel. US sales to Hospira were up 16% year-over-year to $27.9 million. The increase was driven by strong contributions from CLAVE, Custom Sets and standard oncology.

For the first quarter of 2011, US sales to Hospira represented 39% of our total revenue compared to approximately 37% for the same quarter of 2010. Our domestic and direct sales combined with our specialty distributors were up 10% to $25.9 million year-over-year as a result of strong performance of Custom Sets, CLAVE and TEGO. International sales increased 7% to $16.7 million year-over-year representing over 23% of our total revenue and were driven primarily by Custom Sets, standard oncology and standard critical care products.

Our gross margins expanded 670 basis points year-over-year to 48.5%. This improvement was attributable to a favorable product mix of 430 basis points and better than expected manufacturing efficiencies of 240 basis points. On a sequential basis, our gross margins decreased by 110 basis points primarily due to absorption costs related to the normal closure of our manufacturing facilities during the year end holidays.

SG&A expenses increased 16.3% to $22.9 million or 32% of sales compared with $19.7 million or 31% of sales for the first quarter of last year. The first quarter 2011 SG&A included a one-time $2 million expense related to our long-term retention plan, and increased sales and marketing compensation and benefits of $0.7 million. Our research and development expenses increased to $2.1 million compared to $0.9 million for the first quarter of 2010. The increase was primarily due to a $0.3 million one-time expense related to the long-term retention plan I just mentioned and higher new product development costs. In the first quarter, we received a $2.5 million payment from a legal settlement which is on a separate line item under operating expenses.

For the first quarter of 2011, our operating income totaled $12.2 million or 17% of sales compared to operating income of $6.4 million or 10% of sales a year ago. Starting last quarter, we decided to provide our EBITDA or earnings before interest, depreciation, and amortization metric to help you understand the strength of our business model and the cash we are generating from our business. For the first quarter of 2011, we generated $18.1 million in adjusted EBITDA including stock comp expense compared to $11.9 million a year ago.

Moving to our balance sheet and cash flow, as of March 31, 2011, our balance sheet remains strong with no debt and $106.8 million in cash, cash equivalents and investment securities. This equates to approximately $7.78 per outstanding share. We also had $195.3 million in working capital. Additionally, we generated $15.2 million in cash flow from operating activities.

Our capital expenditures totaled $4.9 million during the first quarter and primarily included machinery, equipment and molds for our plants in the US and Slovakia. Day sales outstanding for the first quarter were 64 days which are in line with our past four quarters. The slight increase during the past four quarters is due to an increase in direct sales and our sales expansion outside of the United States. We expect DSOs to be approximately 70 days in the foreseeable future.

The increase in inventory this quarter is due to the backlog of orders going into the second quarter and to support a temporary extension of our global supply chain as we ramp up production in Slovakia. Now I would like to turn the call over to Dr. Lopez to review our 2011 revenue and earnings estimates and provide an update on our business trends.

Thanks. Based on our current business trends and strong global demand, we believe that all of our main product lines will post growths during the year. As a result, we reaffirm our previously issued top line guidance and continue to expect our total revenue to be in the range of $295 million to $305 million. Due to better than expected efficiencies and improved product mix during the first quarter, we now estimate our gross margins for the fiscal year 2011 to be approximately 47% to 47.5% which is an increase from our previously expected range of 46% to 46.5%.

We expect our margins to improve by over 100 basis points on an annual basis in 2011 compared to 2010. To help you with our modeling, for the remainder of the year we now expect increased pressure on the cost of our resin-based raw materials. In addition, we also projected at the beginning of the year we anticipate increased costs during the second quarter from the first quarter for our plant in Slovakia as it ramps up production and we expect less favorable product mix. Our SG&A in the fiscal year 2011 are expected to be approximately 28% to 28.5% of total sales compared to the previously expected level of 27% to 27.5%. This increase is due primarily to higher sales and marketing compensation and benefits for additional new hires and one-time expense related to the long-term retention plan we incurred during the first quarter.

We continue to expect R&D expenses as a percentage of sales to be approximately 2%. We now expect to achieve diluted earnings per share in the range of $2.30 to $2.50, up from the previous guidance of $2.25 to $2.45. For modeling purposes, our tax rate is expected to be 36%. Our operating cash flow is expected to be approximately $45 million to $50 million in 2011. We continue to believe that capital expenditures will be $16 million to $19 million in 2011.

Now let me discuss in more detail our ongoing strategic and product development initiatives and how they're expected to impact our performance going forward. We're pleased with the first quarter results and remain confident that all of the investments we made in the last year in our manufacturing facility and processes, product development and sales and marketing initiatives will continue to serve us well through 2011 accumulated in another year of record sales and profitability.

As we mentioned in our last conference call, we are excited about the Custom Sets opportunities that should come from our new operations in Slovakia. During the first quarter, we completed transferring production processes and equipment from Mexico and Italy to central Europe and we're now shipping final product from this facility. We are confident that this project significantly strengthens our market positions in the European markets, provides us with significant distribution and cost savings and will eventually result in further operating efficiencies.

Turning to new products. During the quarter, we released our MicroCLAVE Clear, a neutral displacement needlefree connector, at the annual scientific meeting for the Society for Healthcare Epidemiology of America on April 1 to 4, in Dallas. MicroCLAVE Clear allows clinicians to visualize the fluid pathway, verifying effective flushing of the patient catheter after use with blood and medication that could leave residual or fluid precipitates after aspiration or infusion.

The connector's clinically proven MicroCLAVE design effectively clears blood and blood residual with flush volumes as low as 2.0 mL, while the connector's clear housing allows for visualization of the internal fluid path upon flushing the connector. Part of the full line of MicroCLAVE connecters that includes the original MicroCLAVE and the Antimicrobial MicroCLAVE, MicroCLAVE Clear shares the design features that have been clinically proven to provide a safe and effective microbial barrier.

In addition, the MicroCLAVE's neutral displacement design may help hospitals address recent concerns raised by the FDA regarding the safety of positive displacement connectors. We also saw continuous positive trends from TEGO. Sales from our TEGO connector, specifically designed to be used in dialysis, approached almost $2 million during the first quarter representing a 152% increase year-over-year and a 38% increase on a sequential basis. Based on our strong year-over-year growth our oncology products continue to perform in line with our expectations.

Due to the recent product improvements we've made, strong global demand in the number of conversions now in place we continue to expect sales from our oncology business to double in 2011 to approximately $15 million in sales compared to the minimal sales in 2009. Looking forward, we remain focused on expanding our market share of existing new products to our global customer base, leveraging our strong cash flow, and building value for our shareholders. Now I'd like to turn the call over for questions.

Thank you, sir. (Operator Instructions) Our first questioner in queue is Matt Dolan with ROTH Capital Partners. Please go ahead.

Hey, guys, good afternoon. Thanks for taking the questions. Scott, the first one maybe on the gross margin side of things, clearly Q1 came in ahead of our expectations and I would imagine ahead of the Company's. I appreciate the full year guidance, but could you help us understand kind of how we finish up the year in the model? Does this tick down in Q2 and ramp outside of your range or maybe frame that up a little better for us?

Well, as you can see from the first quarter, product mix always has or tends to have, or can have a significant influence on our gross margins. The cost of resin, we're starting to see some pressure there. The product mix we don't see as favorable going forward, along with the costs with our ramp up in Slovakia we should start to see those increase as we move forward as well. Directionally, I don't see many differences other than product mix going forward for the rest of this year.

So just to compare it to your guidance range for the year, though, are you expecting to be within that range at year end, above or below it?

Within that range by year end. So there can be, as you know, there can be some variability to our quarters.

Sure. Okay. And then maybe you can help us just understand how we should view this legal settlement relative to the increase in your guidance for the year. I think Q1 was ahead of your expectations kinds of across the board, but was that the main driver or was it a gross margin upside? Maybe put more simply what led to the EPS increase?

It was basically driven by better gross margins.

Okay. And then on the revenue side maybe, "Doc," you could chime in here. I know you've maintained the guidance for the year, but I think in the prepared remarks someone mentioned an increased inventory due to backlog into the second quarter, so could you touch on how revenues are tracking relative to your expectations with respect to sell-through data and new product contributions, "Doc?"

According to my expectations we're right on.

Okay. Any -- sell-through data changed dramatically or any comments there?

No. We're right on schedule.

Have new products begun contributing to where we can hear about them?

Not yet.

Not yet. All right. All right, I will let somebody else in. Thanks, guys.

You're welcome.

Thank you, sir. Our next questioner in queue is Junaid Husain with Soleil Securities. Please go ahead.

Hey, good afternoon, guys. Scott, relative to your manufacturing facility in Slovakia, could you tell me what the capacity utilization is at this facility, and then as a follow-up how do you expect the level of utilization to grow for the balance of 2011?

Well, as we said on our last call, we expect capacity to be at about 30% by mid-year and then that should be close to when we have most of our product that we're manufacturing transferred to that facility. From there the growth will have to come from increased market share, and that's what we look past the middle of this year.

Got it. And then as part of your 2011 guidance, what have you baked into your revenue expectations from Slovakia?

We believe that once the factory, we have everything transferred to that factory, we obviously believe that custom will continue to serve us very well and that's baked into the mid- to high-teens growth that we believe will come from custom, so there is already some expectations built into that number.

Junaid, remember that a lot of Europe is already custom because the system is done on tenders, and the complexity of the set is increased just prior to getting the order. In other words, they try to make them as specific as possible so that nobody else can make the set. So there truly is a Custom Set of business, almost everything in Europe.

Right. Got you. "Doc," switching gears a bit, could you help us understand, I think you guys won a three-year contract with Premier for hemodynamic monitoring products. Can you give us a sense for what these monitoring products represent as a percentage of total sales? I am just trying to understand the materiality of this to your business.

Scott, can probably answer that better question.

Sure. Monitoring is a portion of our standard critical care, so we don't break out standard critical care. That represents 18% of our total business. This allows us to take the monitoring portion of that on an exclusive basis on a portion of their hospitals. But the agreement itself is basically an extension of a [GECO] agreement that we already had with them.

Got it. All right. Thanks so much, guys. That's all I've got. Nice quarter.

Thanks.

Thank you, sir. Our next questioner in queue is Jayson Bedford with Raymond James. Your line is now open.

Hi, good afternoon. Thanks for taking the questions. Just a couple of follow-ups on the last ones. The new Premier contract on the critical care side, will you be adding any more resources to address that opportunity, and I am guessing the 2% to 3% year-over-year growth that you reiterated for critical care doesn't assume much of an impact from this new contract?

Well, as we already mentioned in the call, we expect this year's standard critical care to be 2% to 3%. Now, we have in addition to the extension of these agreements for critical care, we have new product that we're developing for this marketplace, and so we obviously expect at some point that we should do better than the 2% to 3% that we expect this year. But for this year, we feel good about the 2% to 3% which is a long cry from the dramatic decreases we saw in previous years prior to us acquiring the critical care product line from Hospira.

Okay. Fair enough. "Doc," you mentioned that much of the European market is custom. How big is the kind of established market that you're going to address with these products?

Bigger than the US market for Custom Sets. We're doing a total of about $100 million in Custom Sets. I think the potential for Slovakia is great, it's essentially the same-sized market when you add up all the different countries.

Okay. And I apologize if you break this out. But of that $100 million in custom how much is US versus OUS?

We don't have that broken out. That's a number that we can certainly put out onto our website.

Okay. And then just last couple here. I don't think you mentioned Genie or Spiros, and I am wondering, are those back on the market because I know there was some sort of manufacturing or a ship hold late last year?

No, they're back on the market and they're doing well. We have had to make product improvements to it, and when we made the product improvement we pulled the market off the -- product off the market -- the customers, and exchanged it for new product. But the Spiros 2 is doing very well, and there are no complaints whatsoever, and selling very well. Same with the Genie.

Okay. And then just lastly for me, the MicroCLAVE Clear, that introduction, is there any price difference with that product versus --

Small, small.

Okay. Thank you.

Thank you. Our next questioner in queue is Mr. Ramgopal with Sidoti. Please go ahead.

Yes, hi, good afternoon. Just a few questions. First, just to circle back on the custom critical care, I think, you said it declined and I was just making sure if it was really due to Hospira's ordering patterns or anything else?

On the custom critical care that's not going through Hospira. Those are direct sales or through our specialty distributors. So that doesn't have anything to do with Hospira. The custom critical care was just down due to ordering patterns, nothing significant.

Okay. And on the SG&A side, did you make any additions to the salesforce this quarter?

Yes, we did. I don't have the exact number, but we did add a few, both in sales and marketing.

Okay. Now that the Slovakia facility is up and running and you're starting to feel more comfortable about things in Europe, any long-term plans as it relates to maybe moving beyond Europe into, example, Asia?

Well, we're already in Asia selling, not a large amount of product, but we're already in Asia. We expect to just continue our existing distribution model.

So those are like building a facility in Asia?

Yes, I would say from an operational standpoint we've got quite a bit on our plate right now with Europe, so that gives us plenty of to do. We certainly look at other areas, geographical areas around the world, as well, and when it is the right time for us we'll make investments there as well.

And we just launched a new product in Europe, and it is very early stages, but we'll see how that goes and we need a lot -- we have the capacity to deliver everything that we need to make in 2011 for the new product.

Right. And finally, "Doc," again, looking at the balance sheet and the cash you're generating, certainly a tremendous amount you're sitting on. I was wondering if, your thoughts of maybe initiating a quarterly dividend or something like that?

No dividend, and we look for good acquisitions when they go on sale. And, Mitra, we've had this problem from the beginning of the Company, too much cash flow.

A good problem to have.

It's not a bad one to have.

Okay, thanks again.

You're welcome.

Thank you, sir. (Operator Instructions) Our next questioner in queue is James Terwilliger with Duncan-Williams. Please go ahead.

Hey, Scott, hi Dr. Lopez, can you hear me?

You're very clear.

Scott, first of all, congratulations on a nice quarter. Scott, could you go over the TEGO numbers again real quickly? I don't know if I got all of those down.

Well, TEGO was approximately $2 million for the quarter. And that's up 152%.

152% year-over-year and 38% sequentially, and this is mostly focused on dialysis?

That's correct, catheters in the dialysis market.

Okay. And then on the oncology side, you're still saying that you believe that business will double in 2011 to approximately $15 million?

That's correct, strongly believe it.

Strongly believe it. Can you guys quantify, Scott, or Dr. Lopez, can you quantify the industry shift or the conversion from DEHP to non-DEHP? Is that still driving some underlying currents of your business?

No. We've transferred that over many years ago.

Okay. And the industry has as well, correct?

Most of the industry has.

And then, most of my questions have been answered, but when I look back at this conference in, I want to say in Dallas in early April, was the main topic down there really safety issues and hospital, concerns about hospital-acquired bloodstream infections or what was the tone of that conference as it relates to your products?

I think you're absolutely correct. It was strictly over what you mentioned.

Okay. Thanks, guys, I will jump back in queue. Thank you.

You're welcome.

Thank you. Our next questioner in queue is Gregory Macosko with Lord Abbett. Please go ahead.

Yes, thank you. With regard to the cash, et cetera, did you purchase any shares in the quarter at all?

We did not.

Okay. And just so I understand the legal settlement and all that's around that and the difference in the SG&A line, that was up 17%. I am assuming that was from the year-over-year change in the salesforce in marketing?

No. There was also a one-time expense of $2 million in the SG&A line item and $300,000 in the R&D line item related to a one-time payout on a long-term retention plan in the first quarter. Again, it was just a one-time event.

Last year?

In 2011, this year.

So within that SG&A line there is a $2 million one-time expense? I didn't understand that.

And there is also a $300,000 in R&D, also a one-time revenue expense.

Okay. So basically what you are saying is that bottom line in terms of R&D and when you net out the legal settlement, it kind of came out a wash or close to it, is that correct?

Very correct.

Okay, all right, very good. And you continue to suggest a kind of 31%, 32% going forward, was that the idea?

For total operating expenses for SG&A, 28% to 28.5% and for R&D approximately 2%.

Okay, okay. All right. And then with regard to just inventory in the channel now, it is built up now for expectations going forward a little bit?

Certainly built up for that along with temporarily extending our supply chain related to the start up of our factory in Slovakia.

And the sales, and I believe in the third and fourth quarter last year, there was some one-time sales for, I believe, the Hospira pump or something. Has that worked its way through, do you feel?

Yes, we do believe that has worked its way through.

Okay. Okay. Thank you very much.

You're welcome, Greg.

Thank you, sir. And presenters, at this time I am showing no additional questioners in the queue. I would like it turn the program back over to John Mills for any closing remarks.

Okay, thank you. And thank everybody for participating in today's call. We look forward to updating you on our 2011 progress on the second quarter call in July. And as a reminder, we will be attending a number of conferences in the next few months and hope to see you there. Thank you.

Thank you, sir. Ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.