ICU Medical Inc (ICUI) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to our second-quarter 2011 ICU Medical, Inc. earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to hand the conference over to Mr. John Mills from ICR. Sir, you may begin.

Good afternoon, everyone. Thank you for joining us today to review ICU Medical's financial results for the second-quarter ended June 30, 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 second-quarter financial performance. Dr. Lopez will review our revenue and earnings target ranges for fiscal 2011, and wrap up the call with a brief discussion of current business trends. Then the Company will open the call for your questions.

Before we start, I want to touch upon any forward-looking statements made during the call, 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 everyone. We are pleased to report another successful quarter marked by strong financial performance and important operational achievements. Our total sales increased 13% year-over-year to approximately $78 million due to many factors, including strong contributions from our I.V. therapy and our oncology markets.

While we believe our key product lines are well-positioned for continued worldwide market share expansion, our new oncology market growth continues to exceed our expectations.

Our earnings per share increased 20% to $0.67 per diluted share, even after we more than doubled our investment in R&D. Over the years we have rapidly expanded our product offerings in the I.V. therapy, oncology and critical care markets. And our Company's internal go-to-market strategy is driven by focusing on these markets instead of focusing on each individual product line that we offer.

As Scott will discuss in a moment, based on our goals of improving how we communicate our current and future market growth opportunities, we will continue to report our sales by product line as we have done in the past. We will also begin reporting sales by a different market category of I.V. therapy, oncology and critical care, just as we did in today's earnings release.

Before I go into more detail on our recent business trends and future outlook, I would like to turn the call over to our CFO Scott Lamb to review our financial results for the quarter. Scott.

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.

Our total revenue for the second fiscal quarter increased 13% to $77.8 million compared to revenue of $68.9 million for the same quarter a year ago. Improvement in our top line continued to be driven by CLAVE and MicroCLAVE NeedleFree Connectors, custom I.V. sets and oncology products.

Our net income for the second quarter of 2011 increased 23.1% to $9.5 million or $0.67 per diluted share, as compared to net income of $7.7 million or $0.56 per diluted share for the second quarter of 2010.

For the six months ended June 30, 2011, our revenue increased 12% to $149.3 million compared to $133.2 million in the same period last year. Our net income for the six months ended June 30, 2011 increased 47% to $17.6 million or $1.24 per diluted share compared to net income of $12 million or $0.86 per diluted share for the same period last year.

As you know, over the last few years we broke our total sales down by product category and distribution channel, and we will continue to do so for the remainder of 2011. And as Doc mentioned, we have begun today to break out our total revenue by market segment rather than just by product line. We believe it will allow you to better understand how we view the markets in which we operate and what our major growth drivers are in those markets. So on this call we would like to just introduce our new sell segmentation, which you can also find in our earnings release.

Today we view ICU Medical as a Company that develops, manufactures and markets a complete line of clinically proven, customizable medical devices for use in the following three major applications -- I.V. therapy, critical care and oncology.

Our I.V. therapy products include customized I.V. sets and the industry's broadest line of needlefree I.V. connectors, shown to help reduce hospital acquired bloodstream infections.

The critical care product category is comprised of hemodynamic monitoring and custom monitoring sets, latex-free advanced sensing catheters, pressure transducers and closed needlefree blood conservation systems.

Finally, our oncology products represent the world's only needlefree closed system transfer device for the safe handling of hazardous drugs, as well as custom sets used for chemotherapy.

For the second quarter of 2011, our I.V. therapy market comprised 63% of our total sales; critical care market, 21%; and the oncology market, 10%. The remaining 6% of our total sales primarily represent the products sold in the renal and diabetes markets.

For the second quarter of 2011 I.V. therapy market sales were $49.2 million, a 12% increase compared with the same period last year. Critical care market sales were $16.5 million, a 6% decrease year-over-year. And oncology market sales increased 73% to $7.3 million compared to the same period last year.

Now let me discuss our second-quarter sales by product category. CLAVE and MicroCLAVE NeedleFree Connectors increased 12% to $26.4 million from $23.7 million a year ago, and represented 34% of our total revenue. We believe CLAVEs are well-positioned for long-term growth levels of mid-single digits.

We also look forward to benefiting from MicroCLAVE Clear, our new product launched last quarter. And Doc will talk more about this at the end of the call.

Custom sets, which include custom oncology, custom infusion and custom critical care, represented 31% of our total revenue and increased 4% to $23.9 million compared to $23.1 million for the same quarter a year ago.

While custom infusion sets posted a 10% year-over-year increase, our custom oncology decreased during the quarter, as more customers moved towards standard ChemoCLAVE systems with not as much emphasis on custom oncology I.V. stats.

Along with decreases in custom critical care and custom oncology, we believe sales from our custom products will be down in the mid-single digits when compared to the previous year, which includes $7.5 million of one-time sales in the second half of 2010. Excluding the one-time sales last year, custom is expected to be up in the low single-digits.

Sales from our standard critical care products decreased by 6% to $13.1 million compared to $13.9 million a year ago. The decrease was primarily due to competition. We will be introducing new products next year and expect this category to improve over time.

Standard critical care products represented 17% of our total revenue for the second quarter. We expect critical care to be flat to down 2% for the year. Remember, this does not include custom critical care.

Standard oncology product sales increased 176% to $6 million year-over-year and 168% sequentially, representing 8% of our second-quarter total sales. This strong growth was attributable to strong demand for our products and the previously discussed evolution of our product base, as well as certain performance improvements we implemented into our oncology products during the second half of 2010.

Demand and order backlog for these products remain very robust, and we now expect that our standard oncology sales will be better than previously announced target of $15 million.

Now moving to our second-quarter sales by distribution channel. US sales to Hospira were up 5% year-over-year to $27.4 million, primarily due to growth in standard oncology, CLAVE and other I.V. therapy product revenue.

For the second quarter of 2011 US sales to Hospira represented approximately 35% of our total revenue compared to approximately 38% for the same quarter of 2010.

Our domestic and direct sales, combined with our specialty distributors, were up 4% to $26.2 million year-over-year, primarily as a result of strong growth in CLAVE, custom infusion sets and TEGO, partially offset by lower critical care sales.

International sales increased 42% to $23.1 million year-over-year, representing almost 30% of our total revenue. Strong international growth was due to custom sets, CLAVE and oncology products.

Our second-quarter gross margin of 46.5% was in line with our expectations and slightly down compared to 46.7% a year ago. Sequentially the decrease from 48.5% was primarily due to increased pressure on the cost of our resin-based raw materials and increased cost from our plants in Slovakia as we ramp up production. We continue to expect our gross margin to be in the range of 47% to 47.5% for the full year.

SG&A expenses increased slightly by 1.8% to $19.7 million year-over-year. This was due primarily to an increase in compensation travel for nine new hires in sales and marketing, slightly offset by a decrease in legal expenses. As a percentage of sales our SG&A decreased to 25.4% from 28.1% for the second quarter last year. We now expect SG&A as a percent of revenue to be 27.5% to 28% for the full year.

Our research and development expenses increased to $2.5 million compared to $952,000 for the second quarter of 2010. We will continue to increase our investments in new and existing products and markets to leverage our strong marketshares and distribution channels for new product offerings. We now expect R&D to be approximately 3% of sales going forward.

For the second quarter of 2011 our operating income totaled $14 million or 18% of sales compared to operating income of $11.8 million or 17% of sales a year ago.

Our EBITDA, or earnings before interest, depreciation and amortization, totaled $19 million compared to $15.9 million for the second quarter a year ago.

Now moving to our balance sheet and cash flow. As of June 30, 2011, our balance sheet remained strong with no debt and $120.8 million in cash, cash equivalents and investments securities. This equates to approximately $8.65 per outstanding share.

We also had $212.1 million in working capital. Additionally, we generated $10.3 million in cash flow from operating activities during the second quarter.

Our capital expenditures totaled $4.8 million during the second quarter, which primarily included machinery, equipment and molds for our plants in the US and Europe.

Days sales outstanding for the second quarter were 61 days, which are better than expected in spite of our increase in direct sales and our sales expansion outside of the United States. We expect DSO to be approximately 65 days in the foreseeable future.

Now let me turn the call back to Dr. Lopez to review our 2011 revenue and earnings guidance and provide an update on our business trends.

Thank you, Scott. Based on our strong first-half results, we are raising the bottom end of our annual revenue and earnings per share guidance range. We now expect revenue to be in the range of $297 million to $305 million compared with the previous range of $295 million to $305 million.

We now expect our earnings per share to be in the range of $2.35 to $2.50 compared to the previous range of $2.30 to $2.50.

Regarding the remainder of the year, we expect our revenue for the third quarter to be down sequentially. We are seeing increased competition globally in critical care, which is beginning to put pressure on our pricing and our ability to keep and capture new customers. Also, we are seeing a slight weakness in orders from Hospira for CLAVE and custom sets for I.V. therapy in the second half of this year when compared to the first half of last year.

It is also important to remember this one-time additional sales of $7.5 million to Hospira in the second half of last year when comparing year-over-year expectations.

We expect our tax rate to be 35% for the year, down from our original estimate of 36%. This slight decrease in our tax rate will be offset from a 100 basis point increase in our R&D for the year.

Our market -- on a market segment basis, we expect our I.V. therapy sales to increase year-over-year approximately 2.5% to 4.5%. This comparison includes a $12.5 million of one-time sales to Hospira in the second half of last year. We expect critical care to be down approximate 2% to 4%, and we expect our oncology market segment to be up 40% to 50%. Our other categories will be approximately 20% to 30%.

Now let me review our recent operating developments. During the second quarter we continued to make progress with positioning our products in global markets and to educate our current and potential customers on our industry-leading value proposition in oncology.

As we have already discussed on the previous call, last quarter we launched our Clear MicroCLAVE Neutral Displacement NeedleFree Connector. The MicroCLAVE Clear allows clinicians to visualize the fluid pathway, verifying effective flushing of the patient's catheter after use with blood and medication that could leave a residual, or fluid precipitant, after aspiration or infusion.

In May we announced results of an in vitro presentation at the [2000] Infusion Nurses Society annual meeting in Nashville, Tennessee, which showed that our MicroCLAVE Neutral Displacement NeedleFree Connector outperformed all other connectors tested in its ability to provide an effective barrier to bacteria transfer and colonization.

In this study the MicroCLAVE was compared to six needlefree connectors in terms of bacterial transfer and colonization over a 96 hour period. In all three phases of testing, bacteria transfer, biofilm formation, and biofilm bacterial formation, our MicroCLAVE significantly outperformed all connectors tested.

The MicroCLAVE's ability to remove -- to provide clinicians with an enhanced level of protection from bacteria being transferred from external surfaces to the patient's bloodstream can be an important benefit in the fight to eliminate catheter-related bloodstream infections.

In a separate study it was confirmed that our ChemoCLAVE, the world's only needlefree closed system transfer device for safe handling of hazardous drug, performs as well as, and in some cases better than other systems in the market that can help hospitals comply with new legislation designed to protect health care workers and patients from accidental exposure to anti-neoplastic and other hazardous drugs in preparation and administration.

While improving patient and caregiving safety by eliminating the possibility of accidental stick, ChemoCLAVE is a microbiologically and mechanically closed system that is easy to use, generates less biohazardous waste, and costs less to implement than any commercially available closed system transfer device on the market today. More than 1,500 hospitals and clinics worldwide have already adopted the ChemoCLAVE system.

On the critical care front, we have been awarded a new 36-month contract with Premier Purchasing Partners, the group purchasing unit of Premier, for our hemodynamic monitoring products, which are mostly used in the critical care setting.

Effective July 1, 2011, the new agreement allows Premier members at their discretion to take advantage of special pricing and terms pre-negotiated by Premier. In addition, we will be a single source supplier of hemodynamic monitoring products to Premier's innovative ASCEND program.

Now I would like to turn the question over to -- the call over for your questions.

(Operator Instructions). Matt Dolan, ROTH Capital Partners.

The first question maybe on some of the commentary, Doc, that you had around sales for the rest of the year. It looks like you have reduced the growth outlook or the growth rate outlook you had for custom as one item. Maybe you could just clarify a little more on the sell through data to Hospira that makes you think revenue comes down sequentially, if that is what you're getting at?

Well, we had some one-time sales and we don't expect those to come back. I think we are just -- we are comfortable with this range, Matt. We are not comfortable in going outside this range. I think we know our business better than anybody, so (multiple speakers).

So do we look for a -- overall, look for a sequential downtick to in Q3 and then back to higher levels -- maybe just compare second half versus first half, because, A., your current guidance, you're kind of at the middle of that range, and I just want to see how that plays out. Is it a downtick in 3 and then a lift back up in Q4?

Put a slight downtick in Q3.

Then maybe for Scott on the EPS side, you have already put up a pretty nice first half of the year and the guidance implies slowing down from there. I understand revenues in there, but gross margin, I think, should tick up in the next couple of quarters as you build in Slovakia. So why wouldn't you see continued improvements in EPS from here on out?

Well, for the first six months we were at 47.5% gross margin, and we expect to come in somewhere between 47%, 47.5%. Obviously, we were down in the second quarter to 46.5%. So taking that into account, if you look at the second quarter as well, we had about $0.025 to $0.03 of pickup in earnings per share that came from catch-up in the 100 basis points lowering of the tax rate. We also had some other income of about $300,000 that would be nonrecurring as well.

So if you factor all of that in, and you keep revenue in the $297 million to $305 million range, that is where we are comfortable coming in. Keep in mind, also, that SG&A should run about 27.5% to 28%. And R&D, we are raising from 2% of revenue up to 3% of revenue.

Okay, that's helpful. Then (multiple speakers).

Like we always say, Matt, you can't look at this Company on a quarter-to-quarter basis, you've got to look at it year-to-year.

Understood. If we look at oncology year-to-date, I know you said you will exceed your $15 million guidance, but is there anything more specific you can give us there? I think you will handily exceed it if you keep growing sequentially out at Q2. Is that how shall we should think about it?

I would just look at it -- again, don't look at us on a quarterly basis. Certainly, the second quarter was a good quarter for oncology. We expect to continue to do well in oncology. It is about $8.3 million, right?

Yes.

About $8.3 million for the first two quarters. So expect oncology to be up 40% to 50% for there. That is what we are -- the total oncology market, that is what we are most comfortable with. Certainly, we will exceed, or we should exceed, the $15 million standard oncology.

Then, finally, on Slovakia, just maybe an update there. Are you at the utilization levels you had anticipated? And what type of uptake are using in Europe with the availability of that facility? Thanks.

So we are in the process now of transferring the remaining product lines that are getting transferred from our Germany facility to Slovakia. That should be done sometime in the third or by the end of the third quarter. At that point we will have transferred everything over to that facility. That will then allow us to more focus on getting the factory better leverage, both through output and also through efficiencies. That should take us, hopefully, into the year 2012.

Great, thank you.

Jayson Bedford, Raymond James.

Thanks for taking the questions. It is just a couple. Maybe just as a follow-up, I think Doc mentioned one-time sales, and I wasn't sure if that was in reference to 2Q 2011 or the back half of 2010. So I guess the question is more did you have any one-time type sales in 2Q?

No, what Dr. Lopez is referring to was the $12.5 million of one-time sales to Hospira in the second half of last year. That was broken down between CLAVE and custom I.V. sets. So if you include the custom I.V. sets into the custom I.V. product range that puts, obviously, pressure on a year-over-year basis.

Got you. That was just more a clarification. Thank you. On the gross margin, you gave a little bit of detail on resin and Slovakia being the big impactors from 1Q to 2Q. Is it possible, Scott, maybe to break out the amount of the two? Meaning, I am guessing resin can obviously snap back depending on oil prices, and Slovakia, I am guessing should get better with volume.

It should eventually. I think the key word there is eventually. So Slovakia broke out -- broke down to about a little over 100 basis points. Raw material was about 75 basis points. So that made up the bulk of it, and there are some other odds and ends in there as well.

Then maybe this -- touching on an earlier question -- but maybe this is implied in the number, but have you seen any topline benefit from having Slovakia up and running? Are you seeing a direct correlation in Europe?

Well, as we have said in the past, certainly OUS business is up, and Europe is one of the driving factors for that increase, now approaching 30% of our total revenue. Honestly, we are not putting a full court pressure yet on custom I.V. set sales above and beyond where we have traditionally been at. We want to make certain that factory is up and running efficiently, it can handle any increases over -- keep in mind, right now we are focused on getting the factory up and running and getting all of our product transferred from both Italy and Mexico and Germany, with Italy and Mexico being completed. So right now we're just focused on getting Germany transferred over.

And the full court press, does that happen late this year or early next?

Well let's -- I think once we get through this transition then we will be better prepared to answer that question.

Okay.

Remember, Europe is mostly custom. It is done by tenders or sets and it is mostly custom. Slovakia plays right -- plays that role very well as far as filling those orders.

Fair enough. Just a last one and I will let someone else jump in. On oncology, besides the state of Washington, have you seen any more states come on? And I guess, the law goes into effect later this month. Are you prepping for increased orders or do you have any visibility into this opportunity?

We haven't seen any other states.

We were focused on Washington early.

Certainly, but no other state so far. Just like [neo] legislation, it takes one and then the momentum builds and eventually everybody jumps on board.

Okay, thank you.

Junaid Husain, Ticonderoga.

Scott, it sounds like your international business is doing fairly well, but just given some of the uncertainties in Europe, I have got a few questions for you. The DSOs for Europe, how does that compare to the US?

Well, certainly, they are quite a bit more than what they are in the US. They have been trending fairly steady over the last few quarters as a matter of fact. Obviously, we have some exposure there, but so far we have not really seen any significant growth in any bad debt.

Got you. Then I know that you see sales through data on enclave and some of your other products from Hospira. When you look at this data, do get this data from Europe as well, and how does that look?

We do not. A lot of our sales to Europe go through the US. So we do get -- we do get to see that data as well, but we haven't broken it down between US and OUS.

Then I know that with Slovakia you view Europe as a key geography for you. But to what extent, if you could give us your high-level thoughts, to what extent do you think that the sovereign debt issues in some of these geographies could potentially impact your business over, call it, the next 10, 12 months?

I think that is anyone's guess. Doc, if you want to -- wild guess.

We have quite a bit of business in Italy. But Italy is better off than the rest of them -- better off than Greece and Portugal and Ireland. But there is no indication we have any problems there.

Nothing of significance.

Got it.

It is something we keep an eye on, Junaid.

It is probably no different than the US not raising the debt ceiling.

Alright, switching gears. Doc, a big picture question for you. As you know, we have got a new Chief Executive over at Hospira with Michael Ball. I know that you have been good friends with Chris Begley. And you guys have known each other for a long time.

So two questions here. First, have you had a conversation with Michael Ball since he has picked up the CEO position? Then secondarily, what does new leadership at Hospira mean for ICU Medical in particular?

The answer is yes, I have had a lengthy conversation with Mike Ball. I am very impressed with him, very impressed. And I think the relationship is just going to be better. Chris is still there. Chris just moved up a notch, but he is still there.

So, I think I'm very impressed with Michael Ball. I am impressed with his take on business and customer focus, and I think it is going to be a good thing for ICU.

Do you see it as business as usual or would you expect that the relationship would change over the next couple of years?

Here is where we are at. He wants us to become more involved with Hospira, not less.

Can you elaborate or --?

New product launches and such. I leave it to the fact that I think the relationship will be better, because Chris and Mike are there, and I have a great amount of respect for both of them and their managerial skills.

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

Jeffrey Cohen, C.K. Cooper.

Thanks for taking my calls. A couple questions, can you talk about the facility in Italy and Germany and plans for them once the transference to Slovakia is complete?

Sure. So Italy will continue to act as sales and distribution for us for a lot of our direct sales into Italy. Germany will continue to act as sales and distribution for Germany, as well as continuing to manufacture our [Medoc] machine.

I know you have had a number of questions on Slovakia. Can you talk about on perhaps utilization rates as you see them through the balance of 2011 and into 2012?

Well, on our last call we talked about getting the utilization rates up to about 30% midyear, and we are probably close to that. Throwing in some additional growth as well as Germany should get us up to maybe around 35%, possibly 40%. Then that takes us into 2012.

Okay, and lastly, I know you don't typically comment on any new products R&D-wise. Can you talk about anything that is out there or soon to be out there or any product areas that are out there or soon to be out there, or any trade shows coming up that we may see something?

Well, I will stick to my rule that we won't talk about products until they have reached $1 million in sales or run rate of $1 million in sales. So we're going to stick to that. We do have new products. I am very excited about them, and so was Michael Ball at Hospira.

But I think we will stick to our guns here. We won't talk about them until we have more data for you -- more objective data. (multiple speakers).

Okay, thanks for taking my questions.

Gregory Macosko, Lord Abbett.

Lots of good questions, but one if you might just talk a little bit about. You mentioned a new Premier contract that had, I think, you said special pricing. Could you talk about that? You did suggest that gross margins would be flat. Do you feel that Premier contract will have any significant effect -- or affect on the gross margin?

It shouldn't have any significant effect on overall gross margins for the Company. Obviously, we are seeing some pricing pressure out in the marketplace in critical care coming from competition, but not enough to drive the overall margin down in any way.

Can you talk about how much of your sales are on contract pricing or Premier-type contracts?

Well, a significant amount of our domestic direct sales are on contract. I can't give you a specific percentage.

We don't know.

Okay, but -- and I probably missed it and should have heard it, but how much is direct at this point?

Well in the second quarter it was $26.2 million.

All right, thanks very much.

I am showing no further questions at this time. I would like to hand the conference back over to Mr. John Mills.

Thank you. Thank everyone for participating in today's call. And we look forward to updating everyone on our 2011 progress, on our third-quarter call in October. As a reminder, we will be going to a number of health care conferences in September, and also marketing, so we hope to see you out there. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect. And have a wonderful day.