ICU Medical Inc (ICUI) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen. And thank you for standing by. Welcome to the ICU Medical, Inc. third-quarter fiscal year 2011 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.

Now I'll 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 third quarter ended September 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 third-quarter results in more detail. Dr. Lopez will review revenue and earnings targets 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 base 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'll now turn the call over to Dr. Lopez. Go ahead, Doc.

Thank you, John. Good afternoon, everyone. We are pleased with our accomplishments through the third quarter marked by solid sales of $76.5 million, net income of $9.3 million, or $0.65 per diluted share, and positive cash flow of $10.6 million. In spite of the deepening economic crisis in Europe, our international sales, driven primarily by Europe, were up 9%, while domestic distributor and direct sales increased 6% year-over-year. Our top-line performance during the quarter was driven by worldwide growth of CLAVE and MicroCLAVE, oncology products, and TEGO, validating our investments in existing and new products.

We continue to see Medicare's decision to stop reimbursing hospitals for catheter-related bloodstream infections, putting pressure on hospitals to reduce nosocomial infection. Also known as hospital-acquired infection. This is driving hospitals to use proven infection prevention tools to lower costs and improve patient outcomes. Our expanding portfolio of infection prevention products includes the CLAVE, which experienced 12% year-over-year sales growth during the quarter. Also, our oncology business was up 68% year-over-year. And we believe this trend will continue as we continue to invest and expand our product portfolio for the market.

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.

Thanks, Doc. Before I begin, let me remind all of you that the sales numbers we are covering, as well as our financial statements, are available on the Investor portion of our website for your review. Our total revenue for the third fiscal quarter increased 1% to $76.5 million compared to revenue of $75.7 million for the same quarter a year ago. Strong growth in CLAVE, oncology products and TEGO during the quarter was partially offset by expected decreases in custom sets and critical care, which I will discuss in more detail in a moment. It's worth noting that included in the third quarter 2010 revenue were 1-time orders of $5.9 million from Hospira. Excluding these 1-time orders, our third-quarter 2011 revenue grew 9.6% year-over-year. Our net income for the third quarter of 2011 increased 3.2% to $9.3 million or $0.65 per diluted share, as compared to net income of $9 million or $0.65 per diluted share for the third quarter of 2010.

For the 9 months ended September 30, 2011, our revenue increased 8% to $225.7 million, compared to $209 million in the same period last year. Excluding the 1-time orders from Hospira, our revenue increased 11.2% compared to the same period last year. Net income for the 9 months ended September 30, 2011 grew 28.1% to $26.8 million or $1.89 per diluted share, compared to net income of $20.9 million or $1.51 per diluted share for the same period last year.

As we already discussed in our previous conference call, we have begun to break our total revenue down by market segment, as well as by product line. Currently, we operate in 3 major markets, including IV Therapy, Critical Care, and Oncology. For the third quarter of 2011, our IV Therapy market comprised 65.4% of our total sales. Critical Care market 19.3%. And Oncology market 8.9%. The remaining 6.4% of our total sales were generated primarily from products in the renal and diabetes markets.

For the third quarter of 2011, sales from the IV Therapy market decreased 4% to $50 million. Sales in the Critical Care market were down 6% year-over-year to $14.8 million. Third quarter sales in the Oncology market increased 68% to $6.8 million. Finally, our Other product category grew 35% year-over-year, contributing $4.9 million to the top line. You can also view the new market segmentation and our year-to-date top line performance in our earnings press release.

Now, let me discuss our third-quarter sales by product category. Sales from CLAVE and MicroCLAVE needle-free connectors increased 12% to $28.7 million compared to $25.7 million a year ago. And represented 37.5% of our total revenue. The third quarter of 2010 included a 1-time order of $1.4 million from Hospira. Excluding this 1-time order, CLAVE grew approximately 18% year-over-year. We are pleased with the solid contribution our new clear MicroCLAVE continued to make to this product category during the quarter, and believe CLAVEs are well-positioned to grow 10% to12% for the full fiscal year.

Custom sets, which include custom oncology, custom infusion, and custom critical care, represented 30% of our total revenue, and decreased 19% to $22.8 million compared to $28.3 million a year ago. The third quarter of 2010 included 1-time orders of $4.5 million from Hospira. Excluding these 1-time orders, custom sets increased 3% year-over-year. As we already discussed on the previous call, some of our customers moved from custom oncology products towards standard chemo CLAVE systems, which resulted in a 46% decrease in sales from custom oncology during the third quarter. Also, we continue to see pricing and volume pressure come from the competition for custom critical care. We expect custom sets to decline slightly in 2011 because of the 1-time Hospira orders in the second half of 2010 and the declines in custom critical care and custom oncology discussed earlier.

Sales from our standard critical care products represented 15% of our total sales and were down by 5% to $11.6 million compared to $12.1 million a year ago. The decrease was attributable to volume and price pressures due to the competition. We now expect sales from standard critical care to decrease in the low- to mid-single digits for the full fiscal year. In the meantime, we are working on stabilizing this business, investing in sales and marketing initiatives, as well as launching new products next year which we believe will help return Critical Care to positive growth.

Standard oncology product sales more than tripled, increasing 222% to $5.6 million year-over-year, and represented 7.3% of our total third quarter sales. This strong growth was primarily attributable to the evolution of our product base I mentioned earlier, 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 robust.

Now, moving to our third quarter sales by distribution channel. US sales to Hospira were down 7% year-over-year to $30.3 million as strong performance of CLAVE and standard oncology were offset primarily by significant decreases in custom products. As discussed earlier, the prior year's third quarter Hospira sales include $5.9 million of non-recurring revenue. Excluding the non-recurring revenue, Hospira sales were up 5% year-over-year.

For the third quarter of 2011, US sales to Hospira represented approximately 40% of our total revenue compared to approximately 43% for the same quarter of 2010. Our domestic distributor and direct sales increased 6% to $27.4 million year-over-year, and were driven by strong growth of CLAVE, TEGO, and standard oncology products.

International sales increased 9% to $17.7 million year-over-year, representing 23% of our total revenue. Growth in international markets was primarily attributable to strong performance of oncology products in Europe and Latin America.

Our third quarter gross margin expanded 160 basis points to 46.5% compared to 44.9% a year ago. The improvement in gross margin was attributable to a favorable product mix and lower freight costs, partially offset by startup costs at our new factory in Slovakia, and higher raw material costs. We continue to expect our gross margins to be approximately 47% to 47.5% for the full fiscal year.

As expected, our SG&A expenses increased by 11.3% to $20.4 million year-over-year due to our continuous investments in new sales and marketing initiatives. As a percentage of sales, SG&A was 26.7% compared to 24.2% for the third quarter a year ago. We expect SG&A as a percentage of total revenue to be approximately 28% for the full fiscal year.

Our research and development expenses totaled $1.9 million compared to $1.1 million for the third quarter of 2010. This increase was in line with our expectations as we continue to invest in our existing and new products in order to expand our product portfolio in all 3 of our major target markets. We expect our research and development expenses to be approximately 3% of total sales for the full fiscal year. For the third quarter of 2011, our operating income totaled $13.3 million or 17% of sales, compared to operating income of $14.6 million or 19% of sales a year ago.

Now, moving to our balance sheet and cash flow. Our EBITDA or earnings before interest, depreciation and amortization, totaled $18.1 million compared to $18.6 million for the third quarter a year ago. As of September 30, 2011, our balance sheet remains strong with no debt and $119.1 million in cash, cash equivalents and investment securities. This equates to approximately $8.61 per outstanding share. We also had $213.2 million in working capital.

During the third quarter we purchased $10 million of stock under our $40 million stock repurchase program, with approximately $30 million still available to spend as of September 30, 2011. It is also worth noting that in the third quarter we saw our inventory levels drop to $43.4 million compared to $49.4 million in June. This is primarily due to the planned reduction in safety stock of products transferred to our new plant in Slovakia, and the consolidation of our supply chain and distribution warehouses.

Additionally, we generated $10.6 million in cash flow from operating activities during the third quarter. For the first 9 months of this year, we generated $36.1 million of cash flow from operations compared to $18.8 million for the same period last year. We expect operating cash flow this year to be in the range of $45 million to $50 million.

Our capital expenditures totaled $4 million during the third quarter and primarily included machinery, equipment and molds for our plant in the US. We believe capital expenditures will be $17 million to $19 million in 2011. Day sales outstanding for the third quarter were 64 days. We expect DSOs to be approximately 65 days in the foreseeable future.

Now I'd like to turn the call back over to Dr. Lopez to review our 2011 revenue and earnings guidance and provide an update on our business trend.

Thanks, Scott. Based on our current business trends and strong performance of some of our key product lines, we are raising the bottom end of our revenue guidance range. The new range is $300 million to $305 million compared to the previous range of $297 million to $305 million.

On a market segment basis we expect our IV Therapy sales to increase year-over-year approximately 3% to 5%. This comparison includes the $11.7 million of 1-time sales to Hospira in the second half of last year. We expect Critical Care to be down approximately 2% to 4%. And we expect our Oncology market segment to be up 40% to 50%. Our Other product categories will grow approximately 15% to 25%.

We are also raising the bottom end and the top end of our diluted earnings per share guidance range. The new range is $2.43 to $2.54 per share compared to the previous range of $2.35 to $2.50 per share. For modeling purposes, our tax rate is expected to be 34% for 2011.

Now let me review some exciting developments on the new product front. Just a couple weeks ago we launched the Neutron needle-free catheter patency device, with constant neutral pressure, at the Association for Vascular Access annual scientific meeting in San Jose, California. Neutron is the world's first and only device with FDA 510(k) clearance to claim the ability to prevent fluid displacement during an IV run dry, infusion pump stop, or patient vascular pressure changes caused by coughing, sneezing, crying, or movement. All of which have been associated with loss of catheter patency.

In 3 months of clinical usage at Sharp Home Infusion Services in San Diego, California, award-winning Sharp Health System, a change to the Neutron device from one of our competitors' connector, led to a 70% reduction in occlusion rate. Results of early clinical use and pre-launch testing of the Neutron device have been so favorable, that we are offering our customers $100,000 performance guarantee. If the healthcare facility does not experience a reduction in catheter occlusion rates in the first 3 months after converting all of its central lines to Neutron, we will pay that facility $100,000. In addition, we continue to see positive demand for our new clear MicroCLAVE in the IV Therapy market. Both of these products fit well into our long-term strategy to expand our product line of needle-free vascular access devices.

In conclusion, I am very excited about our pipeline of new products and our ability to raise guidance. Now I'd like to turn the call over for your questions.

(Operator Instructions) Matt Dolan with ROTH Capital Partners.

Scott, first question on gross margin. I know you gave us the guidance and you're keeping that static. But maybe you could walk us through where you are with Slovakia, and when that impact starts to roll off. And try to maybe quantify where gross margins head once you're out of that transfer phase.

As we've said in previous calls, this year we expect Slovakia to put pressure downward on gross margins by about 100 basis points. And that's about what we saw in the third quarter and expect to see also in the fourth quarter. We've transferred all of the products over from our various factories for a product that was being built for Europe. That's now all being built in Slovakia. So now it's just a matter of utilization.

So going into Q4, maybe you can walk us through the logic of the sequential downtick in EPS. I presume with the revenue guidance we see that flat to up, gross margin flat to up. Is it really just an operating spend issue Because I think the top end of your EPS guidance would reflect a flat fourth quarter EPS performance.

Fairly flat. That's right. SG&A -- we expect that we'll have some increased costs in SG&A. Our tax rate was 31% for the third quarter, with 34% for the year. So obviously our tax rate in the fourth quarter will go back up. We had some discrete items in the third quarter that we flushed through our tax provision. So a combination of those gets us to the EPS for the fourth quarter.

And then last question is on your growth. Organically this year, assuming the guidance, you're organically growing in the double digits. Doc, I know you talked about the Neutron. Any other products to think about into next year? Or more broadly, do you feel a double-digit growth rate is really sustainable for this Company at this point?

I think so. And as far as new products go, I'll be talking to you about a new product in January. I think this new product is going to be something. We launched the product already in Europe and have a number of accounts and we're just getting it back to the US, or into the US, as I speak. But I believe we've got some great new products, including one that I'm really excited to talk to you about. I don't want to talk about it until January.

Okay. Thank you.

Jayson Bedford with Raymond James.

Maybe it's implied in the number, but have you seen any top line impact from having Slovakia active now?

Not yet. Hard to tell.

And then, in terms of Europe, it looked good but you had a very strong 2Q. Maybe you can just highlight where you were strong, maybe where you may have been weak. And then maybe just generally comment on volumes in Europe.

Sure. Our strength in the third quarter, a lot of that strength came from oncology. Custom is doing well over in Europe and we expect it to continue to do well. Keep in mind that Europe, we really don't have seasonality in our business except for maybe somewhat in Europe where everyone is on vacation. So we did see a little bit of that in the third quarter in Europe, but we still have a lot of good expectations, high expectations for Europe.

And now that Slovakia is up and running here, do you plan to be more aggressive in going after new business?

Absolutely.

And then in terms of the CLAVE growth, obviously quite strong. What's the big driver behind that? I'm guessing, I don't think there's a price difference on MicroCLAVE Clear, so just wondering what's driving that? I think you mentioned 12% growth.

The market is driving it. They perceive this part as being a brand new product and we can't keep it on the shelves. It's flying off the shelves. And it allows us to go to other markets that we couldn't previously go to that we were excluded from.

Exactly right. And as we mentioned on this earlier, infection control, the pressure being put on hospitals for infection control.

And then I think I could probably do the math here but what were Hospira one-time sales in 4Q 2010?

It was around $11.7 million total for the year. So $5.9 million in the third.

So subtract them.

Thank you.

Mitra Ramgopol with Sidoti.

First, Scott, on the gross margin. It was flat relative to the second quarter despite you talked about previously increased competition, critical care, raw material costs, et cetera. Are you very comfortable that in terms of the pressures you're seeing externally, you should be able to at least show some nice improvement going forward on the gross margin?

We are obviously in the fourth quarter, we'll have to do between 47% and 48% for the fourth quarter. As we brought down our inventory level significantly in the third quarter, that does put some pressure on our manufacturing. So obviously that, with a combination of product mix, we're fairly comfortable with our fourth quarter and annual guidance.

Okay. And if I look at the distribution channels on the domestic side, you obviously increased as a percentage of revenue. And you talked about maybe in the fourth quarter, you'll be spending some more on SG&A. Is the increase we're seeing more a function of just an expanded sales force or is it more a function of just greater penetration in existing accounts versus maybe picking up new accounts?

It's a combination of all of the above. It's an increased effort and obviously we are continuing to invest in our sales and marketing group. And this is just a function of that investment.

And again, I think you mentioned you bought back some stock in the quarter. I don't know if you have handy the number of shares or maybe the average share buyback?

It was about 39-and-change, the average buyback price. $10 million.

We still have authorization for 30 more.

Correct.

And finally just on Slovakia again, I think you mentioned we're not seeing any benefit on the top line. You think by the first quarter of 2012 that should become apparent? Or would it be more like second half?

I think in our fourth quarter call, we'll address that in more detail, Mitra. But again, Slovakia, we have plenty of capacity there. Europe, we believe is a prime market for customization and oncology. And nothing has changed our minds about that.

Okay. Thanks again.

(Operator Instructions) Gregory Macosko with Lord Abbett.

Just a few things relative to the balance sheet. 1 thing, I see that there's some assets held for sale. Could you remind me what that is?

Yes, that's just a smaller product line of ours that is not in one of our target markets.

Which one?

Just 1 of the smaller ones. If we end up doing something with it, then we'll talk about it then.

You mentioned, Doc, that you've got some new products coming in critical care. Is that what we should expect to hear about in the fourth quarter call?

Yes, absolutely. I'm as excited as when I was in New York with you over the CLAVE line and custom sets.

Okay, good. And then finally, R&D was down about $6 million sequentially. And I know it's going to be 3% for the year, it was 2.5%. Was there any reason for it being down sequentially like that?

Yes, it was down about $800,000 I believe. I was just the timing of expenses and efforts. We expect that to be back up and should be around 3% for the year.

Okay, good. And was it discrete items on the tax rate?

Yes, it had to do with some reserves and tax credits that we were able to benefit from.

Okay, not any more of those coming? That's run down now?

We're always looking for more.

Okay. And I know it's small, very small, about 6% of revenue. Is there anything going on there with diabetes or the other?

Certainly, in renal, especially, we're really excited about. As you know, we've talked about TEGO in the past and the fact that we're really the only ones out there in the market with a connector to control infection. And Orbit is doing well, as well. Those are 2 of the main drivers.

Okay, very good. Thank you.

(Operator Instructions) Presenters, at this time, I'm showing no additional questioners. I'd like to turn the program back over to John Mills for any closing remarks.

Okay, thank you. Thank you for participating in today's call. And we look forward to updating you on our 2011 progress on our fourth quarter call, and providing guidance for 2012, as well. We will be attending a number of investor events over the next few months and hopefully we'll see many of you at those events. Thank you.

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