ICU Medical Inc (ICUI) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the ICU Medical first quarter 2012 earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session with instructions following at that time. (Operator Instructions). As a reminder this conference call is being recorded. Now, I'll turn the call over to John Mills of ICR.

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, 2012. 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 for the quarter. Then Scott will discuss first quarter financial performance and provide a financial guidance update for the second quarter and full fiscal year. 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 managements 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 managements current expectations. We refer all of you to the Company's SEC filings for more detailed information on the risk and uncertainties that have a direct bearing on operating results and performance and financial conditions. With that said, I'll now turn the call over to Dr. Lopez.

Thank you, John. Good afternoon everyone. We are pleased with our first quarter results and expect continued top and bottom line improvement as the year progresses. As we continue to expand market share in our target markets, our revenue increased 5.7% to $75.5 million. Our top line performance reflected robust growth in infusion therapy and oncology products, which was partially offset by an expected decline in critical care. Our international sales were up 13.6% while domestic sales grew 3.1% year-over-year, validating continued demand for our products worldwide.

For the first quarter of 2012, we generated net income of $7.6 million, or $0.53 per diluted share. We also generated strong cash flow from operating activities of $18.3 million. During the quarter we continued to strengthen our distribution partnerships, as well as utilizing our strong balance sheet by investing in new products and enhancing our sales and marketing strategies. We believe these incentives position us well for the remainder of the year and will enable us to accomplish our strategic and operational goals.

In summary during the first quarter, sales were up, particularly our oncology sales. Inventories were down and inventory turns were up, DSOs were down, SG&A was essentially flat compared to flat last year. We continued to generate strong operating cash flow. We ended the quarter with no debt and cash of approximately $184 million, which equates to $13 per share and we have a soft launch of three new products, including Diana in Europe, which has now been placed in over 35 hospitals and we expect to have Diana in an additional 40 hospitals by the end of the year.

Keep in mind, Diana is entering an empty market and we are in the early adopter phase. We will continue to update you on our progress in the coming quarters and will provide potential revenue numbers to you once we hit approximately $1 million in annualized revenue. Now I'd like to turn the call over to our CFO, Scott Lamb, to review our first quarter results and our financial guidance.

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 first quarter of 2012 increased 5.7% to $75.5 million, compared to $71.5 million in the same period last year. Net income for the first quarter of 2012 was $7.6 million, or $0.53 per diluted share, as compared to net income of $8.1 million, or $0.50(Sic-see press release) per diluted share for the first quarter of 2011. Now let me discuss our first quarter revenue performance by market segment. You can also view our detailed market segmentation in our earnings press release.

For the first quarter of 2012, sales from the infusion therapy market increased 9.6% to $51 million and represented 67.5% of our total sales. This growth was attributable to strong performance of NeedleFree Connectors, primarily CLAVE and MicroCLAVE, as well as custom sets. More specifically, sales from CLAVE and MicroCLAVE increased 12.9% to $28.3 million, compared to $25 million a year ago representing a 37.4% of our total revenue. Custom infusion sets were up 7.4% year-over-year to $19.6 million, or 25.9% of total sales. We expect sales in infusion therapy to increase approximately 6% to 9% in fiscal year 2012 from fiscal year 2011, and to be driven by both NeedleFree Connectors and custom sets.

As competitive volume and price pressures continued during the first quarter, sales from the critical care market were down 14.4% to $13.6 million, compared to $15.9 million a year ago and comprise 18.1% of our total sales. We believe that critical care represents a good value proposition for our customers worldwide and we continue to invest in these products to return them to positive growth. Given the current market conditions, we continue to expect critical care sales to decrease year-over-year by approximately 4% to 8%.

Sales from our oncology market grew 29.9% to $6.4 million, compared to $4.9 million a year ago and represented 8.5% of our total sales for the first quarter. On a sequential basis, sales from the oncology market were up 19.9%. Based on the current demand, backlog of conversions and expected growth opportunities, we expect sales from this market to increase approximately 35% to 45% for fiscal year 2012.

Our other product category, which primarily includes products in the renal and enteral markets, grew 10% year-over-year to $4.5 million, representing 5.9% of our first quarter revenue. This growth was primarily due to TEGO which increased 9% year-over-year to $2.2 million, and Orbit which we have now stopped producing. We expect sales in this product category to increase approximately 3% to 6% this year.

Now for our first quarter sales by distribution channel. Domestic sales of Hospira were up 4.1% year-over-year to $28.8 million and were driven by strong performance of CLAVE and MicroCLAVE NeedleFree Connectors, as well as custom sets and standard oncology products. For the first quarter of 2012, domestic sales to Hospira represented 38.2% of our total revenue, compared to 38.8% for the same quarter of 2011. Our non-Hospira domestic sales increased 2% to $26.7 million year-over-year, as double digit growth in infusion therapy and oncology was partially offset by an expected decrease in critical care.

International sales were up 13.6% to $19.9 million year-over-year, representing 26.3% of our total revenue and were driven by double digit growth in infusion therapy, oncology, and other products, partially offset by lower critical care sales. Growth came primarily from both Europe and the Pacific Rim. FX from Europe negatively impacted our sales by approximately $400,000 year-over-year.

Our first quarter gross margin was 46.3%, compared to 48.4% a year ago and 47% in the previous quarter. The decrease in gross margin was attributable to utilization cost pressure from our new factory in Slovakia which did not start up until the end of March last year, manufacturing inefficiencies, and price reductions in critical care. We expect our gross margins to be in the range of 47% to 47.5% for the full fiscal year of 2012.

SG&A expenses decreased by 8.6% year-over-year to $20.9 million, compared to $22.9 million for the first quarter of 2011. The 2011 SG&A included $2 million of one-time expense from the long term retention plan pay out. Excluding this one-time expense, SG&A was almost flat year-over-year. Overall during the first quarter of 2012, slightly higher sales and marketing SG&A expenses were offset by lower legal costs. As a percentage of sales, our SG&A expenses were 27.7%, compared to 32% a year ago. We expect SG&A as a percentage of total revenue to be 26.5% to 27% for the full fiscal year 2012.

Our research and development expenses increased 31% to $2.7 million, compared to $2.1 million for the first quarter of 2011. This increase was in line with our expectations as we continue to invest in new products for all our target markets. We expect our research and development expenses to be about 3% of revenue for the full fiscal year of 2012. Our tax rate for the first quarter was 34%. Our operating income for the first quarter of 2012 totaled $11.4 million, or 15.1% of sales, compared to operating income of $12.2 million, or 17.1% of sales a year ago. Our EBITDA totaled $16.3 million, compared to $17.1 million for the first quarter a year ago.

Moving to our balance sheet and cash flow. As of March 31, 2012, our balance sheet remained very strong with no debt and $184 million in cash, cash equivalents and investment securities. This equates to approximately $13 per outstanding share. Additionally, we had approximately $251 million in working capital. It's also worth noting that at the end of the first quarter our inventory levels decreased to $37.3 million, compared to $40.4 million as of December 31, 2011 and $51.2 million as of March 31, 2011. During the first quarter of 2012, we generated $18.3 million in cash flow from operating activities. Our capital expenditures totaled $3.6 million during the quarter and primarily included machinery, equipment and molds for our plant in the US. Day sales outstanding for the first quarter were 50 days. We expect DSOs to be approximately 55 to 60 days in the foreseeable future, which is an improvement from our historical DSOs.

Now let me update you on our financial guidance for fiscal year 2012 and the second quarter. Based on the current business trends, we reaffirm our previously announced revenue guidance for the full fiscal year of 2012 and expect to generate revenue in the range of $318 million to $330 million. On a market segment basis, we expect our infusion therapy sales to increase year-over-year approximately 6% to 9%. We expect critical care to be down approximately 4% to 8%, and we expect our oncology market segment to be up 35% to 45%. We expect our other category will be up 3% to 6%. We also reaffirm our earnings guidance and expect our diluted earnings for the full fiscal year of 2012 to be in the range of $2.45 to $2.70 per share. For modeling purposes, our tax rate is expected to be 35% for 2012.

For the second quarter of 2012, we expect our revenue to be in the range of $76 million to $78.5 million, and we expect a steady sequential progression of revenue growth during the third and fourth quarters. Gross margin will be 47% to 47.5% during the second quarter and we expect our gross margin to increase to approximately 48% during the second half of the year. We expect our earnings per share to be in the range of $0.54 to $0.59, which includes a tax rate of 35% and expect our earnings per share to increase throughout the year.

During the second quarter we expect some softness in Southern European countries, as well as continued weakness in critical care sales. As we already discussed in our previous call, the Slovakia plant will continue to put pressure on our gross margins throughout the entire year. However, we expect this impact to somewhat decrease during the second half of the year as we increase production volume. We expect our second quarter SG&A to be sequentially higher than in the first quarter due to increased sales and promotional costs and higher legal costs. Our operating cash flow is expected to be approximately $40 million to $50 million in 2011(Sic-see press release) and we believe capital expenditures will be $13 million to $18 million in 2012. Now Operator, we are now ready to open the call for your questions.

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

Scott, on the EPS number for the year relative to Q2, obviously now with your guidance we can see what the back half needs to be I think averaging close to $0.74 a quarter. So walk us through what gets you there in the back half of the year to be able to affirm the midpoint of your guidance for 2012.

Certainly a lot of it is going to be driven by top line. We expect improvements in our gross margin, as we mentioned, getting to approximately 48% in the second half of the year. Then getting leverage off of our operating expenses to improve the operating margin. Slovakia will help on the gross margin side, as well as moving past some of the manufacturing inefficiencies that carried into the first quarter from the fourth quarter of last year.

Okay, and then looking at revenue, it's a similar concept. It still is a big uptick. You said that you get there and maybe you can give us some more detail on why it looks like for Q1, I.V. was a little above your annual guidance, Critical Care and Oncology were below. I'm guessing new products in Oncology accelerate that number. But walk us through where you are with Critical Care in terms of the competitive dynamics that have been there and why that should rebound to at least more modest decreases throughout the year.

Sure, so just take them one by one. Infusion therapy, as you mentioned, we're there. On the Critical Care side, keep in mind that the comps become much easier in the second half of the year and so combination of adding new accounts, as well as new products coming out later this year, should help on the Critical Care side. Oncology is the launching of new products, as well as we mentioned already on the call it's the number of conversions and new account opportunities that we are seeing already in place, along with our current backlog that help us get there.

Okay, and last one on the buyback, it doesn't look like you bought any stock during the quarter, so can you confirm or deny that? What was assumed or what is assumed in your earnings guidance as it relates to the buyback and therefore the share count?

We did not buyback any shares in the first quarter and the guidance does not include any buybacks for the rest of the year. We're not saying we are or are not buying back any additional shares for the rest of this year, but the guidance does not include any additional buybacks.

If I could follow-up, what is then the swing factor in your range of guidance which is pretty wide?

Yes, just at the end, it's top line. That's what gets us there.

Jayson Bedford, Raymond James.

On your Oncology business, the number you put up in the quarter, is that a fair reflection of demand or were you still working through some inventory in the quarter?

Not so much working through the inventory. We got through most of those issues in the fourth quarter last year. This is primarily sell-through, matching, sell-in. As I mentioned to Matt, it's really what we're seeing now in our backlog, as well as conversions that we have going on as we speak, as well as additional account opportunities that we see, not only in the US but globally.

Did you see any contribution or increased contribution from the state of Washington at all?

We have not unless you've heard differently, Doc?

No, not yet. We're doing well in Washington, but no big push coming from that new law.

Contemplating the guidance, is there a big push at some point from that state?

Well, we're hoping for it but we hope for it, but don't count on it.

To expand on an earlier question, what can you do or what are you doing in the Critical Care business to stem the declines here? I realize the comps get easier but just kind of fundamentally, how can you turn that business around?

One of the ways is to launch new products and we have a new product that we have a lot of faith in that we launch in June of this year, and it's potentially a very large money maker. It's one of the things we do. The other things we're doing is differentiating our products to things that we do that the competitor can't do, so both of those in unison.

In terms of, I think you mentioned three new products, [Diana] sounds like one. Any more details on the other two, obviously it sounds like one of them is in Critical Care. Is the other in Critical Care and then maybe are they product upgrades or are they additive to the portfolio?

New products, totally new products and I'll talk about them probably next quarter. When they get to be $1 million annualized in sales then we know we have a product keeper. I'll talk about them more next quarter or the quarter after that when they hit that number.

All three products, can I assume that all three of the new products have been launched in the US?

No, you can't make that assumption. We have launched them in Europe. For example, Diana we launched in Europe and in 35 hospitals in early infancy stage of the product life cycle and the customers love it and we expect to sell another 40 machines before the end of the year. The product is just being soft launched in the US.

Switching gears a little bit, and this will be my last one and I'll get back in queue. Gross margin, any way to quantify the impact from the start up in Slovakia, as well as the pricing dynamic on Critical Care?

The start up in Slovakia cost us about 80 basis points and we've been saying along approximately 100 basis points. That's going to stick there for the next quarter or two and then the rest would be manufacturing efficiencies and the price decrease, and that's probably split down the middle.

James Terwilliger, Benchmark.

First of all, I thought this was a good quarter in terms of how you started 2012. A lot of my questions have already been answered but Scott, one thing I was worried about going into the gross margins for this year was the increase in oil and gas prices and the impact there on resin prices. But when I look at the second half of this year, I'm actually going to be taking gross margins up from where I sit today. How did you bake into the cake with your guidance the increase in resin prices as it relates to gross margins?

First of all, I think as we've mentioned in the past, that the increase in the price of oil does not have a direct correlation on the price of our raw material. It's not a one for one direct correlation, first of all. Second, as the price of oil was declining last year, we did not see the same decline in the cost of our raw material. We did try to bake in a slight increase in the cost of our raw material for 2012. With all that being said, what I'm trying to say is that we haven't seen a significant price increase this year in our raw material from the increase in the price of oil.

And we don't expect any.

We don't expect any but you never know what's going to happen with the price of oil, but we do have a slight increase baked in already into our 2012 guidance.

If I had that concern coming into the call, at this point in time that concern probably is not as significant as I would have thought; is that fair?

I think that's a fair statement unless of course things change, but as of we speak today we don't see it.

I'm going to move on to Europe. Your international business was up 13.6%, I think it was a very strong double digit number. When I hear everything coming out of Europe and I see a deceleration, what drove the international sales. Could you break down, to the degree that you're comfortable, what are the main markets in Europe that you're operating in? France, Germany, Spain, Italy? Because even though you look at the EU, some countries within there are doing much better than some other countries. If you could give me your European business at 30,000 feet and then how did the international sales or the international revenue jump 13.6% overall?

As we already mentioned, first of all, the growth internationally came from two areas, the Pacific Rim and Europe. To drill down a little bit closer on Europe, as we also mentioned, we are starting to see a little bit of a weakness in the Southern European economy, so that would be Italy, Spain, Greece, and so forth. Beyond that, where we're strong, we're strong in most of the other countries as well.

South America.

Certainly outside of Europe, we're strong in Latin America and South Africa as an example, but our two strengths come from Pacific Rim and Europe. Northern European countries we do fairly well to be perfectly honest with you. Even though Southern Europe is maybe seeing some weakness, we're continuing to see market share gains in the rest of Europe.

My last question and I'll jump back in queue. How would you characterize the US market from a healthcare medical device pricing perspective?

We are not seeing other -- outside of Critical Care, we are not seeing pricing pressure in any of our target markets or product categories.

A lot of our products do not have competitors.

That puts you at a premium position out there in the market.

(Operator Instructions). Mitra Ramgopal, Sidoti.

Most of my questions have been answered but Scott, I'm just wondering clearly you're doing more business overseas, especially in Europe. With regards to the guidance, what is your expectation for where you expect Slovakia to be in terms of capacity by the end of the year?

Well we do expect utilization to improve. We will not be at 60% utilization by the end of the year, but that's what helps us get to approximately 48% gross margin towards the latter half of the year.

I know you said its been a little too early to talk in detail about Diana but clearly, you're having initial success. If you could just give us some idea as to the potential of the market that you're looking at in Europe?

As Donald Trump would say, it's huge. I divide markets into small, medium and large. It's just a large market. I probably can't say more than that.

Again there's no one else with a competing product?

Like many of our products we've launched, no competition.

Regarding the cash, clearly, you're building up a nice war chest so to speak. Any thoughts in terms of additional use of the cash outside of the occasional share buyback?

Well as we've always said, our policy, our cash policy is investing back into the Company, stock buybacks, and we will look for acquisitions, small ones, that are strategic and will benefit and are accretive.

For example, I bought a Company called Neo Care for approximately $5 million and that allowed me to produce the Diana machine. Those kind of acquisitions are very lucrative for us, but nothing in the big category.

There are no further questions in the queue at this time. I'd like to turn the call over to Management for any closing remarks.

Thank you, everyone. That concludes today's call. We look forward to updating you on our 2012 progress on our second quarter in July and also wanted to let everyone know we will be attending a number of conferences and non-deal marketing road shows over the next few months. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.