ICU Medical Inc (ICUI) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to ICU Medical third-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 is being recorded. Now I will turn the conference over to John Mills with ICR. Please begin.

Thank you. Good afternoon everyone. Thanks for joining us today to review ICU Medical's financial results for the third quarter and nine months ended September 30, 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 third-quarter financial performance and provide a financial guidance update for the full fiscal year. Then the Company will open the call for your questions.

Before we begin, 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 risk 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 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. Go ahead, Doc.

Thank you, John. During the third quarter, we focused on leveraging our strong cash flow and continued to invest in new products for portfolio, to expand the market share and to educate distributors and customers about the benefits of our innovative devices.

Let me highlight some of our key achievements. Our third-quarter revenue increased to a record $81.4 million, driven by improvements in our infusion therapy and oncology markets, which was partially offset by a decrease in Critical Care and impacted the euro currency translation. I'm very pleased with our 346 basis point improvement in gross margin, and strong operating margin which grew over 400 basis points to above 21%, even as we increased our research and development investment by 60%. As I like to say, you can run but you can't hide when it comes to operating margins.

Net income for the third quarter grew to over $12 million or $0.82 per diluted share, which represents an increase of almost 26% compared to diluted earnings per share we recorded a year ago. Now I'd like to turn the call over to our CFO, Scott Lamb, to review our third-quarter financial results and our guidance. 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. As Doc already mentioned, our third-quarter 2012 revenue was a record $81.4 million, an increase of 6.5%, compared to $76.5 million in the same period last year.

The euro decline unfavorably impacted our top line performance by $1.3 million. Excluding the euro impact, our revenue was up 8.2% year over year. Net income for the third quarter of 2012 was $12.2 million, or $0.82 per diluted share, as compared to net income of $9.3 million, or $0.65 per diluted share for the third quarter of 2011. The third quarter of 2012 net income included approximately $0.5 million or $0.03 per diluted share related to discrete tax items. For the nine months ended September 30, 2012, our revenue increased 3.8% to $234.2 million, compared to $225.7 million in the same period last year.

The euro decline unfavorably impacted our year-to-date revenue by $3.1 million. Excluding the euro impact, our revenue for the nine months ended September 30, 2012 was up 5.1% year over year. Net income for the nine months ended September 30, 2012 was $28.9 million or $1.98 per diluted share, compared to net income of $26.8 million or $1.89 per diluted share for the same period last year.

Now let me discuss our third-quarter revenue performance by market segment. You can also view our detailed market segmentation in our earnings press release. For the third quarter of 2012, sales in the infusion therapy market increased 13.6% to $57.2 million, and represented 70.2% of our total sales. This strong growth was attributable to strong performance of NeedleFree Connectors, primarily CLAVE and MicroCLAVE, as well as custom sets. More specifically, sales from CLAVEs and MicroCLAVEs increased 6.2% to $30.4 million, compared to $28.7 million a year ago, representing 37.4% of our total Company-wide sales.

Custom infusion sets were up 25.8% year over year to $23.2 million, compared to $18.4 million a year ago, and comprised 28.5% of our total Company-wide sales. We expect sales in infusion therapy to increase approximately 9% to 10% in fiscal year 2012 from fiscal year 2011, and to be driven primarily by both NeedleFree Connectors and custom sets.

Sales in the Critical Care market were down 11.8% to $13 million, compared to $14.7 million a year ago, and represented 16% of our total sales. The decrease was attributable to competitive volume and price pressures, which began in the second half of last year. We continue to invest in these products and believe they represent long-term growth opportunities. Given the current market conditions, we expect Critical Care sales to decrease year over year by approximately 10% to 12%.

Sales in our oncology market increased 10.2% to $7.5 million, compared to $6.8 million a year ago. This growth was driven primarily by an increase in market share. We continue to believe that our oncology products represent a great growth opportunity. We are in the right market at the right time but conversions are taking longer than expected. Based on the current demand and backlog of conversions, we forecast sales from this market to increase approximately 20% for fiscal year 2012. The change in our projected growth rate is based on the delay of forecasted conversions and new business.

Our other product category, which primarily includes products in the renal and [ineral] markets was down 18.6% to $3.7 million compared to $4.6 million a year ago, representing 4.6% of our third-quarter total revenue. Sales from TEGO increased 17.6% year over year to $2.6 million, but were primarily offset by the elimination of Orbit sales due to the sale of that product line and which we stopped shipping in the first quarter of this year. We expect sales in this product category to decrease approximately 15% this year.

Our third-quarter sales by distribution channel were as follows. Domestic sales to Hospira increased 10.1% year over year to $33.1 million, compared to $30 million for the third quarter of 2011. This growth was primarily driven by CLAVEs, MicroCLAVEs, NeedleFree Connectors, and custom infusion sets as well as oncology products.

For the third quarter of both 2012 and 2011, domestic sales to Hospira represented approximately 41% and 39% of our total revenue respectively. Our non-Hospira domestic sales increased 5.8% to $29.3 million, compared to $27.7 million a year ago, as double-digit growth in infusion therapy and oncology products was partially offset by decreases in Critical Care and our other product category.

International sales were up 1.7% year over year to $18.9 million, representing 23.2% of our total revenue during the third quarter. The decline was primarily attributable to softness in Europe and the euro decline. As I already discussed earlier, foreign exchange from Europe negatively impacted our third-quarter sales by approximately $1.3 million.

Our gross margins for the third quarter expanded 346 points year over year to 50%. This reflects a more favorable product mix and peso exchange rate. The improvement in the peso exchange rate improved gross margins by approximately 100 basis points in the third quarter, with the product mix making up the majority of the rest of the improvement. Based on a strong dollar and improved product mix, we now expect our gross margins for the full fiscal year of 2012 to be approximately 49%, compared to our previous range of 48% to 48.5%.

SG&A expenses were $20.2 million compared to $20.4 million for the third quarter of 2011. As a percentage of sales, our SG&A expenses were down to 24.8%, compared to 26.7% a year ago. We expect SG&A as a percentage of total revenue to be approximately 26.5% for the full fiscal year of 2012, compared to our previous projection of 27%.

Our research and development expenses increased 59.2% to $3 million, compared to $1.9 million for the third quarter of 2011. This increase was in line with our expectations as we continue to invest in our existing and new products for all our target markets. We expect our research and development expenses to be about 3.5% of revenue for the full fiscal year of 2012, compared to our previous guidance of 3.3%.

Our tax rate for the third quarter was 31%. The lower than expected tax rate was due to discrete items recognized during the quarter. We expect our tax rate to be approximately 33% for the full fiscal year of 2012. Our operating income for the third quarter of 2012 increased 31.9% to $17.5 million compared to $13.3 million a year ago. Operating margins expanded 410 basis points to 21.5%, compared to 17.4% a year ago. Our EBITDA totaled $22.4 million or 27.5% of revenue, compared to $18.1 million or 23.6% of revenue for the third quarter a year ago.

Now moving to our balance sheet and cash flow. As of September 30, 2012, our balance sheet remained very strong with no debt and $204.3 million in cash, cash equivalents, and investment securities. This equates to approximately $14.18 per outstanding share. Additionally, we had $283.7 million in working capital.

During the third quarter, we generated $9.5 million in cash flow from operating activities. Our capital expenditures totaled $5 million during the quarter and primarily included machinery, equipment, and molds for our plant in the US. Days sales outstanding for the third quarter were 60 days, and we expect DSOs to be approximately 55 to 60 days in the foreseeable future.

Now let me update you on our financial guidance for the full fiscal year of 2012. Due to the decrease in the value of the euro and sluggish European economy, our drop in Critical Care business and slower growth in oncology, we are lowering our previously announced revenue guidance range for the full fiscal year of 2012. The new range is $315 million to $318 million, compared to the previous range of $318 million to $325 million.

As I already stated earlier, on a market segment basis, we expect our infusion therapy sales to increase year over year approximately 9% to 10%. We expect Critical Care to be down approximately 10% to 12%, and we expect our oncology market segment to be up approximately 20%. We expect our other category will be down approximately 15%.

We are raising our previously announced diluted earnings guidance range. The new range is $2.75 to $2.80 per share, compared to the previous range of $2.55 to $2.70 per share. The increase is primarily due to improved product mix, improved manufacturing efficiencies, and the favorable peso exchange rate.

For modeling purposes, our tax rate is expected to be 33% for 2012. And our operating cash flow is expected to be approximately $45 million to $50 million in 2012, and we believe capital expenditures will be in the range of $16 million to $19 million in 2012. Now I'd like to turn the call over for your questions.

(Operator Instructions)

Matt Dolan, ROTH Capital Partners.

Nice quarter. Hey, Scott. First question is on the gross margin. It's been up around the 50% level here for the last two quarters. So, as we look a little bit further down the road, I know you called out 100 basis points from the peso, but is there any reason that we shouldn't see not only a sustainable level here, but perhaps some improvement as we go into 2013?

Well, certainly the peso is the variable, as you mentioned. We have built in -- we expect the peso to remain at its current levels, plus or minus. The improved product mix -- that should continue. Obviously as we move forward, especially with infusion therapy and oncology doing well. So, I would expect that going forward, while we should expect to see continued improved gross margins, there is some variability in the peso and product mix. But overall, I would expect continued improvement.

Okay. And then you called out a number of variables on the revenue side of the equation for the year. Looks like you still look for an uptick sequentially in Q4. Can you talk a little bit more specifically about what you're seeing in Europe, dissect the euro from the actual volume in Europe?

And then the second part of the question is on Critical Care and some of the competitive pressures. The guidance around Critical Care has certainly bounced around this year. So, is there any end in sight, or is that going to remain unpredictable for the foreseeable future? Thanks.

Well, first of all, with Europe, if you bifurcate the euro from the market itself, we are seeing softness. The growth outside of the euro was relatively flat in Europe, and we would expect Europe to continue to be flat to slightly up. We are continuing to be very bullish on Europe and our factory over in Slovakia, and I think that, long term, that will pay dividends for us.

As far as Critical Care goes, we continue to see competitive pressures coming from the marketplace. We do have some product line gaps that we will need to fill in, as well as some product line enhancements. As you can see from the investments that we're making in R&D, a lot of that increase in expenditures is going into Critical Care, but it's going to take some time to see the fruits, if you will, of our labor. But we do believe we're on the right path. We do believe that we have the right products in the pipeline. It's just going to take some time to get them out into the marketplace.

Okay. If I can sneak one or two more in. The Hospira business popped up quite nicely sequentially in Q3. Do you have any read or visibility on the sell-through data that that's kind of a new level, or were there any one-time components to that performance?

Well, sell-through is up nicely for Hospira as well. We are continuing to keep an eye on sell-through with Hospira. Certainly Hospira going into 2013 is looking to make some improvements in the marketplace, and I think they're just getting ready and poised to do well going into 2013. But certainly don't want to speak for them.

Okay. And then last one is on the device tax. Scott, I don't know if you've looked at it, what the impact might have been in 2012, but is there any framework you could give us as we think about models for 2013? And then I'll get out of the way. Thank you.

Well, just like about everyone else, we're waiting to see how the Supreme Court ruled, so we're still getting our arms wrapped around the final details. There's a lot of work involved in preparing for this, come January 1. The 2.3% is obviously on revenue, excluding exports and certain OEM products. And so, we're still trying to whittle out what that's going to be exactly. You probably could get somewhere close with what that number's going to be, but we're not prepared to give the impact until our fourth-quarter call.

Thanks for all the time.

Larry Solow, CJS Securities.

Just a few follow-ups. Slovakia, you mentioned it, in terms of the utilization, did that bounce back down to the 35%, or can you just give us an update on that?

It is back down to the 35%.

Will increases -- are they completely dependent on an uptick in Europe, or will you still be transferring some -- will utilization still rise slowly even in a flat environment in Europe?

They are solely reliant on the European market. So, every custom set that we build for Europe -- I'm sorry, that we sell into Europe is built in Slovakia.

It's already being done in Slovakia, exactly. Okay.

Yes.

I know you don't give too much info on the R&D pipeline until products are out there. Any update maybe on Diana or anything you could speak of?

Nothing new. We are launching Diana on December 3 in the US.

December 3. Okay.

Certainly, you're always welcome to go out onto our website and take a look at Diana out there.

Okay. Then, you mentioned in terms of gross margin obviously several factors are helping drive the improvement. Sounds like absent of the variability in peso, we could still see some more improvement. How about in terms of leverage on the [EV] SG&A line. Obviously you guys have done a good job driving that down, even sequentially the last few quarters. As we look out into '13 and beyond, still room for more improvement there?

Well, we're always looking. We've always talked about getting leverage off of our investment in sales, marketing, and R&D, and you can see that we're starting to get that type of leverage. Obviously, as we grow the top line, we'll have to continue to invest in sales and marketing, but we do believe that we'll continue to get, or at least see, that type of leverage going forward. But it's not to say that we will -- we won't continue to invest in SG&A.

Right. Okay. Great. Thank you very much.

Junaid Husain, Dougherty & Company.

Scott or Doc, relative to Hospira, they recently had a warning letter at one of their facilities in the Caribbean. I believe it was Costa Rica. I don't think your products flow through that facility. But can you tell me -- is there any impact that this or other manufacturing issues at Hospira could potentially have for you guys?

We do have some product that flows through that facility. It hasn't had an impact on us, and hopefully it won't going forward.

Okay. And then, Doc, I know that you don't like talking about new products that you have in the pipeline until they've reached a certain threshold, but just kind of given the lower-than-expected guidance that you've given us, is it possible that you could -- that perhaps new products could offset a weak Europe?

Yes.

Care to elaborate?

Well, never in the history of the Company have we launched or will launch as many products as we are this year, [before] December 31. And we have a head start in Europe with our new products, for example, Diana. We have quite a head start. So, I think it's -- we're in great position.

Okay. Fair enough. And then, Scott, can you remind us for fourth quarter, I believe you typically shut down your plants at the end of December for maintenance. Are you expecting to do that again, and what kind of impact could that possibly have on margins?

Well, in our Mexico facility we do shut down for a few days, not necessarily for maintenance, but there is some slowdown due to the holidays, both in Salt Lake and in Mexico. I would imagine we will see some of that in Slovakia as well. It's not really a shutdown as much as it is just a slowdown. As far as an impact goes, I would look -- if there is going to be any impact, that would be more on the first quarter than it would be on the fourth quarter.

Got it.

At the cost of goods sold level.

Got it. Got it. Good. Thank you. That's very helpful. That's all I've got, guys. Thanks so much.

Jayson Bedford, Raymond James.

Just a couple quickies. On oncology, I think you mentioned the conversion's taking longer. Can you site a common reason for the longer sales cycle?

Well, you said it. Yes, there's -- one is budgets and one is -- the other is just market awareness. We continue to work with industry leaders in the marketplace, in educating the workforce out there, and the other is just budgets. You're asking them to go from spending nothing to something. Other than that, again, we're still up 10% year over year. We should do somewhere around $30 million this year, which is up from $24.5 million last year. So, again, just to reiterate --

I would also add that we have improved upon the first product, the Spiros, quite a bit. And we're launching that product the next couple weeks into some beta sites. So --

Exactly. As Doc mentioned, we've got new products coming out in this product line, as well as all of our other product lines.

Okay. What do you think is the trigger for the oncology market, which seems under-penetrated? I think you cited that it's your biggest growing opportunity or fastest growing opportunity. What's the trigger to really crack that market, and maybe as a question to augment that -- can you just give us an update on where the state of Washington sits?

Nothing's changed in Washington.

No.

Okay.

The key to cracking the market is to hit that inflection point that you hit with all new products that are successful. We're still in the flat line 10%, 15% line, and there hasn't been enough people, early adopters. When the early adopters completely are sold, then you hit that high slope and we just haven't hit it yet. The pharmacists and the nurses and -- they're aware of handling these drugs, but some of them are not aware of the risk. Very specifically, they don't know that such a high incidence of birth defects and such. So, I just think it's just early in the marketplace. It will hit that strategic inflection point and take off. I have no doubt about it.

We're in the first position. We're the leading Company out there with these products. And we have another product called ChemoGuard that we're beta-siting testing, and that product there I think is the first time that anybody's ever made a dry connector without a needle. And the pharmacists will love the product, so we'll see after we get through our beta-site testing. The answer to your question is -- it's early in the market life cycle.

Okay. And there has been a few comments around new products. Can you just maybe give us an idea of how many new products you expect to launch between now and year end, and maybe in 2013 as well? Thanks.

I will when they get to a certain size. They get to a $1 million size, I'll let you know. Up until then, it's -- rather not talk about them.

I guess I was just looking for the number, meaning, three, four, five, two?

I think more like six to eight.

By year end?

By year end.

Thanks. I'll get back in queue and let someone else jump on.

Mitra Ramgopal, Sidoti & Company.

Most of my questions have pretty much been answered, but I just wanted to follow up on the Critical Care business. In light of the decline you're seeing, will you attribute it more to pricing, the breadth of products you're offering, or is the solution for example to add more salespeople? I don't know if there's anything in particular you might share with us.

At the moment, it's more about -- pricing affected us the first half of the year on a year-over-year comparison, but right now it's really about filling in some of the product line gaps that we have and making a few enhancements. That's really all that is needed. In addition, we've got new products coming in that should give us additional market opportunities, and that's what we're looking for. There's definitely money to be made in this market.

Okay. Thanks again.

(Operator Instructions)

James Terwilliger, The Benchmark Company.

Congratulations on a nice quarter. My first question is going back to oncology and the conversions. I'm very excited about the opportunity you have in that market. I think that market's going to be very robust. Could you comment a little bit on, not necessarily the conversions taking longer, but a little bit on just the length of the sales cycle from when you -- to a customer to when you actually are selling product to that customer? And then secondly, is there an issue there as it relates to any type of increased investment that you may need in sales and marketing to support and develop that oncology market?

Well, first of all, the sales cycle itself varies, just depending on the hospital or the facility. It can take some time. As you may know, there are two distinct call points within the US. One being the pharmacy and the other in nursing. So, it can -- it does and can take time to get the two organizations together and on the same page, and that can be part of it.

And it's just literally going back then to the market awareness. There may be a need recognized at the facility, but they just don't have budget for it. And you've got pharmacists that are already working under vented hoods and think that that takes care of them. So, it really is just educating everybody out there to the dangers, the exposure to these hazardous drugs.

And then the second part of my question was more on the sales and marketing perspective. As you develop this market, you're most likely going to have to be investing in sales and marketing going forward.

That's why I -- right. There's Hospira, for example, distributes for us.

Hospira's been very successful in Spain in oncology, as a matter of fact.

So, as Doc just mentioned, Spain is a good example of success from Hospira, as well as we'll continue to make investments in our own sales force, as I mentioned at the beginning of the call.

Okay. And then I've got actually -- I was wondering, Dr. Lopez, if you could comment on the new product announcement, or the announcement that went out this morning concerning the NanoCLAVE just from a very high level. When I've looked at some of the clinical data with neonatal and pediatric patients, it's very positive. And then you've got three conferences coming up with that -- where that product will be featured. I was just wondering if you could comment on a high level as it relates to the NanoCLAVE.

Launch it next week at the AVA show. It's a CLAVE, but CLAVE specifically designed for neonates. It's extremely small, extremely low dead space, which the nurses require because the babies are so small, you don't want medication tied up in the connector or the tubing. It's very robust, and it doesn't cause catheter occlusion, which is a big negative. So, we're going to get -- we will make a lot of sales in neonatology for that product. We'll sell a lot.

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

Thank you. There are no further questions at this time. I'd like to turn the call over to management for any closing remarks.

Well, thank you, everyone, for participating in today's call, and we look forward to updating you on our 2012 progress on the fourth-quarter conference call in January. And as a reminder, we will be going to a number of investor conferences and marketing events over the next few months as well. 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.