ICU Medical Inc (ICUI) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ICU Medical Incorporated second-quarter 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 follow at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. John Mills of ICR. Please go ahead.

Good afternoon, everyone. Thank you for joining us today to review ICU Medical's financial results for the second quarter and six months ended June 30, 2013. On the call today representing ICU Medical is Scott Lamb, Chief Financial Officer. We will start the call with a brief review of the quarter, and Scott will discuss second-quarter financial performance, and provide financial guidance for the third-quarter and fiscal-year 2013. Finally, the Company will open the call for your questions.

Before we start, I would like to touch upon any forward-looking statements made during the call, including management's beliefs and expectations about the Company's future results. Please be aware, they are based on the best available information to management, and assumptions that management believes are reasonable. Such statements are not intended to be a representation of future results, and are subject to 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, performance, and financial conditions.

With that said, I will now turn the call over to Scott Lamb. Go ahead, Scott.

Thank you, John. Good afternoon, everyone. Before I begin, let me remind all of you that the sales numbers we are covering in this call, as well as our financial statements, are available on the investor portion of our website for your review. For the second quarter of 2013, our revenue increased 1.8% to $78.7 million, compared to $77.3 million in the same period last year. Our top line performance during the quarter was highlighted by continued robust growth in oncology, which was offset by a decrease in critical care. Net income for the second quarter of 2013 was $7.4 million or $0.48 per diluted share, as compared to net income of $9.1 million or $0.63 per diluted share for the second quarter of 2012. The decrease in our earnings per share was due to lower-than-expected revenue growth, lower gross margins of 220 basis points, an increased investment in R&D, sales and marketing, the new medical device tax, and a 4.1% increase in our diluted share count compared to the same time last year.

For the six months ended June 30, 2013, our revenue was $153 million, compared to $152.8 million in the same period last year. Net income for the six months ended June 30, 2013 was $16.1 million or $1.06 per diluted share, compared to net income of $16.8 million or $1.16 per diluted share in the corresponding period of the prior year. The decrease in our earnings per share was due to an increased investment in R&D, sales and marketing, the new medical device tax, and a 4.6% increase in our diluted share count when compared to the same period last year.

Now let me discuss our second-quarter revenue performance by market segment. You can also view our detailed market segmentation in our earnings press release. For the second quarter of 2013, sales in the infusion therapy market increased 3.3% to $53.1 million, compared to $51.5 million a year ago, and represented 68% of our total sales. The increase was attributable to robust performance of Clave and custom infusion sets, which grew 6.9% and 6%, respectively.

Sales in the critical care market were down 19.1% to $12.7 million, compared to $15.7 million a year ago, and represented 16% of our total sales. The decrease was attributable to volume, as pricing continues to stay consistent. While critical care continues to impact our top line, we started to see some encouraging signs of stabilization of this business, as critical care sales were flat compared to the first quarter of 2013. Also, on a consecutive quarter basis, sales from critical care in the first quarter of 2013 were down only 3.8%, and in the fourth quarter of 2012 they increased 1.5%.

Sales in our oncology market increased 31.7% year over year to $9.4 million, compared to $7.1 million a year ago. We are pleased with our continued growth of oncology products. For example, Diana, our recently launched oncology product in the US, has now been placed, or is waiting to be placed, in 20 US locations. We expect that oncology products will continue to grow as we convert new customers.

Our Other product category, which primarily includes products in the renal and enteral markets, increased 15% to $3.5 million, compared to $3 million a year ago, representing 4.4% of our second-quarter total revenue. This growth was primarily attributable to our Tego product line, which increased 19.7% to $2.4 million compared to $2 million a year ago.

Our second-quarter sales by distribution channel were as follows. Domestic sales of Hospira increased 4.3% to $28.3 million, compared to $27.2 million for the second quarter of 2012, and were driven by strong performance of Claves and standard oncology, offset by decreases in custom and other product lines. For the second quarter of 2013 and 2012, domestic sales to Hospira represented approximately 36% and 35.1% of our total revenue, respectively. Our non-Hospira domestic sales decreased 2.4% year over year to $28.6 million, compared to $29.2 million in the second quarter of 2012. Oncology products increased 34.4%, while infusion therapy and other product categories were up 6% and 1.5%, respectively. This growth was offset by an 18.3% decrease in critical care.

International sales were up 4.4% year over year to $21.6 million compared to $20.7 million a year ago, representing 27.5% of our total revenue during the second quarter. Our performance in international markets was driven by robust growth in oncology and other product categories, which increased 36.1% and 81.7% of international sales. Critical care was down 21.5%, and sales from infusion therapy decreased 0.8% year over year.

Our gross margins for the second quarter were 48.4%, compared to 50.6% a year ago. The decrease was primarily attributable to a stronger peso and unabsorbed factory overhead, partially offset by a favorable product mix. We expect gross margins to improve during the next two quarters, and to be approximately 49.5% for the full fiscal year of 2013.

SG&A expenses increased 1.6% to $23.2 million in the second quarter of 2013, compared to $22.8 million for the second quarter of 2012. As a percentage of revenue, our SG&A expenses were flat year over year at 29.5%. The dollar increase was primarily due to the new medical device tax. We expect SG&A as a percentage of total revenue to be in the range of 27.5% to 28% for the full fiscal year of 2013.

Our research and development expenses were up 43.1% year over year to $3.9 million, compared to $2.7 million a year ago. We project R&D expenses to be approximately 3.4% of our total revenue for the full fiscal year of 2013, which is higher than we previously expected. We are excited about the opportunities in our new product pipeline.

Our operating income for the second quarter of 2013 decreased $2.6 million to $11 million or 13.9% of sales, compared to $13.5 million or 17.5% of sales for the second quarter of 2012. Our EBITDA totaled $16 million or 20.3% of revenue, compared to $18.4 million or 23.9% of revenue for the second quarter a year ago.

Now moving to our balance sheet and cash flow. As of June 30, 2013, our balance sheet remains very strong with no debt, and $244 million in cash, cash equivalents and investment securities. This equates to approximately $16.66 per outstanding share. Additionally, we had $318.2 million in working capital. During the second quarter of 2013, we generated $15.2 million in cash flow from operating activities. Our capital expenditures totaled $6 million, and primarily included machinery, equipment, and molds for our plant in the US. Days sales outstanding for the second quarter were 57 days, and we expect DSOs to be approximately 55 to 60 days in the foreseeable future. Our inventory turns continue to run about 4 times.

Now, let me update you on our financial guidance for the third-quarter and fiscal-year 2013. For the third quarter of 2013, we expect our revenues to be in the range of $82 million to $84 million, and we expect our diluted earnings per share to be in the range of $0.65 to $0.70.

Now moving to our annual guidance. Due to softness in the critical care market, a slight year-over-year decrease that we now expect in sales to Hospira for the full fiscal year, which includes the inventory adjustment from the first quarter, and a shift in the timing of conversions from new business in both the infusion therapy and oncology markets, we are adjusting our previously issued revenue and earnings guidance. For the full fiscal year of 2013, we now expect to generate revenue in the range of $320 million to $325 million, compared to the previous guidance of $330 million to $337 million.

On the market segment basis, we expect our infusion therapy sales to increase year over year approximately 2% to 4%. We expect critical care to be down approximately 8%, and we expect our oncology market segment to be up approximately 22% to 27%. We expect our Other product category to be down approximately 20%.

We expect our diluted earnings to be in the range of $2.50 to $2.60 per share, compared to the previous guidance of $2.70 to $2.85 per share. This incorporates the medical device tax expense, which we still estimate to be approximately 0.6% of our total revenue. Excluding the medical tax, our guidance would have been in the range of $2.58 to $2.68 per diluted share for fiscal 2013.

At the end of June, we had 108 domestic sales reps and 43 OUS sales reps, and plan to add approximately 12 additional salespeople worldwide. Also, our tax rate is expected to be approximately 34%, excluding first quarter's discrete item of approximately $600,000. Including the discrete item, our tax rate is expected to be approximately 33% for the year. Our operating cash flow is expected to be approximately $45 million to $50 million in 2013.

Our two main manufacturing facilities in Salt Lake City, Utah and Ensenada, Mexico are now both at approximately 85% capacity. And later this year, we will begin to expand the manufacturing square footage at Salt Lake City to accommodate expected future growth. Our Slovakia plant is now approximately at 40% capacity. We expect 2013 capital expenditures will be $23 million to $28 million, which are primarily for manufacturing capacity expansion, tooling and equipment for new products, and also include maintenance costs of approximately $14 million.

And with that, I would like to turn the call over to your questions.

(Operator Instructions)

And our first question comes from the line of Jayson Bedford with Raymond James. Your line is open.

Hi, Scott. Can you hear me?

I can hear you just fine, Jayson.

Okay. I hate to start off with this question, but I think it is relevant. Obviously, there is a lot of rumors swirling around in the quarter. And so, I just wanted you to comment on whether or not you have hired a bank to explore strategic alternatives?

As you know, Jayson, we just don't comment on market speculation or rumors.

Okay. I guess then, related to the business in the quarter, obviously, it didn't turn out the way you had expected from a guidance perspective. Can you just give us a little more color as to -- it looked like the miss, at least relative to our numbers was kind of broad-based. But why was the business slower than you expected in the quarter?

Well, first to start off with, as I explained in the call, critical care was a little bit disappointing. It was down a little bit more than we had expected. As I also mentioned, it appears that we have reached the point where it seems to be stabilized around that $13 million mark. Our conversions that we still expect for new business, we are still seeing them in the forecast, in the pipelines, and the backlog. They are just shifting to the right a bit. And then the overall guidance we brought down, we are seeing Hospira down slightly from our previous expectation. Nothing certainly significant, but still down nonetheless as we get closer to the end of the year, and get more firm orders coming from them.

Was -- so if I look at the variance in the quarter here, did Hospira -related revenue come in lighter than you expected, or was it your non-Hospira revenue that came in lighter than expected, just in the quarter?

Primarily in the quarter, it was our non-Hospira revenue that seems to be shifting out to the right just a bit. But overall for the year, from our previous expectations, Hospira, we expect now to be down slightly.

Okay. And in IV therapy, I have always thought of that as a pretty consistent business. I think your old guidance was in the 6% range. Now it is 2% to 4%. I am guessing the drop-down in Hospira can explain some of that. But have you lost a little share, or is it more market sluggishness that is impacting that?

I certainly wouldn't characterize it as either, as much as -- just again, what we are forecasting in new conversions, new customers, is just shifting to the right a little bit. But there has not been any share loss.

Okay. And then, I guess the last question for me, and then I will jump back in queue. In terms of the added reps, I think you said you were going to add 12 people worldwide. I thought that was a similar number starting the year. So have you not yet hired those folks that you thought you would have?

Not yet. We are still in the process. It is going a little bit slower than expected. But I am certain the second half of this year, we are going to get on that, and do a better job at hiring.

Did you hire any new reps in the quarter?

I think net, we are about where we were at the second quarter, give or take one or two.

Okay, thanks. I will jump back in queue.

You are welcome.

Our next question comes from the line of Thom Gunderson with Piper Jaffray. Your line is open.

Hi. Good afternoon, Scott.

Hi, Thom.

Hi. So on the hiring of the new reps, it is going slower than expected. You said it was going slower than expected on our last call. I guess, I am talking a little more about the elephant in the room that Jayson mentioned. Regardless of commenting on market speculation or rumors, it was a dominant part of our side of the business on ICUI since May 8, I think. Were you distracted in any way by all the swirling around, and the [arbs] and the commentary in the calls, et cetera, that might have slowed some of these things down, or shifted to the right as you say?

Well, again, the reasons for not hiring vary. It is certainly something that we expect to do a better job of, and starting in the third quarter. And that is just something that we are focused on, in adding those additional salespeople to go after those additional opportunities that we see. Not only in oncology, but in other parts of the market, as well. And that is where our focus is.

Okay. So, no real distraction from your standpoint?

Well, like I said, we are just focusing in on the business.

Got it.

As always.

And then, if I look at the news release and fiscal year 2013 guidance, the first phrase is, due to current business trends. And you gave -- you talked to Jayson a little bit about critical care being down more than you thought, and some things going a little slower. But are there any, between end of April and mid July, or mid April to mid July, what really shifted from a trend standpoint that you can say, this is why things were going slower than we really thought?

Sure. That is actually a great question. And critical care, those orders generally come in on 3-week turnaround. And so we have less visibility into future sales, particularly here in the US on critical care. The rest of the business, oncology, as you can see is going -- continues to do very well. Infusion therapy did well, but not as quite as well as expected. And that was due, primarily what I told Jason, which was that was the timing of these conversions, the backlog of these conversions.

And you don't see anything that changes the conversions. It's just taking longer. And so you move a little into third quarter, and that moves a little into fourth quarter, and whatever was in fourth quarter moves out to next year? Is that all this is?

Exactly.

All right.

Yes, absolutely. It is just the nature of the beast.

Okay. And then one last question, sort of a general question on international. And that is, are you seeing anything out there that makes it any different for you, on the international front, the global front. Is anything particularly slow, or any parts of the world picking up more or less than you thought?

Asia seems to have slowed down a bit. We are still growing in most places outside the US. Europe continues to be hard-fought. But we are seeing growth there as well, which I think -- at least qualitative and probably quantitatively is better than a lot of companies in our space are doing these days. So, it is getting a little more hard-fought out there, but nothing that we can't overcome or that we are not pushing through.

Got it. Thanks for the time.

You're welcome.

(Operator Instructions)

Our next question comes from the line Mitra Ramgopal with Sidoti. Your line is open.

Yes, hi. Good afternoon. Just a few questions, Scott. First on the gross margin, I know it came in about 220 basis points. How much of that would you attribute to the peso verses the overhead? And how much do you think was being offset by mix?

Well, for the peso, it was around 82 basis points, and favorable mix was about -- 140 to 150 basis points. And then the rest was in manufacturing. Product mix was favorable. Peso was unfavorable by about 82 basis points, and the rest was manufacturing absorption.

Okay, thanks. And with regards to the revenue guidance coming in a little, how much again would you attribute that to the timing of new business, versus Hospira maybe pushing out -- or softer orders there, and critical care being a little weaker than expected?

Well, it is a combination of all three. Hospira is just down slightly from our expectations both in oncology and infusion therapy, but still doing well. I think overall Hospira is doing well. And then, critical care was a little bit of a disappointment. I won't kid you. It -- however, if you look at the trend, it appears that we are settling in at about that $13 million per quarter. I think we are fairly confident going forward that, that is where we can maintain until some of the newer products come out.

And then it is really again, it is just the -- if we look at the backlog of conversions that we are either forecasting or have scheduled. Some of that just is shifting to the right, and that is pretty much it. And that -- those conversions are both in oncology and infusion.

Okay, thanks. And again, I think you mentioned Slovakia was running at about 40%. Given what you are seeing in Europe, where should we sort of expect that number to be by year-end?

Well, Europe, I think we are doing better there. We got a little bit of a bump, a positive bump from the euro in the quarter. But all things being equal, I think that Europe will continue to maintain and grow. Not at the rates that we have in the past, but most people are not growing at those type of rates. So again it is, I think we are doing fairly well in Europe, all things considered.

Okay, thanks. And finally, on the question, on new products. You did touch on Diana earlier, regarding the backlog, et cetera. How many systems are -- I don't know if you can share with us how many systems are pretty much out there -- and give us the sense of the overall market potential you are looking at?

Well, if you are in the US, which is really a big focus of ours right now, we just have a few that we placed out there. Like I said, we expect to have placed, or will have placed up to 20 here within the next few months. And I can tell you that those places that we are going into, they are very excited to trial Diana.

Okay. Thanks, again.

You're welcome.

And I am not showing any further questions at this time. I would like to turn the call back to Mr. John Mills for closing remarks.

Thank you for participating in today's call, and we look forward to updating you on our 2013 progress on the third quarter call in October. We also expect to be attending a few conferences and marketing trips in the back half of this year, and hope to see you there. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.