ICU Medical Inc (ICUI) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2014 ICU Medical Incorporated Earnings conference call.

(Operator instructions)

As a reminder, this conference may be recorded.

I would now like to turn the conference over to our host of today's call, Mr. John Mills.

You may begin.

Thank you.

Good afternoon, everyone. Thank you for joining us today to review ICU Medical Financial Results for the First Quarter ended March 31, 2014. On the call today representing ICU Medical is Vivek Jain, Chief Executive Officer and Chairman, and Scott Lamb, Chief Financial Officer.

Vivek will start the call with a brief overview, and then Scott will discuss first-quarter financial performance and provide financial guidance for the second quarter and full year of 2014. Finally, the Company will open the call for questions.

Before we start, I want to touch upon any forward-looking statements made during the call, including management's beliefs and expectations about the Company's future results.

Please be aware, they are based on the best available information to management and assumptions that management believes are reasonable. Such statements are not intended to be a representation of future results and are subject to 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.

Please note that during today's call, we will discuss non-GAAP financial measures, including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency into ICU's ongoing results of operations, particularly in comparing underlying results from period to period.

With that said, I will now turn the call to Vivek Jain.

Go ahead, Vivek.

Thanks, John.

Good afternoon, everybody.

Our first-quarter results were largely as we expected. We generated strong cash flow and adjusted EBITDA, and we continue to be comfortable with our guidance for the full year of 2014.

We have a number of areas that are performing well including, in order of priority, our US Direct Infusion business, our Oncology business, and our International Sales channels. And we have two discrete areas that have to improve consistently.

I have been in the Company now for about three months, and have been quickly getting up to speed with the team.

I have been able to meet many of our important customers, our channel partners around the world, have gotten to know our sales teams, held onsite reviews of our manufacturing platforms and quality systems, and get into the details of our financial situation about where we drive cash returns.

And ultimately, I've been able to test my hypotheses on the value drivers within the Company that I mentioned on the last call.

With a little bit of time now under my belt, I feel like the core value drivers are solid and largely in line with what I outlined on the last call. Just to go over it again, there were three main value drivers I believed when joining. And they all feel right today, and I wanted to quickly run through them again.

First, ICU was one of the world's most competitive manufacturers of infusion disposable products at the right quality and cost levels with the ability to offer customization that the customer deeply values, which stem from a set of operational processes and capital investments that are difficult for others to reproduce.

Second, we participate in important sticky markets, where macro tailwinds are pushing parts of the business forward. Examples of this are the handling of dangerous oncology drug products, where there's an expanding need for safer medical devices to take clinicians out of harm's way and the global recognition of patient safety in infusion therapy. We bring high clinical and economic value to these areas.

And lastly, we have a healthy financial profile with good adjusted EBITDA and cash conversions and a strong balance sheet. The $20 cash per share is self-evident and growing. And even in the face of some discrete headwinds, we've continued to generate good cash flow.

I am deeply focused on our adjusted EBITDA and operating cash flows, which are due to an entrenched set of customers where switching, crossed, and training are significant.

In addition to confirming these views I had going in, I did find that we have a number of basic operational areas to improve our performance. We have inefficiencies and poor execution in spots.

And I think some of these, certainly those that relate to inefficiencies in the way we've run the business, with just some basic operational rigor can be improved in the near to medium term.

As I said in the last call, I thought ICU was a Company that was big enough to be big and small enough to be small. We are a big player in the category and can expand our global reach, but we have an income statement that is able to be influenced quickly. Just some basic operational improvements can make a meaningful impact on our P&L.

As we talked about on the last call, the Company's been in what we call the prolonged transition period. It's likely not a surprise during these transition periods, companies don't make the marginal investment when they're unsure about the long term.

We need to solidify some areas. So there will be a period of reinvestment and reallocation into certain must-do areas to keep us competitive and create additional value.

The other key issue in this transition has been the volatility in the US infusion landscape. I continue to view that situation as temporal, as after having spent time with our OEM partners, I believe our partners are doing everything they can to win.

But the short-term impacts of the issues are real, and it's important to be realistic about them on our P&L.

So with all of that said, I wanted to try to bookend the two basic scenarios as I see the range of plans unfolding for ICU Medical in 2015.

In the best case, we will have better execution to improve our top line performance, responsibly deploy capital, drive operational improvement, and explore returning capital to shareholders to the extent it makes sense. In the worst-case, we will continue to fight headwinds on the top line; but we can still drive operational improvements and more actively explore returning capital to shareholders.

There is no question to me that either one of those cases is value creating relative to where we are today. It is just too soon to know where the pieces are going to fall to perfect this scenario.

I believe either scenario would drive more cash flow generation and returns to shareholders than we have to date. We are keenly aware of when we need to start these activities to make sure they're fully in our 2015 results.

We are not going to want to get into the specifics of those activities today, as they're not fully fleshed out. But we will provide more color as the year progresses.

I will say our goal is to have at least $10 million of improvement in our cash flow, or roughly 15%, in 2015, assuming flat revenues. And that's based on a series of small, individual, operational improvement projects.

While there is much work to be done, I think there are a lot of positive drivers and some tailwinds pushing parts of the business forward. And the range of plans is starting to come together.

I have a lot of confidence in the long-term value creation due to the confluence of our platforms, increasing global reach, ability to renovate and reprioritize, and strong balance sheet power.

In the short term, we will have some bumps. We will overcome them; we will emerge stronger. I look forward to working with you and all of my colleagues at ICU over the next number of years.

On our next call, we will provide you with more color on the near-term operational improvements and how they will improve our overall returns.

With that, I'll turn it over to Scott.

Thanks, Vivek.

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.

On our last conference call, we explained how we will begin to provide additional metrics to measure our current and future results. On today's call, we will discuss non-GAAP financial measures, including results and guidance on adjusted earnings per share and adjusted EBITDA basis.

We believe these adjusted financial measures provide a more complete analysis of cash flow performance and greater transparency into our results of operations. Our management team utilizes adjusted financial measures internally to run our business.

We have included reconciliations of these non-GAAP measures with today's release, and plan on providing as much detail as possible on any adjustments that are added back.

We have steady, comparable medical device companies, and saw the majority of these companies that were providing adjusted financial measures. We feel that it is important to provide these measures as we begin to exit our transition period. Specifically, there were certain reasons why we believe this change made sense.

First of all, the Company had not made a senior officer level hire from the outside in over five years. And the majority of the senior team is homegrown, which is a good thing; but we did and do need some roles filled from the outside.

With Vivek's hire and the potential for others, for the first time we have unique upfront stock issuance that we did not have in prior periods. In addition, it's important to note the majority of these options are, and will be, performance-based and only realized if the Company achieves value creation for the shareholders first.

Second, as we seek to improve operating performance, it is likely we will have one-time costs to reduce inefficiencies. We have never had those types of situations here.

Lastly, we have never significantly pursued deployment of our capital. We want to make sure we responsibly deploy capital. And while nothing is imminent, we have never had significant expenses in prior periods.

Again, going forward, we will provide as much detail as possible on any adjustments. Those key adjustments we are talking about include stock compensation expense, restructuring, and transaction-related costs.

So, on to reporting our Q1 results.

During the first quarter, we achieved growth in all areas, except our OEM business. Our first-quarter 2014 revenue was $73 million, down approximately $1 million from last year.

First-quarter 2014 adjusted EBITDA was $17 million, compared to $19 million in the same period last year. The decline was primarily due to a decline in revenue and an increase in R&D expenditures.

Adjusted EBITDA is excluding approximately $2 million in stock compensation expense in the first quarter.

Adjusted diluted earnings per share for the first quarter 2014 was $0.72, compared to $0.81 for the first quarter of 2013.

GAAP net income for the first quarter was $6.7 million, or $0.43 per diluted share, as compared to GAAP net income of $8.7 million, or $0.58 per diluted share, for the first quarter last year.

Our first-quarter net income was also impacted by a higher tax rate of 34%, compared to the same-period-last-year-rate of 28.8%, which included discrete items. Please refer to our press release for a detailed reconciliation table comparing our adjusted EPS to GAAP EPS.

Now, let me discuss our first-quarter revenue performance by business segment. You can also view our detailed business segmentation in our earnings press release.

For the first-quarter, sales in Infusion Therapy decreased 5%, to $51 million, and represented 69% of our total sales. Direct Infusion Therapy grew 3%, and was offset by a decrease in our OEM sales of 13%.

In order to improve and streamline our reporting process, we have combined our products previously recorded under the Other category into Infusion Therapy. Our Other category is now less than $500,000 and represents items such as royalties.

Sales in Oncology increased 10% year over year, to $9 million, compared to $8 million a year ago. And Oncology represented 12% of revenue.

Sales in Critical Care increased 4%, to $13 million, and represented 18% of our sales. This increase was attributable primarily to volume outside the US.

Our first-quarter sales for Domestic and International were as follows.

Domestic sales were down 6%, to $49 million, for the first quarter when compared to $52 million for the same period last year. The primary reason for this decline was our US OEM business.

International sales were up 10%, to $24 million, compared to $22 million last year. The increase was driven by Infusion, Oncology, and Critical Care across most of our sales channels.

Our gross margin for the first quarter was 49.2%, compared to 49.5% last year, primarily reflecting higher freight costs and less-favorable product mix.

SG&A expenses decreased to $22.5 million, compared to $22.9 million last year.

Our Research and Development expenses increased 91% year over year, to $3.6 million, as we continue to invest in organic growth opportunities in all our primary business segments. As we stated on our fourth-quarter call, we continue to invest in innovation and new products throughout 2014.

Moving to our balance sheet and cash flow.

As of the end of March, our balance sheet remained very strong, with no debt. And we increased our cash and cash equivalents, and investment securities to $304 million. This equates to approximately $20 per outstanding share.

Now, let me update you on our second-quarter and full-year guidance for 2014.

For the second quarter, we expect revenues to be in the range of $73 million to $75 million.

We expect our adjusted diluted earnings per share to be between $0.54 and $0.58, and GAAP earnings per share to be between $0.32 and $0.36. Lower than our first-quarter results, due largely to the cost of additional resources and a full quarter of higher stock compensation expense.

We are reaffirming now our previously-announced annual guidance, and expect to generate revenue in the range of $285 million to $300 million. Our guidance takes into account expected continued growth in our Direct Infusion, Oncology, and our International business.

We believe this growth will likely be offset by continued weakness in our US OEM business and in the back half of the year, as we mentioned on our last call.

We continue to expect our adjusted fully diluted earnings for 2014 to be in the range of $2.45 to $2.75. And adjusted EBITDA to be the range of $58 million to $65 million.

We expect GAAP fully diluted earnings to be in the range of $1.15 to $1.45. And you can find a reconciliation of these metrics in our press release and on our website.

We expect Overall Infusion Therapy sales to decrease 7% to 12%. We expect Critical Care sales to decrease 7% to 14%, and we expect Oncology sales to grow above 10%.

We expect gross margins to be approximately 50%. And we expect SG&A to be approximately 34% to 36% of revenue.

We also expect Research and Development spend to be slightly more than 2013. And for modeling purposes, we expect our tax rate to be approximately 34%. In addition, we expect our CapEx to start declining in 2015.

We are pleased with our results in the first quarter and some of the improvements we are seeing in our business, as we've stated already. 2014 will be a transition year for our Business. But we are confident that we will return to profitable growth.

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

Certainly.

(Operator instructions)

Chris Lewis, Roth capital partners.

Hello guys, good afternoon.

Hello Chris.

First, Vivek, I appreciate the color just on your kind of initial takeaways from the review of the business. I was hoping you could talk a little bit more on your takeaways with the OEM channel partners.

What gives you confidence that that is going to end up working out over the longer term? What have you learned about the partner there in your three months? And then, what you doing to support that partner to help accelerate improvements in that area?

I think that's a really important question. First of all, I think just at a urgency level, all of our partners, and certainly our largest ones are deeply focused on the issues they may have. I've spent some time with our customers and they are adding a lot of resources and a lot of focus to improving themselves.

And so that gives us some confidence. Ultimately, we don't control it. I think there is pretty good history and data out there when people have been in these situations, how long it takes to remediate oneself. And, they're certainly along in the journey.

For us to support them, I think is just to make sure we can deliver the highest quality products, and continue to innovate with the right amount of reliability that they can count on and that is ultimately what we're trying to do. At some level, it is in their hands. For us, it's about making sure that they are doing everything that they can do to win, and certainly from what I've seen so far, I feel better about that today than the day I joined.

And then on the guidance, first-quarter, particularly on the GAAP number came in quite a bit above where we were in most of the street. So, as we kind of look out, I think first quarter is typically been the seasonally weakest quarter for the company. So, if you just annualize that it gets you far above the top end of your GAAP EPS range for the year.

So, maybe walk us through what is embedded during the rest of the year. Or kind of what I am missing? That revenue guidance number isn't ticked up.

Sure. That's a good question, Chris.

So first of all, what is not in the first quarter, as I've mentioned, full quarter's worth of stock compensation expense. As we also mentioned on the call, there is additional resources that we are going to incur going forward. We have a handful of additional people that we are looking to bring on. And so, that is going to increase the cost.

Second half of the year is looking maybe little bit bumpy, and so that's built into the guidance as well. It's really that simple. There's not a lot more to it than that.

All right. And then can you talk about the oncology space? You brought down outlook a little bit for the year. Still growing double digits, which is nice.

But, maybe just talk about the competitive landscape in that market? It seems it is getting a bit more crowded, so how should we think about that going forward as you move ahead? Thanks.

I think what is really exciting about the oncology market is it is a conversion market and so the category is largely being created. And, it is moving away from people, from legacy techniques to using safer products, and that is one of the few places that is still happening out there. So, it naturally attracts more competitors. I think were very early, Dr. Lopez, the founder of this Company and the team here, did a great job of figuring out oncology early and getting into the market. So, I think we're pretty entrenched there.

I think if you actually look at the data on competitive shares, it hasn't changed that much over the last year or two, even with the new entrants. But I don't think we are naive or approaches any hubris because it is an exciting market, there are new people coming. And so when we talk about resource allocation and tilting our own investments, it is an area that we are likely going to try to deploy more resources towards over time, not less, because it is deeply valuable.

Okay. Thanks for the time.

Larry Solow, CJS Securities.

Thanks. Good afternoon. Just following up on Chris's questions, Vivek, maybe just a high-level type of question [prospare] Now that you have been there for a few months and you've had a chance to look more under the hood, what would you say are some of the positive surprises that really excite you? And on the flip side, what are some of the negatives that maybe you weren't aware of or maybe that the company really needs to improve on most?

Sure. I think the positives, and it depends whether it is a positive or negative. A short-term operational positive is there are things the company hasn't done particularly well.

Just in the complexity we have and the way we contract, we distribute our product sometimes. The amount of people involved between our product and the end customer, there's lots of different pieces that we can run ourselves better on.

So, while that is a negative for me, I see that as an opportunity because it's basic operational stuff. Pricing is another one of those dynamics. And a lot of things we do in the custom business truly are custom, and we make sure we get price more in line with value, so to speak. So, I think there are some opportunities that just did not have to be attacked because there were a lot of good things going on, rising all boats, and now they do need to be attacked.

I think operationally, the additional surprise or the continued delight I find is really around the strength and quality of our manufacturing platforms. And the efficiencies that they offer if we can drive more volume and more scale into them.

So, when I was trying to bookend the pieces of the puzzle, we were trying to bookend that with assuming flat revenues in the worst-case, what we can do from an operating perspective. If we can figure out how to drive more volume through our factories, the economic power of that is really appealing. So, how powerful it is I guess I would consider it an incremental surprise. I knew this company was very good at it, and I didn't realize the economies of scale around that.

And then from a -- I guess jumping back little bit to something more on the negative side, its just the core operational processes and the core accountability around sales and marketing execution and performance. We have great people with deep customer relationships. As you grow up a little bit, the Company used to run them in a bit more formal manner and keep rejuvenating things a little bit and developing marketing programs, and we get away from that. That's near where I'm spending a lot of my time too, because that ultimately is how you drive the top line.

Does that make sense?

Absolutely. Then on Hospira, are they still losing share?

I mean, can you give us any update on sort of where they stand with their Costa Rica facility? And does the back half of your sales guidance trickling down a little more, is that because some of the contracts that they have already lost just take a little time to convert?

I think I really don't want to comment on somebody's market share. I think you should just review the publicly available information on their company and the other people in that space.

I do think we are trying to adequately handicap, if there have been losses of new pump placements of new deals only. What would the knock on -- we're downstream of that on some portion of the products. What are the knock on effects for that?

It's a little difficult to triangulate, because we're not sitting at tables, so this is our best attempt. That's what we're putting in for the back half of the year.

Okay and then the oncology sales declined over a slower growth rate. Is that just a delay in conversions? Or is it competitive? Are sales Hospira's supplying, is that an issue too?

I think it's much more that it -- look, it's double digits. Whether it is 10% or 13%, I felt is a little too granular. (multiple speakers)

Absolutely.

In a very small line item, just on the other hand, critical care is doing a little better than we put the guidance out and we are not overestimating that because of anything we have done, per se. On net, between critical care and oncology, I think its a wash. I just felt like we're getting too specific giving prime numbers as a guidance around oncology.

Got you, okay, great. Thank you.

Jayson Bedford of Raymond James.

Hello guys this is Mike calling in for Jason. Can you hear me okay?

Perfectly.

Great, thank you. Vivek, you just touched on this briefly, but on the critical care business a little better than expected in the quarter, guidance is still down double-digits at the midpoint. Are you just being cautious there, or is there anything new competitive -- with your competitor in terms of price or volume share?

I think critical care so far is the area were, candidly Mike, I've spent the least amount of time. I would not say the nice little bump off the bottom is because we have done anything differently. I think it was just some random ordering patterns and timing from international, so critical care there, we've still got to get to. I don't think we have any different assumptions today around that.

Okay, great. And then, Scott, when we saw you in December, ChemoLock was a new product you were releasing. Is that in the full launch yet, or is that still yet be fully launched?

We have a lot of great product existing in oncology. We have got some new ones, such as ChemoLock, that we have been talking about that is being received very well. But, it's just another one of the many very good products that we have within that space.

So, we look at it as one more piece of the puzzle as far as our product offering goes. So, I think that oncology we have some of the best products in that space and ChemoLock is just another example of that.

Okay. And then lastly, some housekeeping.

I know the GAAP EPS guidance isn't changed, but it looks like there is a difference between the non-GAAP EPS guidance on last quarter's call and the guidance in the release. Can you provide the difference between those numbers?

Yes. If you remember on the last quarter call, that was the first time that we had come out with non-GAAP measurements. And, we had not done a full reconciliation of the GAAP to non-GAAP in the first quarter. So, what you are saying here now is that full reconciliation.

Is there another expense in there besides the stock-based comp that is being excluded from non-GAAP?

Last quarter there were a few other items. It was primarily stock-based compensation, but there are a few other items. And, what we have seen -- what you see now on the reconciliation is the true line item reconciliation between the two measurements.

Okay. Thank you.

Mitra Ramgopal, Sidoti & Company

Hello, good afternoon. First, Vivek, I don't know if it's a little too early to talk about this, but as you have had your discussions with OEM partners etc., are you committed to the status quo in terms of dealing with exclusively almost one OEM? Or are you prepared to expand that?

I think the answer is -- the simplest way I think about it is, it is really on a market by market basis. And so, it is choosing where it matters in the right geography on a market by market basis. So where our products are delivered to a customer in an integrated fashion, where other products are sold alongside of it or contracted alongside of it, it makes sense to have the best partner in that particular geography. Where the parts are sold individually and competed for on exactly their own two legs, we can compete very effectively without a partner.

So, I think what we're doing is really looking at it much more granularly on a market by market basis than saying if there's one partner that fits all sizes for all shapes and places. If you kind of read our financial statements, you are seeing pretty nice international growth. And we're spending a lot of time trying to figure out in each individual market around the world what is the right way to get our products to market.

Great. That's great. That actually brings me to my next question.

Given the strength you are seeing on the international side, I don't know if you could give us some more color where it's coming from, and maybe an update on what is going on in the Slovakia facility in terms of the capacity it is running at? And again, in terms of the hiring, if its going to be -- I know you talked about bringing in some senior people potentially. Is it going be also for the international side?

I think, first of all, just to take on the expense fees. We are being very cautious on any fixed cost long-term investments. So we want to have a beat on making sure we know exactly what costs and operational improvements can be realized in 2015, the range of scenarios on revenue. And when we feel like we have that locked down then we will take a little bit more steps in bringing permanent costs in, and so I don't want to assume that is all happening right now.

In terms of where the growth is coming from, it's pretty balanced. I have been pleased here at -- we obviously talk about just international versus US. Our international business is really a well-rounded portfolio between Asia, Europe, and Latin America. And, I think this little company has done a nice job of building those channels. Frankly, without a lot of resources to try to mine them.

And so, that is an area that is earmarked for how do we invest a little bit to keep growing. Because a lot of our technologies, just like we talked about market creation in oncology, in a lot of those markets there is still basic core market creation an a need for access connectors. So, we ought to participate in that, and given our manufacturing platforms are cost advantages, we can make some hay there, so let's invest and make that happen. So, I think it's actually very balanced for our international businesses around the world.

Thanks, that's great. And finally, actually relates to the guidance and the deployment of capital, I'm assuming there are no acquisitions being factored into the guidance.

That's correct.

Yes, I think the message we were trying to say on the bookends on the book best case of the worst case -- in the best case, we are going to responsibly deploy capital and we stand on the track records we have of doing those things. In the worst-case, we recognize that we run a relatively inefficient capital structure here, and sooner or later the needs to be resolved. So, I think we are very aware of the situation.

And again I know it's a little early, but as you look at deployment of capital, if you could remind us if the buy's is sort of strengthening your existing segments or is it sort of opening up some new channels, potentially?

I think about deals in two dimensions. Both up and down the staircase a little bit. I think it is very easy to imagine a scenario where we would spend a little bit of capital to possibly forward integrate into our distribution channels and control how to get closer to the customer in some of these spots globally.

And, those are not big things, or they're small things but they're very logical as a small company tries to grow. And then there's larger or midsize opportunities, and I think there we have to be very cautious for the same reasons we talked about on the last call. This company does not have a ton of infrastructure to be able to handle that kind of work.

And, in some regards, we would have to probably look at things or even more freestanding businesses, but it scares me to go too far away from what is our core today of really manufacturing well, being a great OEM supplier, being a great direct sales company in certain markets, around these devices. So, two steps away, I feel like we might not bring a lot of value to the equation. So, we're going be patient and disciplined about that.

Okay, thanks again.

I'm showing no further questions at this time. I would now like to turn the call over to Scott Lamb, CFO for closing remarks.

Great. Well, thank you very much for joining us today, and we look forward to updating you on our 2014 progress on the second quarter call in August.

Thanks everybody, appreciate the interest.

Ladies and gentlemen this concludes today's conference. Thank you for your participation and have a wonderful day.