Moog Inc (MOG.B) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Zevex fourth quarter and year end 2003 conference call. My name is Liz and I will be your coordinator for today. At this time, all participants are in a listen only mode. We will, however, be facilitating a question-and-answer session towards the end of the conference. If at any time during the call you require assistance, simply key star followed by 0 and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn your presentation over to your host for today's call, Miss Genevieve Sanchez, Investor Relations Coordinator. Please go ahead.

Thank you Liz. Good morning, everyone, and thank you for participating in today's conference call. Joining me today are Chairman and Chief Executive Officer David McNally and Chief Financial Officer Phil McStotts to discuss our 2003 year end financial results. Early this morning Zevex released financial results for the 2003 fourth quarter and year end. If you have not received the news release or if you'd like to be added to the Company's fax and e-mail list please contact me at 801-264-1001, ext. 203. All recent news releases can be accessed via the investor relations section of the web site which is www.zevex.com. Also this conference call is available for replay and the telephone number for the replay is 888-286-8010 and the pass code number is 60708313. This information also appears on our conference call press release.

Before we precede any further, it is my duty to inform you that comments made by management during this conference call will contain forward-looking statements that involve risks and uncertainties regarding the future results of Zevex International. Please refer to the Company's filings with the Securities and Exchange Commission including the Company's form 10-Ks for the years ended December 31st, 2002 and 2003 and form 10-Q for the first three-quarters of 2003. These filings identify specific risk factors that may cause actual results to differ materially from those described in forward-looking statements.

Now I'd like to turn call over to Dave McNally, our CEO. Dave.

Thank you, Genevieve. Good morning, listeners, and welcome to our year-end conference call. We view last year as a turning point for the Company. We finished the year by simplifying the Company in order to focus on the businesses that have the best prospects for our growth and profitability. Unfortunately, the actions that we took resulted in a huge loss for the year.

We believe that loss is a onetime event and that we have set the stage for a profitable future. On December 31st, we sold our Physical Evaluation business which we had acquired in 1998. After five years of operating this business with high expectations for growth, it became evident that it would take substantial additional investment to have a chance of realizing our expectations.

After careful consideration, we decided the risk outweighed the potential benefits of keeping the business as part of Zevex. We then sold the business back to one of the original owners for a substantial loss. The two businesses that we have committed to are the Therapeutics Division and the Applied Technology division. Our Therapeutics Division markets award-winning clinical nutrition delivery devices including enteral feeding pumps, disposable sets and accessories. We're focused globally on the home health-care market which due to the aging population and pressure on controlling health-care costs is the fastest-growing market segment for clinical nutrition delivery devices.

Our Applied Technology division develops and manufactures medical device components and systems under private labels for many of the world's leading original equipment manufacturers. Our core competencies include optoelectronics, ultrasound and fluid delivery systems. We make surgical tools, components, and systems that improved the safety and effectiveness of cataract surgery, open heart surgery, colon resection, organ transplantation, dialysis, blood component harvesting and infusion therapies.

Last year, sales of our Applied Technology division grew by 8 percent over the prior year and therapeutics division sales grew by 2 percent. In our focus market segment of home health-care, therapeutics sales grew by 8 percent in the U.S. and sales doubled internationally.

Before I provide more insight into our sales performance and prospects, I'd like to turn the call over to Chief Financial Officer Phil McStotts who will provide detail on our financial results and the financial aspects of our restructuring.

Good morning, everyone. Revenue for the fourth quarter of 2003 was 6.3 million compared to 7.1 million for the fourth quarter of 2002. The revenue decline is primarily related to a $250,000 decrease in stationery enteral feeding product sales and a $450,000 decrease in Physical Evaluation product sales. For the fourth quarter of 2003, the Company had a net loss of $8 million compared with net income of 31,000 for the fourth quarter of 2002. The fully diluted loss per share for the fourth quarter was $2.36 compared to earnings per share of 1 cent for the fourth quarter of 2002.

During the fourth quarter of 2003, in response to the changing marketplace of our business segment, we evaluated our business opportunities, modified our strategies to focus on core market offerings of Ambulatory Enteral Feeding and specialized contract manufacturing services. In this process we sold our Physical Evaluation business which resulted in a loss of approximately 4.7 million.

We also reevaluated our reporting units and determined that the stationery and ambulatory enteral product line which comprised our therapeutics division should be disaggregated. Two product lines have now become separate recording units. This determination was due to the different market and sales practices of the stationary enteral product line compared with the ambulatory product line and our refocused emphasis on the home care market segment.

During the fourth quarter, we also performed specific analyses of the stationary enteral product line and determined the indicators of impairment existed relating to the recording unit. After valuations determined that the fair value of the stationery enteral reporting unit was less than the carrying value we took an impairment loss on the recording unit for both asset and goodwill in the amount of approximately 1.6 million.

During this process, we discontinued the sale of our feeding tubes in the therapeutics segment due to low margins, high maintenance and sales cost associated with the limited sales volume. This resulted in inventory obsolescence charge for approximately 250,000 within the therapeutics line.

We also sold these feeding tubes at or below cost during the fourth quarter to move some of the excess inventory. During the fourth quarter, we also took an inventory obsolescence charge of approximately 200,000 related to our Physical Evaluation and applied technology units for materials associated with products that we no longer manufacture.

In 2003, we established a lean manufacturing philosophy including the transition and processing to continuous flow production. In doing so, we decreased our inventories by over $2 million which also had an impact on the amount of overhead required to be capitalized for accounting purposes. The effect of this reduction of capitalized overhead was reflected in a significant increase in fourth-quarter cost of goods.

For the fourth quarter, Applied Technology products accounted for approximately 46 percent of our total revenue. Therapeutic products accounted for 45 percent and our Physical Evaluation products accounted for 9 percent.

Revenues for the year ended December 31, 2003 was 25.9 million compared to 25.5 million for the year ended December 31, 2002, a 1 1/2 percent increase. The increase in revenue over 2002 is largely due to an 8 percent increase in domestic sales of EnteraLite® Ambulatory Enteral Nutrition, delivery pumps and disposable sets and an increase of approximately $950,000 in international sales for enteral pump within the therapeutics division.

In addition, our Applied Technology division revenue for manufactured product services in engineering increased over 8 percent. The revenue growth was partially offset by a 26 percent decline in orders for stationary enteral nutrition delivery pump disposable sets. And weaker demand for Physical Evaluation products that resulted in a decline in sales of these products of approximately 17 percent. Our net loss for the year was 8.3 million compared with net income of 214,000 for 2002.

The fully diluted loss per share for 2003 of $2.43 compared to earnings per share of 6 cents for 2002. The loss as a result of the items I described earlier plus increased research and development costs in excess of $500,000.

Our gross margin in 2003 was 32 percent compared to 44 percent in 2002. The difference in gross margin was primarily due to the following. The write off of discontinued products and miscellaneous obsolescence inventory in the fourth quarter, downward pricing pressure related to some of our therapeutics products, non reoccurring manufacturing engineering costs associated with establishing new production lines in our Applied Technology division and the different product mix delivered by our Applied Technology division during the years.

For the 2003 year, therapeutics produced products accounted for approximately 47 percent of revenue, Applied Technology products accounted for 41 percent and Physical Evaluation products accounted for 12 percent.

Going forward, we expect our gross profit will increase to 38 to 40 percent of gross revenues in 2004 when taking into consideration our anticipated product mix, the effects of our lean manufacturing processes, and a reduction of $400,000 in depreciation expense from the enteral feeding pumps which we wrote down Applied Technology year end. We have also decreased our general and administrative expenses and eliminated high-cost debt during the past year.

Our line of credit is currently paid off. Working capital December 31, 2003, 5.8 million compared to 6.1 million at the end of 2002. Now I'd like to turn the call back over to Dave.

Thank you, Phil. Our ultrasonic components business include surgical handpieces for cataract surgery and numerous sensors used to detect liquid levels and air bubbles in critical medical applications. Last year, sales in this product area grew 10 percent based upon a combination of the strength of existing customers and new applications entering production.

During the fourth quarter, sales grew 34 percent over the fourth quarter of 2002.

Our optoelectronic products include components used for blood oxygen sensing, blood collection and cell saving and chemistry analysis. During the year, sales grew 4 percent over the prior year and for the quarter, sales increased 8 percent over those of the fourth quarter of 2002.

Systems which we manufacture under private label include the Life Port Kidney Transporter of organ recovery systems; the SurgASSIST computer mediated surgical system for power medical interventions; and a new system for one of the world's leading medical device companies. Sales in this product area grew by 3 percent in 2003. Sales during the fourth quarter declined 47 percent compared to those of the fourth quarter of 2002 which contains some extraordinary engineering service contract revenue associated with the development of the Life Port Kidney Transporter. That product is now in production and is enjoying acceptance by the transplantation community. To date over 40 kidney recipients have benefited from organ perfusion by the Life Port.

The outlook for our Applied Technology division is bright in each of our three major areas of focus -- ultrasonics, optoelectronics and systems. This is based upon the strength of our existing customers, some of which have been with us for 16 years, combined with new products that our engineers have been developing for existing and new customers.

In order to accelerate business development we have added an Applied Technology corporate accounts manager who is responsible for business development with certain existing key accounts and new prospects. This complements our Applied Technology division's director of sales and our customer support group.

Now I'd like to turn our attention to our therapeutics division. Once again our EnteraLite® product line grew in 2003. Sales increased in the U.S. by 8 percent and sales doubled internationally. During the fourth-quarter EntraLite sales declined by 5 percent compared to an exceptionally strong fourth-quarter of 2002.

We do not believe that the performance of the fourth quarter of 2003 is indicative of weakness in the product line going forward. As a matter of fact we believe that the recent launch of our new DEHP free disposable sets will have a positive impact on sales.

Unfortunately our stationary enteral feeding pump and disposable set business continued to decline last year. Sales dropped by 26 percent for the year and by 27 percent for the fourth quarter. This business has been a challenge for us to compete in as the sales forces of our competitors significantly outnumber ours and some of those competitors bundle pumps and disposable sets with foods. Our best chance for success in stabilizing this business is for our territory managers to leverage our patented lifeguard anti free flow technology and work with our distribution partners to reach the vast number of customer prospects.

In order to more effectively compete in the domestic enteral pump market, we replaced all of our independent manufacturers representatives with direct territory managers. We completed these changes earlier this month. We now have 10 full-time employee territory managers -- up from 6 last year. Two area managers oversee the territory managers and a North American sales manager is responsible for all sales activities, including corporate accounts.

Internationally, enteral feeding pump sales more than doubled in 2003. This is the result of success by our major international distributors including Nestle in Germany, Metasina (ph) in the United Kingdom and Baxter in Puerto Rico and the Caribbean. During the fourth quarter of 2003 international pump sales declined 40 percent from those for the fourth quarter of 2002 as one of our distributors corrected for an overstock situation. We expect that it will take at least one more quarter for international pump sales to pick up.

Looking ahead in 2004, we expect our domestic EntraLite pump and disposables business to remain strong. In our stationary pump and disposable set business our success will depend on our ability to work effectively with our distribution partners.

Internationally, we expect therapeutic sales to begin modestly and grow stronger through the second half of the year.

Finally, sales of the Physical Evaluation division -- which we have since sold -- declined 17 percent in 2003 and dropped 44 percent for the quarter.

Without the Physical Evaluation division, last year's sales would have been approximately $23 million. We believe that we can grow the sales of each of the remaining divisions this year and that the mix of therapeutics to Applied Technology revenue will be roughly 55 percent for therapeutics and 45 percent for Applied Technology. Similar to what 2003 would have looked like without sales from the Physical Evaluation division.

During the coming year we expect sales and marketing expenses to be approximately 13 to 14 percent of sales, including the changes that we have made in our sales forces. The biggest impact to reducing sales and marketing expenses was the sale of JTech which had sales and marketing expenses of 52 percent of its sales last year. We have made substantial progress in reducing general and administrative expenses in 2003 and we expect G&A to remain at about 16 to 17 percent of sales in 2004.

Research and development expenses should remain at about 4 to 6 percent of sales for 2004.

Now, operator, I'd like to open up the call to questions.

+++ q-and-a.

{Operator Instructions}.

Don Lttlewood of Littlewood Burke (ph) Company.

I was a little bit surprised at the size of the write-offs, but hopefully you've cleaned out everything with what you've done. I've got a couple of questions. In the Applied Technology area, the Life Port product. Can you give us some idea of the order level there and the backlog for that product?

Yes, Don. This is Dave, and with respect to the Life Port we are producing not only the Life Port instrument but also the disposable sets and with respect to that business, I want to be careful with what I say with respect to any confidential information of our customer. But we expect this to be a million dollar piece of business or greater this year. I can say that the acceptance is moving along faster than we had originally anticipated so we are very encouraged by that but in round numbers, we expect it to be a million or better for us this year.

Are you working on other products for this customer?

We are as a matter of fact and we are working on the next logical system with them, some early engineering work presently. And of course we will let them release any news with respect to exactly what that is in their timing for market release but we are working on some next generation technology with them.

This large company you talked about -- the blue-chip company that you're -- I guess it's an optoelectronic product you're doing?

It's actually a system that involves -- a complete system that is built around our ultrasonic technology.

Ultrasonic. Okay.

The customer has launched the product in the marketplace. We don't yet have permission to talk about the customer or the specific application but it is indeed a blue-chip company and what we expect to be a significant program rolling forward.

Any idea in dollar amount of revenues that you can project for that?

I'd best refrain from that at this time. I'm sorry, Don.

Okay. In the therapeutics area are you adding any additional international distributors?

We are. We are currently seeking to expand our network globally. Certainly Europe is the biggest market so countries that would be a logical extension after Germany would include France and other parts of the European Union that we do not presently penetrate with our current distribution. But we are looking to expand globally and as well as on to other continents too.

Can you give us some idea of the revenues in the first quarter inasmuch as we're one day away from the end of it?

Phil?

Revenues for the first quarter will if you -- last year sales -- I am trying to be careful here -- if you took last year's sales and pulled out the Physical Evaluation business, divided that by 4, we'd be at that number.

So I guess as an overview, Don, it looks like our business is continuing on without the Physical Evaluation division at the levels we've been at during last year and we expect that to accelerate with our improved focus as we go through this year.

How about profitability?

Profitability will be there Don.

Even in this quarter -- current quarter?

Yes.

All right, good, I wish you the best of luck and let's see if we can grow this thing a little bit, huh?

Thank you, Don, and we appreciate your support and in response to your introduction as well as we looked at taking the hit on selling the Physical Evaluation division we evaluated all of our assets to make sure that what we're left with now are performing assets that are appropriately valued.

Good. Thank you.

Thank you, Don.

{Operator Instructions}.

You have no further questions in the audio queue at this time. Please go ahead, Mr. McNally.

Thank you, Liz. We're already well into 2004 and we already see benefits of our focus on Applied Technology and therapeutics division. From research and development to manufacturing, our operations are focused on continuous quality and margin improvement and the abolition of our technologies. Even during this period of restructuring, we have continued to invest in the future, expanding our sales forces and developing new products. As a matter of fact, the Company presently has 32 U.S. and foreign patents issued with 34 more pending.

In closing, I'd like to say that we believe that our new focus will allow us to improve our profitability and growth in the market segments in which we have chosen to compete. We look forward to continuing these conference calls and keeping you apprised of our progress. Thank you all for joining us today.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and have a great day.