Moog Inc (MOG.B) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Zevex second quarter 2004 earnings conference call. At this time all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press the star followed by the zero. And as a reminder, today's conference is being recorded Thursday, July 29th of 2004.

I would now like to turn the conference over to Nancy Schultz, Director of Corporate Communication and Investor Relations. Please go ahead, ma'am.

Thank you, Gilbert [ph]. Good morning and thank you for participating in today's conference call. Joining me today are Chairman and CEO David McNally and CFO Phil McStotts to discuss our 2004 second quarter financial results.

Early this morning Zevex released financial results for the second quarter of 2004. If you have not received the news release or if you would like to be added to the company's fax or e-mail list, please contact me at 801-264-1001, extension 203.

The replay for our conference is available on our website at www.zevex.com or www.streetevents.com. On the Zevex home page, click on the microphone symbol to hear the replay broadcast. You may also access archived copies of Zevex's news releases on the investor relations portion of our website.

Before we proceed, it is my duty to inform you that comments made by management during this conference call may 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-K for the year ended December 31, 2003, and Form 10-Q for the second quarter of 2004. These filings identify specific risk factors that may cause actual results to differ materially from those described in the forward-looking statements.

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

Thank you, Nancy. Good morning, listeners, and welcome to our second quarter 2004 conference call. I would especially like to welcome Nancy Schultz to our investor community. Most recently, Nancy was the Director of Investor Relations and Corporate Communications at Merit Medical, where she was tremendously successful. We are proud to have her on board.

I am pleased to report that last year's restructuring contributed positively to our second quarter performance. Our net income of $193,000 and 6 cents per fully diluted share clearly compares favorably with the net loss of $28,000 and 1 cent per share for last year's second quarter. Those results from the second quarter of 2004 demonstrate that our Applied Technology and Therapeutics divisions can operate profitably.

For those of you who may be new to the conference call, the two businesses that we are committed to are the Therapeutics division and the Applied Technology division. Our Therapeutics division makes the best pumps in the world for enteral nutrition used by patients who cannot feed themselves. We believe that our pumps are the best because they combine accuracy in nutrition delivery with small size, long battery life and patented safety features in a manner that allows enteral patients to enjoy unprecedented mobility. In addition, we develop, manufacture and market disposal sets and accessories that accompany the pumps. We are focused globally on the home healthcare market, which, due to the aging population and pressure on controlling healthcare costs, is the fastest-growing market segment for enteral nutrition delivery devices.

Our Applied Technology division develops and manufactures medical device components and systems under private label 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 improve the safety and effectiveness of cataract surgery, open heart surgery, colon resection, organ transplantation, dialysis, blood component harvesting and infusion therapies.

Excluding sales from the Physical Evaluation division that was sold in December 2003, sales in our two business divisions grew by 4% during the second quarter and 5% during the first half of 2004 over sales of these two divisions for the same periods of 2003. Before I provide more insight into our performance and prospects, I'd like to turn the call over to CFO Phil McStotts, who will provide detail on our financial results.

Thanks, Dave. Revenue for the second quarter 2004 was $6.2m compared with $6m for the second quarter of 2003, a 4% increase. Revenue for the first six months of 2004 was $12.4m compared with $11.9m for the first six months of 2003, a 5% increase. This comparison does not include revenue from the Physical Evaluation division for 2003, which was approximately $846,000 for the quarter and $1.6m for the first six months.

The increase in revenue over last year's second quarter when excluding the Physical Evaluation business is largely due to a 17% increase in our Applied Technology division revenue. Specifically, ultrasonic surgical hand pieces and sensor revenue increased 26% and medical systems revenue increased by approximately $500,000 for the quarter.

Within the Therapeutics division, EnteraLite feeding pumps and disposal set revenue increased 3%. This growth only partially offset a 33% decrease in stationary disposal set revenue while our international revenue held steady. Overall, sales for the Therapeutic division declined approximately 5% during the second quarter of 2004 compared to the second quarter of 2003.

For the six month period the increase over last year's first six months when excluding the Physical Evaluation business, is largely due to a 22% increase in revenue from our Applied Technology division. Within the Therapeutics division, EnteraLite feeding pumps and disposal set revenue increased 5%, which is offset-- been offset by a 23% decrease in stationary disposal set revenue and a 20% decrease in our international revenue. Overall sales for the Therapeutic division declined approximately 8% during the first six months of 2004 compared to the first six months of 2003.

The second quarter of 2004 the company had net income of $193,000 compared with a net loss of $28,000 in the second quarter of 2003. Fully diluted earnings per share for the second quarter of 2004 were 6 cents compared to a net loss per share of 1 cent for the second quarter of 2003. For the first six months of 2004, the company had net income of $402,000 compared with net income of $149,000 for the first six months of 2003. Fully diluted earnings per share for the first two quarters of 2004 were 12 cents compared to earnings per share of 4 cents for the same period in 2003.

Our nutritional delivery products accounted for approximately 54% of the revenue in the second quarter and 51% for the first six months while our contract manufactured products accounts for 46% of total revenue for the quarter and 49% for the first six months of 2004.

Our gross profits as a percentage of revenue were 39% for both the second quarter of 2004 and the second quarter of 2003. Gross profit as a percentage of revenue was approximately 38% for the first six months of 2004 compared to 41% for the first six months of 2003. We attribute the decrease in gross profit percentage in 2004 compared to 2003 to differences in the product mix delivered during the first half of the year.

In 2003 revenue and cost of sales included sales of the divested Physical Evaluation business, which products were sold at a higher gross profit percentage. If associated revenues and cost of sales were extracted from the financials, the gross profit percentages would be similar.

Selling, general and administrative expenses decreased during the second quarter of 2004 to $2m as compared to $2.1m for the second quarter of 2003. The decrease is primarily related to reduction in personnel from the sale of the Physical Evaluation business, although the decrease was offset in the second quarter of 2004 due to non-recurring legal expenses incurred in a negotiation and drafting of a strategic distribution, manufacturing and servicing agreement with Royal Numico announced last week.

Selling, general and administrative expenses decreased during the first six months of 2004 to $3.7m compared to $4.2m for the first six months of 2003. The decrease is primarily attributed to those items discussed earlier relating to the reduction in personnel from the sale of the Physical Evaluation business, offset by the non-recurring legal expenses.

As stated earlier, net income increased to $193,000, 3% of revenue, in the second quarter of 2004 compared to a net loss of $28,000 in the second quarter of 2003. Net income increased to $402,000, 3% of revenue, in the first six months of 2004 compared to net income of $149,000, 1% of revenue, in the first six months of 2003.

The increase in net income during 2004 as compared to 2003 was due to a decrease in interest expense as the company has reduced its debt during the past year, a reduction in research and development costs and the realization of a deferred tax asset valuation allowance. We had income tax expense of $3600 in the first six months of 2004 compared to income tax expense of $67,000 for the first six months of 2003.

The decrease in tax expense for 2004 from 2003 is due to the reversal of part of our deferred tax asset valuation allowance in 2004. We expect that we'll be able to realize a portion of the deferred tax valuation allowance related to a net operating loss carryforward in 2004. This will result in an effective tax rate of zero for the 2004 year.

Working capital at June 30, 2004, was $6.3m compared to $5.9m at December 31, 2003, and $7.2m at June 30, 2003. The outstanding balance of our funded debt at June 30, 2004, was $2.2m compared to $4.2m-- $4.9m at June 30, 2003, a reduction of $2.7m in the last 12 months. The ratio of current assets to current liabilities increased to 3.82 at June 30, 2004, from 2.59 at June 30, 2003.

Currently we have over $1m in cash on hand and have a zero balance on our line of credit. Total stockholders' equity was $13.3m at June 30, 2004, up from $12.9m at December 31, 2003.

Now I'd like to turn the call back over to Dave.

Thank you, Phil. I'm pleased to report that sales of all of our product areas of focus have grown during the first half of 2004. Within the Therapeutics division, EnteraLite pumps and disposal set sales are growing 5%. Within our Applied Technology division, sales of every product area have grown by at least 18%, resulting in 22% revenue growth from the first six months of last year.

As Phil mentioned, Therapeutics revenue growth has been tempered by a decline in disposal set sales for stationary pumps and a decline in international sales compared to 2003 first half sales.

Within the United States our sales force is working diligently to outpace the decline of stationary disposal set sales with EnteraLite product line sales growth. In particular, we see promise in promoting the use of EnteraLite pumps for oncology patients of all ages, which is a new market segment for us. Our sales team provided evidence of their progress during the first half of 2004, generating record EnteraLite sales. Internationally, our agreement with Numico holds the promise of generating more than 50% product line revenue growth during 2005.

Within the Applied Technology division, the systems engineering development programs for the first half of 2003 have generated a significant increase in manufactured systems sales during the first half of 2004. Most notably, the LifePort Kidney Transporter organ recovery system entered the production phase during the second half of 2003 following a considerable funded development program. As previously announced, our engineering team won a prestigious Gold Medical Design Excellence Award for the LifePort from Canon Communications earlier this year. We expect engineering services revenue to pick up again during the second half of 2004 for the new product development for existing and new customers.

Looking ahead to the second half of 2004, we expect that we can grow revenue from the combined Applied Technology and Therapeutics divisions in the third and fourth quarters over revenue from those divisions in last year's third and fourth quarters. We believe that we will begin to see the positive impacts from the Numico business during the fourth quarter.

We do not anticipate significant changes to our gross profit margins in the third quarter. While our gross profit margin goal for the year remains 40%, I would like to point out that quarterly gross profit margins are highly dependent on the product mix delivered during each quarter.

Now, Gilbert [ph], I would like to open the conference call up to questions from our listeners.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. If you have a question please press the star followed by the one on your push-button phone. If you'd like to decline from the polling process, please press the star followed by the two. You will hear a three-tone prompt acknowledging your selection. Your questions will be polled in the order they are received. If you're using speaker equipment you will need to lift the handset before pressing the numbers. One moment, please, for our first question.

Our first question comes from Mr. David Wright. Please state your company name followed by your question.

Henry Investment Trust. Good morning.

Good morning, David.

Lots of nice news. I have a couple of housekeeping questions and then I have some other questions. On the sale of the Physical Evaluation division, why haven't you just backed those numbers out instead of leaving them in there and having to sort of present two sets of numbers?

Well, according to our auditors in relationship to that, we'd have to go back and then restate those prior years.

Right. And you didn't want to do that?

No, we didn't want to do that.

So this is going to go on for two more quarters, anyway?

Correct.

And you got rid of that in December of last year or January of this year?

December 31st of last year.

So presumably after December 31 of this year the comparison is going to stop.

Correct.

The other housekeeping question was on this income tax refund receivable, $400 and some odd thousand?

Correct.

When do you expect to get that?

I actually received that in July.

And that's what got your cash up to $1m?

Yes.

OK. This Numico news is great news. Can you help me a little bit with the margin that you expect from that?

We expect the margin from the Numico business, all told, to be at or better than our current gross margin goal of 40%.

Right. As you know, the two-- the margins in the two segments jump around form year-to-year. Assuming you can stop jumping around, what's your target gross margin for each of the segments that gets you to the 40% combined?

We've not broken that out publicly as of yet and actually, even within each of those product lines there are different components, David, that are above and below that in each of the Therapeutics as well as the Applied Technology divisions.

So we'll just need to look for the segments on a quarterly basis as we go forward to divine that?

Yes. And not to get ahead of ourselves, our goal, of course, is to continue to strive to improve our margins. Our first goal is to get to 40% this year.

OK. Two more questions and I yield. To put your production in the pump business up by 50% year-over-year is super. What kind of leverage are you going to get on the SG&A line from that?

SG&A will have-- I'll call it minimal impact in relationship to-- our SG&A currently, if you combine them, and I'll use the six month figure versus the quarterly figure, is about 30%.

Right.

The dollar amount related to SG&A of this new business will probably be down in the 5% range related to that overall asset.

Five percent of revenues?

Yeah.

So if your SG&A is constant and your revenues in that segment go up by 50% and then 25% of whatever for the whole company and the incremental SG&A is 5%, then your overall SG&A as a percentage of overall sales is going to go down quite a bit.

Yes it will. Correct.

Well, that's super. Lastly, on this contract with Numico and your kind of $7m of forecast revenue, which I understand is based on minimum commitments in the contract, how do those minimum commitments relate to Numico's current run rate of production?

That's a very good question, David, and they're consistent with their current run rate, their proven history as a leader in the business.

So the contract minimums are pretty close to 100% of current run rate?

I have to be careful, of course, for competitive reasons, but the contract minimums are consistent with the run rates. We believe that we're being reasonably conservative in our projections.

Right. So there is the potential for a little upside?

There is that potential.

OK. Well, it sounds like you got things going in the right direction. Congratulations and thank you.

Thank you, David, for good questions.

Ladies and gentlemen, if there are any additional questions, please press the star followed by the one at this time. As a reminder, if you are using speaker equipment, you will need to lift the handset before pressing the numbers. Mr. McNally, there are no further questions at this time. Actually, we have a followup question from Mr. David Wright.

You lost all the people from the last quarter's call.

Yeah, I guess they're on vacation.

They're off flying today, David. You're wrapping them all up.

You mentioned on the applied tech side, this kidney machine which I guess is called LifePort?

Yes.

Who are you making that for?

We make that for a company out of Chicago by the name of Organ Recovery Systems.

Organ as in your body, not in the state?

That is correct. Organ as in your body. And they are-- their thrust and strategy is to develop products that help in organ preservation and tissue preservation, extending the life of tissues and organs and they have a tremendous research capability, as well as a domestic and international presence, as well.

And obviously not-- not all of your contract clients want their names disclosed, right?

That's correct. The challenge we have is that we're working-- as a matter of fact, in some ways we are the Intel inside many pieces of medical equipment that is distributed globally and some of our customers consider us a competitive advantage and don't allow us to disclose their name.

Right. And talk a little bit about capacity, both for the Numico business and also for any perceived rebound in contract manufacturing?

We have the capacity here to service the Numico business with our existing staff. If the Numico business exceeds our expectations, we see it as a build-out on the production floor and we have access to great labor here in Salt Lake City. In terms of the management team and infrastructure, that team is in place to be able to handle that business and provide tremendous service to Numico and support the relationship.

With respect to the rebound in the Applied Technology business, which we saw begin in this first half of the year, we have the ability as well, the infrastructure, to service that business. If engineering revenues, I should say engineering service revenues, rise in the second half of the year and beyond, then I would expect that we will be hiring more engineers to provide that support.

OK. And then how much more-- when-- how much income before you start paying taxes again?

There's a few little things in there, David, but roughly, if you took out approximately everything including our research and development credit that number is a little over $2m before we have-- we're actually paying tax again.

So you get $2m of pretax, roughly--

Correct.

--before you go to paying tax again?

Correct.

OK. Thanks again.

Thank you, David.

Mr. McNally, there are no further questions at this time. Please continue.

From the results of this second quarter 2004 we've continued to demonstrate the benefits of our focus on our Applied Technology and Therapeutics divisions. We believe that the first half of this year has proven the viability of our business model. The growth in sales from our Applied Technology division during the first half of 2004 is encouraging. We view the Numico relationship as a key element of our strategy to grow our global presence and sales of our Therapeutics division.

In closing, I'd like to convey to you the enthusiasm of all of our employees who come to work each day focused on technology transforming life. We believe that our continued focus on our customers and business partners will result in further progress for all of our stakeholders. We look forward to keeping you apprised of our progress and thank you for joining us today.

Ladies and gentlemen, this concludes the Zevex second quarter 2004 earnings conference call. You may now disconnect. Thank you for using AT&T Teleconferencing.