Moog Inc (MOG.B) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Zevex third quarter 2004 earnings conference call.

[Operator Instructions].

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

Good afternoon 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 2004 third quarter financial results.

A short time ago Zevex released financial results for the third quarter of 2004. If you have not received the news release or 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 the 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 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 & 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 forward-looking statements. Now I would like to turn the call over to David McNally, our Chairman and Chief Executive Officer. Dave?

Thank you, Nancy. Good afternoon, listeners and welcome to our third quarter 2004 conference call. As you may have seen by now, we had a disappointing third quarter, for reasons we believe are short-term in nature and which I will discuss later in this conference call.

We reported a net loss of $295,000 or $0.09 per share, compared with a net loss in last year's third quarter of $407,000 or $0.12 per share. Revenue from our Therapeutics and Applied Technology divisions for the third quarter was $5.34 million, which increased 1% from $5.29 million from those two divisions for last year's third quarter. Revenue numbers for the third quarter of 2003 do not include revenue from the Physical Evaluation division that we sold in December 2003.

For those of you who may not know, we are committed to two businesses, our Therapeutics business division and our Applied Technology division. Our therapeutics division makes the best pumps in the world for enteral nutrition, which are 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 that allow enteral patients to enjoy unprecedented mobility.

In addition, we develop, manufacture and market disposable sets and accessories for pumps. We are focused globally on the home healthcare market, which due to the aging population and pressure on controlling the healthcare cost is the fastest growing market segment for enteral nutrition delivery devices.

In contrast to our therapeutics division, 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 in this division include expertise in 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, combined sales in our two other divisions grew 1% during the third quarter and grew 4% during the first nine months of 2004, compared with sales of these two divisions for the same periods of these two divisions for the same periods 2003.

There are clear reasons for these results. Before I provide more insight into our performance and prospects, however, I would like to turn the call over to Chief Financial Officer Phil McStotts, who will provide detail on our financial results.

Thanks, Dave. Revenue for the third quarter of 2004 was $5.34 million, compared with $5.29 million for the third quarter of 2003, a 1% increase. Revenue for the first nine months of 2004 was $17.8 million, compared with $17.2 million for the first nine months of 2003, a 4% increase. This comparison does not include revenue from the physical evaluation division of approximately $834,000 for the quarter and $2.4 million for the first nine months of 2003.

The increase in revenue over last year's third quarter excluding the physical evaluation business, is largely due to an increase, an 11% increase in revenue generated by the therapeutics division. Specifically, in our therapeutics division, EnteraLite feeding pumps and disposable set revenue increased 16%. This growth more than offset a decrease in the disposable set revenue, and international therapeutics revenue increased approximately $100,000 for the quarter.

Applied Technology division revenue decreased 10% during the third quarter of 2004, compared to the third quarter of 2003.

Medical systems revenue increased by approximately $270,000, but was offset by 21% decrease in surgical hand piece and sensor revenue due to a temporary delay in orders from three customers who ordered those products.

For the nine-month period, the increase in revenue over last year's first nine months when excluding the physical evaluation business, is largely due to an 11% increase in our Applied Technology division revenue. Specifically, surgical hand pieces and sense of revenue has increased 9% and medical systems revenue has increased by approximately $1.7 million for the first nine months of this year.

Within the therapeutics division, EnteraLite feeding pumps and disposable set revenue increased 8%, which is then offset by a 19% decrease in stationary disposable set revenue and a 12% decrease in our international revenue. Overall, sales for the therapeutics division declined approximately 2% during the first nine months of 2004, compared to the first nine months of 2003.

For the third quarter of 2004, the company had a net loss of $295,000 compared with a net loss of $407,000 in the third quarter of 2003. The fully diluted loss per share for the third quarter of 2004 was $0.09 compared to a diluted loss per share of $0.12 for the third quarter of 2003.

For the first nine months of 2004, the company had net income of $107,000 compared with a net loss of $258,000 for the first nine months of 2003. Fully diluted earnings per share for the first three quarters of 2004 were $0.03 compared to a diluted loss per share of $0.08 for the same period of 2003.

Increase in net income during 2004 compared to 2003 is due to a decrease in interest expense as the company reduced its debt during the past year, the reduction in research and development cost and the realization of a deferred tax asset valuation allowance.

Our therapeutics division accounted for approximately 56% of the revenue in the third quarter, and 53% for the first nine months. Our Applied Technology division accounted for approximately 44% of total revenue for the quarter and 47% for the first nine months.

Gross profit as a percentage of revenue was 34% for the third quarter of 2004, compared to 32% for the third quarter of 2003. Gross profit as a percentage of revenue was approximately 37% for the first nine months of 2004, compared to 38% for the first nine months of 2003. We attribute the change in gross profit percentage from 2004 to 2003 to differences in product mix delivered during the third quarter and the first nine months of the year.

In 2003, revenue and cost of goods included sales of Jay Tech, the Physical Evaluation business in which products were sold at a higher gross margin. Extracting the revenue and cost of goods of the Physical Evaluation business from the financials, gross margins increased 2.5% for the first nine months of 2004.

Selling, general and administrative expenses decreased during the third quarter of 2004 to $1.7 million compared to $2 million for the third quarter of 2003. The decrease is primarily related to a reduction in personnel from the sale of the Physical Evaluation business. Although the decrease was partially offset in the third quarter of 2004 due to non-recurring legal expenses in the amount of approximately $70,000 related to the manufacturing and servicing agreements with Royal Numico.

Selling, general and administrative expenses increased during the first nine months of 2004, the $5.4 million compared to $6.2 million for the first nine months of 2003. The decrease primarily is related to those items discussed earlier related to the reduction in personnel from the sale of the Physical Evaluation business offset by non-recurring legal expenses of approximately $340,000.

We had an income tax benefit of $30,000 in the first nine months of 2004 compared to an income tax benefit of $117,000 for the first nine months of 2003. Decrease in tax benefit in 2004 from 2003 is due to the reversal of part of our deferred tax asset evaluation allowance for the first nine months of 2004.

During the third quarter of 2004 the company also received a tax refund in the amount of $33,580, which was originally accounted for as part of a deferred tax asset evaluation allowed. We expect that we will be able to realize a portion of the deferred tax valuation allowance related to net operating loss carry-forward in 2004, thereby resulting in a partial reversal of the related valuation allowance and an effective tax rate of zero for the 2004 year.

Working capital at September 30, 2004, was $6.2 million compared to $5.9 million at December 31, 2003, and $6.9 million at September 30, 2003. The outstanding balance of our funded debt at September 30, 2004 was $2.132 million compared to $4.182 million at September 30, 2003, a reduction of $2.1 million in the last 12 months.

Current ratio of current assets/current liabilities increased 3.97 at September 30, 2004, from 2.80 at September 30, 2003. Total stockholder equity was $13 million at September 30, 2004, compared to $12.9 million at December 31, 2003. Now I would like to turn the call back over to Dave.

Thank you, Phil. I am pleased to report that within our therapeutics division, our sales team generated record sales of our EnteraLite pump and disposable sets which grew 16% during the third quarter over the third quarter of 2003. Sales of stationery pumps and disposable sets continued to decline compared with last year's third quarter, although they were up 9% sequentially from the second quarter of 2004.

International sales for the therapeutics division increased 40% from the third quarter of 2003, based upon increased sales to distributors in Europe and the Caribbean. When all product areas are combined, sales from the therapeutics division grew 11% over last year's third quarter.

Now I would like to address the reasons why our performance for the quarter was not what we expected. Sales from our Applied Technology division declined 10% during the quarter from sales during the third quarter of 2003. Within the Applied Technology division, three of our top customers failed to place their regular orders for surgical hand pieces and sensors, reducing expected sales from these customers by nearly $400,000.

The largest of these customers is transitioning to just in time ordering. This caused them to delay their orders during the third quarter to reduce their inventory. Notably, they've already placed a sizable order for the fourth quarter and we believe they have returned to their historical ordering pattern.

The other two customers have more direct demand issues and it will take some months before they begin to place orders at historical levels. This means that our fourth quarter Applied Technology revenue will likely be less than that of the fourth quarter of 2003. In the meantime, medical systems sales were strong during the third quarter, and we expect that they will again be strong in the fourth quarter of 2004. This may help mitigate the temporary decline in sales from ultrasonic hand piece and sensor customers.

It is noteworthy that our engineering team has completed yet another state-of-the-art system's product development program for a leading Applied Technology customer. Earlier this year, Zevex completed the development of the Medtronic AAR1000 active area removal device.

This cardiac surgery product alerts the cardiovascular team of any venous air entry treatment into the system and working with the venous air removal device incorporating Zevex's ultrasonic sensors actively removes air during open-heart surgery. For more information on this product, please go to the Medtronic website at www.medtronic.com and type in a search for resting heart system.

I would now like to address our research and development investment for the third quarter. We are driving completion of an internal research and development project to develop a new therapeutics product that should be ready for market introduction in early 2005. This effort increased R and D costs for the therapeutic division to $389,000 during the third quarter of this year, compared to $155,000 in the third quarter of 2003. We expect that our R and D investment for the new product will remain at this level for the fourth quarter of this year and we look forward to announcing the product launch.

On the international front, we are carefully planning the rollout of enteral feeding pump products with Royal Numico. -The rollout is now expected in the late first half or early second half of next year. We still expect annualized revenue of at least $70 million from the strategic relationship. However, the mid-year rollout will cause our projected revenue from Numico for 2005 to be approximately $3.5 million instead of $7 million that we previously projected.

We are not pleased with this quarter's performance. We believe that the causes of our revenue and earnings shortfalls are temporary. Historically, we recognize that contract manufacturing demand from various customers can change from quarter to quarter. When demand from a few large customers is weak during the same quarter we experience a revenue shortfall such as that in this year's third quarter.

We do not expect this shortfall to persist past the fourth quarter of this year as our customers are viable and we have not lost business to competition. We also have new business in the pipeline, which will help to diminish dependence on particular customers. Even with all of this said, I would like to remind our audience that the Applied Technology division revenue has increased 11% year-to-date.

In the meantime, revenue from our therapeutics division is growing. Our domestic sales force once again generated record sales of portable feeding devices during the third quarter. Meanwhile we are reading a new product for launch in early 2005 and preparing for manufacturing of products for Numico in 2005.

Based upon this progress, we believe that our strategy to focus on our Therapeutics and Applied Technology division businesses remains sound and that we are positioned for growth in 2005 and beyond. Now, operator, I would like to open the conference call up to questions from our listeners

Thank you, sir. [Operator Instructions]. Our first question comes from David Wright (ph). Please go ahead, sir.

I hope I'm not the only one again this time.

Good afternoon.

Good afternoon.

Phil, could you review again those legal numbers? Was it $70,000 in the third quarter and 340,000 for the nine months?

Yes.

Is that all related to Numico?

Yes, it is.

OK. Dave, can you talk about why the delay in the Numico rollout?

There are a number of products associated with the revenue stream in Numico, and combinations of the practicality of the rollout and customizations that we are making to some of the products have caused us to more realistically reassess the rollout plan. We have been very carefully planning with Numico, working in concert to make certain that we ensure the success of the relationship long-term, even though it means there is short-term impact in the next six months to what we originally projected.

Well, can you give a little more detail? Is the problem more with you manufacturing their existing products? Or is it more with you manufacturing your new products for them?

I have to be careful for competitive reasons with respect to limiting the detail, which I go into. But the best way to put it is that there are number of customizations being made to products in order to best meet the needs of the marketplace. That is going to take some time to do that properly and also coordinate the tremendous marketing resources of Numico with any of our rollouts. So, that's as far as I should go for competitive reasons.

Well now you previously said that there exists at Salt Lake City in the building the capacity to do all of this.

And there is, yes.

It sounds like the work is turning out to be more complex or complicated than you originally thought. What impact is this going to have on your non-Numico production?

We don't expect any impact to our non-Numico business. We have both engineering and manufacturing resources that have the capability to manage a number of customers simultaneously. And we don't expect impact to our other businesses.

OK, what is the status of your agreement? I was surprised that there was still legal on it in the third quarter. When have you actually signed the agreement? Or have you?

The agreement was signed on the 20th of July, and those agreements we expect will be filed with our Q. And based on the new rollout schedule, the parties are working together on an amendment to the agreement to accommodate the rollout. So actually those legal costs that did fall into this quarter were actually, of course, incurred this quarter with respect to the agreement that was signed in the third quarter.

Right, OK, and so on the last call you predicted a pick up in revenues in the second half of the year and now you are backing off of that. And you've talked about 40% gross margins. And if you just look sequentially here from Q2 to Q3, your revenues were down 14%. And that took your gross margin from 39% to 34%. But that 900,000 drop in sequential revenue affected operating income by over half a million dollars, which absent some extraordinary item I hope you didn't explain to me, is an incredible amount of down side leverage.

The business that did not come in this quarter was profitable business. I would like to confirm also, David, that our gross margin goal remains 40%. We believe that we can get there. The product mix this quarter made it tough for us to make progress.

Outside of legal, was there anything else extraordinary on the expense line in the third quarter?

Not in the G&A. No, that was the only extraordinary items that occurred during the third quarter.

OK, thanks very much.

You're welcome, David.

Our next question comes from Richard Gerenoy (ph). Please go ahead, sir.

Well, good afternoon. Could you give a flavor for what percent of the applied technology sales of three customers were in, say, '03 and '02? And then nine months of '04?

Again, Richard, just to reiterate your question, the question is what percentage of revenue, of Applied Technology revenue is typically generated by those three customers?

Right.

Is that it? OK.

And typically, they are fully consistent in terms of their orders. Two of the three have been long-time customers of the company and in terms of what they typically generate on a quarterly basis, about half a million dollars a quarter.

That's for all three of them?

That would be individually.

OK, I see. OK. And then you broke out medical systems from hand piece and sensors. Do those two constitute all the categories you break out in Applied Technology? Or are there some other categories as well?

Basically, we break out our Applied Technology or I will say into four categories.

OK.

We have our ultrasonic hand pieces. We have our sensor business, which includes both ultrasonic as well as, ultra-electronic. We have our systems revenue, which are complete systems.

Right.

And we have our engineering revenue. Those are the four categories that we internally break out our Applied Technology business.

Right. And are the first two the majority of revenue in that area?

Yes.

Historically they have been, although we have seen a rise in the systems revenue.

Right. OK. And, oh, then as you customize things, products for the Numico deal, does any of that -- are there a lot of dollars there of re-engineering? Or since you didn't mention it in the increase in R & D, I'm guessing no. But --.

Not a substantial number of dollars in terms of the customization of those products. And there's a program where some of the customizations will actually be funded, too.

Is that essentially, you know, putting a private label on them?

I better wait until we file the agreements to give more color on that, because we have not provided that publicly.

OK. All right. Thank you.

You're welcome.

[Operator Instructions] . Our next question comes from Donald Littlewood. Mr. Littlewood, you are in queue. Go ahead.

Hello, Don.

Hello, there - (inaudible)

It appears that we are having problems with Mr. Littlewood's line. Our next question comes from David Wright. Please go ahead, sir.

Hi. I just was not listening clearly when the last gentleman was asking, did you say that these three customers that are contract manufacturing customers each generate $500,000 a quarter in revenues normally?

Normally two of those three do.

Two of the three generate 500,000 a quarter each in revenues?

Yes.

In the aggregate, the three generated $400,000 less in revenues in the third quarter than you might have expected?

That is correct.

OK, thank you.

Gentlemen, we have no further questions. Do you have any closing comments?

Yes. The results of this quarter have not shaken our confidence in our strategy of focus on our Applied Technology and Therapeutics divisions. Even with the disappointing third quarter, sales from our Applied Technology division have increased 11% during the first three quarters of 2004. Sales of our EnteraLite product line within the therapeutics division have grown 8% during the first three quarters of 2004.

Looking forward, we view the Numico relationship as a key element of our strategy to grow our global presence and sales of our therapeutics division. We also look forward in 2005 to the introduction of our new product. In closing, we believe that our continued focus on our customers and business partners will result in further progress for all of our stake holders. And we look forward to keeping you apprised of our progress. Thank you for your support and for joining us in this call.