Moog Inc (MOG.B) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the ZEVEX fourth quarter and year-end 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. [Operator Instructions]. As a reminder, this conference is being recorded today, Wednesday, March 30, 2005. I would now like to turn the conference over to Ms. 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 Chief Executive Officer, David McNally, and Chief Financial Officer, Phil McStotts, to discuss our 2004 fourth quarter and year-end financial results. A short time ago ZEVEX released financial results for the fourth quarter and year ended December 31, 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 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 years ended December 31, 2004 and December 31, 2003. These filings identify specific risk factors that may cause actual results to differ materially from those described in forward-looking statements. And now I'd like to turn the call over to David McNally, our CEO.

Thank you, Nancy. Good afternoon, listeners, and welcome to our fourth quarter 2004 conference call. For the year ended December 31, 2004, revenue from our Therapeutics and Applied Technology divisions increased 3% to $23.6 million compared with $22.9 million for the year ended December 31, 2003. For the fourth quarter of 2004, revenue from our Therapeutics and Applied Technology divisions increased 3% to $5.9 million compared with $5.7 million from those two divisions for last year's fourth quarter. The 2003 revenue figures do not include revenue from the Physical Evaluation division that we sold in December 2003.

We reported a net loss in the fourth quarter of $286,000, or $0.08 per share, compared with a net loss in last year's fourth quarter of over $8 million, or $2.36 per share. While these results indicate progress from our refocused company we're not satisfied with 3% growth, nor with losing money. We believe that the catalysts for significant growth and profitability are in place and that 2005 will be a better year. Later in this conference call I will provide insight into prospects for the year ahead.

For those of you who may not know we are committed to two businesses, our Therapeutics division and our Applied Technology division. Our product lines are based upon our technical expertise in fluid management and measurement and surgical ultrasound. We believe that we can successfully grow the Company from this technology platform.

Our Therapeutics division makes the best pumps in the world for enteral nutrition, which are used by patients who cannot feed themselves. We believe 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. These pumps are used by patients who may have experienced head or neck trauma or have gastrointestinal disorders such as short bowel syndrome, intestinal malabsorption, bowel pseudo-obstruction and other disorders that prevent normal digestion.

In addition, we develop, manufacture, and market disposable sets and accessories for 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 in this division include expertise in ultrasound, optoelectronics 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. Before I provide more insight into our performance and prospects, I'd like to turn the call over to our Chief Financial Officer, Phil McStotts, who will provide detail on our financial results.

Thanks, Dave. Revenue for the fourth quarter, 2004 was $5.9 million compared with $5.7 million for the fourth quarter 2003, a 3% increase. Revenue for the year ending December 31, 2004 was $23.6 million, compared with $22.9 million for the same period of 2003, also a 3% increase. This comparison does not include revenue from the Physical Evaluation division of approximately $576,000 for the quarter and $3 million for the year ended December 31, 2003.

The increase in revenue over last year's fourth quarter, excluding the Physical Evaluation business, is largely due to an 11% increase in revenue generated by the Therapeutics division. Specifically, in the therapeutics division, EnteraLite feeding pumps and disposable set revenue increased 7%, or $120,000. This growth more than offset the 14% decrease or $100,000, in stationary disposable set revenue; while our international Therapeutics revenue increased approximately $290,000 for the quarter.

Applied Technology division revenue decreased 5% during the fourth quarter of 2004 compared to the fourth quarter of 2003. Medical systems revenue increased by approximately $470,000 but was offset by a 19% decrease of $670,000 in surgical handpiece and sensor revenue due to a temporary delay in orders from three customers whose orders -- who order these products. Revenue has increased in this product area by 23%, or $370,000, compared with the third quarter of 2004.

For the year ended December 31, 2004, the increase in revenue over last year's revenue, when excluding the Physical Evaluation business, is largely due to a 7% increase in our Applied Technology division revenue. Specifically, Medical Systems revenue increased by approximately $2.2 million, or 360%, for the year; with this increase partially offset by lower Engineering revenue of $1.2 million, or 64%, as certain products have moved from Engineering to Manufacturing.

Our surgical handpiece and sensor revenue held steady during the year. While the Therapeutics division, EnteraLite feeding pumps and disposable set revenue increased 8%, $600,000 during 2004. Also, our international Therapeutics revenue increased approximately 5%, or $100,000, during the year. This growth was offset by an 18% decrease of $600,000 of stationary disposable set revenue. Overall revenue for the Therapeutics division increased approximately 1% during 2004. For the fourth quarter of 2004, the Company had a net loss of $286,000 compared with a net loss of $8,020,000 in the fourth quarter of 2003, which included the loss on the sale of the Physical Evaluation business and asset and goodwill impairment charges.

The fully diluted loss per share for the fourth quarter of 2004 was $0.08 compared to a diluted loss per share of $2.36 for the fourth quarter of 2003. For the year ended 2004, the Company had a net loss of $179,000 compared with a net loss of $8,278,000 for 2003. The fully diluted loss per share for 2004 was $0.05 compared to a diluted loss per share of $2.43 for the same period in 2003.

Our Therapeutics division accounted for approximately 54% of the revenue in the fourth quarter and 53% during 2004. While our Applied Technology products accounted for 46% of the total revenue for the quarter and 47% for the year ending December 31, 2004. Our gross profit as a percentage of revenue was 32% for the fourth quarter of 2004, compared to 15% for the fourth quarter of 2003; which included the write-off of discontinued products, non-recurring manufacturing engineering costs associated with the establishing of new product production lines.

During the fourth quarter of 2004, we incurred additional expenses and decreased our anticipated -- and decreased our anticipated gross profits, including manufacturing start-up costs associated with the launch of our new EnteraLite Infinity product line and additional accruals for inventory obsolescence and product warranty reserves.

Gross profit as a percentage of revenue was approximately 36% for 2004 compared to 32% for 2003. We attribute the increase in gross profit percentage in 2004 to expenses that were recorded in 2003 that were non-recurring in 2004, such as the write-off of discontinued products and nonrecurring manufacturing engineering costs associated with establishing new production lines.

Selling, general, and administrative expenses decreased during the fourth quarter of 2004 to $1.7 million, compared to $2.1 million for the fourth quarter of 2003. The decrease is primarily related to reduction in personnel from the sale of the Physical Evaluation business, although the decrease was partially offset in the fourth quarter of 2004 due to non-recurring legal and marketing expenses related to the EnteraLite Infinity product launch. Selling, general, and administrative expenses decreased to $7.1 million in 2004 compared to $8.3 million in 2003. The decrease is primarily related to the reduction in personnel from the sale of the Physical Evaluation business, partially offset by non-recurring legal expenses.

As stated earlier the company had a net loss of $286,000 in the fourth quarter 2004 compared to a net loss of $8,020,000 in the fourth quarter 2003. The net loss decreased to $179,000 in 2004 compared to a net loss of $8,278,000 for 2003. The decrease in the loss during 2004 compared to 2003, in addition to the items mentioned earlier, included a decrease in interest expense as the Company has reduced its debt during the past year, the reduction of research & development costs and the realization of a deferred tax asset valuation allowance.

We had an income tax benefit of $31,000 in 2004 compared to an income tax benefit of $69,000 in 2003. The decrease in tax benefit from 2004 to 2003 is due to the reversal of part of our deferred tax asset valuation allowance for 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 the deferred tax asset valuation allowance. We expect that we'll be able to realize a portion of the deferred tax valuation allowance related to net operating loss carry-forwards in 2005; thereby resulting in a partial reversal of the related valuation allowance and an effective tax rate of 0.0% for the 2005 year.

Working capital at December 31, 2004, was $6 million compared to $5.9 million at December 31, 2003. The Company had positive cash flow from operations for the fourth consecutive year, generating over $1 million in 2004. The outstanding balance of our funded debt at December 31, 2004, was $2,120,000, compared to $2,393,000 at December 31, 2003; a reduction of $270,000 in the last 12 months. The ratio of current assets to current liabilities increased to 3.2 at December 31, 2004, from 2.25 at December 31, 2003. Total stockholders equity was $12.7 million at December 31, 2004, compared to $12.9 million at December 31, 2003. Now I'd like to turn the call back over to Dave.

Thank you, Phil. While we've reported overall sales growth during the fourth quarter of 2004, with certain product areas underperforming in sales, we were not as profitable as we believe that we can be going forward. For example, sales from our Applied Technology division declined 5% during the quarter from sales during the fourth quarter of 2003. Specifically, sales of surgical hand pieces and sensors to three of our top customers continued to be slow, reducing expected sales from these customers by nearly $400,000. Orders from each of these customers did increase during the fourth quarter over the third quarter of 2004, and the outlook for 2005 is that we expect sales to these customers to return to historical levels as early as in the first quarter.

We are also proceeding with new Applied Technology development and manufacturing programs for existing and new customers. We expect these new programs to drive growth later this year and beyond. Within the Therapeutics division, the 18% decline in stationary disposable set sales offset most of the growth from ambulatory pump and disposable set sales and international sales.

Two growth catalysts are now in place to accelerate Therapeutics division sales. The first was the strategic relationship established with Royal Numico last year. We expect to generate approximately $3.5 million in additional sales to Royal Numico this year beginning in late second quarter or early third quarter of the year. The rollout of Enteral feeding pump products is on schedule. Once underway, we expect annualized revenue of at least $7 million from this strategic relationship.

The second growth catalyst relates to the launch of our EnteraLite Infinity product line in January of this year. The product is being well received by the market. The feature set of the EnteraLite Infinity meets the needs of a broader range of users than any of our previous pump models and, based upon our patented technology, the product is more robust, yet has a lower cost of goods than our other pumps.

While revenue grew 3% for the fourth quarter over the prior year's quarter, we had additional expenses that negatively affected our gross profit and our operating margin. The net loss for the quarter was due to the product sales mix affecting gross profit as well as a number of higher expenses totaling approximately $270,000. These expenses included costs associated with manufacturing start-up for our EnteraLite Infinity product line, non-recurring legal costs and accruals for inventory obsolescence and product warranty reserves. Of course, more substantial sales growth would have offset these expenses.

While we have made substantial progress in 2004, we are not satisfied with our fourth quarter performance or our performance for the year. However, in 2004 we improved upon a sound balance sheet by reducing debt to its lowest level in seven years and we demonstrated of sales, general & administrative expenses. Now, we believe that the drivers for sales growth are in place to make 2005 a profitable year.

I'd like to caution our listeners that we expect the change in profitability to take place during the second half of 2005 as sales growth accelerates. In the meantime, we are focused not only on growing sales in 2005 but also filling an Applied Technology sales pipeline beyond this year. Now, operator, I'd 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. [Operator Instructions]. Don Littlewood, Littlewood Burke.

Couple of questions. This 3.5 million in sales that you expect in 2005, is this going to be profitable?

We expect it to be profitable, yes, Don.

I don't know how much pressure Numico puts on you as far as pricing of this, but I wouldn't want to see you trading dollars.

Yes. We've structured the agreement so that this should be profitable business for us.

Okay. The new pump, you getting orders in for that now?

Yes. We are shipping pumps and we're seeing-- what is encouraging, Don, we're seeing not only sales to existing customers but sales to new customers that we've not done business with before.

All right. That's good. How about organ recovery? Where does that stand at this point with-- are you still producing kidney transporters?

We are. We're producing kidney transporters and supplying not only the transporter but the disposable sets for use with those. Their business has remained steady and has met our expectation with respect to forecasts.

How about new products for them?

There is still work underway on their behalf in looking into new areas of application for the product. We've talked about pancreas, liver, and heart, and we're working in step with them to be ready to commercialize any of those products as soon as they're ready.

Okay. Lastly this is now the 30th of March, which is the end of three months of this year. What do the revenues look like for the first quarter?

The best I can say, Don, without pre-announcing is to say that the first quarter is in line with what we have put forward in this presentation.

I don't know what that is though, or any idea what that is.

Well, we've said that particularly those three customers in the Applied Technology area, we expected that they would be operating at the same pace that we had seen them at historically. So I can confirm that as an important part of the Applied Technology model.

David Wright, Henry Investment Trust.

Question for Phil. As you get into producing under the Numico agreement, what kind of demands is this going to put on your balance sheet, and how will you fund them?

Currently, it will have a-- an impact in relationship to my balance sheet. Funding them, we have-- we've got our line of credit, and we have a $3 million line of credit which is -- doesn't have much of a balance on it at the moment, and that's basically how we're going to fund. The $3 million will be significant-- sufficient to manage the Numico business.

Richard Deeringly, Long Port Partners.

The comment about you're expecting sales and margins in the second half to be increasing, how much of that -- and it's specifically from mix. You've already-- you've discussed in the past how the Royal Numico agreement is more profitable. What is implied in that comment about your base business? And then as you're discussing that, would you break out the anticipated effect of the Infinity pump from the rest of the base business?

All right. And, Richard, this is Dave McNally. I'll try to break the question down, as you presented it. One is, with respect to the growth in the second half of the year, we expect the most substantial portion of that growth to come from profitable business with Numico; with the production of pumps and revenue generation for us beginning late in the second quarter or early in the third quarter of this year. So that's where we see the second half revenue kicking into gear.

As far as the Infinity goes, with respect to the product launch, of course, it's still very early. We're certainly internally forecasting that we can grow the business based on this great technology, but are not making any outward projections in terms of what revenue growth we'll see from that product line and modeling that through the year.

And then I think the final point of the question was with respect to base business and I think you may be referring to my comment with respect to the Applied Technology business. Is that correct?

Well, the -- the-- yes, both it and the-- the old pump business essentially.

Oh, okay. Okay. I'll take that one at a time in terms of the Applied Technology business, we see a fairly steady business as we look at the four quarters of this year for the Applied Technology business; that the ramp in that business will come from new applications that we're developing coming on line. And, of course, that timing is controlled as much by the market and our customer actually more so than us.

And then with respect to our other enteral business we're seeing that most customers are wanting to order the new product. We still have a substantial disposable set sales business for our installed base of enteral nutrition delivery pumps. So the base business doesn't go away with the launch of this new product. The disposable set sales, which are the lion's share of that business, will remain in place as we see it, then we'll be layering in this new business on top of that; and replacing new pump sales, in most cases with the Infinity.

I see. And what -- how long have you -- are you in a full production mode on Infinity at this point?

Yes, we are.

So-- and could, you know, could you discuss the normal glitches that might have happened as you ramped up production?

Actually it's been-- I'm pleased to report that with a -- the seasoned VP of operation we brought in over two years ago, that this has been one of the smoothest transitions to manufacturing that we've seen. Start-up costs, there are always start-up costs with running early parts off of injection mold tooling. Disposable set components, even more so than the pumps, because we're running fairly high volume there.

So there's always some material that gets scrapped along the way. That was minimized in this process. There's the tooling investment on the production line. We've developed a great team of manufacturing engineers in house who've been able to do that efficiently. And to the best of our knowledge, as far as our industry knowledge, we've been able to develop and get this product into manufacturing more cost effectively than any of the competitors that we're aware of.

[Operator Instructions]. Jeremy Zu, Wedbush.

You mentioned international division has been growing. What proportion of your business is from international versus domestic?

Currently our international business is about 17% -- I'm sorry, 14% of our business, Jeremy. With the Royal Numico taking place in the second half of the year, that proportion of business related to our international will actually hit about 17% this year- for 2005.

And do you see that as a growth-- growth division going forward?

Definitely.

A bigger and bigger portion of your overall business?

Yes. Royal Numico, in the full workings of all the agreements bring in excess of $7 million annually from sales and that is all internation sales.

Now where are you selling to, what countries or what continents?

In terms of the agreement, we've not disclosed the specific countries; but they are-- they include the continents of Asia, Europe, and South America and the Pacific Rim. So a very broad distribution.

[Operator Instructions]. At this time I show no further questions. I'd like to turn the conference back over.

Thank you. The results of this quarter and the 2004 year have confirmed our strategy of focus on our Applied Technology and Therapeutics divisions. Even with a disappointing fourth quarter, sales from our Applied Technology division have increased 7% during the year. Sales of our EnteraLite product line within the Therapeutics division have grown 8% during the year. Looking forward, we view the Royal Numico relationship as a key element of our strategy to grow our global presence and sales of our Therapeutics division products. We also anticipate market acceptance in 2005 for our new EnteraLite Infinity pump. Our 2005 forecast for Applied Technology business is encouraging and we are developing the sales pipeline for business beyond 2005.

In closing, we believe that our continued focus on our customers and business partners will result in further progress for all of our stakeholders and we look forward to keeping you apprised of our progress. Thank you for your support and for joining us today on this call.

Thank you. Ladies and gentlemen, this concludes the ZEVEX fourth quarter and year-end conference call. Thank you for participating in today's conference, and at this time you may now disconnect.