Moog Inc (MOG.B) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the ZEVEX International first-quarter 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, May 4th, 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 2005 first-quarter financial results. A short time ago, ZEVEX released financial results for the first quarter ended March 31, 2005. 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 call is available on our Web site at ZEVEX.com or StreetEvents.com. On the ZEVEX homepage, click on the microphone symbol to hear the replay broadcast. You may also access archived copies of ZEVEX news releases on the Investor Relations section of our Web site.

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, 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.

Thank you, Nancy. Good afternoon, listeners, and welcome to our first-quarter 2005 conference call. For the quarter ended March 31, 2005, we reported revenue of $6 million and net income of $45,000. Compared to the first quarter of 2004, revenue and net income decreased. However, we are encouraged by the progress we made this quarter when compared with the fourth quarter of last year, which is an important comparison because it reflects positive changes taking place within our Company. Specifically, gross margins improved 4% in the first quarter of 2005 from the fourth quarter of 2004. This is due to the product mix delivered during each quarter as well as savings achieved by our purchasing group and improved manufacturing efficiencies during the first quarter.

Revenue was lower than last year for two reasons. In our Therapeutics division, sales of our ambulatory pumps and disposable sets in international sales did not grow enough to compensate for a decline in stationary disposable set sales in the United States.

In the Applied Technology division, the first quarter of last year contained $255,000 in deferred revenue related to the sale of products to our divested Physical Evaluation division. Without this revenue, Applied Technology sales would have increased 5% over the first quarter of 2004.

The difference in earnings from the first quarter of 2004 to the first quarter of 2005 is a result of lower sales and the difference in the product mix delivered during each quarter. At current margins, quarterly revenue of $6 million is close to break even. Therefore, sales above that level and the product mix delivered during any particular quarter can significantly affect earnings.

Later in this conference call, I will provide insight into prospects for the year ahead, but right now I'd like to provide a brief overview of our business for our new listeners.

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 pumps and disposable sets for the delivery of enteral nutrition, which are used by patients who cannot feed themselves. Our pumps combine accuracy and nutrition delivery with small size, long battery life, and patented safety features that allow enteral patients to enjoy unprecedented mobility. Our 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 pseudoobstruction, and other disorders that prevent normal digestion.

In addition, we develop, manufacture, and market disposable sets and accessories for our pumps. We are 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 enteral 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 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.

Products from both our Applied Technology and Therapeutics product lines have won prestigious Medical Design Excellence Awards, which we believe validate our position as a technology leader in medical devices. 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 first quarter 2005 was $6 million compared with $6.2 million for the first quarter of 2004, a 4% decrease. The decrease in revenue from last year's first quarter is largely due to a decrease of $130,000 or 17% in sales of our stationary enteral feeding delivery products within our Therapeutics division. Our EnteraLite Infinity and EnteraLite portable feeding pump and disposable set revenue held steady. And our international Therapeutics revenue grew by $39,000 or 10% during the quarter compared to the first quarter of 2004.

Our Applied Technology division revenue decreased 3% to $3.1 million during the first quarter of 2005 compared to $3.2 million in the first quarter of 2004. During the first quarter of 2005, Surgical Handpiece and sensor revenue increased approximately $70,000 or 3% over the first quarter of 2004. Our engineering revenue held steady during the quarter. Our Medical Systems revenue decreased approximately $160,000 from the first quarter of 2004.

During the first quarter of 2004, approximately $255,000 of Applied Technology Medical Systems revenue was deferred revenue generated by the sales products manufactured for JTech Medical, the Physical Evaluation business that was sold in December 2003.

The first quarter of 2005, we had net income of $45,000, 1% of revenue compared with net income of $209,000, 3% of revenue in the first quarter of 2004.

Fully diluted earnings per share for the first quarter of 2005 were $0.01 compared to the earnings per share of $0.06 for the first quarter of 2004.

Our Therapeutics division accounted for approximately 48% of total revenue in both the first quarter of 2005 and 2004. While our Applied Technology products accounted for 52% of total revenue for the same period. Our gross profit as a percentage of revenue was approximately 36.5% for the first quarter of 2005 compared to 37.5% for the first quarter of 2004. We attribute the 1% decrease in gross profit to the different product mix delivered in each quarter. It's not uncommon for variations in our product mix to cause differences in gross profit for comparative quarters.

Selling, general, and administrative expenses increased during the first quarter of 2005 to $1.8 million compared to $1.7 million for the first quarter of 2004. The increase is primarily related to personnel and insurance costs.

Research and development expenses decreased by approximately $65,000 during the first quarter of 2005 compared to the first quarter of 2004. As stated earlier, the Company had net income of $45,000 in the first quarter of 2005 compared to net income of $209,000 in the first quarter of 2004. The decrease in net income during 2005 compared to 2004 is due to the combined effects of lower sales, changes in gross profit, and increased selling, general and administrative expenses, partially offset by decreased research and development costs.

We had income tax expense of $2,635 in the first quarter of 2005 compared to income tax expense of $3,615 in the same period of 2004. Income tax expenses for those periods represent minimum tax payments due to the various states where the Company is required to file. We expect we'll be able to realize a portion of the deferred tax assets related to net operating loss carryforwards in 2005, which would result in a partial reversal of related valuation allowance.

Working capital on March 31, 2005 was $6.1 million compared to $6 million on December 31, 2004 and $6.2 million on March 31, 2004. The outstanding balance of our funded debt on March 31, 2005, was $2,870,000 compared to $2,120,000 on December 31, 2004, an increase of $750,000.

The change in funded debt during the first quarter of 2005 was associated with an increase in our line of credit balance. The increase in the use of the line of credit was primarily related to an increase in accounts receivable balances due to substantial product sales in the third month of the quarter, and a decrease in accounts payable. The ratio of current assets to current liabilities decreased to 3.03 on March 31, 2005 from 3.20 on December 31, 2004. Total stockholder equity was $12.8 million on March 31, 2005 compared with $12.7 million on December 31, 2004.

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

Thank you, Phil. Within the Applied Technology division, sales of Surgical Handpieces, sensors and systems to three of our top customers were back to normal historical levels during the first quarter. The forecast for the rest of this year from these customers also remains strong.

Within the Therapeutics division, international sales grew but not enough to compensate for flat ambulatory pump and disposable set sales and the decline in stationary disposable set sales.

The two growth catalysts I mentioned in last quarter's conference call that are in place to accelerate therapeutics division sales are much closer now and we should begin seeing some contribution from them in the third quarter.

The first was the strategic relationship established with Royal Numico last year. The rollout of enteral feeding pump products for Royal Numico was still on schedule for late this quarter or early third quarter. 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, although it became available for sale only in the first quarter of this year. It is not unusual for customers to postpone purchases of pumps while they evaluate new technology, such as our EnteraLite Infinity. 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 demand grows for the EnteraLite Infinity platform, we expect sales of disposable sets for our installed base of EnteraLite pumps to remain strong. During the first quarter, we experienced a drop in demand for EnteraLite disposable sets, which we attribute to ordering patterns.

While we have made progress from the start of 2005 from the end of 2004, we are not satisfied with our first-quarter performance. However, we believe that the drivers for sales growth are in place to make 2005 a profitable year. I'd like to caution our listeners once more that we expect the change in profitability to take place during the second half of 2005 as sales growth accelerates. Based upon anticipated revenue growth during the second half of this year, we expect both revenue and earnings to compare favorably to last year's results for the second half and full year. Presently, we are focused not only on growing sales in 2005, but also filling the sales pipeline beyond this year.

Now operator, I would like to open up the conference call to questions from our listeners.

Thank you. (OPERATOR INSTRUCTIONS). Bill Shriver, Pine Cone Capital.

This is Bill Shriver with Pine Cone. How you doing? Dave, I just wanted to understand what still may need to happen for this Royal Numico agreement and really to rev up sales internationally. Could you address that?

Yes. Of course, for competitive reasons, I have to be careful with what I say about the specific content of the product line for Royal Numico. But essentially to get started, we need to begin manufacturing pumps of certain models for them and selling them to them, of course.

In terms of where we are in the process, we've done most of the groundwork associated with the first models with Numico in terms of getting parts on hand to build product. And it's a matter of working with them through the appropriate schedule for their various markets globally.

Okay, good. And maybe just one other follow-up question to that. Does this in any way cannibalize any sales that you currently have in any of those international locations? Or are you looking at this as incremental?

We're looking at this as incremental. We don't believe that it cannibalizes any of our sales internationally in the markets that Numico serves.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Richard Deernly (ph), Longport Partners.

Good afternoon. The three customers that came back somewhat I gather faster than you were expecting, what happened there?

Certainly, we try to be conservative when we look ahead at forecasted demand. And we're excited to see that all three customers are enjoying success in the marketplace from a lot of hard work that went into last year for them to bolster their product lines and their sales structure. Two of them specifically have been expanding their distribution relationships and those have paid off in increased sales. Another has expanded its product line and we're seeing enjoyed sales there as well.

I noticed Advanced Medical Optics has made an acquisition or two. Are you making -- penetrating new products there?

Not only with Advanced Medical Optics, but with all of our Applied Technology customers, we see the first place to grow business is with our long-standing established customers. We have seen our business grow significantly with customers that have acquired other product lines. And certainly, AMO, just as our other Applied Tech customers, would be a great opportunity to grow as long as those acquisitions fit into our technology base.

All right. And were the sales of the Infinity pump significant in the quarter?

I'd say that in the month -- they started to reach significance in the last month of the quarter, as we had had some weeks to get the product out into the marketplace. It was a particularly strong month of March in terms of pump sales with the Infinity getting out. So we're much encouraged by that.

So March was strong?

Yes.

Okay. But the quarter was -- it was probably not very significant?

Yes, it wasn't significant. When we take into effect the fact that our EnteraLite -- the predecessor product, EnteraLite pump and disposable set sales -- were essentially -- when we look at sales from the prior year, they were actually down a bit. It was combined with Infinity that we were able to achieve essentially flat sales. So as I mentioned earlier in the conference call, one possibility is that we've seen some customers hold off on purchasing the existing product while they evaluate the new product. And certainly, our expectation is that we should be able to parlay this new product into additional sales.

Right. Okay, thank you very much.

Sally Wilson. Please state your company name followed by your question.

I'm an individual investor and I'd like to know what new products you have in the research and development pipeline.

Yes, good afternoon, Sally. And this is David McNally. We intend to continue to invest, even though we've launched our next generation product in our Therapeutics product line, the EnteraLite Infinity product, we're continuing to develop new products. Some of them are variations of existing products in that line that we believe will enhance their distribution worldwide. I'd say that our initial focus is on the Applied Technology division in developing proprietary component technologies, particularly in the sensor areas. So that's where our focus is this year in terms of the heaviest part of our research and development investment.

Thank you.

Don Littlewood (ph), Littlewood Burke (ph) & Co.

I have a couple of questions. Is Numico a stocking distributor? Or will they be a stocking distributor?

The relationship is more than that. It almost, Don, it almost takes on more of an OEM type of relationship, where we're supplying multiple models or devices to them. And what we would see happening there is designing -- and actually this is well underway -- designing the system to be more of a system that's focused on demand in the field and us producing product as demand grows in the field with their customer base.

They are going to or not going to carry inventory?

They will carry inventory in order to meet the needs of their market. But I see it as an expanded relationship beyond what might be the classical distributor relationship, such as a -- like a McKesson or a Gulf South distribution relationship in the United States. It's more of an OEM and private-label relationship.

Okay. In the Applied Technology area, how many new products are you working on for say the three largest customers that you have?

For our three largest customers, today, we're focused on enhancements to existing products with their lines. We're exploring opportunities with other product line extensions and new products for them. But I'd say with our largest customers, presently, having invested a great deal over the past two years for all three of our top customers, that we're starting to see the benefits of that investment in engineering development of those products presently.

Okay, thank you.

Jeremy Zhu, Wedbush.

Hi, I was wondering, what's the projected accruals (ph) profits margin for your Royal Numico sales? Is it going to be higher, lower, about the same?

Well I can say that we're not projecting, of course, at this time, projecting numbers for revenue growth or earnings growth overall as an organization. With respect to Numico, Jeremy, I regret that I'm going to have to refrain from answering that as well with respect to our competitive position with Numico.

I can say that the margins for the Numico business are designed to be in line with our current business.

Okay. That's great. Thank you.

At this time, I show no further questions. I'd like to turn the conference back over for any concluding comments.

The results of this quarter have demonstrated improvement over the third and fourth quarters of 2004. While we produced just better than breakeven results, the business in our Applied Technology and Therapeutics divisions looks promising. We view the Numico relationship as a key element of our strategy to grow our global presence and sales of our Therapeutics division products. Our 2005 forecast for Applied Technology business is encouraging and we are developing the sales pipeline for business beyond 2005.

In closing, I would like to welcome all of our shareholders to our annual meeting at 9 AM on May 18th at our headquarters in Salt Lake City. For those of you who may not yet be shareholders, our 2004 annual report is now available. Please contact Nancy Schultz if you would like copies. In addition, both interactive and PDF versions of the 2004 annual report are available on the Investor Relations section of our Web site.

In 2005 and beyond, we believe continued focus on our customers and business partners will result in progress for all of our stakeholders. We look forward to keeping you apprised of our progress. Thank you for your support and for joining us today in this call.

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