Moog Inc (MOG.B) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the ZEVEX International second quarter earnings conference call. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, August 4, 2005. At this time, I would like to turn the conference over to Ms. Nancy Schultz, Director of Corporate Communications and Investor Relations. Please go ahead, ma'am.

Thank you. Good afternoon, and thank you for participating in today's conference call. Joining me today are President and Chief Executive Officer, David McNally, and Chief Financial Officer, Phil McStotts to discuss our 2005 second quarter financial results. A short time ago, ZEVEX released financial results for the second quarter of 2005. If you have not received the news release or if you would like to be added to the 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 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 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, 2004 and form 10-Q for the second quarter of 2005. 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 Chief Executive Officer.

Thank you, Nancy. Good afternoon, listeners, and welcome to our second quarter 2005 conference call. As you may have seen by now, revenue grew 9% during the second quarter to $6.8 million compared to $6.2 million in last year’s second quarter. Revenue from our Applied Technology division grew 11% and revenue from our Therapeutics division grew 7%. We reported net income of $168,000 or $0.05 per share compared with net income in last year’s second quarter of $193,000 or $0.06 per share. Phil McStotts will go into more detail during his financial review.

For those of you who may not know, we are committed to two businesses – our Therapeutics division and our Applied Technology division. Our Therapeutics division makes enteral nutrition pumps, 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, durability, 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 the 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.

In January we introduced our newest addition to our enteral nutrition pump product line, the EnteraLite Infinity pump. In June, we received the Silver Medical Design Excellence award from Canon Communications for the EnteraLite Infinity pump. Market acceptance of this product has been going well. Sales are beginning to make a noticeable contribution. In the second quarter we achieved record domestic ambulatory product revenue based upon record pump sales, the majority of which were EnteraLite Infinity pumps.

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.

Before I provide insight into our 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.

Thanks Dave. Revenue for the second quarter of 2005 was $6.8 million compared with $6.2 million for the second quarter of 2004, a 9% increase. Revenue for the first six months of 2005 was $12.8 million compared with $12.4 million for the same period of 2004, a 3% increase. Our Therapeutics division generated approximately 53% of total revenue in the second quarter and 51% during the first six months of 2005 while our applied technology division produced 47% of total revenue for the quarter and 49% for the first six months of 2005.

Therapeutics division revenue increased 7% to $3.6 million during the second quarter of 2005 compared to $3.4 million for the second quarter of 2004. The increase in revenue from last year’s second quarter is largely due to a $275,000 or 14% increase in sales of our EnteraLite and EnteraLite Infinity products over the second quarter of 2004. International therapeutics revenue increased $50,000 or 7% during the quarter compared to the second quarter of 2004. These increases were partially offset by a decrease of $80,000 or 13% in sales of our stationary enteral feeding delivery products.

Applied Technology division revenue increased 11% to $3.2 million during the second quarter of 2005 compared to $2.9 million in the second quarter of 2004. Specifically, during the second quarter of 2005, Applied Technology medical systems revenue increased approximately $240,000 or 44% during the quarter. Applied Technology engineering revenue increased approximately $50,000 or 130% from the second quarter of 2004. Surgical handpiece and sensor revenue increased approximately $35,000 or 2% over the second quarter of 2004.

Therapeutics division revenue increased 2% to $6.5 million during the first six months of 2005 compared to $6.4 million the first six months of 2004. For the first six months of 2005, the increase in revenue over last year’s revenue was due to a $250,000, or 7% increase, in our EnteraLite and EnteraLite Infinity products over the first six months of 2004. International therapeutics revenue increased $100,000 or 8% during the first six months of 2005 compared to the same period of 2004. These increases were partially offset by a decrease of $210,000 or 15% sales of our stationary enteral feeding delivery products.

Applied Technology division revenue increased 4% to $6.3 million during the first six months of 2005 compared to $6.1 million for the first six months of 2004. In 2005, surgical handpiece and sensor revenue has increased approximately $100,000 or 2% over the first six months of 2004. Applied Technology engineering revenue increased approximately $45,000 or 33% during the first six months. Medical Systems revenue increased approximately $70,000 or 5% from the same period in 2004.

Gross profit as a percentage of revenue was 36.3% for the second quarter of 2005 compared to 39.1% for the second quarter of 2004. Gross profit was 36.4% for the first six months of 2005 compared to 38.3% for the first six months of 2004. We attribute the decrease in gross profit during the second quarter and first six months of 2005 when compared to the same period of 2004 to the different product mix delivering during each quarter. Notably, the results for the second quarter of 2004 included $193,000 more in relatively high-margin engineering service revenue. Further, the Company made a $67,000 adjustment for obsolete inventory during the second quarter of 2005. Without these factors, gross profit related to product sales was approximately 36% for the comparable periods.

Selling, general, and administrative expenses were $2 million for both the second quarter of 2005 and 2004. During the first six months of 2005 selling, general, and administrative expenses increased to $3.8 million compared to $3.7 million for the first six months of 2004. This increase is primarily related to the increase in personnel and insurance costs. We had no income tax expense for the second quarter of 2005 and 2004. Income tax expense of $2,635 for the first six months of 2005 compared to income tax expense of $3,615 in the same period of 2004. Income tax expense represents minimum tax payments due to the various states where the Company is required to file. We expect to be able to realize a portion of our deferred tax asset related to net operating loss carryforward in 2005, which would result in a partial reversal of the related valuation allowance.

For the second quarter of 2005, we had net income of $168,000 or 3% of revenue compared with net income of $193,000 or 3% of revenue in the second quarter of 2004. Fully diluted earnings per share for the second quarter of 2005 were $0.05 compared to earnings per share of $0.06 for the second quarter of 2004.

For the first six months of 2005, we had net income of $214,000 or 2% of revenue compared with net income of $402,000 or 3% of revenue for the first six months of 2004. Fully diluted earnings per share for the first six months of 2005 were $0.06 compared to earnings per share of $0.12 for the same period of 2004. The decrease in net income during 2005 compared to 2004 is due to the combined effect of the change in product mix and inventory adjustment, and increased selling and administrative expenses.

Working capital at June 30, 2005 was $6 million compared to $5.9 million at December 31, 2004 and $6.3 million at June 30, 2004. The outstanding balance of our funded debt at June 30, 2005 was $2,540,000 compared to $2,120,000 at December 31, 2004, an increase of $430,000. The changed in funded debt during for the first six months of 2005 was associated with an increase in our line-of-credit balance. Increase in the balance of our line-of-credit was primarily related to an increase in accounts receivable balances due to substantial product sales in the third month of the current quarter and a decrease in accounts payable partially offset by a decrease in inventories. Ratio of current assets to current liabilities decreased to 3.12 at June 30, 2005 from 3.2 at December 31, 2004 and 3.82 at June 30, 2004. Total stockholder equity was $13 million at June 30, 2005 compared to $12.7 million at December 31, 2004.

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

Thank you, Phil. We’re pleased to report 7% Therapeutics division sales growth. Within the Therapeutics division, our sales team generated record sales of our ambulatory pumps and disposable sets during the second quarter. Sales of domestic stationary pumps and disposable sets continued to decline compared with last year’s second quarter. International sales for the Therapeutics division held steady compared with the second quarter of 2004. However, the forecast for pump shipments to Nestle is improving and we have now begun shipping products to our new largest international customer Numico. So far this year, Numico has not accounted for 10% of our total revenue in any period. That will change during the third quarter. By yearend we expect Numico to be our largest customer with 2005 revenue exceeding $3.5 million as projected last year. As we have also previously projected, we expect our business with Numico to produce $7 million in annual revenue beginning in 2006 during the term of our contract.

As Phil mentioned, sales from the Applied Technology division grew 11% this quarter. I am pleased to report that sales to our largest Applied Technology handpiece and sensor customers remains strong. The forecast for the second half of the year indicates continued strength from these key customers. In addition, our operations and engineering groups are working with new customers to bring their products into production during the coming year.

Looking back sequentially to the first quarter of 2005, our second quarter revenue grew 14%. Therapeutics division revenue grew 26% and Applied Technology division revenue grew 2% compared with the first quarter of 2005. We are currently holding the line on operating expenses. Selling, general, and administrative expenses, while greater for the second quarter, were slightly lower as a percentage of sales than the first quarter. Total operating expenses were 33% of sales for the second quarter compared with 35% of sales for the first quarter of this year.

Over the past five years, we have built a more capable leadership team beginning at the Board level. More recently, we have made key executive hires in operations, quality and regulatory affairs, and engineering. Next we are making investment in future sales by hiring two new sales managers, one for the eastern United States and one for Europe, in order to more effectively identify and secure opportunities for new projects and to support existing customers. I would like to note that we already have an outstanding sales manager in place for the western United States, Asia, and the Pacific Rim who has been with the Company for 12 years. In addition we expect to hire a seasoned Vice-President of Sales and Marketing by the end of this month, who will provide strategic direction and coordinate our sales and marketing personnel. We expect this new team to be in place by September 1.

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

Absolutely, sir. (OPERATOR INSTRUCTIONS) Sam Bergman. (ph)

Good afternoon, gentlemen. A couple of questions. First, regarding enteral pumps, what is the percentage of accessories that you sell with those pumps in terms of revenue?

In terms of accessories, are you referring to the disposable sets?

Yes.

Roughly in relationship to our enteral sales, it’s approximately 80/20.

80% disposables and 20% pumps?

Yes.

And your CapEx for the year, for ’05?

That will be approximately $1 million.

Can you tell me what it has been up to now?

$397,000.

What does the pipeline look like right now for large programs like Numico going forward in the third and fourth quarter of this year?

Of course, we have a number of opportunities that we’re continuously working toward in terms of our applied technology model. I would say that of the magnitude of Numico, that is a great model going forward of the types of opportunities that we want to capitalize on. But I can’t speak to any specific programs presently, only that we have several that are in the works. I can’t say that they are going to come to fruition in the third and fourth quarters. We’re relying in our expectation for the second half of the year and our growth on organic growth from our existing customer base and a few new programs, but not particularly of that magnitude.

What about new products instead of new programs?

We’re working on new products under OEM agreements under our applied technology model. We’re also investing R&D on new proprietary products including components for our Applied Technology division and new proprietary products for our Therapeutics division. We’re primarily focused on line extensions and opportunities for us to reduce cost-of-goods across the board.

When are these items supposed to be released?

We’ve not announced any news publicly in terms of what the dates of release of new products will be for competitive reasons.

Going to the SG&A, it seems to me that if you are hiring two or three people in the upcoming months, your SG&A is going to take a hit versus the percentage of sales.

We’ve modeled that. Based on our expectation of sales growth, we believe that the impact as a percent of sales will be minimal, if any. Of course, we expect that those people are going to produce new business to offset the expense.

Even though they were just hired? You expect new business coming in from them?

We’re expecting our organic growth to carry us through short-term and then the new business that they would bring in, long-term. We don’t believe that it will be a great deal of time before they start to produce. The reason I say that is we’re hiring seasoned professionals.

Cash balance at the end of the quarter?

Cash balance at the end of the quarter was roughly – actually $226,000.

How large is the credit line?

The credit line is $3 million.

Is there a need to increase that credit line?

We’ve modeled it out. We believe that the $3 million line will meet our needs in the near future, which includes the growth that we anticipate from our Numico customer.

The last two questions. What was the DSOs?

55 days.

That’s it. Thank you.

Bill Shriver.

Thanks. Good afternoon. Could you address the increase in accounts receivable from last December to June this year?

The biggest reason is sales have increased substantially. If you look at it in relationship to the fourth quarter of last year to this particular quarter, it has increased by almost $1 million. Our sales cycle, which is probably not much different than most companies, runs in a manner of about 25-25-50. At the end of each particular quarter, I always have this bolus in relationship to sales. When my sales increase substantially, like they have since from December, that is the reflection in relationship to the receivable increase.

When you say 25-25-50, does that mean over the last three months?

Yes. In the first month of a quarter, I generate roughly 25% of my revenue for the quarter.

And then 25% in the next month and ----

And 50% -- and those are within four or five percentage points on a consistent basis. It has been that way forever. We’ve tried to flatten it out. It’s within four or five points on a quarterly basis by month.

Why do you think half the sales come in the last month of the quarter, if I understand you correctly?

Unfortunately, most of the business all the way through the supply chain has very similar drivers. We see the cyclical nature of the business from our applied technology customers that are public companies as well as the push in our Therapeutics business. We see the same type of revenue drivers rippling entirely through the capital equipment system related to our products. We do work diligently with our customers to forecast better and try to smooth that out. It has become the nature of the business that we see that quarterly push in the third month of each quarter.

I appreciate that clarification. My thoughts would be that as the consumable product becomes a greater percentage of sales – and that may not be the case yet for the new pump system – but, hopefully that would smooth out. Have you ever seen that change over time as products become older in their lifecycle?

As a matter of fact, you’ve touched on something that is the most – I’d say that is the most steady of our product lines in terms of shipments. The disposable sets streams typically our customers are managing inventories on a steady basis. We see steady usage and demand on the disposable side. We don’t see that cyclical nature on disposables. As those become a greater part of our sales, that can help to smooth that out. At the same time, we’re growing our Applied Technology business. That mitigates some of that smoothing as well and continues to drive the cyclical nature.

Your accounts receivable, I think you said were----

About 55.

55, okay. Alright. I appreciate the clarification.

David Wright. (ph)

Good afternoon. Dave, thanks for that good update in your commentary on how things are going. That was a good quarter. You haven’t had revenues like that for a little while.

We’re encouraged.

Just to clarify a couple of your remarks. It sounds like you started shipping to Numico in the second quarter?

We did.

In EnteraLite, it sounds like – could I infer that you have had some sequential strength in sales of that product?

We have. We’ve had sequential strength in the EnteraLite. That is primarily based on disposable set revenue remaining strong while we launched the next generation EnteraLite Infinity.

Right. Do you have some hope for the sequential strength to continue for the balance of this year?

Certainly we have the hope. More importantly, we’re planning to continue the strength in the product line and to grow revenue.

With these two new area sales managers, are these for Therapeutics? Or are they for both segments?

As the European business is primarily under –- I will call it an OEM model with proprietary products, when we look at Nestle and Numico, our European manager of this sales area in business development will manage all product lines. In the United States, we’ve split the United States in half. We’ll have one person covering the eastern part of the US and one the West. Those people will be focused on Applied Technology business as we have our own Therapeutics sales force here in the US.

That sounds very good. It sounds like the cylinders are starting to fire. In a little company sometimes it’s hard to keep them all going. I wish you continued luck.

(Operator Instructions) Sam Bergman.

Just a couple of quick follow-ups. The Numico contract is for what – 3.5 million through ’05 and then 7 million in 2006?

Yes. We project that we’ll produce at least 7 million in revenue per year starting in 2006.

Do you have the capacity right now to do that?

We do.

In terms of profit margins for that particular contract, is it similar to what you attain in the Applied and the Therapeutics?

Yes, it is. It is – I’ll put it this way. It is at least as profitable as our existing business today.

The only other question is in terms of engineering services, what percentage of that was in the revenue mix this quarter?

In this particular quarter – you know what, I'm sorry (multiple speakers). I've got my sheets here but –- I'm sorry, that's the one percentage I didn't actually run out so I'm doing that real quick as I bumble -- it’s about 2.5%.

About 2.5%. Do you see any high margin services like you had in last year’s quarter?

We’re certainly striving for those. Historically we’ve looked at engineering services as a means to get to production. What we have been learning, however, is that we can charge a premium for our specialty technologies for our capabilities in fluid management and measurement and surgical ultrasound. With those specialties, we’re looking at that more and more as a profit center going ahead and believe that it is possible. We’ve certainly not demonstrated that we can consistently do that in the past. We are going to strive for that in the future.

Going back to the credit line, what would be your capital needs next year if you had that Numico contract at $7 million? Wouldn’t you have to have an additional credit line or raise some capital on that?

No. Again, we’re very comfortable. Literally, once we get through the end of the year, we actually anticipate peaking on our line of credit late in the fourth quarter. From that point on, all indications are that our cash flow is sufficient to fund all the Numico business as well as our anticipated growth for next year.

Paying taxes – will that happen at all in 2006 or not?

I sure hope so.

What is the remaining NOL?

I am sorry. What?

What do you have for remaining operating losses.

The remaining NOL – I have to qualify that a little bit because there are NOLs that are related to that. There's also tax credits related to – R&D tax credits and so forth. We have roughly about $2.2 million in available income before we have to pay tax.

Okay. Thank you very much.

Gentlemen, there appear to be no further questions at this time. Please continue.

The results of this quarter have increased our confidence in delivering profitable growth this year. It is with great energy and enthusiasm that we head into the second half of the year. In closing, 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. Thank you for your support and for joining us in this call today.

Thank you sir. Ladies and gentlemen, this does conclude the ZEVEX International second quarter earnings conference call. Thank you all for your participation. You may now disconnect.