Moog Inc (MOG.B) 2006 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Zevex Third Quarter 2006 Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded Tuesday, October 31, 2006. At this time, I'd like to turn the presentation over to [Colleen Dahl], Investor Relations Assistant. Please go ahead.

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 2006 third quarter and first nine months financial results.

A short time ago, Zevex released financial results for the third quarter and first nine months of 2006. 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. A replay of this conference call will be available on our web site at www.zevex.com. You may also access archived copies of Zevex's news releases on the Investor Relations portion 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, 2005, and form 10-Q for the third quarter 2006, which is be available today. These filings identify specific risk factors that may cause actual results to differ materially from those described in forward-looking statements.

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

Thank you, Colleen. Good afternoon listeners, and welcome to our third quarter 2006 conference call. We are pleased to announce our results for the third quarter.

As you may have seen by now, third quarter revenue grew 28% to $10.4 million, compared with revenue of $8.1 million for last year's third quarter. We reported net income of $0.07 per share for the third quarter of 2006, compared with net income of $0.15 per share for the third quarter of 2005.

Compared to last year's third quarter, revenue from our therapeutics division increased by 56% and revenue from our applied technology division decreased by 11%. Later in this call, our Chief Financial Officer, Phil McStotts and I will provide more background on the change in quarterly earnings as well as revenue growth by product area.

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 and sells Enteral nutrition pumps, which are used by patients who cannot feed themselves.

We believe that our pumps are superior to all others offered in the market 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 disposal 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.

Last June, we received the Silver Medical Design Excellence Award from Canon Communications for the Enteralite Infinity pump. In August 2005, Numico, our exclusive distributor of a private label version of the Enteralite Infinity, launched the Flowcare Infinity in European markets.

Market acceptance of this product has continued to go well through the first nine months of 2006. In the United States, sales of disposable sets are accelerating based upon on our rapidly growing installed base of 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 sensors, food management, and surgical ultrasound.

We make surgical tools, components, and systems that improve the safety and effectiveness of cataract surgery, open heart surgery, 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 our Chief Financial Officer, Phil McStotts, who will provide detail on our financial results.

Thanks Dave. For those of you have participated in our previously quarterly conference calls, I will be presenting today in a new format. I would like to focus on specific areas that I believe are of greatest interest to our listeners rather than recapping all the content of our press release and 10-Q filing.

Revenue for the third quarter of 2006 was $10.4 million, compared to $8.1 million for the third quarter of 2005. Revenue for the first nine months of 2006 was $31.5 million, compared with $20.9 million for the same period of 2005.

Our gross profit, as a percentage of revenue or gross margin, was approximately 33.6% for the third quarter of 2006, compared to 37.9% for the third quarter of 2005. Gross margin was approximately 34.8% for the first nine months of 2006, compared with 37% for the first nine months of 2005.

We primarily attribute the decrease in gross margin to four factors. First, the product mix delivered by each business division differed during the periods in 2006 and 2005. During the third quarter and first nine months of 2006, our revenue was greater in lower margin products and services than in the prior year. Sales from our therapeutic division accounted for 71% of total revenue for the third quarter, 66% of total revenue for the first nine months of 2006, compared with 58% for the quarter and 54% for the first nine months of 2005.

This quarter we experienced a combined effect of significant growth of lower margin therapeutics revenue with a decline in higher margin applied technology revenue. We attribute this temporary decline in our applied technology division revenue open dollars and as a percentage of revenue to a decrease in demand from one of our largest sensor customers, which we expect will increase again during the next two quarters.

As we stated in the past, it is not unusual for us to experience fluctuation in demand from some of our largest applied technology customers from time to time and we will continue to execute our strategy to mitigate the potential for this effect.

Second, we incurred one-time costs associated with the transfer of manufacturing of the Enteral disposable products of our therapeutics division to a new, third party supplier. The impact of these costs amounted to approximately a 1.4% decrease in gross margin for the third quarter and a 1.1% decrease for the first nine months of 2006. The transfer to our new, third party supplier was completed in the third quarter.

Third, we generated lower margin service revenue of approximately $800,000 in the third quarter and $2.2 million for the first nine months of 2006. This service relates to the maintenance of Nutricia Clinical's enteral feeding pumps and has performed on our behalf by our third party service provider in Europe.

Although this service business generates an operating margin, the gross margin on the service is well below our corporate average. Our gross profit as a percentage of revenue would have been 35.3% for the third quarter and 36.2% for the first nine months of 2006 had service revenue been excluded. Although we anticipate the service revenue will decrease in the future, to date, we have not experienced the decline.

Fourth, material costs have increased over the prior year at a rate that was greater than expected. Our engineers in research and development and operations are currently executing cost reduction initiatives that we expect will allow us to return to prior levels of gross margin during the first half of 2007.

Our operating income decreased to $706,000 or 7% of revenue in the third quarter of 2006 compared to operating income of $805,000 or 10% of revenue in the third quarter of 2005. Operating income increased to $2.7 million or 8.5% percent of revenue for the first nine months of 20066 compared to operating income of $1.1 million or 5% of revenue for the first nine months of 2005.

The decrease in operating income during the third quarter of 2006, as compared to the same period of 2005, is related to the following factors.

First, we increased selling, general and administrative expenses which included recruiting expenses, personnel insurance costs, legal fees, non-cash stock based compensation expense, bonus accruals, and Sarbanes-Oxley section 404 compliance costs.

FAS 123R non-cash stock-based compensation expense decreased our operating margins in the third quarter of 2006 by 1.2%, compared to the same period of 2005, and 1% for the nine month period. Sarbanes-Oxley section 404 compliance costs decreased our third quarter operating margin by approximately one percent. It should be noted however that our SG&A expenses, as a percentage of revenue, have decreased to 22.2% for the third quarter of 2006 compared to a 23.9% in 2005, and 22.4% for the first nine months of 2006, compared with 27.5% for the same period of 2005. We believe this trend will continue as revenue continues to grow.

Second, we have increased our investment in research and development in 2006 by greater than $150,000 in the third quarter and $300,000 in the first nine months compared to the same periods of 2005. We had net income of $419,000 or 4% of revenue in the third quarter of 2006 compared to net income of $785,000 or 10% of revenue in the third quarter of 2005. Yet net income of $3.4 million or 11% of revenue in the first nine months of 2006 compared to net income of $1 million or 5% of revenue in the first nine months of 2005.

The decrease in income, net income, in the third quarter of 2006 is due to the increase in operating expense mentioned earlier as well as income tax expense of $297,000. In the third quarter of 2005, income taxes were offset by the reversal of the tax valuation allowance, therefore eliminating all tax expense for that period.

Increase of $2.3 million in net income in the first nine months of 2006 was primarily generated by profitable revenue growth, increased operating margins, and the previously disclosed $1 million patent settlement.

Working capital at September 30, 2006, was $13 million compared to $7.9 million at December 31, 2005 and $6.6 million at September 30, 2005. A portion of working capital represented by cash was $3.4 million at September 30, 2006, compared to $600,000 at September 30, 2005. Total stockholder's equity was $20.5 million at September 30, 2006 compared with $15.1 million at December 31, 2005.

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

Thank you, Phil.

This quarter's record results again reflect strong sales growth from both domestic and international therapeutics products, but a decline in applied technology product sales. Total revenue from our therapeutics division grew by 56%.

Sales of domestic Enteral feeding pumps and disposable delivery sets increased by 14% over the third quarter of 2005. Domestic ambulatory product sales grew 14% based upon the continued success of our sales force in driving demand for our Enteralite Infinity and Enteralite pumps and disposable sets.

International sales from therapeutics products and service in the same period include by 139%. The increase in international sales was due primarily to increased revenue from Nutricia Clinical. International therapeutics sales continued to exceed our expectations based upon Nutricia Clinical's success in selling the Flowcare Infinity portable feeding pump in Europe.

Nutricia-related demand for service from our third-party service provider in Europe was also strong during the quarter, generating approximately $800,000 in revenue.

Based upon having achieved $3.5 million in revenue with Nutricia Clinical during the third quarter and $10 million in total revenue during the first nine months, we are increasing our projection for 2006. We now expect that revenue with Nutricia Clinical to exceed $12.5 million for the full-year 2006.

Total revenue from the applied technology division decreased by 11% or $375,000 during the quarter. Revenue from sensors and hand pieces decreased 7% as demand fro one of our largest sensor customers declined during the quarter. As we stated in our press release today, we expect that this demand from that customer to begin to recover during the fourth quarter.

Although systems revenue declined during the third quarter, the LifePort Kidney Transporter and disposable set business with organ recovery systems is continuing to run very strong as market acceptance for the LifePort continues to increase demand for disposables.

The decline in systems revenue during the third quarter was due to a continued decline in demand from one of our other customers. Meanwhile, we are working to bring to market more component and systems products that utilize our core technologies for applied technology customers.

Additionally, last week, we launched our new LifeGuard line of miniaturized air bubble detectors at the Medical Design and Manufacturing Exposition in Minneapolis. Early indications are that this product line will help our customers for fluid management products to get to market faster with our adaptable, reliable sensors.

It is noteworthy that engineering service revenue increased 35% during the third quarter. We expect that we will produce even stronger engineering service revenue during the fourth quarter. This revenue is generated form customers that are planning to introduce products to the market later this year and beyond. We are assisting these customers in the development of new products and we expect to manufacture and service those products throughout their product lifecycles.

For the first nine months of the year, our revenue increased 51%. Therapeutics division revenue increased 85% for the nine month period while applied technology division revenue has increased 11%. Based upon our performance so far this year, and the year-over-year revenue growth that we are forecasting for the fourth quarter, and barring any unforeseen events, we are once again raising our overall 2006 corporate revenue growth forecast from 30% to 35%. This means that we expect revenue for the full year to exceed $41 million.

Many shareholders have been asking for revenue growth and earnings guidance for next year, 2007. Some of our applied technology customers have already begun providing their growth forecasts for the coming year. However, those forecast tend to be firm for the first three months and then become more speculative as we look further out in time.

In the therapeutics area, we believe that we can continue to achieve growth in domestic sales due to the track record of our sales force in achieving double-digit revenue growth this year. Internationally, Nutricia Clinical is also forecasting growth based upon continued organic growth as well as the continuing replacement of their installed based of older model pumps.

Although it is early to provide a firm projection for 2007 in revenue, our preliminary forecast indicates that 20% revenue growth is achievable in 2007.

From an operating income perspective, we are setting goals to achieve 10% operating income or better in the coming year. We believe that we can do better than the 7% that we achieved this quarter, especially when we consider the cost reduction initiatives that are underway. We expect the impact of our cost reduction projects to become evident during the first half of 2007.

With respect to goals and incentives, I would like to note that we will continue to incur stock incentive expenses in the quarters and years ahead. Our Board of Directors and executive team believe that stock is an important motivational and retention tool and we intend to continue to utilize it to align shareholder and employee interests.

Now before turning the conference call over for the question and answer session, I would like to convey the excitement level within our company to our shareholders and listeners today. Tomorrow, we will be celebrating our 20-year anniversary. Our entire is excited at Zevex for a number of reasons.

First, we have demonstrated that we can grow and achieve profitability in competitive marketplaces. Second, the markets that we compete in provide tremendous growth opportunity. Third, our products are well differentiated within those markets. Fourth, we have a plan for growth and a team that can execute as proven so far this year. And finally, we have the programs in place to improve our performance, including revenue and margin growth.

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

Thank you, sir.

[OPERATOR INSTRUCTIONS]

Our first question will come from Sean McMahon with Kennedy Capital Management. Please go ahead.

My first question goes with the tax rate - what kind of tax rate should we look at in '07?

'07, 34% tax rate is, say, a good rate to use.

Okay. I think, what, you ran a 40% this quarter?

And the 40% this quarter was a little higher than expected and the main reason for that is in shoring up all our deferred tax assets and then reconciling the tax return back to all the deferred assets in this quarter when we filed in the third quarter, is where that differential-- difference came in relationship to the tax rate of what I expected it to be, which was 34% to the 40% of what it was.

But going forward, an effective tax rate for the year of 2007, 34%

Okay and I guess looking forward here. The leverage and the model -- I guess, how much should I look at it as commission rates on SG&A?

In relationship to what?

Sales.

Okay, in relationship to the sales. It's hard to give that specific answer and the reason being is that they vary so much in relationship to where the product is sold, whether it's applied tech or whether it's in our therapeutics. But generally speaking, an overall amount, less than 5% of the incremental sale would be related to sales.

Okay. And you know, sorry to keep looking forward here but you know, you guys kind of talked preliminary and I'm not trying to tie you to a number or anything, but what is really pushing that growth in `07? Is it just continuation of your guys executing on your plan here? Is there some new products out there that you think -- what is it? What would continue that growth?

This is Dave. The primary drivers of the growth are, and I will take each product area, continued execution by our domestic sales force in the therapeutics area. They have proven that they can drive organic sales in the mid-teens, achieving 14% growth this quarter. We think that they have the capacity to increase that. And so we're very excited for that momentum that we've already secured based on the technology that we launched last year in our Infinity product line.

Internationally, Nutricia Clinical continues to do very well with our product line, both capturing market share and continuing to replace their install base of older pumps. So that is also a significant driver of growth.

And in the applied technology area, we have some promising forecasts from some of our customers for growth next year. We also couple with that, we do have at least one new launch in the applied technology area planned from next year with a new customer. And in the therapeutics area, we have a new product launch that is scheduled to take place before the end of the first quarter.

Okay, great. Thanks, guys. Congratulations.

Thank you.

Thank you.

Thank you. Our next question will come from Don Littlewood with Littlewood, Burke and Company. Please go ahead.

Hi Phil and Dave.

How are you doing, Don?

Good afternoon, Don.

Good. I want to talk a little bit more about these new products. You've got increase engineering revenues come in from customers. You've got increased research and development expenses of your own. Can you talk a little bit more about the new products and what you foresee as some revenue potential for them in the near term, anyway?

I'll start on the applied technology side, Don. And as I mentioned, last week we launched a new product in our applied technology area. And it is a flexible yet compact bubble detector product and this is direction that we want to be taking in that business looking forward is developing products like that on our own, on our own resources that can help our customers to get their products to market faster.

The idea being that if we develop a smaller, more effective product that takes a lot of the R&D of the process for our customer, it allows them to get into the market faster and generate manufacturing revenue for us. That product, I would say is a, in terms of our expectations for that, I expect that that is a way of planting seeds in new accounts. Significant accounts in that business area typically generate more than $100,000 a year. And I would hope that we would be generating a couple of those within the next 12 months in that area.

They can range all the way up to multi-million dollar customers as well, though. So I am bracketing it very broadly and it's a way of developing a pipeline of innovation for those customers.

As I look specifically, Don, at other applied technology customers, we have new customers coming on in the sensors and the hand piece areas that we believe will exceed $1 million in revenue next year. We have at least one of those that we believe will enter the market in the first half of the year. So that gives a little more color in terms of the magnitude for applied technology.

In the therapeutics area, in order to bring a product to market, a significant product to market in that area, it needs to generate more than $1 million annually in revenue. And our expectations are that we will be launching a product in the first quarter that will do that.

This is a new pump model or a modification to an existing?

For competitive reasons, I'd like to not go any further in terms of the description of the product, but we will certainly issue press release on that when we do it, Don.

Okay. Thank you. Let's work on this operating profit margin, though. That gives everybody a sense of pause.

Yeah, we're certainly focused on that as one of our key initiatives immediately, Don.

Okay, thank you.

You're welcome.

Thank you. Our next question will come from Richard Tierney with Longport Partners. Please go ahead.

Good afternoon. And thanks for the added detail. It makes the release a lot easier to digest.

You're welcome, Dick.

Just a little housekeeping. The other international revenue in the quarter that wasn't Numico, was that $300,000? $500,000? How much was that?

Roughly speaking, it was--

Roughly that's about a, an a quarterly basis Dick, that's roughly about a $300,000 to $400,000 business quarter-by-quarter.

Okay, so it stayed in that range?

Yes, it has been fairly consistent. It has achieved our forecast and been fairly steady in producing revenue.

In the third quarter Dick, it was about $350,000.

Right, okay. And then same way; the U.S. stationary therapeutics business, the release seemed to suggest that might have grown a little. Did that get up above $500,000?

It literally was right at that level.

Right at $500,000. It's held steadier than we would have forecast. That's a credit to our inside sales team as well as our outside sales force.

Right. I take it the -- since you're projecting operating margins to be flattish in the fourth quarter, that that's suggesting that the applied tech revenues will stay flattish in the fourth quarter. Is that --

Actually no, Dick. There's a couple of factors in relationship to that, that why they will be flat in this particular forth quarter is we are continuing some heavy R&D expenses and we're going to again, have some impact and even a little more impact in relationship to our Sarbanes-Oxley 404 compliance cost in this fourth quarter.

I thought you said it was going to be sort of flat with this quarter at $100,000 or so.

That was the stock option expense.

That was the stock option expense.

I beg your pardon. What is Sarb-Ox running?

We had stated that that cost would run us somewhere between $200,000 and $300,000 last quarter and that's about where we're -- we're going to end up somewhere in that neighborhood.

Okay, and it was about that in this quarter?

Yeah, it was about 1% -- the effect was about 1%.

In this quarter?

In this quarter, on my margins, operating margins.

Your mention of going after another round of cost cuts is a bit of a surprise. Could you flesh that out?

Sure. And I just want to clarify one other point, Dick, as well. And that is on the SOX cost. I don't want to infer that we incurred $200,000 to $300,000 per quarter. We had estimated $200,000 to $300,000 in the second half of the year.

Total, right.

And for any other listeners out there. Then with respect to cost cuts, I would say that my expectation and, if you had a discussion with our VP of Operations, he is probably out there smiling right. We're always driving to reduce cost and diligently working from the disposables area as well from the device, when it comes to capital equipment. We are specifically focused in our higher revenue generation products, including pumps and disposable sets on figuring out ways to make those cost-effective. And we do it by design and also by improving our manufacturing processes. We have a team here in house of automation engineers that are figuring out ways to semi-automate the assembly of pumps and disposable sets. And we also have some design changes underway to reduce the cost of our disposable sets, working very closely with our third party supplier.

So those are the key areas that we're focused on as they are generating proportionately more revenue. We see that as the opportunity for us to improve our margin by reducing those costs.

Right. You had suggested on the costs last quarter of changing disposable set manufacturers, that you'd guess you were going to recapture your $100,000 or so of the cost hit last quarter this quarter.

I believe actually what that was, Dick, was we had incurred those costs in the second quarter and we anticipated incurring some additional costs in the third quarter. And that's why we went out and we basically said that is all complete now. And so that particular cost related to our gross margins will go away.

Okay. Was the hit in this quarter a little above plan?

A little bit above plan?

Yes.

I would say earnestly, Dick, the transition involved more than anticipated but at the end of the day, or I should say at the end of the third quarter, I would say that we did it right from the perspective of taking care of our customers throughout the process. We took care of our customers and we didn't have people that needed feeding sets that couldn't get them. We incurred some more costs on our end and so did our third party supplier, but we go through those challenges that pop up along the way.

Good, okay. Thank you.

Thank you. Our next question will come from Bill Silver with Pinecone Capital. Please go ahead.

Yeah thank you. Hi Dave, Phil. Congratulations --

Good afternoon, Bill.

Congratulations on the top line and congratulations on coming up on your 20th year anniversary here.

Thank you.

A couple questions though, if I may. Just in your goal of getting gross margins back on target here, you mentioned some of the cost reduction efforts. What type of pricing power do you think you have with the therapeutic products either from an end-user standpoint here in the U.S. or through the distributors?

I would say that we have limited pricing power in the therapeutics area, limited in that within reason, we're able to earn a premium with the highest priced competitor in the field, of the players, in particular ambulatory enteral feeding pumps and disposable sets.

So we earn a premium price over our competitors. However, this is acceptable within a limit, of course, within the limitations of reimbursement and so we're very cautious there not to damage our ability to grow the business by placing prices too high in an effort to raise our margins.

So as I look at it realistically, and I think getting to your question, I don't believe we have the pricing power to raise prices to recapture our margins. I think what we have to do is be innovative and figure our ways to cost out of the product.

Okay, I appreciate that clarification. And maybe that leads to the second question, too. On the increase -- I guess the increased expenses in R&D, you know, what portion of that or what programs are really new products or which ones are more sustaining-type maybe cost-reduction type efforts?

I would say for the most part, our IR&D projects are based on new products.

Okay.

Sustaining engineering and manufacturing engineering flow through our cost of goods.

Okay, so that's what's over on the manufacturing group pretty much, from the cost reduction programs?

It does.

Okay good. And then I had another question. Just on the -- you know, you mentioned that you would certainly use shares or option against share as incentives going forward. Maybe through 2007, what type of further dilution do you expect in the share total, either on a percentage basis or an absolute basis?

I have to kind of couch that a little bit, because everything is basically comes through our compensation committee. And depending on how successful we are, also generates the more incentive for the compensation committee to -- for higher award. So if there was not any growth, and I'll put in that way, if the company did not grow from 2006 to 2007, I can say there would be very dilution factor because the stock compensation would not take place.

If you looked at it in a manner, and we've going to restricted stock units versus stock options, or less dilution factor, if I was saying, "what is that number for next year?" It would be less than 100,000 shares.

Okay. Okay, well thanks for that clarification. Yeah, good luck getting the -- hitting your targets next year on the top line growth and also getting the operating earnings back up to target.

Thank you, Bill

Thank you.

Thank you, sir.

[Operator Instructions]

Our next question will come from Mike Petusky with Thompson Davis & Company. Please go ahead.

Good afternoon, fellas. I had to briefly step off the call and, forgive me if this has already been asked. I think I heard a 34% tax rate guess for next year. Can you talk about what cash taxes will be next year?

Cash taxes next year, I would say they would be zero. And I'm basing that on several factors that I receive from the tax standpoint, a deduction for the difference between when stock options were issued and when they were exercised under S8 filing. I would anticipate that because there are options next year that expire, that there will be some options that will be exercised generating that tax expense. So my actual hard, out-of-pocket cost related to taxes next year will be minimal. There will be state taxes, the minimum state requirement. But again, all in all, Mike, that's probably less than $10,000.

Okay, okay great. And one other thing I may have missed and forgive me if I did. Did you guys give Numico revenue guidance for `06 revised?

Yes we did.

Yes. Yes, we did for this year.

What's that number?

It would $12.5 million. Actually, the way it was said there it exceeds the $12.5 million.

Listen, congratulations, great top line, and I know you'll get it going on the operating line. Thanks.

Thanks.

Thank you, Mike.

Thank.

[Operator Instructions]

Our next question is a follow up from Richard Tierney. Please go ahead.

At one of the conferences, you mentioned you were making progress on an entry into Japan. Could you flesh that out a little?

Yes, we have ongoing discussions with two qualified potential distributors in Japan and we're currently working with each of them to study the market, to identify which would be the best partner for us based on their perspective on the market and their place in the market to work with. Now, that's not a guarantee that either of those two will be our distributor. However, it's promising that they are very interested in the benefits of our product for the patients in Japan.

So we're encouraged by that and, as I have mentioned before, it's a long process but we're well under way with that process.

Would you guess that the distribution deal would be something like Numico's?

I would love to think that it will be a deal of that quality as Numico is an excellent business partner. And we are certainly driving to work with partners of that stature. I think the reality is that the market in Japan is considerably smaller than the markets served by Numico.

And in terms of the way the deal would be structured, we see ourselves providing the pump and all of the disposable sets in their entirety in that situation, which would be different from Numico, where we're providing disposable set components.

Right.

So we'd capture more of that business.

Oh, and did I- this is a minor point but in the beginning of September at the Roth conference, I think you said that your customers get 50% or better gross margin and then at the Noble Conference, you said a 60% or better gross margin. Did I hear that correctly?

I would say under most scenarios, our customers in the U.S. homecare market do achieve, on the disposable set side of the business, better than 60% gross margin, for the most part. Under most reimbursement scenarios. On the capital equipment, it's typically closer to 50%.

Okay. Thank you.

Thank you, Dick

Thank you, sir. Management, at this time we have no additional questions in the queue. I will turn the conference over to you for any further remarks.

Thank you. In closing, I would like to again recognize and thank our employees and leadership team for their continued execution to this year's plan. While we see room for improvement, we've made considerable year-over-year progress during the first nine months of 2006. We are now focused on making the fourth quarter a successful close to a year marked by record revenue and earnings.

Thank you all for participating today.