ICU Medical, Inc.
Q4 2007 Earnings Call Transcript

Published: 29 Jan 2008

[Operator:]

Good day, ladies and gentlemen, and welcome to the year-end 2007 ICU Medical Incorporated Earnings Call. My name is Eric, and I'll be your coordinator for today. (Operator Instructions). I would now like to turn your presentation over to your host for today's call, Dr. George Lopez, President and CEO. Please proceed.

[George Lopez:]

Good afternoon, everybody. Thank you for joining us today to review our ICU Medical's financial results for the fourth quarter and fiscal year ending December 31, 2007. I'm Dr. Lopez, Chairman and President of ICU Medical. With me today is Frank O'Brien, our CFO, and Scott Lamb, our Corporate Controller. I will start the call by highlighting our operating achievements during the fourth quarter. Then Frank will discuss in more detail our financial results for the fourth quarter and fiscal year 2007, as well as our revenue and range targets for fiscal 2008. I will wrap up the call with a discussion of current business trends, and then we will open the call for your questions. But before we start, I want to touch upon any forward-looking statements during this call. Please be aware that they are based on the best available information to management and assumptions that management believes are reasonable. Such statements are not intended to be representation of future results, but are subject to risk and uncertainty. Future results may differ materially from management's current expectations. We refer all of you to our SEC filings for more detailed information on the risks and uncertainties that have a direct bearing on our operating results and performance and financial conditions. With that said, let me begin. We are pleased with the overall performance we achieved during the fiscal year and the fourth quarter in as much as sales and earnings were in line with our expectation. 2007 was a year of investment and positioning us for growth in 2008 and beyond. Even though we faced challenges during the year in critical care, our other product offerings continued to do well in all channels and we are in a very strong position for continued revenue growth and earnings growth in 2008. We are looking at sales, excluding critical care and increasing approximately 16% in 2008. In 2007, we invested in our sales force and infrastructure for the roll out of many of our new products. We improved manufacturing efficiencies of Salt Lake City and Mexico, and in the fourth quarter our gross margins expanded almost 9 percentage points to 42% year-over-year. Our operating income for the fourth quarter increased approximately 35%, compared to the same quarter a year ago because of the improvement in the gross margin. As expected, sales of our critical care product distributed by Hospira continued to be sluggish during the fourth quarter and declined 36% from the relatively strong number in the fourth quarter of 2006. They are relatively flat from third quarter of 2007. Hospira controls the sales and marketing of the critical care products that we manufacture. While we don't foresee any improvement in our critical care sales to Hospira during 2008, Hospira now has a significant number of full time sales people, who have been especially trained or dedicated to sell critical care products. During 2007, we generated strong cash flow from our operating activities, exceeding $41 million. As of December 1, we have $96 million in cash and investment, no debt and a $132 million in working capital. And this is after buying back a total of 1,062,922 shares for $41 million during 2007. This solid financial condition provides the proper resources for our growth initiatives going forward, including the continued development of new products, strengthening our sales and marketing team, and funding on going improvements at our manufacturing facility. Looking ahead in ’08, we are very excited about the many opportunities for new and existing product lines as well as cost saving; we believe that we will continue to achieve. Turning to our product offerings, we are particularly encouraged by the recent positive trends in our Oncology, CLAVE and custom CLAVE product lines. Based on current demand, we believe our new oncology product will generate in excess of $10 million in sales in 2008, compared to less than $1 million in 2007. I can also tell you that in December, we signed a contract with Hospira to distribute our oncology products. This should increase sales once we get production volumes up. Our other new products Genie, TEGO and Orbit should generate in excess of $3 million in 2008. The feedback and demand we’re receiving for our new patented products are very exciting. We should consider these numbers as preliminary since our sales to-date are relatively small. But before I go into more details on the opportunities in ’08 and beyond, I’d like to turn the call over to Frank to discuss our quarterly and annual financial results. Frank?

[Frank O'Brien:]

Thanks, Doc. Before I begin, let me remind all of you that the sales numbers that we are covering as well as our financial statements will, as usual, be available on our website as I am speaking. As discussed on earlier calls, in the later half of 2006, we discontinued the production of two low margin product lines, Punctur-Guard and the product line under our Hospira Salt Lake City arrangement that we anticipated to discontinue when we bought the plant. The sales of these two discontinued lines totaled $2.2 million in the fourth quarter of 2006 and $14.6 million in the fiscal year of 2006. Today, we will be discussing sales on a pro forma basis excluding our discontinued lines to help you better understand our fourth quarter and annual results. We have not isolated margins on these product but they are negligible. The reconciliation of the actual GAAP numbers is available on our website along with the other sales numbers. As these products lines were discontinued in 2006, this is the last time we are going to be discussing sales on a pro forma basis. Our revenue in the fourth quarter of 2007 decreased 10% to $45.5 million, compared to pro forma revenue of $50.6 million in the fourth quarter a year ago. Net income for the quarter totaled $6.0 million, or $0.41 per diluted share, compared with net income of $6.9 million, or $0.44 per diluted share, in the fourth quarter of 2006. For the fiscal year of 2007 we achieved revenue of $188.1 million, compared to pro forma revenue of $187 million last year. Net income for the fiscal year of 2007 totaled $23.1 million or $1.51 per diluted share. The 2007 income includes a net $2 million, or $0.13 per share, the amount on a favorable litigation settlement, offset by a legal judgment against us. Without this, we would have earned a $1.38 per share in 2007. This compares to the net income of $25.7 million, or $1.64 per diluted share, in 2006. Our CLAVE business passed a notable milestone in 2007. CLAVE and custom sets with CLAVE, our total CLAVE line exceeded $100 million annually for the first time, coming in at over $106 million for the year. This was an $8.9 million or 9% year-over-year increase. The CLAVE is still the best connector in the market, and has the lowest infection rates of any connector and we continue to be excited about its future growth. Now let me discuss our sales mix for the fourth quarter. Sales from CLAVE products, excluding custom I.V. systems, increased 3% from $17.7 million to $18.2 million year-over-year. CLAVE sales, including custom I.V. sets with CLAVEs on them, increased 4% to $26.8 million in the fourth quarter of 2007, compared to $25.7 million in the fourth quarter of 2006. Sales from custom products, which include CLAVE and non-CLAVE, but excluding custom critical care products, increased 5% year-over-year. However, the decrease in custom critical care products caused an overall 18% decrease to $14.2 million, compared to $16.7 million in the same quarter a year ago. This was driven primarily by a decrease in custom critical care products. Excluding the decrease in custom critical care products, as I said custom products increased 5% year-over-year. Sales from our critical care products that we sell to Hospira, including custom products, decreased 31% to $12.5 million in the fourth quarter, as compared to $19.5 million in the fourth quarter a year ago. As Dr. Lopez has already mentioned, we do not expect improvement in our sales from critical care products to Hospira in 2008. However, we are encouraged by the recent sales and marketing initiatives of Hospira, which now has a dedicated team to sell our critical care products and we have some of the new critical care products. So we believe our sales in critical care products to Hospira can increase in the future. Our fourth quarter sales by distribution channel are as follows

[George Lopez:]

Thanks Frank. Based on our strong business fundamentals, and our market strength, we are excited about our prospects for 2008 and beyond. Let me share with you a few of my thoughts about some developments going on at ICU Medical and in our industry, and how we believe our future performance will benefit from these trends. I will start with our existing product line. CLAVE has always had a lower hospital infection rate compared to other connectors. More attention has been focused on this issue and federal funding for Hospital-acquired infection is going away, so hospitals are more keenly aware of this issue. Our CLAVE and custom CLAVE products have proven to be the most efficient and safest device, perfectly designed for minimizing this problem. We have recently expanded CLAVE within the DA Hospital, and other hospital systems for this particular reason. As I already discussed earlier, in spite of disappointing sales of our critical care product, we remain optimistic of the future of this business. We believe our critical care products have a tremendous value proposition to help their professionals around the world. As we enter 2008, Hospira's decision to focus dedicated sales people on critical care and the introduction of new products for this market such as Latex-free balloon catheters should in our view produce the results we know this part of our portfolio is capable of achieving. We are enthusiastic about the future results that our manufacturing capabilities combined with Hospira sales team are capable of delivering. Now, let me update you briefly on our new product development. In 2007, we told you about the development of our new oncology products and now we are positioned to begin expanding our sales reach within these products. Now as a reminder, Genie our first Closed Vial Access Device and Spiros our Close Male Connector in the line of I.V. therapy products are being as primarily for the delivery of hazardous medication such as oncology drugs. Initial demand for our oncology products has been extremely strong and is rapidly growing. We expect our oncology products to increase ten-fold and generated at least $10 million in total sales in 2008. Right now, we have the capacity to support production of products with a potential of $14 million in annual sales of Genie and $24 million in annual sales in Spiros. In 2007, we made the upfront investments necessary for the expansion of these products in '08 and we're very well positioned for growth. The market response from these products has been very strong, and we fully expect these products to be a significant part of our offerings for many years to come. In addition, we continue to develop our Orbit 90 Diabetes Set and TEGO, our new connector designed to control infection in dialysis catheters. Both these products are steadily gaining market recognition, and we're pleased with the initial sales. In addition, we officially initiated a full scale launch of our oncology portfolio by the end of the first quarter. In total, we expect our sales from these new products to exceed $13 million in '08, but obviously we have the capacity to sell more. So what are our financial targets for 2008? For the full year of 2008 excluding critical care, we expect our revenue to be up 16%. This growth has been offset by an expected decline in critical care. Overall, we expect to generate revenue of approximately $200 million in '08. Based on the sales number, we see earnings of approximately $1.50 per share, up from a $1.38 in 2007 excluding the one-time legal items. We have not historically provided quarterly targets, but I would like to point out something that may be obvious. The impact of our new products will become more significant as the year progresses. So the first quarter of 2008 will probably be our weakest quarter of the year. In conclusion, I would like to say that we are well-positioned to expand our portfolio of patented products addressing some of the most important issues in the healthcare industry today and in the future. Now, I'd like to turn the call over for any questions if I may.

[Operator:]

(Operator Instructions). First question comes from the line of Mitra Ramgopal with Sidoti. Please proceed.

[Mitra Ramgopal:]

Yes. Hi, good afternoon guys, just a few questions. Just getting back to the guidance, I think you are saying the revenue is $200 million excluding critical care?

[George Lopez:]

No, including critical care.

[Mitra Ramgopal:]

Including critical care. Okay. And the gross margin, I think your goal is a 45%?

[George Lopez:]

Yeah.

[Frank O'Brien:]

For the year.

[Mitra Ramgopal:]

And I thought at some point last year it would have been -- the goal in '07 was just to get to 45% and by '08 closer to 50%. Fairly in '07 we were closer to 40%. Any reason why we can't get more, quicker expansion on the margins, now that the move is completed and you are pretty much going to be rolling out the new products and getting more capacity?

[George Lopez:]

You want to take that.

[Frank O'Brien:]

Yeah. Mitra, we’ve made a lot of progress there. I think one of the things that's happened though is our volume on critical care is down, and it's just tough to make that up. But we are continuing to make progress on the margins. And I think overtime, once we get the new products in there, we'll forget about the 45% because we will be way passed that.

[Mitra Ramgopal:]

All right. And it just seems like you are having a really significant bump up in SG&A.

[George Lopez:]

Mitra that's all sales force. That’s an addition of at least 20 new salesmen that’s focusing on oncology for the launching of products at the end of this quarter.

[Mitra Ramgopal:]

Because I think last time I talked to you, you were looking at SG&A closer to 23%, 24% range and this does seem a little high here.

[George Lopez:]

That'll be a little low for us, 23%.

[Scott Lamb:]

Yeah, we’ve made a decision to significantly increase our sales and marketing support for the new product.

[George Lopez:]

Completely focused with the new sales force.

[Mitra Ramgopal:]

Right, I was sort of expecting '08 in terms of the guidance. If you look back to what we did two years ago in '06, '08's guidance is still well below where you were two years ago. Is this like a conservative guidance or is this just a lot of headwind you are facing?

[Frank O'Brien:]

Well critical care certainly hasn’t helped. It was reasonable in '05; it was down in '06, down again in '07. Tough to make all that up.

[Mitra Ramgopal:]

Right, in fact I’m going back to '03 and you did $1.48. So the $1.50 in '08 five years later, seems we're not much along the road.

[George Lopez:]

Back to your question on margins, margins determine the bottom line. We don't want to leave you with the impression; we don't think we'll get our margins up. We’ve always said in the past that to get them above in the classical range they were used to before the critical care acquisition in the 55, mid-50 range its going to take new products, and we're just launching the new products now. We’ve tested the product, we're comfortable with it, we're rolling out, we have our national sales meeting next week, and so they alter the size and then same thing goes for the hospital, and then followed by Hospira's sale force could stream this I believe on 1st of March. So, we’re expecting the contribution to the margins to be new products, but as all the new products will take a while to get established, they don't take off by the way, takes a little bit of time. That should be a kind of contributor to our margin expansion, as that number gets bigger and bigger. Remember it's a big market, Mitra.

[Mitra Ramgopal:]

All right, thanks. And there's also one quick question. Just looking at the tax rate again, I think in the fourth quarter, it looks like more a 25% rate. I don’t know what one should expect going forward for ’08?

[George Lopez:]

For ’08, we are looking at approximately a 31% tax rate, which is in line with 2007 by the way for the year.

[Mitra Ramgopal:]

Okay, thanks.

[Operator:]

(Operator Instructions). We are showing no more questions in queue at this time. I would like to turn the call over to the management for closing remarks.

[George Lopez:]

Okay. Well, thank you very much for joining us on this call. We'll see you next quarter.

[Operator:]

Thank you for your participation in today's conference. This concludes our presentation. You may how disconnect and have a good day.