ICU Medical, Inc.
Q3 2008 Earnings Call Transcript

Published: 17 Oct 2008

[Operator:]

Welcome to the third quarter 2008 ICU Medical Inc. earnings conference call. (Operator Instructions) Now I’d like to turn the presentation over to your host for today’s event Dr. Lopez.

[George Lopez:]

I want to thank you all for joining us today to review ICU Medical’s financial results for the third quarter ended September 30, 2008. I’m Dr. Lopez, Chairman and President of ICU Medical and with me today is Scott Lamb, our CFO. I will start the call by reviewing our key operating and financial achievements for the third quarter and then Scott will discuss in more detail our financial results and our increased revenue and earnings targets for fiscal 2008. I will wrap up the call with the discussion of current business trends and later we will open the call for your questions. Before we start, I want to touch upon any forward-looking statements made during this call. Please be aware they are based on the best available information to management and assumptions that management believes are reasonable. Such statements are not intended to be a representation of future results and are subject to risk and uncertainties. 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 condition. With that said, let me begin. We are very pleased with our overall results we achieved in the third quarter as well as top-line performance and profitability exceeded our expectations. Each of our core product lines posted double-digit growth, resulting in total sales at $54.7 million, a 22% increase year-over-year. Our third quarter net income improved almost 63% to $7.6 million or $0.52 per diluted share compared to the same quarter last year. International sales were up 37% while domestic sales to especially distributors and direct increased 30%. The primary growth drivers for the third quarter were CLAVE and customs systems which increased 15% and 36% respectively. Our new oncology product continued to gain worldwide momentum and we’re up more than 71% on a sequential basis. Additionally, during the third quarter results encouraging signs of improvement in our critical care division, although it’s truly making a different conclusion about the near term performance of this product line, we were encouraged to see positive developments. We will continue to work with our partner Hospira. As a testament to our strong portfolio products, we recently entered into our product first ever five year agreement with Premier Inc.; operator of one of the nation’s largest healthcare purchasing networks. We believe this contract which begins in 2009 combined with our recently expanded distribution agreement with MedAssets will enable us to continue to diversify our revenue by partners in the coming years. During the third quarter 35% of our sales were generated by our distributors and direct sales force compared to 32% last year, while 65% of third quarter revenue was attributed to Hospira. We daily valued these industry leading relationships and look forward the capitalizing on additional growth opportunity. We have entered the last quarter of the fiscal year as a very strong and financially sound company. As of September 30, we have $117 million in cash and investment and $158 million in working capital. Our operating cash flow for the first nine month of the year totaled $21 million. Additionally, during the quarter, our Board of Directors authorized a new program to purchase up to an additional 40 million of our common stock. We have not yet purchased any stock under this plan as of today and our wonderful purchase is opened in two days from today. We are optimistic about our business prospectus for the reminder of the year and beyond. Our efforts to invest in product innovation and expand our market footprint continue to payoff. We believe our company is on the right track to continue to improve sales growth and profitability over the long-term. Now, I would turn the call over to our CFO Scott Lamb to discuss our third quarter financial results in more detail; Scott.

[Scott Lamb:]

Before I begin, let me remind all of you that the sales numbers we are covering, as well as our financial statements are available on the investor portion of our website as well. Our revenue for the third quarter of 2008 increased 22% to $54.7 million, compared to revenue of $44.9 million for the third quarter a year-ago. The strong growth was driven by double-digit increases in our core businesses, including CLAVE and custom systems, as well as positive contributions from critical care. Net income for the third quarter of 2008 increased almost 63% to $7.6 million or $0.52 per diluted share, compared to net income of $4.7 million or $0.31 per diluted share for the third quarter of 2007. Now let me discuss our third quarter sales by product category, consisting of CLAVE custom systems, critical care and new products, including oncology. Sales from CLAVE products represented 37% of our third quarter total revenue and grew 15% from $17.7 million to $20.5 million year-over-year. As we mentioned on the second quarter call, we had a few shipments due to timing that would occur early in the third quarter and this along with increased demand contributed to the strong third quarter increase in sales. Year-to-date CLAVE product sales increased 6% to $57.1 million from $54.1 million a year ago. CLAVE continued to enjoy market share growth and we believe to expand our relationship with MedAssets and the new relationship with Premier beginning in 2009 will help drive long-term growth. Excluding custom, critical care products represented 19% of our total sales for the third quarter. Sales from this product line increased 7% to $10.4 million compared to $9.7 million a year ago. As George already mentioned earlier, we are pleased to see signs of improvement in critical care. On a year-over-year basis critical care well account 20% and while we still have a lot of improvement in critical care we are working for the Hospira and establishing a solid foundation to return critical care to positive growth. Customs systems, which include custom oncology, custom infusion sets and custom critical care comprised 35% of our total revenue. Sales from custom systems increased 36% to $19.1million compared to $14 million a year ago. Sales from our new products, which include TEGO, Orbit and oncology products increased over 64% to $4.6 million in the third quarter of 2008 compared to $2.8 million for the second quarter of this year and we are more than 10 times sales reported for the same quarter last year. New products represented about 8% of our total sales for the third quarter of 2008. Now the third quarter sales by distribution channel were as follows. Sales to Hospira were up 18% primarily due to strong contribution from CLAVE and critical care. Domestic distributors and direct sales grew 30% to $9.5 million year-over-year and were driven by robust increases in custom systems and CLAVE. International revenues increased 37% to $8.2 million year-over-year, as our core and new products continue to gain momentum in different parts of the world led by strong growth and both Europe and the Pacific Rim. Third quarter 2008 international sales represented 15% of total sales compared to just 13% in the third quarter of 2007. Now let me review our key operating metrics. In the third quarter of 2008, our gross margin was 46% compared to 43% for the same quarter of last year. The margin improvement is attributable to a favorable product mix and improved efficiencies at our manufacturing facility in Mexico, which were offset by increased costs in raw material and transportation. SG&A expenses totaled $13.6 million, as compared with $11.5 million for the same period last year. The increase in SG&A was primarily attributable to continued investments in our sales and marketing initiative to support growth momentum of our new and existing products and higher compensation and benefit costs. We expect our SG&A expenses to be flat or slightly down in the fourth quarter representing 26% to 27% of total annual sales. Research and development expenses decreased to $857,000 in the third quarter of 2008 compared to $2.2 million in the same period last year. The decrease was primarily attributable to our increased focused on our core projects during the quarter. We expect our R&D expenses to be at approximately 3% of total revenue for 2008. Next year we expect to gradually increase our investments in research and development initiative to both our core and new product development. Our operating income for the third quarter increased to 86% to $10.5 million compared to $5.6 million for the same quarter a year ago. This was due to stronger sales and improved gross margins, and finally moving to our balance sheet and cash flow. As of September 30, 2008, our balance sheet remained very strong with approximately $117.4 million in cash and marketable securities and $158.4 million in working capital. Additionally, we generated about $21.3 million in cash flow from operating activities during the first nine months of 2008. Our capital expenditures totaled $2.6 million during the third quarter and we expect our capital expenditures to be approximately $14 million for the full year of 2008. We expect to generate operating cash flow of approximately $25 million this year. Before I turn the call back to Dr. Lopez, let me update you on our guidance for the fiscal year. Based on recent results in our fourth quarter outlook, we are increasing our revenue guidance for the full year of 2008 to $199 million to $203 million, compared to the previously announced $190 million to $200 million. In addition, we are increasing our diluted earnings per share for full year 2008 to $1.48 to $1.53, compared to the previously announced $1.35 to $1.45 per diluted share. Diluted earnings per share guidance does not include an additional $0.13 to $0.16 related to estimated tax benefits to be realized in the fourth quarter of 2008. The majority of the estimated tax benefits will be attributable to tax credits for investments in research and development. The remainder of the benefits will be attributable to a non-recurring, realization of tax benefits related to intangible assets. By including these benefits in guidance, full-year 2008 diluted earnings per share are expected to be in the range of $1.61 to $1.69. Our annual gross margins are expected to be approximately 43%, which is inline with the previously issued guidance. SG&A expenses are expected to be 26% to 27% of revenue and R&D 3% of revenue. We expect our full-year effective tax rate before the Q4, the free tax benefit as I already mention, to be approximately 32% for the full-year. Now I’d like to turn the call back over to Dr. Lopez.

[George Lopez:]

Our operational and financial achievements during the third quarter strongly validate our strategy in market leadership and position us for continuous progress for the remainder of this year and beyond. Before I conclude the call, let me very briefly discuss some recent developments which position us well for further improvements and growth. As I mentioned earlier, we recently entered into a five year agreement with Premier, operator of one of the nation’s largest healthcare purchasing networks. This is our first ever contract with Premier and we will began in 2009. Premier’s members will now be able to take advantage and purchase our CLAVE and MicroClave Needleless connectors, our valued custom I.V. Set program as well as our new line of Safe Handling products for oncology. Premier’s members consist of approximately 2000 hospitals and more than 50,000 other healthcare sites. We look forward to building a mutually beneficial and long-term relationship with both Premier and its members. As within the new relationships like this, it will take time to increase revenue through this agreement, but we are optimistic about the long-term opportunities, which represents for ICU. We will continue to leverage our just recently expanded partnership with MedAssets. Under this expanded agreement, MedAssets will continue to co-market our CLAVE and MicroClave Needleless connectors, along with customs sets for a minimum of three additional years, through September 30, 2011. Also MedAssets will begin offering our new full line of Safe Handling oncology products; SPIROS, Genie and custom oncology set to the success of network of oncology service customers. As Scott mentioned earlier, we showed all strong growth in all of our sales channels, especially distributors and direct sales grew 33% or $4.6 million over last year, coupled with this sales to our valued custom on SPIRO grew 18% over the last year. Turning to our products, our new oncology product continued to grow at a very robust stage both domestically and internationally. We continue to expect our oncology products to generate approximately $10 million in total sales in 2008 compared to less than $1 million for all of 2007. In conclusion, I would like to say that we are confident in our company’s future and proceeds further improvements in growth across each of our core product line. We have an improved sales and marketing strategy in place as well as sufficient cash flows invest in R&D and finance future business activities. We continue to strive to be the low cost manufacture in our space and are always looking for ways to improve the efficiencies. Now, I’d like to turn the call over to questions if I may.

[Operator:]

(Operator Instructions) Your first question comes from the line of Mitra Ramgopal with Sidoti.

[Mitra Ramgopal:]

A few questions; first, the critical care business really came back strongly. I don’t know if you could give us a little more color as to anything specific that was done to get it back on track?

[George Lopez:]

The biggest change was the integrated put on 18 direct sales people, on a full time basis, that’s the biggest change. We think we’re seeing the effects of that. It’s truly to call whether it’s a trend or not, it just one quarter, so we are still guardedly optimistic.

[Mitra Ramgopal:]

Okay and I know if look at the gross margin, again this is probably the best quarter we have seen in about four years and again I know I looked at the guidance for the rest of the year, but if we go a little further out ’09 etc, it seems like a lot of things are working now in your favor including critical care and the product mix and the efficiencies etc. Do you think it’s fair to say now we have kind of a sound quarter on margins also?

[George Lopez:]

Well, just to reiterating, people do 43% for the year and we are seeing some efficiency gains particularly in our Mexico facility, in addition to our new product and really asking our margins going to go up next year. Well, we’ll tell you more about that and we will give you a short answer. We think that it will be higher than this year.

[Mitra Ramgopal:]

And then I guess just looking broadly in terms of the nature of your products and the end-user, just looking at the overall economy and what’s happening out there, again are you seeing any concern in anyway that it could impact you?

[George Lopez:]

I was asked this question earlier this morning, I believe Mitra that we’re absolutely be fresh and prudent because our products are not like other medical companies that have elective surgeries, elective products. I think the medical companies that have Botox, companies that have durable medical equipment, you’re going to see a interaction in that market. Our products are basically like the name says ICU products; they are not elected. If you have get chemotherapy and you have to get it through an IV set, you have to get drug, so ICU’s pretty much recessional to it and I don’t see any recession more likely to depression hurting us in any lower target. I think we’ll as you know our cash flow and our balance sheet is strong and we don’t require any banking or lines of credit. So I think we are as bulletproof as far as we can be as far as in this recession goes.

[Mitra Ramgopal:]

Okay thanks and again looking at the balance sheet and the cash flow you are throwing off, I know you mentioned the share buyback program is in place and other uses of cash and you attempted to be more aggressive now in terms of growing the businesses, via adding more sales people or international expansion or are you prepared to kind of see how it goes and build the cash?

[Scott Lamb:]

Sure, we were always looking for opportunities that will help grow the business, whether it is a strategic acquisition and certainly as opportunities continue to arrive and our sales and distribution channels in the market will add accordingly as you can see. In the third quarter in this year we have been willing to and have invested in our sales and marketing initiatives.

[George Lopez:]

More specifically a lot of focus which is going to move towards international, if you see international it’s growing very, very strongly. We think we have a lot of opportunities in international and we will be spending money for the sales force in the international and investing in the sales force and company in internationals, specifically in the oncology field.

[Mitra Ramgopal:]

Okay last question; tying into the oncology products again, it seems you were ramping nicely into this quarter; would you say that it’s ahead of your expectations at this stage or…?

[George Lopez:]

I think we gave pretty accurate numbers all through the year. We think we said $9 million to $10 million and we’re right on schedule. I think if you look at our guidance in January, its pretty spot on for the third quarter and fourth quarter and first and second quarters.

[Mitra Ramgopal:]

Okay, so again you are very encouraged I guess going ahead. We should only continue to see that given the size of the market and you’re the only player there.

[George Lopez:]

Yes.

[Operator:]

Your next question comes from the line of Jay Hafner with Skystone Capital; please proceed.

[Jay Hafner:]

Just a couple of quick detailed questions; what was the currency benefits of revenue in the quarter?

[Scott Lamb:]

It was negligible.

[Jay Hafner:]

And can you give us an idea what the custom growth with ex-custom critical care? It usually is in your Q.

[Scott Lamb:]

35%

[Jay Hafner:]

Okay, so that picked up as well and was most of that the custom and oncology sales?

[Scott Lamb:]

Strictly it was all across the Board, the distributors [inaudible] and oncology.

[Jay Hafner:]

And as you are adding new distributor customers to the network, are they filling much pipeline inventory or is this…?

[George Lopez:]

We haven’t added any new distributors that I’m aware of. Now this is just more new customer accounts.

[Jay Hafner:]

I thought that some of or lot of your international win through a distribution channels?

[George Lopez:]

No, a lot of it does go through distributors, but we’ve added no new, we’ve practically contracted distributors and here again most of the growth is just through new customers.

[Operator:]

And Dr. Lopez at this time I show no further questions within the queue. I would like to turn the call back over to management for any closing comments.

[George Lopez:]

Well, thank you all for joining us. We’ll see you next quarter.