Apr 17, 2008
Executives
George Lopez - President and CEO Scott Lamb - CFO
Analysts
Mitra Ramgopal - Sidoti & Company Junaid Husain - Soleil
Operator
Good day ladies and gentlemen and welcome to the First Quarter 2008 ICU Medical Earnings Call. My name is Sylvania, I will be your coordinator for today.
At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.
(Operator Instructions). As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the presentation over to your host for today's call, Dr. George Lopez, President and CEO.
You may proceed sir.
George Lopez
Good afternoon everybody. Thank you for joining us today to review ICU Medical's financial results for the first quarter ended March 31st, 2008.
I'm Dr. Lopez, Chairman and President of ICU Medical.
With me on the call today is Scott Lamb, our CFO. I will start the call by reviewing our operating highlights for the first quarter, and then Scott will discuss in more detail our financial results, our revenue and earnings target 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. Before we start, I want to touch upon any forward-looking statements during this call.
Please be aware there would be some best available information to management and assumptions that management believes are reasonable. Such statements are not intended to be representation of future results and are subject to risk and uncertainty.
Future results may differ materially from managements' current expectation. 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. First quarter results were in line with our expectations and we are pleased with the overall business performance.
Our results were primarily driven by strong growth in the new oncology line, as well as sales of CLAVE, excluded in our critical care and custom critical care line, sales grew 5% year-over-year. In the later half of the first quarter 2008 we initiated a full launch of our oncology portfolio, including the Spiros and the limited release of Genie and we are very pleased with the early results from this launch.
This line generated $1.3 million during the first quarter of 2008 and we are in tack to increase our oncology sales tenfold in 2008 compared to 2007. Even though we are pleased with the overall first quarter results, critical care continued to offset the gains we experienced in other parts of our business.
We factored and reduced critical care sales in our guidance, and even though we expected the decline in the critical care line during the first quarter. The critical care line is profitable, we are certainly not satisfied with this line's performance.
As you remember, we manufacture this line, but Hospira is responsible for the sales. During the later part of the first quarter, Hospira deployed a dedicated sales team to focus on improving sales and increasing the penetration of this product line.
We believe by combining their expanded focus on selling the current portfolio products, as well as the new Latex-free balloon catheters and the many future products on the oncology pipeline will eventually experience better results from the critical care business. We enter 2008 with improved manufacturing efficiencies that our Salt Lake City and Mexico plants, as we continue to distance ourselves from competition as the leading low cost manufacturer.
Our efficiencies and speed to market enable us to take advantage of the opportunity in custom systems, which now make up over 30% of our overall revenue. We are excited about our opportunities in 2008 and believe our patented portfolio of leading safe medical connectors, custom systems, new products, and patented low cost manufacturing processes have us positioned for long-term profitable growth.
Now I will turn the call over to our new CFO, Scott Lamb, to discuss our first quarter results in greater detail, Scott.
Scott Lamb
Thanks Doc. 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 our website as well.
Our revenue in the first quarter of 2008 decreased 9% to $44.7 million, compared to revenue of $48.8 million in the first quarter a year ago. This decline was due to our critical care and custom critical care businesses.
Excluding these product lines, our revenue was up 5% compared to last year. Net income for the first quarter of 2008 was $2.9 million or $0.20 per diluted share, as compared to net income of $4.5 million or $0.29 per diluted share for the first quarter of 2007.
The first quarter of 2007 results exclude the one-time after tax benefit from a legal settlement of $5.3 million or $0.34 per share. To make our reporting of revenue by categories easier to understand, we will be reporting revenue by four categories now and in the future.
First of all, CLAVE sales, which represents approximately 40% of sales; Critical Care represent approximately 20%, Custom Systems represents approximately 30% of sales, and the remainder is primarily new product sales consisting of TEGO, Orbit, and new oncology products. Sales from CLAVE products increased 7% from $17.1 million to $18.3 million year-over-year.
Sales from Critical Care, which exclude Custom Critical Care decreased 40% year-over-year to $7.4 million, compared to $12.4 million last year. Custom Systems, which include Custom Oncology, Custom Infusion Sets and Custom Critical Care, decreased 2% to $14.9 million, primarily due to 23% decrease in Custom Critical Care.
Excluding Custom Critical Care, Custom Systems would have grown by 4% for the quarter. New products consisting of TEGO, Orbit, and our new oncology products increased to $1.7 million compared to minimal sales in the same period last year.
Our first quarter sales by distribution channel were as follows; Sales to Hospira decreased 19%, primarily due to the decrease in Critical Care and Custom Critical Care products. Domestic distributor sales were up 12% to $7.7 million year-over-year and were driven by strong contribution from our custom sets and CLAVE.
International revenues increased 9% to $6.2 million year-over-year. First quarter 2008 international sales represented 14% of total sales, compared to 12% in the first quarter of 2007.
We continue to expand our footprint in international markets and identify additional growth opportunities for our current products as well as our new oncology products. Now let me review a few of our key operating metrics.
In the first quarter of 2008, gross margin was 40%, as compared to 42% in the fourth quarter of 2007 and 39% a year ago. The margin improvement on a year-over-year basis was attributable to improved efficiencies and productivity gains in our Salt Lake City and Mexico manufacturing facility.
The decrease in gross margin on a sequential basis was primarily due to reduced plant operations in the last 10 days of December and early January, in order to perform planned preventative maintenance and this affected our gross margin by 3.5 percentage points. Excluding this preventative maintenance, we would have achieved gross margins of 43% compared to 39% for the comparable period last year.
We believe our gross margins will improve throughout 2008 and we will achieve total gross margins of 44% to 45% for the full year of 2008. Additionally, this year we have begun plans to build a manufacturing facility in China.
We plan to begin construction in early July and we expect to start production at this factory in early 2009. This plant will initially be used to reduce the cost of our components used in our Custom Systems by moving our smaller cavity tooling to China, which should lead to further improvement in our gross margins.
SG&A expenses for the first quarter were $13.1 million as compared with $12 million for the same period last year. The increase in the SG&A was primarily attributable to higher compensation and salary expenses, as we made investments in our sales force to support targeting sales of our new products, particularly oncology.
Continuing to control operating expenses remains one of our key goals for this year. We target SG&A expenses to be 26% of sales in 2008.
Research and development expenses increased 9% to $2 million in the first quarter of 2008, compared to $1.9 million in the same period last year. We will continue to invest in product development and innovation in target R&D of 5% of revenue for 2008.
And finally, moving to our balance sheet and cash flow. As of March 31, 2008, our balance sheet remained very strong with approximately $99 million in cash and marketable securities.
Additionally, we generated about $5 million in cash flow from operating activities during the first quarter. We spent $3.6 million on capital expenditures during the first quarter and expect our capital expenditures including our investment in the plants in China to total $20 million for the full year of 2008.
We expect to generate operating cash flow of approximately $20 million this year, as we increased our working capital later in the year to support our expected new product sales. Now turning to guidance, we are reiterating our revenue target of $200 million, which is a 17% increase year-over-year, excluding Critical Care and earnings per share of approximately $1.50.
In addition, we expect gross margins to be 44% to 45% for the year. And now I'd like to turn the call back over to Dr.
Lopez.
George Lopez
Thank you, Scott. We are optimistic about our company's future, as our business fundamentals remain strong and well positioned to take advantage of the current market trends for our patented products including CLAVE, Custom Systems, new oncology products, and low cost manufacturing processes.
Hospital-acquired blood stream infection is a major problem in the healthcare community. Medicare has announced that they will soon eliminate to reimbursement to hospitals for the cost in treating catheter related blood stream infections acquired by patients while in the hospital.
Our expanding portfolio of products is proving to not only protect the healthcare community from infections and dangerous chemicals, but also reduce the costs associated with patient infections. We believe our CLAVEs are well positioned to expand our market share due to growing recognition of these products as the safest devices, which guarantee the best protection from hospital-acquired blood stream infections.
We have begun converting some hospitals to our CLAVE for particularly this reason. Recently, Hospira announced they awarded a contract with HPG, a major GPO, which has the potential over time to increase CLAVE business.
Custom Systems now account for 30% of our overall revenue, and we believe this will continue to be a strong growth area for us for many years to come. We are by far the leader in Custom Systems in our industry, and we are constantly striving to expand our leading position.
The reason our Custom Systems have experienced such growth over the past five years is due to a number of attributes. Number one, we created a low cost and efficient manufacturing process that enables us to deliver custom products to healthcare professionals in 14 to 21 days.
It usually takes our competition over two months to provide a similar product. Number two, we've reduced costs to the hospitals and healthcare facilities because, with our Custom Systems, doctors and nurses will often use two or more IV sets to accomplish what one custom designed set can do, thus eliminating waste of components and [tubing].
Three, and most important, the nurse or doctor is able to design a set around their specific procedures, which improves their efficiencies and reduces cost. Four, lastly, many of components and systems are using our patented products.
As I already mentioned at the beginning of this call, we are extremely excited about the new product opportunity. In 2007 we made significant investments in manufacturing and distributing these products, including signing the contract with Hospira to distribute our oncology products, and increasing our own sales force to work with Hospira and our specialty distributors.
As demand for our oncology products is growing, we believe that Genie, our first Closed Vial Access Device and Spiros, our Closed Male Connector is used to protect healthcare workers from toxic chemicals, will begin to rapidly gain market share. During the first quarter, we officially initiated a full scale launch of our oncology portfolio and we expect it to generate approximately $2 million in total sales in 2008 compared to minimal sales in 2007.
Looking forward, we believe we'll improve margins, reduce the decline in Critical Care products and continue to generate strong growth in CLAVE, Custom Systems and all of our new products including oncology. Now I would like to turn the call over to any of your questions.
Question-and-Answer Session
Operator
(Operator Instructions). And the first question comes from the line of Mitra Ramgopal.
You may proceed.
Mitra Ramgopal - Sidoti & Company
Yes, hi good afternoon guys. Just a few questions, starting first with the a maintenance work that was done.
If you can just give us a sense as what was being accomplished there and should we except any of that again by the end of the year, looking out at '09?
Scott Lamb
This was planned preventive maintenance. This was maintenance that a lot of it in the past we have been unable to or haven't taken the opportunity to do the maintenance throughout the year, and so this was something that we had to do at the end of the year.
A lot of our machinery equipment, the cleaning and so forth. (Inaudible) this year.
We are looking at ways to reduce shutting the plant down to do preventive maintenance so that we can do it throughout the year, so we are looking at that right now.
George Lopez
We are looking at other options rather than shutting down and not absorbing any overheads for that period of time, Mitra.
Mitra Ramgopal - Sidoti & Company
Okay. And I believe you said, as far as the end of the first quarter, Hospira is obviously committing more efforts in terms of turning the Critical Care business around.
What's your feel so far? I mean, if you can say, are you encouraged that --
George Lopez
Mitra, I have actually checked on it again yesterday, talking to our angio sales force and they confirmed that they are working together that they have a specialty sales force, they are targeting accounts. It looks like they are actually working the line.
So we believe that they are actually putting a good amount efforts compared to zero effort before. So we get to see the sizeable difference.
We have 18 people that were Critical Care specialists before in other product line and there is evidence that they are starting to see results with the conversions. But it's still early to say anything other than that.
We think it's going to take a couple of quarters to reverse this.
Mitra Ramgopal - Sidoti & Company
Right. And your guidance overall, is assuming a decline for the year, is that correct?
George Lopez
Correct, absolutely.
Mitra Ramgopal - Sidoti & Company
Okay. And I guess that if you have to look at the gross margin, you're saying it would have been 43% absent the shutdown.
So, starting the second quarter, we should be seeing some improvement of the 43, is that a good way of looking at it?
George Lopez
Certainly, improvement over the first quarter and in order to get to the 44% to 45%, we will start to see improvements beginning in the second quarter over the first quarter.
Mitra Ramgopal - Sidoti & Company
Okay. And I guess really, it has to be a pretty strong second half to kind of get to the $1.50 of guidance in light of number you put up in the first quarter?
Scott Lamb
Yes, it will, Mitra. It definitely will have be a strong second half for us.
Mitra Ramgopal - Sidoti & Company
And again just a China, how much are you investing in that facility?
Scott Lamb
We are planning on investing $6 million this year. It should be within the first quarter of ’09, it should be complete.
The facility should be up and operational if all goes well. We are completely new.
We purchased the land, worked everything out with the government, the architects, the designers, then we are ready to go. So we should stay ground on the construction slot.
Mitra Ramgopal - Sidoti & Company
Okay. And again hopefully, it's not going to prove to be any distractions from what you have going on in Salt Lake and Mexico?
George Lopez
We don’t think so. We also think it has a sizable contribution to margins if we are successful.
Mitra Ramgopal - Sidoti & Company
Okay. Thanks again guys.
Operator
(Operator Instructions). The next question comes from the line of Junaid Husain.
You may proceed.
Junaid Husain - Soleil
Good afternoon gentlemen.
George Lopez
Hi Junaid.
Junaid Husain - Soleil
Not relative to gross margins, for the balance of the year, where is the gross margin expansion coming from? Is it primarily from the new products or is it from cost savings or all of the above, and if you could quantify that for me?
George Lopez
Sure, absolutely. It's coming from a combination of those to the new products which have an average margin greater than the company average margin.
It's coming from increased production efficiencies and third will be increased absorption of factories as we continue to ramp up on our new product sales, particularly oncology, which the bulk of our new oncology sales will be in the second half of the year.
Junaid Husain - Soleil
Okay. If I could push you just a little bit on your guidance then, how should we thinking about guidance for the balance of the year?
On the sales and earnings front in terms of the quarterly progression, is it going to be back half weighted, or is it kind of a steady increase to the end of the year?
George Lopez
The third and fourth quarter, is back half weighted. As you see a new product, as you see market acceptance in the category that we are at, $1 million, $2 million in terms of sales, just make the products working and customers like it.
And then once there is the acceptance by the market, then it takes off. So we're looking at third and fourth quarters as most of our sales in new products.
Junaid Husain - Soleil
Okay, that's helpful. And then, I think I might have missed this.
Doc, did you quantify the number of reps that you have dedicated to critical care?
George Lopez
I can tell you how many reps that Hospira has dedicated. Before they had zero reps dedicated to the sales force, now they have 18 and we have 11.
And our 11 guys are working with their 18 people.
Junaid Husain - Soleil
And their 18 reps started when?
George Lopez
Mid-February will be about right. So probably they were up and running by March, yeah.
So it's going to take a little while for them to reverse the slide. But we think its better, we think it's possible.
Junaid Husain - Soleil
And are these brands making new sales reps on the Hospira side or are these folks that they brought them up their --?
George Lopez
This is just the Critical Care we're talking about. For the Spiros side, on the Spiros side, that goes to the underlying reps which they have about 450.
Junaid Husain - Soleil
And then Doc, relative to your sales guidance for 2008, how much of that is dependent on a solid roll out of Hospira's Symbiq infusion pump?
George Lopez
For the Spiros you mean?
Junaid Husain - Soleil
No, the Symbiq infusion pump from Hospira, that they are launching?
George Lopez
None of it is, none, none of it is.
Scott Lamb
We don't have any of that baked into the numbers.
George Lopez
We're just looking at our numbers, as we see them with the sales, none of it is. Although, we're hearing good things about the pump.
Scott Lamb
Yeah.
Junaid Husain - Soleil
Okay. And then last question for you on the legal side of things, relative to your appeal with Alaris anything new to report?
George Lopez
No, just going through the process.
Junaid Husain - Soleil
Okay, good enough, guys. Thanks so much.
George Lopez
Thanks Junaid.
Operator
And there are no further questions in the queue. I would turn the call back to George Lopez.
George Lopez
Thank you all. We'll see you next quarter.
Operator
Thank you ladies and gentlemen. This will conclude the presentation for today's conference.
You may now disconnect.