Jul 17, 2008
Executives
George Lopez - President and CEO Scott Lamb - CFO
Analysts
Junaid Husain - Soleil Securities Mitra Ramgopal - Sidoti
Operator
Good day, ladies and gentlemen, and welcome to the second quarter 2008 ICU Medical Incorporated Earnings Call. My name is Eric and I will be your coordinator for today.
Now, at this time, all participants are in a listen-only mode. We will facilitate the question-and-answer session towards the end of this conference.
(Operator Instructions). I would now like to turn your presentation over to your host for today's call Dr.
George Lopez, President and CEO of ICU Medical. Please proceed.
George Lopez
Good afternoon, everybody. Thank you for joining us today to review ICU Medical's financial results for the second quarter ended June 30, 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 second quarter.
Then Scott will discuss in more detail our financial results 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 that, 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 and are subject to risks 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 pleased with the overall performance of our business and profitability during the second quarter.
Contrary to the continuing weakness in our critical-care sales to Hospira our core and new product lines performed in line with our expectations. Our goal during the quarter was driven by 12% year-over-year increase in sales from custom system as well as strong contributions from our new products, including oncology.
On a sequential basis, sales from our new products increased 64% to $2.8 million excluding our critical care and custom critical care line our total sales increased 9% year-over-year. As we continue to benefit from improved manufacturing efficiencies at our Salt Lake City and Mexico plants, our second quarter gross margins increased 100 basis points to 43% year-over-year, validating improved operating efficiencies of our business.
During the quarter, we continued to forge and receive relationships as we position ourselves for long-term growth. Recently, we extended a minimum of three years -- three additional years, our current agreement for CLAVE and custom IV sets is a MedAsset supply chain system in MedAssets company.
Additionally, MedAssets will begin offering our safe handling oncology product line. MedAsset's agreement strongly validates our reputation as a low cost and quality leader in the industry and provides considerable growth opportunities for years to come.
As I mentioned earlier, performance of our critical care sales to Hospira continue to be disappointing. At the end of the first quarter Hospira was primarily responsible for the sales of the critical care products we manufacture, deployed a dedicated sales team to focus on our critical care product.
Given Hospira’s experience and the great value proposition of these products, we expect the business eventually to stabilize. However, this product line continues to be the most difficult one to predict.
We will continue to work with Hospira, as well as pursue all options to create the best possible outcome for ICU medical. Despite the current softness in critical care, we continue to maintain a leading position in the industry due to our premiered portfolio of core and new products and believe each of our core products has very promising long-term domestic and international growth opportunity.
Additionally, our patent low cost manufacturing processes will position us to maintain our future profitability and to continue to build value for our shareholders. Now, I’d like to turn the call over to our CFO Scott Lamb, to discuss our second quarter financial results in greater detail.
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 the investor portion of our website as we speak.
Our revenue for the second quarter of 2008 was $48.6 million compared to revenue of $48.9 million for the second quarter a year ago. The slight decrease was primarily attributable to double-digit declines in our critical care and custom critical care businesses.
Excluding these product lines, our revenue increased 9% year-over-year and on a sequential basis, our total revenue including critical care grew almost 9% as well. Net income for the second quarter of 2008 increased approximately 88% to $4.8 million or $0.33 per diluted share compared to net income of $2.5 million or $0.16 per diluted share for the second quarter of 2007.
Now let me discuss our second quarter sales by product category. As you remember, to improve the transparency of our business starting last quarter we decided to discuss revenue in the following four categories, CLAVE, Critical Care, Custom Systems and new products which include Oncology.
Sales from CLAVE products represented 38% of our second quarter total sales, and decreased 4% from $19.3 million to $18.4 million year-over-year. The decrease was primarily attributable to timing of product shipments to Hospira.
As you know, our sales will vary from quarter-to-quarter and that is why we have always provided annual guidance instead of quarterly guidance. CLAVE remains one of our strongest product lines, and based on the current demand and strong open orders, we believe that will return to positive growth in the third quarter.
Critical care products represented 18% of our total sales for the second quarter. Excluding custom critical care, sales from this product line decreased 21% to $8.9 million, compared to $11.3 million a year ago.
Custom systems which include custom oncology, custom infusion sets and custom critical care comprised 35% of our total revenue. Sales from Custom systems increased 14% to $17.1 million, compared to $15 million a year ago.
The growth was driven by strong performance of custom infusion sets and custom oncology products which will substantially offset by a 26% decrease in custom critical care. Excluding custom critical care, sales from Custom systems would have grown by 27% year-over-year.
Sales from our new products, which include TEGO, Orbit, and oncology products sequentially increased to more than 60% to $2.8 million compared to $1.7 million for the first quarter of 2008, and were more than four times sales reported for the same period last year. New products represented about 6% of our total sales for the second quarter of 2008.
Now, moving to our second quarter sales by distribution channel, sales to Hospira decreased 8%, primarily due to the decrease in critical care and custom critical care products. Domestic distributors' direct sales increased 31% to $9.3 million year-over-year and were driven by strong contributions from our custom sets and CLAVE.
International revenues increased 6% to $7.3 million year-over-year. Second quarter 2008 international sales represented 15% of total sales compared to 14% in the second quarter of last year.
Now let me review our key operating metrics. In the second quarter of 2008, gross margins expanded one percentage point year-over-year and three percentage points on a sequential basis to 43%.
The growth margin expansion is attributable to improved efficiencies and productivity gains at our Salt Lake City and Mexico manufacturing facilities, which was slightly offset by decrease in volume and pricing for critical care. We decided to temporarily put on hold our plans to build a manufacturing facility in China.
Right now, our Salt Lake City and Mexico manufacturing facilities provide necessary capacity and cost saving benefit to support our profitable growth in the near future and we want to ensure the quality of our rapidly expanding line of new products by continuing the manufacturing of these products in our existing facilities. SG&A expenses for the second quarter were $13.7 million as compared with $11.5 million for the same period last year.
The increase in SG&A was primarily attributable to moderate increases in sales and marketing promotional cost, higher compensation and salary expenses associated with new hirers in sales and marketing as we continue to expand our sales and marketing team to support growth momentum of our new products. We continue to tightly control our operating cost and target SG&A expenses to be 27% to 28% of sales for 2008.
Research and development expenses decreased to $1.5 million in the second quarter of 2008 compared to $2.2 million in the same period last year. As we focus more on core projects during the quarter, we expect our R&D expenses to be approximately 3% of total revenue for 2008.
Our operating income for the second quarter totaled $5.7 million compared to $7 million for the same quarter a year ago due to the increase in SG&A expenses I just mentioned. However, sequentially our operating income was up more than 114%.
Now finally, moving to our balance sheet and cash flow. As of June 30, 2008, our balance sheet remained very strong with approximately $109 million in cash and marketable securities.
Additionally, we generated about $11 million in cash flow from operating activities during the first half of 2008. Our capital expenses totaled 3.5 million during the second quarter and we expect our capital expenditures to total $14 million for the full year of 2008.
This is less than we projected during the first conference calls used to our decision not to pursue building a plant in China of this year. We expect to generate operating cash flow of approximately $25 million in share.
Taking into account the increased softness in our critical care products, we expect 2008 revenue of $190 to $200 million. Due to continued weakness of critical care and higher commodity prices effecting shipping and raw material costs including resins, we expect annual gross margins to be approximately 43%.
SG&A 27 to 28%, R&D 3% of sales and a tax rate of approximately 31%; and diluted earnings per share to be in a range of a $35 to a $45 per share. Now I would like to turn the call back over to Dr.
Lopez.
George Lopez
Thank you, Scott. Despite some obvious challenges in critical care going in the second quarter our business fundamentals remain very strong.
We continue to generate positive cash flow. Our core product lines are performing very well and we are very positioned for long-term growth in all of our core and new products.
Let me talk a little bit more about the exciting recent developments for our CLAVE, custom and oncology products. As I mentioned earlier, we recently expanded our relationships with MedAssets Supply Chain Systems, who are the nation's largest group purchasing organization.
MedAssets provides innovative solutions to healthcare providers to improve their margins and cash flow. This extended renewal continues to offer MedAssets customers our products which were chosen for several reasons including high quality, better patient outcome and cost reduction as well as cost avoidance.
As we mentioned last quarter, our Hospira has awarded a contract with HPG a major GPO which has the potential, over time, for increased CLAVE custom set in Oncology business. We started converting a solution in late Feb in the second quarter to meet conversion deadlines.
Now moving forward, we are beginning to see those customers requesting CLAVE as a needle free choice due to its clinical superiority which is recognized across the market. Demand for our Oncology products continues to grow rapidly in both domestic and international markets as they are designed to provide safety for both healthcare professionals and the patient by reducing exposure to hazardous drugs and by reducing bloodstream infection which are costing the healthcare industry billions of dollars a year.
Our agreement with MedAssets ideally helps position Genie and Spiros for success. We expect our Oncology products to generate approximately $10 million in total sales in 2008 compared to minimum sales in 2007.
Going forward, we continue to focus on improving sales and marketing strategies across all of our product lines and building value for our shareholders. Our core product line, the CLAVE, custom and Oncology are all performing very well based on our strong balance sheet, low cost manufacturing facilities and strong management team we look forward to many years of strong and profitable growth.
Now I would like to the call over to questions, if I may.
Operator
(Operator Instructions) Your first question comes from the line of Junaid Husain from Soleil Securities. Please proceed.
Junaid Husain - Soleil Securities
Good afternoon gentlemen.
George Lopez
Hi Junaid.
Junaid Husain - Soleil Securities
So, Dr. Scott, could you help me out on the guidance front on sales in terms of the range you provided.
I guess I am trying to understand if, just to be clear, the sale profits that you potentially expect in the back half of the year, that's predominantly off of critical care then?
Scott Lamb
Yes, that’s correct.
Junaid Husain - Soleil Securities
Okay. And then, with regards to the new product sales Genie, Spiros, Orbit 90, etcetera.
Could you break that out for us, the $2.8 million?
Scott Lamb
Sure. The majority of it obviously is in oncology.
For the quarter, we had $2.8 million or $2.4 million in oncology.
Junaid Husain - Soleil Securities
And how does that split between Genie and Spiros?
Scott Lamb
We don’t split that out.
Junaid Husain - Soleil Securities
Got you. And then, relative to the premier GPO contract for the I.V.
therapy bid, it’s supposed to come up for renewal imminently. Any additional color that you can provide us here?
George Lopez
We don’t know where the other and they haven’t announced yet, and I understand they delayed the announcement again. So, we don’t know yet, and so we have nothing to say about it.
Junaid Husain - Soleil Securities
Okay. And you’re saying that they have diluted again.
Do you have a date or just kind of wide open? Doc, Scott, are you there?
George Lopez
Yes.
Scott Lamb
Yeah, we’re here. Just to check with premier, we do not know.
Junaid Husain - Soleil Securities
Okay.
Scott Lamb
They’ve announced dates for (inaudible), so.
Junaid Husain - Soleil Securities
Sure. Okay.
And then, in terms of the fund cost associated with the Chinese manufacturing facility, how much have you already put into that initiative?
Scott Lamb
It wasn’t that significant, not enough to talk about, but the good news is going forward that should be no expenses associated with that.
Junaid Husain - Soleil Securities
Okay. And then, Scott, on your auction rate securities, could you tell me how much of that lever to these instruments at the end of the quarter?
Scott Lamb
Sure, $26 million. Keep in mind that we started with about $85 million, we had about $61 million at the end of March, and now we are down to $26 million.
George Lopez
$85 million was tied up, of which was down about 26 million. And as you know, yesterday, UBS announced that they are buying back all of their preferred, and so that represents some additional for us.
Junaid Husain - Soleil Securities
Yes. Got it.
Alright, good enough. That’s all of that, guys.
Thanks so much.
George Lopez
Hey, you're welcome.
Operator
(Operator Instructions). Your next question comes from the line of Mitra Ramgopal with Sidoti.
Please proceed.
Mitra Ramgopal - Sidoti
Yes, hi, good afternoon guys. Just a couple of questions.
I noticed for R&D, it's come down a quite a bit, I think you're shooting for 3% of revenue for the year. Was any of that tied to China, given that you're no longer doing that, that’s the reason for being down?
Scott Lamb
No. We're just focusing on oncology, we are focusing on… there are our core products and we also are no longer subsidizing or paying for MedScan, the cardiology product that we are pursuing.
We stopped pursuing that project. So, that will take us about $250,000 a quarter in the future.
So, it's coming down.
Mitra Ramgopal - Sidoti
And, just sort of a reasonable number to use going forward, if you ever look out for next year?
Scott Lamb
Maybe go up next year.
Mitra Ramgopal - Sidoti
Okay. And I know you talked about increased rise in prices, etcetera, and the impact on margins.
Are you having success with regards to price increases?
Scott Lamb
We are always looking at the market and we'll continue to look at market potential.
Mitra Ramgopal - Sidoti
Okay. And, again just coming back on the margins, I think we've had quite a nice improvement off the first quarter, almost at 43%, but the guidance for the year, again at 43, is just because you had a slow start in Q1?
Scott Lamb
Well, certainly Q1 [waits at] I think, for the year, we are at 41% and so. No, we expect to continue to do well and see productivity improvements helping the bottom line.
Mitra Ramgopal - Sidoti
Okay. And finally just coming back to China, I believe on the last call it sounded as though that was a good opportunity, any reason for the change?
George Lopez
It is still is a good opportunity. We still think we're going to pursue it, and we still think it's a great opportunity.
There're lower costs, but right now we can't afford to split my manufacturing people in half. In terms of -- we're launching these new products, we're ramping up, they are giving traction.
For us to take a gamble right now and split up our resources will be risky, and I'd have to hire a complete new staff and it'd be difficult to do and not risk. Why risk when we have such opportunity in front of us?
The orders are coming in and we're getting good feedback from the markets, so I just don't want to risk it at this particular point.
Mitra Ramgopal - Sidoti
Right. Finally on critical care, you said it's difficult to get the kind of visibility you'd like on that line, and I know Hospira has committed some sales people to try and turn things around.
But, what you've seen so far, are you happy with the progress, or is there something still down the road that if it doesn't turn, you'll just maybe --
George Lopez
We're not happy with the progress. Happy is the wrong word.
Scott might say, he's still looking upon the numbers closely. You might want to see how the numbers are looking.
Maybe it's the best slowdown.
Scott Lamb
Yeah, I think still at this point in time, these sales, the rest of Hospira's have only been in place for 100 days. It's certainly going to continue to take some time, I think, for them to turn this around, and we'll just see what happens in the next.
The sale cycle's got to be three to four months. For these type of products, four months.
So they have only been there for 100 days, so kind of early. But so far, we are seeing better indicators, but not what we want to see.
Mitra Ramgopal - Sidoti
Okay. Thanks again, guys.
Scott Lamb
So the change in our guidance, the reason.
Operator
(Operator Instructions). It appears we have no more audio questions.
Thank you.
George Lopez
Alright, thank you.
Scott Lamb
Thank you, everyone.
Operator
Thank you for your participation in today's conference. This concludes our presentation and you may now disconnect, and have a good day.