Earnings Labs

ICU Medical, Inc. (ICUI)

Q4 2011 Earnings Call· Mon, Jan 30, 2012

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Transcript

Operator

Operator

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the ICU Medical, Inc.'s Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. And now, it's my pleasure to turn the call over to John Mills. Sir, the floor is yours.

John Mills

Analyst

Good afternoon, everyone. Thank you for joining us today to review ICU Medical's financial results for the fourth quarter and fiscal year ended December 31, 2011. On the call today representing ICU Medical is Dr. George Lopez, Chairman and Chief Executive Officer; and Scott Lamb, Chief Financial Officer. We will start the call by reviewing key operational and financial achievements for the year. Then Scott will discuss fourth quarter financial performance and revenue and earnings targets for fiscal 2012. Dr. Lopez will wrap up the call with a brief discussion of current business trends. Then the company will open the call for your questions. Before we start, I want to touch upon any forward-looking statements made during the call today, including management's beliefs and expectations about the company's future results. 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 the company's SEC filings for more detailed information on the risk and uncertainties that have a direct bearing on operating results and performance and financial conditions. With that said, I'll now turn the call over to Dr. Lopez. Go ahead, Doc.

George Lopez

Analyst

Thank you, John. Good afternoon, everyone. Fiscal 2011 was a successful year in our company's history marked by achievement of several significant operating and financial milestones. During the year, we continue to expand the ICU Medical brand in most of our target markets and our revenue increased 6% to a record $302 million. This growth was driven by double-digit improvements in CLAVE as well as oncology and TEGO products. It's worth noting that our oncology sales grew 33% to $24 million, validating strong demand for these revolutionary products worldwide. The international sales increased 14% while domestic sales were up 4% year-over-year. During the fourth quarter, we sold our Diabetes Infusion Set Business also known as our Orbit product line for a net operating gain of $12.6 million. In spite of Orbit's robust value proposition, it was one of our smallest non-core product line. We believe this sale was a strategic step in the right direction to [ph] allow us to better focus on our key target markets where we see a greater growth potential. Excluding the gain on the sale of our Orbit line, our net income through the fiscal year 2011 was a record $36.7 million or $2.59 per diluted share. Additionally, we generated record cash flow from operating activities of $64.5 million. During the year, we strengthened relationships with our distributors and increased investments in research and development initiatives. We also continued to improve our manufacturing efficiencies, expanded our footprint in Europe through our new plant in Slovakia. Today, the plant is operating at 35% of its capacity and we expect to improve this capacity utilization through 2012. Before I go into more detail on our recent business trends and new product offerings, I'd like to turn the call over to our CFO, Scott Lamb, to review our financial results for the fourth quarter and guidance for fiscal 2012. Scott?

Scott Lamb

Analyst

Thanks, Doc. Our total revenue for the fourth quarter of 2011 increased to $76.5 million compared to $75.6 million in the same period last year. Net income for the fourth quarter of 2011 was $17.8 million or $1.26 per diluted share as compared to net income of $10 million or $0.72 per diluted share for the fourth quarter of 2010. Our fourth quarter of 2011 net income included a net $12.6 million pretax gain, which included $1.6 million of SG&A expenses associated with the sale of assets related to Orbit. Excluding this gain and the related income tax expense, net income for the fourth quarter of 2011 was $9.8 million or $0.70 per diluted share. For the fiscal year ended December 31, 2011, our total revenue increased 6.2% to $302.2 million compared to $284.6 million in the same period last year. Net income for the fiscal year ended December 31, 2011, was $44.7 million or $3.15 per diluted share compared to net income of $30.9 million or $2.23 per diluted share for the same period last year. Excluding the gain on sale of Orbit, the $1.6 million of SG&A expenses and the related income tax expense, our net income for the fiscal year ended December 31, 2011, was $36.7 million or $2.59 per diluted share. Now let me discuss our fourth quarter revenue performance by market segment. You can also view our detailed market segmentation and year-to-date top line performance in our earnings press release. For the fourth quarter of 2011, sales from our infusion therapy market increased 3.2% to $52.5 million and comprised 69% of our total sales. The market growth was attributable to strong performance of CLAVE and MicroCLAVE needlefree connectors, which increased 13.7% to $29.1 million compared to $25.6 million a year ago, representing 38% of our…

George Lopez

Analyst

Thank you, Scott. As I mentioned earlier during the call, in the fourth quarter, we continue to make additional investments in our research and development initiative and to introduce new products. Let me give you a quick update on our recent developments in this area and our new product outlook for 2012. A clinical study presented at the American Society of Nephrology’s Kidney Week 2011 showed that TEGO needlefree hemodialysis connector can decrease heparin use and reduce cost over a 3-month period for a dialysis patient. As the world's first and only needlefree connector, FDA cleared for use in hemodialysis applications, TEGO connector provides a cost effective alternative to traditional connectors without affecting blood flow rate or the rate of positive blood cultures. Never in the history of ICU Medical have we had as many new product scheduled for launch as we do in 2012. One of our new products is this system called Diana [ph] , targeting the oncology market. One of our systems' primary features is the ability to significantly increase the accuracy when mixing drug without exposure to these dangerous drugs. We will have a limited market launch at the end of the first quarter. And as usual, for our company, Diana [ph] will be launched into an empty market without any competitors. We don't expect any of our new products to make successful contributions to our top line during the fiscal year as all products will be in a limited release as we ensure the proper positioning of the product offering. We are very pleased with our innovative accomplishments and look forward to sharing with you more details when appropriate. During the fourth quarter, we also made excellent progress strengthening our relationships with our distributor partners. We are very pleased to extend our 2 major distribution agreements with Hospira through December 31, 2018. Under the co-promotion and distribution agreement, which was initially signed in February 2001, we manufacture all new Custom Sets for sale by Hospira and we jointly promote the products under the name SetSource. Under the supply and distribution agreement, which was initially signed in April of '95, Hospira purchases primary CLAVE and oncology products. This agreement -- the agreements we [ph] maintained at current Hospira rights to distribute our products worldwide with terms that previously extended to 2014. Hospira has been a valuable partner for many years. This extension demonstrates their trust and confidence in our product offerings. We look forward to continued relationship providing customers with access to our innovative CLAVE, oncology products, custom infusion sets and other products worldwide. Additionally, we have been awarded a 36-month contract with Novation for our full line of critical care products, including hemodynamic monitoring and catheters, disposable pressure transducers and in-line sampling systems. As we enter our new fiscal year, we have never had so many new products scheduled to launch in the history of the company. Now I'd like to turn the call over for your questions.

Operator

Operator

[Operator Instructions] Our first questioner in queue is Matt Dolan with Roth Capital Partners.

Chris Lewis

Analyst

This is Chris on for Matt. First question, I was just hoping you could walk us through your approach to the 2012 earnings guidance and, I guess, how you see earnings progressing throughout the year.

Scott Lamb

Analyst

Well, as we mentioned already, going through the first quarter, we believe that revenue is going to be in the range of $73 million to $76 million. And we see steady progression throughout quarters 2, 3 and 4. We expect gross margins to be around 47% in the first quarter raising sometime later in the second half of this year. We expect our earnings per share to be in the range of $0.42 to $0.52.

Chris Lewis

Analyst

And then on infusion therapy, I think you said 6% to 9%, can you just kind of provide some more commentary around where the growth drivers are in that?

Scott Lamb

Analyst

It's going to come both from our CLAVE product lines, our needlefree connectors as well as our Custom products. Those are the 2 main product lines within the infusion therapy market and those will continue to be growth drivers for us going forward.

Chris Lewis

Analyst

And then finally, Slovakia. You guys have mentioned it. Can you just provide some more commentary on that as well on gross margin and any top line impact you're able to see from there and kind of what you expect to see from Slovakia throughout 2012?

Scott Lamb

Analyst

Well to start off with, the top line guidance that we gave for the year includes some gain coming from Europe, obviously, and Slovakia. Our plant in Slovakia is a key component of driving growth in Europe especially in the face of the economic conditions currently in Europe.

George Lopez

Analyst

In custom sets.

Scott Lamb

Analyst

In custom sets, exactly. So the plant there, as we mentioned, is around 35% utilization. That utilization rate will increase throughout the year, probably more towards the latter half of the year. And as we've already said, it's putting about 100 basis point pressure on our gross margin. So as we push more volumes through there, then you should see some gradual improvement in the gross margins coming from pushing more volumes through that factory.

Operator

Operator

Our next questioner in queue is Jayson Bedford with Raymond James.

Jayson Bedford

Analyst

So just on the last question. So Slovakia is going to have a 100 basis point impact in 2012 as well?

Scott Lamb

Analyst

Going into 2012, it has the 100 basis impact. As we increase volume through that factory, that impact will lessen throughout the year. But we believe, throughout 2012, there will be some impact from that factory, less [ph] as we move forward.

Jayson Bedford

Analyst

So over the guide, I think you mentioned 47 to 47.5. What's kind of the approximate headwind on a full year basis?

Scott Lamb

Analyst

Well, if you look at -- we were 47 for the year, for 2011. And so not looking really at any other additional significant headwinds, that we have the same headwinds heading into 2012 that we did in 2011 except that we believe we'll get some cost pressure relief in the Slovakia plant towards the later part of the year.

Jayson Bedford

Analyst

Okay. Anything else impacting the gross margin? It seems like that's kind of the primary variance between, at least, our model and the guidance. Outside of Slovakia, is there anything else that is noticeably impacting the gross margin line?

Scott Lamb

Analyst

Nothing new. So on a year-over-year basis, obviously, the pricing pressure on critical care kicked in, in the second half. So you see a little bit of that maybe on a year-over-year basis on the first couple of quarters. But other than that, we don't see -- at this point in time, we don't see any other significant headwinds.

Jayson Bedford

Analyst

And then on the revenue guide, it looks like, let's call it, 5% to 9% for 2012. The business has been tracking in the 10% range over the last couple of years. You have a good pipeline. Is the big difference here the slower growth profile associated with critical care?

Scott Lamb

Analyst

Yes. We -- critical care is the major component there.

Jayson Bedford

Analyst

And then just the last couple then I'll let someone else jump on. Neutron, can you just make a quick comment on the uptick in Neutron? And did that have a positive impact in your business in the fourth quarter? And then, I guess as a follow on, does that product cannibalize your existing business? Or do you see it more as an additive piece to the pie?

Scott Lamb

Analyst

We see it as an additive piece but really not contributing significantly in 2012. It's just -- taking a position that the product is high-margin, low-volume product and it won't add anything to the revenue significantly for 2012. We have nothing in for new products.

Jayson Bedford

Analyst

Neutron is classified as a new product?

Scott Lamb

Analyst

Yes.

Jayson Bedford

Analyst

Okay. And then just lastly on the oncology side, have you seen any impact from the state of Washington kind of adopting kind of tighter oncology or support of the safety oncology devices?

Scott Lamb

Analyst

Other than the other states and hospitals being aware of the problem, aware of the danger but no legislation as of yet.

Operator

Operator

Next questioner in queue is Junaid Husain with Dougherty & Company.

Junaid Husain

Analyst

Scott, big picture question relative to Hospira. Obviously, your partner is very distracted these days. I know when we caught up with you in San Francisco your sense was it hasn't materially impacted your business. Any update on that?

Scott Lamb

Analyst

No, we continue to have a lot of faith in Hospira. The size of the business that we're partnered with Hospira is not where most of the issues lie, any of the issues. And so we continue to be very positive, bullish towards Hospira.

Junaid Husain

Analyst

So your products -- none of your products are shipped through Hospira's Rocky Mount or Austin manufacturing facilities?

Scott Lamb

Analyst

No, none.

Junaid Husain

Analyst

And does Hospira still send you the 3 months forward look on their sales from the channel?

Scott Lamb

Analyst

We get 3 months firm and 9 months forward.

Junaid Husain

Analyst

Got you. Switching gears just bit. I think Doc had mentioned that you guys were doing 35% capacity utilization in Slovakia, which I think is where you were at in the last quarter, which kind of begs the question, are you stuck at 35%? Is there something that happened in the quarter? Obviously, it sounds like you can get that higher in 2012. And as a follow-up, where do you think that can go in '12?

Scott Lamb

Analyst

Well, as we mentioned, as we gave guidance on the gross margins, and as we also mentioned on the call, we expect the cost pressure from the Slovakia plant to lessen throughout the year, more towards the latter half of the year. And we try to bake in what those expectations are in the face of the economic downturn in Europe.

Junaid Husain

Analyst

Got you. And then Doc or Scott, on your oncology products, can you remind me, I don't believe you've incorporated automated manufacturing yet. Is that something that you would be looking at in 2012? And as a follow-up to that, what kind of COGS improvements would you expect would it move to?

Scott Lamb

Analyst

Not in 2012.

Junaid Husain

Analyst

I'm sorry?

Scott Lamb

Analyst

Not in 2012. We're not automating in 2012.

Junaid Husain

Analyst

Well, could you give us a sense for what the gross margins are on oncology without automation?

Scott Lamb

Analyst

We haven't broken those out, Junaid. What we've mentioned in the past, in our target markets, critical clear is below the corporate average and the other markets are at or above the corporate average.

Junaid Husain

Analyst

Got you. And then last question for Doc, just for curiosity sake, I was always a fan of the Orbit franchise. I'm just sorry you couldn't make it worth. How much was this business generating for you? And who did you end up divesting it to?

George Lopez

Analyst

If revenues were approximately $3 million, probably would do $5 million this year. It's a great product line and [indiscernible] it just wasn’t our focus where we want the entire [indiscernible]. We sold it off at a very large [indiscernible].

Junaid Husain

Analyst

And can you say who you sold it to?

George Lopez

Analyst

Ypsomed, out of Switzerland.

Operator

Operator

[Operator Instructions] Next questioner in queue is Mitra Ramgopal with Sidoti.

Mitra Ramgopal

Analyst

Yes, I, first, just wanted to follow-up on Orbit, Doc, I know you mentioned it was a non-core product. But are there any other products in your portfolio right now you'd consider non-core that you might be looking to also divest?

George Lopez

Analyst

None that I can think of.

Mitra Ramgopal

Analyst

And then on the new products, you did mention on the oncology side something you're working on, you expect to launch at the end of the first quarter, could you give us a sense as to the market potential on that? I know it's still very early.

George Lopez

Analyst

I think that the market for the Diana [ph] system, for example, is hundreds of millions of dollars. [indiscernible] Specifically, I don't know. Our numbers are way up there, but it's a large market.

Mitra Ramgopal

Analyst

Okay. And if you could give us an update where you stand regarding the sales force expansion, how many -- the size of the sales force at the end of 2011? And how much you feel you need to add in, say, 2012?

George Lopez

Analyst

Scott has those numbers.

Scott Lamb

Analyst

And so at the end of 2011, we had 165 direct sales and we expect to add 5 additional probably sometime in the first quarter.

Mitra Ramgopal

Analyst

And then a quick question on Europe. I know in the U.S., Doc, you'd mentioned your products being recession resistant. With Europe now entering recession, it looks like -- do you see things playing out in a similar way, where it really shouldn't impact your European business as much?

George Lopez

Analyst

Absolutely.

Mitra Ramgopal

Analyst

And finally, just on the cash. Obviously, you've generated a lot here now and any thoughts in terms of -- I know, Scott, you talked about a stock repurchase, if you could remind how much you have outstanding there and potential acquisitions you might be looking at and, finally, any consideration on maybe your dividend implementation?

Scott Lamb

Analyst

Well, to start off with, we spent close to $2 million in buyback in the fourth quarter. So we have approximately $28 million left under the original $40 million authorization that's in place and that's open-ended. We look at buybacks from an opportunistic basis. We're always looking for an asset, a strategic asset that we can bolt-on that will add value to distribution or fill in some product line gaps.

George Lopez

Analyst

And we'll pay cash for it.

Scott Lamb

Analyst

And pay cash for it. And then also investing back into the company such as investing in our sales and marketing force and new factory in Slovakia and so forth.

Operator

Operator

And at this time, there appears to be no additional questioners in the queue. I'd like to turn the program back over to Mr. Mills for any additional or closing remarks.

John Mills

Analyst

Thank you. Thank you, everyone, for participating in today's call, and we look forward to updating you on our 2012 progress, in the first quarter results, which we expect to be in April. Also we will be going to a number of conferences and non-deal [ph] marketing over the next few months, so we hope to see you then. Thank you.

Operator

Operator

Thank you, gentlemen. Ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.