ICU Medical, Inc. (ICUI) Q4 2011 Earnings Report, Transcript and Summary

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.

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.

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?

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 total revenue. This growth was partially offset by a decrease in Custom Sets. The fourth quarter 2010 sales from Custom Sets included a one-time $2.7 million shipment to Hospira. Excluding this one-time shipment, sales from Custom Sets increased $1.6 million year-over-year. We believe CLAVE needlefree connectors and Custom Sets will remain key growth drivers in our infusion therapy market. We expect sales in infusion therapy to increase approximately 6% to 9% in fiscal year 2012 from fiscal year 2011. Sales from the critical care market represented 18.6% of our total sales and were down 4.9% to $14.2 million as a result of competitive volume and price pressures. We continue to invest in research and development as well as sales and marketing of this business. And we believe we have the right strategy to make this a growth market for us in the future. We expect critical care sales to decrease year-over-year by approximately 4% to 8%. Our oncology market was down 13.4% to $5.3 million, which represented 7% of our total sales for the fourth quarter. The decrease was due to product sell-through catching up with sell-in. Demand, backlog and conversions for oncology products remain very robust going into 2012. We expect oncology sales to increase by approximately 35% to 40% year-over-year. Our other product category, which includes products in the renal and diabetes markets, grew 21.7% year-over-year to $4.4 million, representing 5.7% of our fourth quarter 2011 revenue. Strong performance of this market was primarily driven by TEGO in the renal market, which increased 49.6% year-over-year to $2.1 million. We expect sales in this product category to increase approximately 3% to 6% this year. Our fourth quarter sales by distribution channel were as follows: Domestic sales to Hospira were down 0.9% year-over-year to $31.1 million, as strong performance of the CLAVE product line and Standard Oncology was offset by significant decreases in Custom Sets, primarily due to the one-time shipments of Custom last year. For the fourth quarter of 2011, domestic sales to Hospira represented [Audio Gap] for 2012 domestic sales to Hospira represented 40.6% of our total revenue compared to 41.5% for the same quarter of 2010. Our non-Hospira domestic sales increased 5.2% to $29 million year-over-year and were driven by strong contributions from infusion therapy. Our domestic sales, including Hospira, were up 2% to $60.3 million or 78.8% of our total revenue. And international sales decreased 1.9% to $16.2 million year-over-year, representing 21.2% of our total revenue. Our fourth quarter gross margin was 47% compared to 49.6% a year ago and 46.5% in the previous quarter. The year-over-year decrease in gross margin was attributable to higher raw material cost, continued cost pressure from our new factory in Slovakia and price reductions in critical care. We expect our gross margins to be in the range of 47% to 47.5% for the full fiscal year of 2012. SG&A expenses increased by 15.6% to $22.3 million year-over-year due to $1.6 million related to the sale of the Orbit product lines and our continued investment in sales and marketing initiatives. As a percentage of sales, our SG&A expenses were 29.1%. Excluding the $1.6 million related to the sale of the Orbit product line, SG&A was 27% compared to 25.5% for the fourth quarter a year ago. We expect SG&A as a percentage of total revenue to be 26.5% to 27% for the full fiscal year of 2012. Our research and development expenses increased 24.5% to $2.2 million compared to $1.7 million for the fourth quarter of 2010. This increase was in line with our expectations as we continue to invest in our existing and new products and to establish more presence for our new product offerings in the markets we serve. We expect our research and development expenses to be approximately 3% for the full fiscal year of 2012. Our tax rate for the fourth quarter was 31.3%. Excluding the gain on sale of assets discussed earlier, our operating income for the fourth quarter of 2011 totaled $13.1 million or 17.2% of sales compared to operating income of $16.5 million or 21.8% of sales a year ago. Our EBITDA, or earnings before interest, depreciation and amortization, totaled $30.6 million compared to $21.1 million for the fourth quarter a year ago. Now moving to our balance sheet and cash flow. As of December 31, 2011, our balance sheet remained strong with no debt and $160 million in cash, cash equivalents and investment securities. This equates to approximately $11.53 per outstanding share. We also had $233.7 million in working capital. It's also worth noting that at the end of the fourth quarter, our inventory levels decreased to $40.4 million compared to $44.1 million as of December 31, 2010. Additionally, we generated a record $64.5 million in cash flow from operating activities during the fiscal year. Our capital expenditures totaled $15.8 million during the year and primarily included machinery, equipment and molds for our plants in the U.S. and Slovakia and investments in IT. Day sales outstanding for the fourth quarter were 58 days. We expect DSOs to be approximately 60 to 65 days in the foreseeable future, which is in line with historical DSOs. Now let me discuss our revenue and EPS guidance for fiscal year 2012 and first quarter of 2012. For the full fiscal year of 2012, we expect to generate revenue in the range of $318 million to $330 million. On a market segment basis, we expect our infusion therapy sales to increase year-over-year approximately 6% to 9%. We expect critical care to be down approximately 4% to 8% and we expect our oncology market to be up 35% to 45%. We expect our other category will be up 3% to 6%. We also expect our diluted earnings for the full fiscal year of 2012 to be in the range of $2.45 to $2.70 per share. For modeling purposes, our tax rate is expected to be 35% for 2012. For the first quarter of 2012, we expect our revenue to be in the range of $73 million to $76 million and we expect a steady sequential progression of revenue growth during the second, third and fourth quarters. Gross margin will be approximately 47% during the first quarter and we expect our gross margin to increase to approximately 48% sometime in the second half of this year. We expect our earnings per share to be in the range of $0.42 to $0.52, which includes a tax rate of 35% and expect our earnings per share to increase throughout the year. Overall, the Slovakia plant will continue to put pressure on our gross margins throughout the entire year. However, we expect this impact to somewhat decrease during the second half of the year as we increase production volume. We expect our first quarter SG&A to be sequentially higher than in the fourth quarter due to increased sales and promotional costs including the hiring of 5 additional sales people. As we continue to invest in new products, our research and development expenses will also be higher in the first quarter. Our operating cash flow is expected to be approximately $40 million to $50 million in 2012. We believe capital expenditures will be in the range of $13 million to $18 million in 2012. We also expect to continue to use our strong balance sheet and cash flow to repurchase stock on an opportunistic basis and look for acquisition opportunities to expand our leading position in infusion therapy, oncology and the critical care markets. Now let me turn the call back to Dr. Lopez, to provide an update on new products and our business trends.

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

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.

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.

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?

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.

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?

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.

In custom sets.

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.

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

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

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.

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

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.

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?

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.

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?

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

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?

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.

Neutron is classified as a new product?

Yes.

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?

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

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

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?

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.

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

No, none.

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

We get 3 months firm and 9 months forward.

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?

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.

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?

Not in 2012.

I'm sorry?

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

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

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.

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?

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].

And can you say who you sold it to?

Ypsomed, out of Switzerland.

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

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?

None that I can think of.

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.

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.

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?

Scott has those numbers.

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.

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?

Absolutely.

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?

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.

And we'll pay cash for it.

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.

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.

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.

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.