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Executives

Richard A. Packer - Chairman and Chief Executive Officer

A. Ernest Whiton - Vice President of Administration and Chief Financial Officer

Analysts

Joshua Zable - Natixis Bleichroeder

Jonathan Block - SunTrust Robinson Humphrey

Gregory R. Brash - Sidoti & Company

ZOLL Medical Corporation (ZOLL) F1Q09 (Qtr End 12/28/08) Earnings Call January 22, 2009 10:30 AM ET

Operator

Thank you for holding for the ZOLL Medical Corporation 2009 First Quarter Earnings Results. Today's call is being recorded at the request of ZOLL Medical Corporation. If anyone has any objections, you may disconnect now.

At this time, I would like to introduce your host, Mr. Richard Packer, Chairman and Chief Executive Officer. Sir, you may begin.

Richard A. Packer

Alright, thank you for joining us this morning to discuss Q1. I am joined by Jon Rennert, our President, if you have questions for him as well as Ernie Whiton, our CFO. I will ask Ernie to start by covering our Safe Harbor statement. Ernie?

A. Ernest Whiton

The matters we will be discussing today which are not historical information consists of forward-looking statements. Reliance should not be placed on forward-looking statements because they involve risks and uncertainties which may cause actual results, performance and achievements of the company to differ materially from the anticipated future results, performance and achievements expressed or implied in such forward-looking statements.

Forward-looking statements may contain estimates and the actual results may vary materially from estimates. Factors such as overall economic conditions, the demand for the company's products and services, availability of raw materials and manufacturing capacity, risks of non-payment of accounts receivable, risks associated with foreign operations, risks involved in litigation and other risks and uncertainties described from time to time in the companies filings with the Securities and Exchange Commission may cause actual results to differ materially from management's current estimates and expectations. The company disclaims any current intention to update forward-looking statements in the event of any changes in the facts, circumstances or expectations that underlie those statements.

Richard A. Packer

Great, thanks Ernie. As is customary for us, I will start with some additional comments on the quarter. Ernie will add some additional comments as well focused on our numbers. Then we'll take your questions.

So turning to the results; all in all, we believe that Q1 performance is quite acceptable given all of the issues we're facing. We're proud that our teams continue to push forward optimistically and aggressively. We sense little dampening in enthusiasm in spite of the constant drum beat of bad news whenever they pick up the paper or turn on the TV. As we say around here a lot lately, to heck with the economy, there is a life to be saved today. And we think this encapsulates our view of our business these days and speaks to the resilience of our business.

As you know many of our products are standard of care and those that or not, offer unique and compelling clinical reasons to buy. So our customers need our products. And while much of what we sell is capital equipment, the purchase of which can be delayed, eventually customers will buy. So, while business can be affected in times like these, our foundation remains strong and remains cash strong, and we're ready to reaccelerate when the time comes.

Looking specifically at Q1, as discussed in the release, we dealt with three big headwinds during the quarter that made comparisons to prior year tough. The effective last year's California deal and foreign exchange combined, cost us about $11 million of top-line growth or about 12% growth. At the bottom line, these two items cost us more than $0.08 of EPS compared to last year. So digesting that effect and still getting some growth at the operating income line is not too bad.

The California comp is now behind us. FX will likely be an issue all year as discussed extensively last time and with Ernie providing more detail in a bit. But the third issue and unfortunately the hardest to predict is the spending environment which has been rapidly shifting. Let's discuss that as I cover each of our main markets.

In the North American hospital market, we did see a specific reluctance to pull the trigger on deals by hospital administration in the month of December. A number of companies have reported similar events. The early part of the quarter was on track for us. So I think, we got caught a little bit flat footed and we are not in administration early enough to get our deals closed.

Obviously, we cannot be certain how hospitals will react to changing economic environment, but we are working very differently this quarter to move deals sooner and provide incentives to make sure we are near the top of the priority list. Stated simply, it is time to grind it out.

I'm reminded that the last time we saw such a sharp tightening in the hospital market in North America was in 2001, another time of great uncertainty. And by the end of that year, we were back on track and posting record orders in the U.S. hospital market. Hopefully this year will be similar.

Recall that we were cautious about the North American hospital market when we outlined the year, reducing our projected growth rates to the low-single digits in spite of very high growth over the past few years and a great new product, the R Series. So we anticipated some of the slowness, specifically in the beginning of the year and still believe, we can meet our objectives for the year.

We believe the expansion of our new R Series as discussed in the release this morning will help us greatly in this market. Also helping us this quarter were stronger military sales than we had projected. This helped fill the hospital gap and if military sales continue at their recent levels, it will help cushion any further weakness in the hospital market.

Turning to the pre-hospital market, results were very good everywhere but public access AEDs. North American EMS was on track, as we did a good job fighting through funding issues. And we got good results from Canada EMS, as we won and shipped the Auto business discussed in a separate release this morning.

The AutoPulse was also very strong in North American EMS this quarter, doubling over the prior year and thus far the forecast continues to look good. Our data business continued to grow and LifeVest was obviously, very strong and I will discuss that more in a moment. While we remain cautious about US EMS spending so far so good, again remember we have very modest goals this year. We hope that a federal stimulus package with large aid to states will also aid in stabilizing the situation.

In the international market, we continue to perform strongly while absorbing the impact of foreign exchange changes. On a constant currency basis, growth was about 17%. So we're very happy with these results. Thus far we have not seen any significant issues related to economies in the international markets, but obviously, there might be in the future. If for example the UK or China change their healthcare spending plans in reaction to their changes in their economy.

Now let me turn to other items. A brief update on the CERT trial; this is the large AutoPulse trial we are sponsoring. Four of the five sites are currently enrolling, with one small site in Europe still awaiting final IRB approval. We have more than 700 patients enrolled thus far, and expect the Data Safety and Monitoring Board to have their first look at the data around April.

As we believe, we need about 2500 patients to show statistical difference. We don't anticipate any information coming out from that look in April. We expect to get to about 2000 patients by the end of the year, and perhaps we will see some data then if the AutoPulse outperforms our expectations.

Now turning to the LifeVest; we're doing very well here with the annual run rate now about $35 million. Recall this is a reimbursed product, not affected so much by the general economic conditions, with the gross margin of about 75%. The business is now profitable and we will grow in profitability throughout 2009. I will answer any questions you have about this product, but I promised last time to talk a little bit about the potential market size. So I would like to cover that now.

Recall the product is used when a patient has an elevated chance of a sudden cardiac death, but for many reasons does not yet have an ICD. The main marker for this situation is a low ejection fraction usually under 35% and some other cardiac conditions, such as you know recent MI or a partially-blocked artery. So the patient population is broad and falls into many categories, such as post MI, newly diagnosed non-ischemic cardiomyopathy, pre and post cabbage (ph), pre and post-PCI, awaiting transplant and of course, newly diagnosed congestive heart failure.

To model potential demand, we look at annual rates of diagnosis of these patient types using studies that show the rate of low EF [ejection fraction] within these patient populations. We then take out those patients that are unlikely to survive or for one reason or another, unlikely to wear a vest. We remove overlap between the various conditions and then multiply the resulting patient numbers by the number of months they typically wear a vest, which differ by use and by a $2300 per month rental rate, which is little below of what we are running right now.

Doing this math results in a potential US market size of over $1.8 billion. Now obviously, just like ICDs, just because a patient needs it and insurance will pay for it does not mean every one gets it. But getting even a quarter of the potential means this product could be larger than all over the rest of ZOLL. Of course, we would be happy to take you through the math and the sources if you like. If you do so, you'll see that how even one application such as newly diagnosed non-ischemic cardiomyopathy which today represents about one-third of the patient's currently end of device represents more than $400 million of US market potential for ZOLL. This is obviously a very, very exciting opportunity.

So in summary, while our outlook continues to remains somewhat uncertain as the economic situation unfolds, we see Q1 as evidenced we can hold up during these times and achieve an adequate 09 results, while remaining poised for major growth in 2010.

Now, I'll turn the call over to Ernie.

A. Ernest Whiton

Thanks Rick. Let me begin with the balance sheet and then I'll cover our P&L. Our balance sheet remains in excellent shape. We finished the quarter with approximately $68 million in combined cash and investments in zero debt.

During the first quarter, we generated approximately $9 million in positive cash flow from operations. We've spent $2.5 million related to the acquisition of software tooling and inventory from Welch Allyn. We also paid $4.5 million related to Lifecor earn out payments. Capital expenditures for the quarter were approximately $4 million.

Our DSOs and accounts receivable were 78. Over the past two years we have ranged from 72 to 82. During this period we have said and we anticipate using our balance sheet to help customers with good credit to purchase our products and this could our DSOs to move into the 80s or even in the low 90s.

We believe this use of our excess cash is appropriate to help competitive customers standardizing ZOLL or to help customers struggling with budget timing and the market liquidity issues to get the product they need sooner. So our current DSOs are a little lower than we anticipate they might be in the future.

Our inventory increased by just over a $1 million as compared to year end. This includes the purchase of a little $0.5 million from Welch Allyn. Our inventory turns decreased from 3.1 to 2.7. This reflects our anticipated needs over the rest of the year as we seek to reload our 2009 production.

Now turning to the P&L; as we indicated in our press release, our revenue decreased 4% versus Q1 of last year. Q1 of last year included approximately $8 million of very low margin California revenue. We did not expect to see a similar deal like this in Q1 of 09.

We also indicated that we had approximately $3 million of foreign exchange headwind in revenue as expected. We calculated this impact by multiplying our current year local currency revenues, by the difference between the Q1 '08 and Q1 '09 average foreign exchange rates. The major contributors to this headwind were the Canadian dollar, the British pound, the euro and the Australian dollar. The corresponding Q1 impact on operating income was just over $200 million, this impact was also expected.

During our pervious call in November, we reviewed the potential impact of foreign exchange and revenues and operating income for 2009. At that time we expected to see an EPS impact for the year in the mid-$0.20 range, we believe we're still in this vicinity. In addition, due to the rapid strengthening of the U.S dollar within Q1 '09, we experienced the loss in other income of just under $1 million as we marked the foreign denominated inter-company receivables to market at quarter end. We anticipate this impact will be more moderate as we move through 2009.

Gross margin in Q1 improved from 48.5% last year to 52.5% this year, reflecting the absence of the transaction like California. We did see a benefit from higher relative growth of LifeVest and data management revenues, both of which carry higher than corporate average gross margins. This impact was offset by the foreign exchange impact on revenues I just described.

Operating expenses as a percentage of sales increased from 44% in Q1 of '08 to 47% in Q1 of '09. This reflected the inclusion in Q1 of '08 of $8 million of California revenue. Excluding California, operating expenses would have been approximately 48% of sales in Q1 of '08.

Selling and marketing expense increased $1.4 million in Q1 of 09, versus Q1 of 08, reflecting an increase of just over $2 million in our LifeVest business as we doubled our sales force. Our international selling and marketing expenses included a foreign exchange benefit of approximately $700,000.

R&D and G&A increased marginally from a dollar perspective, reflecting an emphasis on spending controls in Q1 of 09, versus Q1 of 08. Operating income improved from 4.9% to 5.3%. As Rick mentioned, in this environment I would say this is a pretty positive thing. The tax rate for Q1 decreased from 36% to 26%. The Q1 09 tax rate included a discreet credit of a little less than $400,000 from retroactive passage of the R&D tax credit. We expect the tax rate for the rest of the year to approximate 35%.

So, let me turn to our forward guidance; from an overall perspective, we do not see a substantial change in our 2009 guidance. We still anticipate 10% annual revenue and 10% annual EPS growth. We may see weaker growth in North American Hospital and public access, offset by stronger growth in our new product areas including LifeVest and AutoPulse. It is also possible that we could see better then anticipated military performance, as we believe our estimates in this area are pretty conservative, given Q1's performance.

We plan to continue to closely monitor our operating expenses as we move through the year. Although we anticipate the difficult capital spending environment will continue for some period of time, defibrillators are a standard of care in our core professional markets. We do expect that as these customers gained improved visibility into what their capital spending capability is over the course of 2009, we will see some deals that have been deferred close.

While these customers can get more time out of existing products, the cost and risk of this strategy built with the passage of time given the nature of the product. Recall that the LifeVest is a reimbursed product with revenue linked more closely to the incidence of heart disease rather than a capital equipment cycle. We have good momentum with this product, as Rick described.

Given the overall current capital spending environment, we believe this may result in Q2 EPS closer to the mid-$0.20 range, with Q4 being a little bit higher than originally expected, as customers gain greater visibility into the capital spending capability and some pent-up demand occurs as customers move forward with deals they have previously deferred. All in all, as we have indicated during Q1, we face considerable headwinds and came out okay.

We will continue to work hard to address these challenges over the next few months, invest judiciously in our future growth products and closely monitor our core operating expenses. We continue to believe, we can stay in course in 2009, positioning ourselves well for future growth as these headwinds subside. We believe our long-term future as a resuscitation company is very bright.

Now let me turn the call back to you Rick.

Richard A. Packer

Thank you, Ernie. Jonathan if you would like to lead us through the question-and-answer period.

Question-and-Answer Session

Operator

Certainly. (operator instructions). Our first question comes from Joshua Zable from Natixis.

Joshua Zable - Natixis Bleichroeder

Hey guys, thanks for taking my question here and congratulation on a great quarter here in a really tough environment.

Richard Packer

Thank you

Joshua Zable - Natixis Bleichroeder

Just a couple of questions of clarity here; first of all, just let me understand, I know you guys are kind of keeping your outlook pretty similar. Obviously, I remember you guys have kind of talked about an uptick in the back half of the year. Ernie just some of your comments now seem to indicate that maybe, you still think there is going to be that uptick because some of the deferred contracts you're going to kind of come through and/or there is kind of going to be sort of the change in maybe the mix that you initially saw. So can you just kind of help clarify what gives you the confidence in the second half of the year? I mean just given the significant drop off in the hospital business in general obviously, I know you talked about the mix. But can you really make that up?

A. Whiton

So our view in the hospital market is that customers pent the whole products for seven to ten years. Products are standard of care. They can't decide not to carry them. When they get to the end of their life, they can get another quarter, another couple of quarters another little bit of time out of their products, because they are biomedical engineers on staff who are responsible for maintaining the equipment. But as time passes and this old equipment that's now past its time is ready for replacement, maintenance costs increase and the risk of a product failure increases and that is not a great profile for hospital. Our capital equipment, ZOLL's capital equipment is not incredibly expensive capital equipment relative to other capital equipment purchases made by hospitals.

So our belief is that the impact on our business from a capital equipment perspective and capital spending perspective is that customers can delay purchases when they lose visibility or they are unsure as to how much spending capability they're really going to have. Does that uncertainty rests and they start spending again. If their defibs are at the end of their life, we believe that we will be at the top at the pile. And Rick talked about some of the actions we are taking to try to help ensure that we're at the top of the priority pile as that happens.

So, when we look at all that business that didn't close in Q1, we see the potential for pent-up demand. We don't know exactly when that's going to close. Is it going to close in March, is it going to close in Q3, is it going to close in Q4. Our view at this point is it's going to close this year. So, that is why we remain optimistic that that the year is going to remain on track.

The other thing obviously is that to the extent that hospital doesn't perform there are opportunities for other parts of our business to perform exactly as you saw in Q1.

Joshua Zable - Natixis Bleichroeder

Well let's talk about that for a second, because I think the other parts of your business, especially the pre-hos was extremely impressive obviously, AutoPulse here. Can you just kind of help us understand, given the stuff that we are hearing about municipalities and charitable trusts obviously, hospital-based kind of EMS-type situation. Is that sort of big contracts that you guys did? I mean, is it just all AutoPulse demand that's sort of new? Was there some sort of, there is some event that sort of all of a sudden keep building now you kind of crossed over the top of the mountain, now you are kind of running downhill with AutoPulse, that a certain amount of people have? Just help me understand, because in this kind of environment... any environment those are impressive, but given especially the contrast hospitals, the pre-hospital numbers were really strong.

Richard Packer

It's a great question Josh. You are asking all the right questions and unfortunately there are not great answers in a time of uncertainty to all those good questions. The AutoPulse this quarter in US EMS was pretty strong. It's just building if you will. We had good strength in Florida which is state grant money that is put out that drives it and that should continue in this quarter as well.

I mean that's probably the biggest thing. There isn't any standing contracts or any one person taking a bulk load of this product. It's still spread across the line and I think as we talked last time, there is an ongoing debate and I don't know which is right. Some people look at the AutoPulse and say, well we have done without it. We have used our hands for decades, we don't need it, let's just continue to use our hands. I'm going to go pitch the capital for it. Other people say that the chief wants to the maintain his spending and he'd would rather go pitch the city counsel on something that's brand new rather than on a replacement as a way to hold his funding, if you will.

So, it's really hard to see what's going to happen in the future. What we do know is we just had a good quarter. The forecast continues to look good for the product and so you know that certainly a ray of good news.

Joshua Zable - Natixis Bleichroeder

Great. And I don't want to take a too many... too much time but just a couple of real quick ones. First on foreign exchange Ernie, just to understand the way to think about it; it seems like you guys convert the dollar the Eurodollar, et cetera at the end of the quarter. Is that kind of the way we should think about it, so next quarter when you guys report it's kind of end-of-quarter event or should we think about it as more of an average as we typically think about it? I am just not sure if I have misunderstood your comments.

A. Whiton

Right. So, revenues that are generated by our direct subsidiaries are denominated in their local currencies. Those get translated into our consolidated revenues at the average rate during the quarter. So that foreign exchange effect shows in our top-line revenues. The other piece of foreign exchange that hit us in Q1 was down in other income, and that results from marking our inter-company receivables, which are foreign currency denominated on our US books to market at the end of the quarter.

So there's two elements going on here, right. When you have pound-denominated revenues and receivables sitting on a pound-denominated balance sheet and P&L, those just get translated at the average rates for the quarters, right. The inter-company receivables are foreign denominated. They're sitting on our US bucks. They get converted to end of quarter rates at the end of the quarter. So does that help?

Joshua Zable - Natixis Bleichroeder

Yes. No that's definitely clear, that's a lot clear, thank you. And then just one other question; I know you guys said you're hiring couple of people on LifeVest here. I know in the past you've talked about sort of investing more and sort of leaving the profitability. I know this year you talked about sort of more profitability than before. Given the comments just about hiring more people and I know you are constantly trying to growing the business, but is the business doing so well that you are hiring more people than you planned or just kind of just all part of the plans still in profitability or the more profitable mode?

Richard Packer

Yes this is all part of the plan. So the plan was to add about 15 people during the course of this year, most of that is front loaded. So we've added five. I think we'll get five or six onboard in Q2 and then a similar number in Q3.

Joshua Zable - Natixis Bleichroeder

Great and thanks for taking all my questions, here and congrats on a really good quarter in a really tough environment especially.

Richard Packer

Thank you.

Operator

Thank you. Our next question comes from Jonathan Block, from SunTrust Robinson.

Jonathan Block - SunTrust Robinson Humphrey

Thanks. Can you guys hear me okay?

Richard Packer

Yes sir.

Jonathan Block - SunTrust Robinson Humphrey

Okay, thank you. Rick you mentioned a very big market for LifeVest. I think anyway you cut it. The question that comes to my mind is that, are there any other competitive devices that are out there right now or in the pipeline that you are aware of that could cut into this market in the near term?

Richard Packer

There isn't anything that we are aware of. This is a PMA device that would require clinical data in advance of approvals. Anyway, we look at this, if someone wanted to do something similar. So, I think if there was a decent sized trial going on or maybe anything fits similar, we would know about it. So, I think so far, we have not seen any competition coming in.

Jonathan Block - SunTrust Robinson Humphrey

Okay and then maybe to move on. I appreciate some of the optimism around North American hospital and saying that you believe the deal that have been delayed are likely to close at some point throughout the fiscal year. Maybe if you just take the other side of this, could you give us a feel for the worst case scenario? In other words, how do you think revenues and EPS could shake out if this environment gets worse, if those deals don't close? Does that 10% top and 10% bottom line, is that flat year-over-year, is it down, is it down meaningfully? I just think some granularity would help investors.

Richard Packer

Jonathan, if you can tell me how far down the worst case hospital revenue would be, I could do the calculation on the top line. Unfortunately, I don't think that there is an adequate way to look at that equation. There is just no way that I think that we can do that kind of calculation.

Jonathan Block - SunTrust Robinson Humphrey

Okay. Maybe just one or two more; Rick, you mentioned 2001 was something last time you guys went through something similar. I have got feeling how defibrillator sales trended as you came out of that time period. I just don't have that sort of history. I am sorry, what they were maybe roughly in 2002, 2003 timeframe.

Richard Packer

So, we're talking about the hospital market that really ceased up in the first part of 2001, obviously in relation to the events at that time. And Q2 was pretty weak as well and then Q3 was right back on track and Q4 was record orders for us. We continued to do well in the hospital market until we got close to the R Series launch where I think our people kind of waited for the new product and weren't ramping the old product that would have been in 2005.

Jonathan Block - SunTrust Robinson Humphrey

Okay, and last question will just be, balance sheet at this point in time I think cash is king and you guys have a lot of it. Are there any plans there I'm saying in a share buyback, but just any other interesting technologies without giving us too much color, or do you think the portfolio here is complete for the time being and it's just getting out, completing CERT trial, commercializing hypothermia et cetera.

Richard Packer

So we do have a lot of cash and it's certainly one of the strengths as Ernie highlighted. We're not going to be bashful to use some of our cash if some of our good customers are having credit issues. We'll do our part to relieve the credit crunch. So we think that it's important to have a decent amount of cash.

There are a lot of opportunities for interesting technologies in our space. As you might imagine, there are an awful lot of people that are in funding stress these days and we're trying to balance everything including when we buy things that typically takes additional investment to move it forward until we get to breakeven. If there was something that we thought could be pretty compelling and moving us forward, we would be anxious to do that.

Within our company, hypothermia which we have not yet brought to market is still on track to get back in humans at the end of this year. The LifeVest which I think we have great traction is going to be a very sizable, profitable business. In the AutoPulse, if this momentum can keep up with the CERT trial kicking in, in the not too distant future. Certainly within the company right now, we have everything that we need to moves all towards a $1 billion company. But strong companies like us should take it. I think should take advantage of the external environment that's putting pressure on people these days and if we are able to get good technology at a reasonable price, we should be bashful to do that. I am not really worried about our cash flow as we move forward over the next three years. We may have some ups and downs quarterly, but this is business that will come.

Jonathan Block - SunTrust Robinson Humphrey

Okay great and I'll hop just with one last one. You mentioned hypothermia and I think you alluded that hopefully it gets out before the end of the fiscal year. I thought I came across something here in New York that said it was mandatory I believe for EMS to carry some form of hypothermia technology. I guess sort of a two-part question; one, have you heard about that and two, does it lay out which way needs to be... in another words is it need to be advanced hypothermia like invasive that you guys have or could it be what would, cooling blanket be adequate? Thanks guys.

Richard Packer

Sure. So what you referring to is a... I don't know whether it was a regulation or I think it's an agreement among the ambulance companies within New York and it's really primarily the New York Fire Department's ambulance service that they will not bring someone resuscitated from cardiac arrest to a hospital, unless that hospital has a protocol for post-arrest therapeutic hypothermia. And so as result of that hospitals in New York that don't already have a hypothermia program and want to retain their patient flow from the ambulance service have to move towards hypothermia.

There is nothing that says what kind what kind of hypothermia there is, and when you think about the hypothermia market, right now it's one-third ice bags and as low tech you can get. It's one-third that we would call more higher tech, more controlled surface cooling. And then about one-third of it is endovascular like the technology that we will be bringing to market.

So there is two things that are happening here in hypothermia, the market for hypothermia is growing rather robustly as people embrace hypothermia and as the people like New York Fire put their foot down and say the hospital you need to get busy on this. The other thing that's happening is there, is a battle for market share if you will, between the various competing technologies, and we look forward to entering that battle at the end of the year.

Jonathan Block - SunTrust Robinson Humphrey

Okay, great. Thanks for your time guys.

Operator

Thank you. Our next question comes from Rob Holsie (ph) from BlackRock.

Unidentified Analyst

Hi, thank you. Quick question; Rick, you talked about December hospitals kind of stopping purchasing deferred from a lot of companies across healthcare. What are you hearing from them on kind of that deferral? Are you hearing that they're just waiting to try to figure out what their spending will be and that it might just be deferred or you are actually hearing that we're going to have to cut our CapEx here and we're not sure where we're going to be spending it at all?

Richard Packer

Well, certainly we are hearing from various places that they have cut CapEx. But I mean I've cut CapEx at ZOLL back in 2004-2005 when our business lagged, but I still spend money. Even though we had a freeze and we weren't going to spend anything, some things are still compelling you just need to go forward.

So I think there is a lot of that going on within hospitals right now. Our administration in a time of uncertainties just said, okay we have a capital of freeze. Our task is to get our clinical advocates our biomed advocates to go to administration and say, yes I know we have a freeze, but we need to go do this small piece of capital expenditure, regardless of what you think we should do right now. And often that gets through to speak. We all get the capital if you will. So we are hearing more of that. We're certainly hearing people talk about uncertainty in terms of how the Feds are going to spread healthcare money. So if they are unsure they're waiting.

There is whole theory out there that has people, perhaps get laid off and they lose their healthcare discretionary procedures will drop significantly and I think hospitals are waiting to see if that's actually true. And the stuff that I see, they are seems to be mix, some stuff orthopedic seems to be moving along okay. And so it's really muddy to uncertain and in the face of that a lot of people are just waiting. Some people, because they are near the end of their budgeting period, they just said well we're going to hold off until the New Year comes and we kind of see how things are. So, it's a mix of everything that we're hearing right now.

Unidentified Analyst

And how do you incent the sales reps to kind of be that quick? Will you incent on new customers or how do you look to change that?

Richard Packer

Well I think the sales people are highly incented because there... so much of their income is tied to performance here at ZOLL. They have very modest pay salaries and very lucrative commission plans that they sell a lot. So, if they want to pay their mortgages, they're doing it, they are very well incented. The key for us is to give them the tools to move some hospitals forward that might be kind of sitting there, a little bit uncertain what their capital environment is going to be their cash flow environment going to be.

And that's certainly where... we are not hesitating to say, look if you are worried about credit or capital, we can make that problem go away by leveraging our balance sheet and we are willing to do that. We've also looked for incentives across the company that are not price related because it doesn't do anybody good to compete on price here in our industry, is fairly sane in that regards. But we try and give people incentives that buy some R Series which features CPR. We'll have an ADE into the deal and they can be... which also features CPR they could begin rolling out an ADE program that they might not otherwise have gotten to this year.

So various tools like that are in the sales forces' arsenal to make things happen. A lot of it is just making sure that they understand that they can't wait until March to make us don't just (ph) that happen. They need to be in the carpeted areas and in admin with the clinical advocates creating a sense of urgency in making sure that our stuff stays at the top to the capital pile.

Unidentified Analyst

Great. And one last question; I know it's really early, but anything not necessarily in revenues, but how is the tone going in the new Health Trust agreement? I guess you still have a chance.

Richard Packer

Well Health Trust is of these that we want and then they put across kind of across the board capital freeze now. If you don't tell anybody at Health Trust, we did get some orders from Health Trust this quarter. Small but that just means people need the stuff and they will spend it.

But I think Health Trust is a classic organization and in the time of uncertainty just says let's stop everything and lets sit and wait and sort it out and then we can get going. We expect to get some business out of Health Trust this year, not that big of a hurt for us anyway because going into Health Trust and many of those hospitals we're starting from scratch, where we have been locked out for a while anyway. So, we weren't expecting a whole lot of business in the early part of the year anyway.

Unidentified Analyst

Great, thank you.

Operator

Thank you. Our next question comes from Greg Brash from Sidoti & Company.

Gregory Brash - Sidoti & Company

Good morning guys. Thanks for taking my call.

Richard Packer

Good morning.

Gregory Brash - Sidoti & Company

I just wanted to gauge your sort of your confidence level on some of these defibrillator orders coming in North American hospitals in the latter part of the year. Just that maybe you have a large number of customers that you know are near the end of their order life now over. Is that sort of what's giving you confidence?

Richard Packer

Well, I think some of the confidence comes from being in the business for a long time and seen the ups and downs and while we try to make everything straight and up to the left at ZOLL. We've never quite been able to do that.

We do know the age of equipment that's out there. We do know that about ten years ago people started the major churn of monophasic to biphasic. So we are now replacing biphasic with triphasic and there is probably more old stuff out there now at this point than perhaps there was three years ago. And we also know the psychology of how CFOs act. I have one sitting right in front of me and I know how he spends capital in the time of uncertainty. And I know that when the uncertainty begins to dissipate, even if business is weak, people look and say we need to invest to keep things moving and they are more judicious. But if you have a clinical need they'll spend the money in hospital.

So you put that all together and already I, Jon may have different views of exactly what the North American hospital may end up being, but that's usually counterweighted by our different views on what we'll get out of military, what we'll get out of the LifeVest, what we'll get out of the other things. So I think you have to look at it as a basket of ZOLL that gives us confidence that we didn't get all of ZOLL, where we think we're going to get all of ZOLL, not any one piece.

Gregory Brash - Sidoti & Company

Okay. And then you also mentioned providing incentives for hospitals to buy earlier in the quarter. Are you seeing or do you have any concerns about your competitors, also offering incentives or say or maybe cutting price to try to move in and steal a customer. Are you seeing any of that?

Richard Packer

Well, I wouldn't say that we've seen a whole lot of that. As I said pricing is fairly same here. We keep away from just, discount is it going to move someone in our view. In this environment if they are uncertain, whether they spend 3% less on our staff, it's not going to compel them. They either have credit issues where they need cash and in some cases our balance sheet is stronger than our competitors. So I think we can do more than other people can or they need some call to action and that's why ADE is bundled in with other stuff. Well yes it creates more value, it's really emphasizing the need to push CPR throughout your facility and with that clinical evidence and emphasis that's what allows a clinician to go to admin and say, we need to get these new defibs because they have CPR, the older ones don't.

In fact, we need to get CPR into our lobby and into some of our outlying areas. It's a clinical imperative. We need to spend this modest amount of money. So that's how we are attacking it. We are specifically staying away from some thinking that if we go to our customer and say, our price is now 3% lower, they are going buy, because we just don't think that works in our industry.

Gregory Brash - Sidoti & Company

Is the reason that doesn't work lowering price, because the hospital would then have to if you're switching to it, different product you have to switch protocols and go through training again and those increased costs often don't outlay the lower prices on the products?

Richard Packer

Well, I think there is some of it. I think it's more of the prices. So it's not that we're so huge that 3% really changes their bottom line. We're kind of small potatoes in the big scheme of it. So 3% doesn't really mean a whole lot to them. They will take it if you put it on the table of course, but it's not going to move them to action. What'll move them to action is solving a problem. And their problem is I don't have the capital this year to spend it, where we can help him with terms or things like that. Or their problem is I don't see this as a priority for the hospital right now. And we solve back by making it a priority and the example that I gave in and there are other examples, the way you make it a priority is by focus on CPR quality which is something that is broken within hospitals. And so you make it a compelling argument and the admin says, okay, this is more than just getting a shiny new vision in somebody's lap.

Gregory Brash - Sidoti & Company

Great, thanks Rick. It's very helpful.

Operator

Thank you. (operator instructions) Our next question comes from Scott Marks from Stenwin Capital (ph).

Unidentified Analyst

Hi just following up on Jonathan's question about what in a worse case scenario, and I know you can't answer that. But, if you just take what we've seen in this quarter, and you kind of extrapolate that through the rest of the year without anything coming back. Can you just give us some contest around what the numbers could be, if we don't see that pickup?

Richard Packer

Ernie, are you able to do that math real time that says that if we do through the rest of the year what we just did for Q1 which has never happened in our history.

Unidentified Analyst

No, I don't mean the revenue number, I mean just the environment we've seen and the spending environment if this was... versus a worst case where hospitals spend less. Just kind of what hospitals spend above what they are doing know?

Richard Packer

I think if hospitals spend what they're spending now, we'd look a lot like what we just saw, right? And so that would make our revenue flat and Ernie are you able to do that calculation in your head?

A. Whiton

I mean the most basic level if spending continue at level of that. Obviously the quarters will be flat.

Unidentified Analyst

right

A. Whiton

We just get $0.14. So 14 times 4 is $0.56.

Richard Packer

Right. But then you get growth in the international, growth in the LifeVest?

A. Whiton

So it's a multistage calculation, I mean depending upon what your assumptions are here.

Richard Packer

So Scott I would say if you give Ernie a minute and you call him this afternoon, we have a model that we have given all terms of what we think hospital growth would be that is built into our plan for the year, right. That implies a certain amount of hospital growth. If you pick one, multiply it by four, subtract out what we have for the year and do the bottom-line impact of that. I mean that's the best we could come to a calculation like that.

Unidentified Analyst

Okay. That will be great.

Richard Packer

Right. We have a hockey stick within ZOLL that's always been there; Q1 is always our weakest quarter because you know we empty the pipeline come out of a strong... out of Q4. So, I mean I can't imagine any scenario where this would be flat. But if that's calculation helps you I will be more that happy to move you through.

Unidentified Analyst

Okay, great thank you.

Richard Packer

Great. Alright, so let me just summarize here. I hope you agree that Q1 highlights the stability of ZOLL in the face of what we consider to be fairly major headwinds. I think it's a credit to our people who are fighting through the adversity, not letting it get to them and certainly, not taking no for an answer.

Our objective here at ZOLL is to get through this period with our people and our investments intact. If we accomplish this in spite of numbers more modest than we're used to, 2009 will have been very successful because we'll have our company poised for greater growth and record profitability.

The waters are certainly choppy and the ride certainly is rough for everyone not just ZOLL. But we're confident that we're in the right boat for the long term. We remain very bullish on where ZOLL is headed. Thank you of joining us. We look forward to talking with you next time.

Operator: Thank you ladies and gentlemen for your participation in today's conference. This does conclude program. You may now disconnect. Good day.

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