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ICU Medical (NASDAQ:ICUI)

Q4 2013 Earnings Call

February 20, 2014 4:30 pm ET

Executives

John Mills - Senior Managing Director

Vivek Jain - Chairman and Chief Executive Officer

Scott E. Lamb - Chief Financial Officer, Treasurer and Secretary

Analysts

Thomas J. Gunderson - Piper Jaffray Companies, Research Division

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Chris Lewis - Roth Capital Partners, LLC, Research Division

L. Mitra Ramgopal - Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen. Thank you for standing by. And welcome to the ICU Medical Incorporated Q4 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would like to turn the conference to our host, Mr. John Mills. Sir, you may begin.

John Mills

Good afternoon, everyone. Thank you for joining us today to review ICU Medical's financial results for the fourth quarter and full year ended December 31, 2013. On the call today, representing ICU Medical is Vivek Jain, who joined last week as Chief Executive Officer and Chairman; and Scott Lamb, Chief Financial Officer.

Vivek will start the call with a brief overview and then Scott will discuss fourth quarter financial performance and provide financial guidance for the fiscal year 2014. Finally, 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, 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.

Please note that during today's call, we will discuss non-GAAP financial measures, including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater transparency into ICU's ongoing results of operations, particularly in comparing underlying results from period-to-period. With that said, I'll now turn the call over to Vivek Jain. Go ahead, Vivek.

Vivek Jain

Thanks, John. Good afternoon, everyone. As John mentioned, I joined ICU Medical last week as the new CEO. Most recently, I was at the CareFusion Corporation, leading 1 of their 2 operating divisions and have responsibility for the majority of the disposable products there with over $1.3 billion in revenues across a variety of business units. I was at CareFusion and its predecessor company, Cardinal Health, for almost 7 years. And it was a very difficult decision to leave, but I felt the opportunity was compelling at ICU Medical. I wanted to thank my previous employer for the experience that I was offered, and I know CareFusion is an excellent, well-managed company filled with dedicated people, and I believe it will absolutely continue to be successful.

I thought I'd take a moment and tell you the 3 basic reasons why I thought ICU represented such a good long-term opportunity. First, there are a set of deep core competencies here. ICU Medical is one of the world's most competitive manufacturer of these products. We're able to deliver these products to our channel partners and our direct customers at the highest quality and produced them at the most competitive prices. We've also become the clear leader in the ability to offer customization that the customer deeply values, and that stems from a set of operational processes that are very difficult for anybody else to reproduce. High quality, competitive production cost and customization comes from years of deep focus in this category, as well as real commitment of hundreds of millions of dollars of capital investment over the years into our manufacturing platforms.

The second thing I'd like was that there were a set of macro tailwinds pushing parts of the business forward in certain very important areas. The first is around oncology and the handling of dangerous drug products where there's an expanding need for safer medical devices and to take clinicians out of harm's way. The other is the global recognition of patient safety and diligence towards choosing products, which meet a higher standard of clinical performance.

Lastly, there's an attractive financial profile here, and that's the third reason I was compelled for the opportunity. With almost $20 a share in cash and investments, and albeit a bit bumpy, there's an underlying set of cash flows that has been reasonably banded. I'm deeply focused on our EBITDA and our operating cash flows, which are due to an entrenched set of customers, where switching costs and training, excluding some unique events, keeps coming in.

And from a financial profile, I thought it was a company that was big enough to be big and small enough to be small. In this category, we're a big player and we can expand our global reach. But we have an income statement that ought to be able to be influenced quickly.

Someone once ground into me there is no long term without the short term. And it is important to recognize where this company has been in the recent term and where we will be in the short term going forward. Dr. George Lopez, the founder here, did an amazing job over 25 years, creating a category from scratch and building a $300 million business. I hope to learn from him and continue to seek his expertise over the next years. He and I both studied companies where a new person has come in to succeed a strong founder, and we're both absolutely committed to being in the group of companies that have made that transition successful. It's our team's job here to honor his legacy. And I think we would both honestly admit that the macro health care landscape and the micro unique dynamics of this company and its category have changed a lot over just a few years. As a result, the company has been in what I would call a prolonged transition period. There were obviously some very public rumors about the future of this company last year, and I think the company did everything right to seek shareholder value during that transition period. And it's likely not a surprise, during these transition periods, companies don't make the marginal investments when they're unsure about the long term. Moving forward, we need to put that period behind us. We need to renovate ourselves for the future. This is not about building a foundation because a very good one exists here already. It's more about making the investments to grow, finishing R&D projects, supporting our channel partners to be successful, bringing clinical knowledge to the marketplace and being able to allocate our scarce resources to areas that will drive growth.

That doesn't happen overnight, so there will be a period of reinvestment and reallocation in the certain must-do areas to keep us competitive and create additional value.

The micro -- the micro unique dynamics of this company and its category also merit a few comments. We have world-class channel partners that we rely on to serve customers, and it's important to recognize that there's been some amount of volatility in that marketplace. I view the issues going on in U.S. infusion as temporal. They will get resolved and I'm confident our partners are doing everything they can to win. But the short-term impacts of the issues are real, and it's important to be realistic about the impact on our P&L. It's also important that we know our role relative to our channel partners, and that we make the right investments in clinical support, education and new products to support our partners.

So in summary, after 5 days, I think there are a lot of positive drivers and some very strong tailwinds pushing parts of the business forward. I have a lot of confidence in the long-term value creation due to the confluence of our platforms, our increasing global reach, the ability to renovate and re-prioritize and our strong balance sheet power. In the short term, we will have some bumps and we will overcome them and we will emerge stronger. I look forward to the journey with all of my new colleagues at ICU over the next number of years. I look forward to working with all of you. I'd also like to take 1 second to recognize Steve Riggs, who served as Interim CEO here over the last number of months, Steve is going to move back to keeping the operations running smoothly, and we're going to make a great team. So with that, I turn over to Scott Lamb, and I look forward to your questions.

Scott E. Lamb

Thanks, Vivek. Before I begin, let me remind all of you that the sales numbers we are covering, as well as our financial statements are available on the Investor portion of our website for your review.

Our fourth quarter 2013 revenue was $78 million compared to $83 million in the same period last year. Our fourth quarter revenue was lower than we previously expected. The growth in our oncology business was offset by lower-than-expected revenue in all our other market segments. Fourth quarter 2013 EBITDA was $19 million compared to $24 million in the same period last year. The decline was primarily due to a decline in revenue and increased operating expenses.

Net income for the fourth quarter of 2013 was $13 million, or $0.86 per diluted share, as compared to net income of $12 million or $0.82 per diluted share for the fourth quarter of 2012. Our fourth quarter 2013 net income benefited from a lower tax rate of 3.1% compared to the same period last year of 34.8%. The lower tax rate was due to a onetime gain from foreign tax benefits and certain domestic tax credits.

For the full fiscal year ended December 31, 2013, our revenue was $314 million compared to $317 million in the same period last year. EBITDA for the full year of 2013 was $72 million compared to $81 million in the same period last year. Net income for the full fiscal year ended December 31, 2013, was $40 million or $2.65 per diluted share compared to net income of $41 million or $2.80 per diluted share for the same period last year.

Now let me discuss briefly our fourth quarter revenue performance by market segment. You can also view our detailed market segmentation in our earnings press release. For the fourth quarter of 2013, sales in the infusion therapy market decreased 8% to $51 million and represented 66% of our total sales. The decrease was primarily due to a $6 million decrease in our U.S. OEM business.

Sales in the critical care market were down approximately 5% to $13 million, and represented 16% of our total sales. This decrease was attributable to volume, both domestic and international.

Sales in our oncology market increased 8% to $10 million and represented 13% of revenue. We continue to remain positive about growth opportunities for our oncology products as the market demand continues to increase and we are well positioned to capitalize on protecting clinicians from exposure to hazardous drugs.

In our other product category, which primarily includes products in the renal and enteral markets, was down 13% to $4 million. Now our fourth quarter sales for both domestic and international were as follows: Domestic sales were $54 million for the fourth quarter of 2013 compared to $62 million for the same period last year. The primary reason for this decline was our U.S. OEM business. International sales were $24 million compared to $20 million. The increase was driven by both infusion and oncology across all of our sales channels. Our gross margins for the fourth quarter were 50% compared to 50.5% last year, and primarily reflect a decrease in overall sales and the less favorable product mix.

SG&A expense increased 6% to $21 million compared to 20 -- to $22 million compared to $21 million for the fourth quarter of 2012. And the increase is primarily due to the medical device tax and accruals for bad debt and warranty. As a percentage of sales, our SG&A expenses were 28% compared to 25% a year ago.

Our research and development expenses increased 56% year-over-year to $3 million, as we continue to invest in organic growth opportunities in all our primary market segments. Our operating income for the fourth quarter of 2013 was $14 million or 17.4% of sales, compared to $19 million or 22.7% of sales for the fourth quarter last year.

Now briefly moving to our balance sheet and cash flow. As of December 31, 2013, our balance sheet remained very strong with no debt, and we increased our cash, cash equivalents and investment securities by $71 million to $297 million. This equates to approximately $20 per share. During 2013, we generated $66 million in cash flow from operating activities.

Now let me update you on our financial guidance for 2014. For the year, we expect revenue to be in the range of $285 million to $300 million. Our guidance takes into account expected growth in our oncology business, as well as our international business. But we believe that this will be more than offset by continued weakness in our U.S. OEM business and critical care. We believe this reduction in OEM sales will be larger in the back half of the year than in the front half. We absolutely need to continue to support our partners but believe we need to be realistic with changes in the marketplace.

We expect overall infusion therapy sales for 2014 to decrease 8% to 12% and non-OEM infusion therapy sales to be roughly flat. We expect critical care sales to decrease 7% to 12%, and we expect oncology sales to grow 13% to 21%.

We expect our EBITDA for 2014 to be in the range of $48 million to $55 million. The majority of this decrease is due to a reduction in revenues and the increase in noncash items and investments into -- back into the company.

As we move forward as a company, we believe that by providing adjusted metrics, such as adjusted earnings per share, is a more accurate representation of our operating results when certain selected items are removed from our results, such as noncash items, in order to help investors better understand our ongoing business. We are currently analyzing comparable companies' relevant reporting and will be providing more information regarding this later in the year.

We expect our adjusted fully diluted earnings per share for 2014 to be in the range of $1.66 to $1.96. This excludes approximately $11 million of noncash items. For comparable reasons, our adjusted fully diluted earnings per share for 2013, excluding the onetime gain from foreign tax benefits and noncash items, would have been $2.74.

On a GAAP basis, we expect diluted earnings per share for the full fiscal year of 2014 to be in the range of $1.15 to $1.45 per share. We expect gross margins for 2014 to be approximately 50%. We expect SG&A to be approximately 36% of total revenue, and this includes approximately $11 million of noncash items, as well as expected decrease -- an expected decrease in overall revenue. In 2014, we expect research and development spend to be slightly more than 2013. And for modeling purposes, we expect our tax rate to be approximately 34%.

Now before we open the call for questions, I would like to say that I've been with the company now for over 10 years. And I'm glad this prolonged transition period is coming to an end, and I'm excited about the future. I recognize the guidance I just provided maybe disappointing for 2014, but we need to be realistic about the current market environment and we will begin to make choices over the balance of the year that will improve our long-term success. And with that, I would like to turn the call over to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first cushion comes from Tim Gunderson of Piper Jaffray.

Thomas J. Gunderson - Piper Jaffray Companies, Research Division

Should have spelled Tom, it's Tom Gunderson. So, Vivek. Maybe you could give us -- no, 2014 is you're setting the bar down there. We've seen this happen before, you're being realistic with what the markets are out there, but you also have to start turning the growth profile around and setting yourself up, like Scott said, for a better 2015. Can you give us a sense -- and you mentioned as one of your 3 basic reasons for coming over is the financial strength and the $20 cash per share. So with all that as a prelude, can you give us a sense of how you view both now and in your previous experience, acquisitions and maybe divestitures, and whether you think that you need to grow globally with acquisitions and what kind of acquisitions might be as far as size and dilution?

Vivek Jain

Sure. I'm all of 5 days into this thing, so I'm not sure I'm going to be able to get to all of that. But I think, I'd first start with your 2014 question. I don't really think this is very much about moving the bar, to use your words there. I think it's just about being realistic about what's happened in the marketplace. All those other companies are publicly reported companies and you can do your own work, but I think it's pretty self-evident as to what's been going on. So I think it's just very important to finally get to the place of acknowledging that for this company. And then turning to the future, I think it's really going to be a balance of organic, which is executing well on the selling and marketing the products that we already have, finishing the development of some the stuff that's in the pipeline. Inorganically, yes, I do think down the road, that hopefully, we're lucky enough and have the credibility to undertake those activities. I would say, after 5 days of being here, the company is relatively immature in some of the areas and having the ability to absorb something else right now. And so what Scott talked about in renovating a bit is getting some of those things in order. I don't think there's going to be some rush to deploy capital here. I think it's much more about just getting the basics in order for the near term.

Thomas J. Gunderson - Piper Jaffray Companies, Research Division

And then a shorter question, and that is on how you look at sales and marketing going forward here. In a year where you're being more realistic, one could see a contraction in the sales force. On the other hand, the most recent information we had was an expansion of the sales force to take better advantage of the sales productivity, which way are you leaning?

Vivek Jain

I don't really have an opinion yet, Tom. I got to do the work and get in there. I mean, I think this company was built off the back of really good innovation and really passionate sales and marketing, really committed sales and marketing. And I'm going to be very careful tinkering with it, I have experience along those lines, and I want to take a little bit of time and be prudent around that.

Operator

Your next question comes from Jayson Bedford of Raymond James.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

I guess just a couple of questions. In terms of the IV therapy business, you talked about temporal issues. Can you just expand a more of what those temporal issues are and how can they be kind of remedied, if you will?

Vivek Jain

I think those issues are obviously a change in the U.S. marketplace. I think at the end of the day, where we feel the knock-on effect of what's going on there. All we can do and what we intend to do is to support our partners by helping them be successful. I don't think it's going to be our role that changes that. Our job is to go make sure we know our role as an OEM player to them and make sure we bring the right support that they have to succeed in front of customers.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

And just your non-OEM business, I think, you said is flat. Why wouldn't that grow a little bit?

It seems like you've got a decent tailwind with some GPO contracts, just curious why wouldn't that grow?

Scott E. Lamb

Yes, Jayson. This is Scott. Yes, we expect that to be roughly flat. Maybe we see a few percentage points growth there, but roughly flat. The market dynamics that Vivek spoke about are affecting everyone. So whether it's our channel partners or us direct, we were facing the same type of headwinds.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

Maybe to Tom's earlier question, the SG&A, if my math is correct, it's a decent jump in '14 versus '13. Are you planning on adding folks, or is this more just a bigger marketing spend?

Scott E. Lamb

Well, Jayson, 2 things. First of all, there's some noncash items in there and we broke out those for you on the adjusted EPS. And as Vivek and I mentioned, going forward, we'll look at how other companies are doing their reporting and our situation, and we'll continue to report out in such a manner. But I think focusing mostly on noncash is the largest driver.

Vivek Jain

Its Vivek. I'll just jump in. I think I know where you're heading with that question. And ultimately, for a small companies like this, it has to be about growth, right? And so I don't really want to rush the judgment on expenses and the SG&A line. I've a pretty good sense of what benchmarks in the industry are, and we'll always be looking at those. But the first question is creating value here has to be growing. And we need to get back to that and that's going to take some time. And that's what's solidifying our base was about.

Jayson T. Bedford - Raymond James & Associates, Inc., Research Division

And just lastly, Vivek, are there any kind of non-competes or any type of restrictions that carry over from your prior employer?

Vivek Jain

I would prefer, Jayson, not to talk about those on the call. I think -- I don't think this is the right forum for that.

Operator

And our next question comes from Chris Lewis of Roth Capital Partners.

Chris Lewis - Roth Capital Partners, LLC, Research Division

In your prepared comments, Vivek, you mentioned the income statement being able to be influenced quickly. I was just hoping, first of all, you could expand on that a bit? And then possibly, talk about what areas of investment you see kind of has the immediate needs here to reaccelerate the growth trajectory that you just talked about?

Vivek Jain

Yes, well, I mean, I think you're seeing the reality of what a small income statement means and how quickly it can be affected by what's going on right now in the marketplace. And that I don't mean that in a good way, right? So I think that same applies in the upside if we are able to grow. Right now we're feeling -- you feel a lot of pain for every dollar of revenues we're not getting. Going forward, I think the investments are, again, largely along the lines of what Scott described, some core infrastructure, some improvement of marketing, some finishing of R&D programs, et cetera. I don't think it's perfectly developed here after 5 days yet, but you could tell the company was growing a very certain way and a very lean way that made a lot of sense to get where it got. But I think going forward, we're going to need a little bit more processed, a little bit more institutionalization of things. I want to be careful, we are not talking about a large amount of money. There's very small dollars, again, on the small income statement, nor are we talking about putting in any sort of corporate expense, it's investment that I know we need to block that will drive revenue down the road.

Chris Lewis - Roth Capital Partners, LLC, Research Division

Okay. And then shift in to oncology, fourth quarter showed a bit of a slowdown there, just in terms of the year-over-year growth rate. And then guidance, I think implies a slightly slower growth outlook in 2014 versus 2013. You sounded pretty positive when talking about that, so can you talk about that segment and kind of the expectations there in 2014?

Scott E. Lamb

Yes, absolutely. So Chris, we see it growing in absolute dollars relatively the same in 2014 over 2013. We're seeing more competitors getting into this space. Yet at the same time, this is a growing market, and this is a market that we expect to continue to grow in and be one of the leaders. So oncology remains a very focal point of ours.

Chris Lewis - Roth Capital Partners, LLC, Research Division

Okay. And then can you break out the $11 million in noncash expenses in 2014?

Scott E. Lamb

No, I can't, really. As far as that goes but examples will be amortization of intangibles, stock compensation expense as a couple of examples to give you.

Chris Lewis - Roth Capital Partners, LLC, Research Division

And then just last one for me. Can you talk about new product expectations in 2014 and what's assumed in terms of new product revenues in the guidance you provided?

Scott E. Lamb

Well, Chris, when new products become relevant, then we'll talk about them. So I'm not trying to back away from that, but I think at this point right now, we're more focused on working with our channel partners and growing the business in the ways that Vivek described.

Operator

Our next question comes from Mitra Ramgopal of Sidoti.

L. Mitra Ramgopal - Sidoti & Company, LLC

Just a couple of questions. First, I know it's been only 5 days and there's a lot to digest but I think you said one of the things that attracted you to ICU was the financial profile or the balance sheet, so to speak. As you look in terms of deploying cash I know not immediately, but how would you sort of prioritize it as it relates to say, acquisitions, potential share buybacks or even a dividend, et cetera? Or is it pretty much going to be in growth mode?

Vivek Jain

Look, I think we're going to have responsible capital deployment I think for a small company, it is more value creating to find growth than to be doing never-ending buybacks. That said, our board did authorize a bit of a larger buyback, as Scott mentioned, we'll be responsible about it just like we'll be responsible on the acquisition front, when we have the trust to do that, when we do things at the right value. We're going to make sure that this is the right thing to do. So you're not going to see us rush or reach or do something like that with our capital buybacks [ph]. It's very hard for small companies like this to acquire this much capital they have and we have to be very careful protecting it.

L. Mitra Ramgopal - Sidoti & Company, LLC

Great. And again, as you kind of -- if you look at the sort of the product segments here, is there a lot of room for you to sort of diversify even more? For example, once infusion therapy becomes sort of an issue, are there other segments then you can potentially layer on or maybe get rid of something like a critical care that has been a drag for the last several years?

Vivek Jain

Yes. I mean obviously I have a lot of experience in divestitures also, given some of the things that I've been associated with. I feel like it's very hard for small companies to get smaller immediately. So again, just like I don't think we'd rush into deploying capital, I don't think we're going to rush into any decisions about removal of businesses. The more interesting opportunities are exactly what you said, which are what other categories, niche categories are out there for us to look at over time. And I would say, I think there are absolutely categories that may not be the ones we're in today, but its something where our core skills around manufacturing and design, et cetera, play an important role. I'd rather get not be very clear on that. I think some of those could be very unique to us. But there's definitely ones out there at sizes that make sense for a company like ours.

L. Mitra Ramgopal - Sidoti & Company, LLC

And finally, as it relates to sort of distribution channels, is there also room for diversification, say beyond Hospira, so to speak?

Vivek Jain

I don't think I have any opinion on that yet. After 5 days, I need to get through really looking at where all the business has held and the shape of the business before I would comment on that today.

Operator

That conclude our Q&A session. I'd now like to turn it back over to Scott Lamb for closing remarks.

Scott E. Lamb

Okay. Well, thank you, everyone, for participating in today's call. And we look forward to updating you on our 2014 progress on our first quarter call in April. Thank you.

Vivek Jain

Thanks, folks.

Operator

Ladies and gentlemen, that does conclude today's conference. Thank you for your attendance. You may now disconnect. Have a great day.

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