Datascope Corp. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

Datascope Corp. (DSCP)

F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

August 12, 2008 12:00 pm ET

Executives

Hank Scaramelli – VP and CFO

Larry Saper - Chairman and CEO

Nino Laudani – VP and COO

Analysts

Greg Brash – Sidoti & Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Datascope Corp. fourth quarter earnings release conference call. Today's call is being recorded. At this time, all lines have been placed in a listen only mode and the floor will be open for question and comments following the presentation. The comments that we will make this afternoon will include forward-looking statements but are intended to fall within the Safe Harbor provision of the Securities Litigation Reform Act. Actual results may differ from these forward-looking statements due to various risks and uncertainties including those that are disclosed in our press release and regular filings with the SEC.

This conference call is being webcast live over the Internet. A replay of the call will also be available on the Investor Relations page of our website for 10 days. At this time, it is my pleasure to turn the floor over to Mr. Hank Scaramelli, Chief Financial Officer, please go ahead.

Hank Scaramelli

Good afternoon, everyone. Welcome to Datascope's conference call to review the results for the fourth quarter of fiscal 2008. I am Hank Scaramelli, CFO of the company. Joining me in the call is Larry Saper, Chairman and CEO of Datascope; and Dr. Antonino Laudani, Datascope's Chief Operating Officer.

First we will have some comments primary then I will give a brief financial review. Dr. Laudani will comment on the operation of the ongoing businesses. Larry?

Larry Saper

Thanks, Hank. We had a very, very good quarter but today, I'm going to let Hank and Nino a review of the quarter. I just have a – I'll be available later for question. I have just one comment that look at Q3 and Q4. They tell the story of the company's new momentum, because for the first time now, we exclude everything except the continuing business. What I mean, back in May, we had the sale of the patient monitoring assets and just last week we announced the sale of the remaining asset that now are excluded by the continuing business. Those assets will be – the performance of these assets, which were in decline, affected Q3. Now, when you look at Q3 and Q4, they tell the story of our new momentum.

I would also suggest that you have a look at the pre-tax operating income. Not that the net is – for example, the net was up 30%, revenues were up 12%, EPS was up 26%, but the pretax income I'll give you probably the best in the (inaudible) powers since it excludes the variability of taxes.

So, now, I'd like Hank to start through.

Hank Scaramelli

Okay. As Larry just discussed, our continuing operation has very strong order, and I will provide a brief financial review of these results. I'd like to start with fourth quarter sales result.

The continuing operations generated $63.3 million in sales, 12% above last year including $1.8 million in favorable foreign exchange, or a non-GAAP earnings for the quarter, was $7.6 million versus $5.9 million with 30% above last year. Earnings per diluted share for $0.48 versus $0.38 cents. Our gap earnings for the quarter was $7.6 million, $0.48 per diluted share versus $2.3 million, or $0.15 per diluted share last year. Last Year's tax earnings included $3.5 million special charges.

Several other key events occurred during the quarter. In May, we've completed the sale of the patient monitoring business, the Mindray Medical International, for $209 million in cash with $31 million in receivable. The net gain, after tax, was $77 million.

In June, we announced the acquisition of the Peripheral Vascular Stent business from the Sorin Group of Milan, Italy. Also, effective as of August 7th, the company completed the sale of its backyard closure business at St. Jude Medical. The operating and results of the IPV business are included in the net earnings of the discontinued business.

Regarding our sales for the fourth-quarter by division. We really had an outstanding quarter in both Cardiac Assist and Intervascular. Our Cardiac Assist have record sales of $51.2 million, 10% above last year, including $1.1 million of favorable FX. However, our worldwide IAB sales continued to be very strong, increasing 16%. U.S. sales increased 7%, making two straight quarters of 6% to 7% sales growth in the United States business. Safeguard was very strong, growing 25%.

Our balloon pumps sales were flat, due to the initial launch of the CS300 pump late last year, which resulted in record pump sales in the fourth-quarter of last year, making for a little bit of a difficult comparison. Our Intervascular sales were also at record at $11.6 million, 23% above last year. This includes favorable FX of $800,000. However, our Vascular Graph and Patches, including the new PTFE products, increased 18% despite the presence of the less invasive Stent Graft. And our Peripheral Stent increased 45% during the quarter and represents 16% of total Intervascular sales.

Regarding our earnings, the gross margin percentage was basically flat at 65.3% versus 65.6% last year. The slight decrease was due to higher distributor sales in Intervascular and lower margins from Peripheral Stents that are sold as an OEM product. Based on the announcement we made of the purchase of the Sorin Stent business, eventually, in the next year or so, we will bring in the manufacturing process in-house and expect to generate margins of close to 70%.

Our R&D expense with 7.7% of sales, down from 8.6% last year. Our SG&A expense was 37.5% of sales, down from 41.8% last year. The reduction in SG&A as the percentage of sale is mainly due to higher sales volume, lower corporate cost related to reduced head count as a result of the patient monitoring sale, and we had at least lower legal cost than last year during the quarter.

The tax rate for the quarter was 38% and for the year, 31.7%. This was primarily due to a shift in earnings during the quarter to higher tax jurisdiction primarily in Europe. Our other income was $500,000 above last year. This was due to the interest earned on the cash receipt from the patient monitoring sale and conversely we had a hit in other expense of $1.2 million, which was due to foreign exchange losses on inter-company receivable, mainly in Japan with our start-up business with USCI. We've taken steps to prevent that going-forward into the first quarter. Keep in mind it was only the second quarter of business in Japan, and we were a little bit underhedged in the month of June. On a full-year basis, sales were $231 million, 8% above last year, including $5.4 million of favorable foreign exchange. Our Cardiac Assist business grew 6%. Our Intravascular business grew 21%. Our non-GAAP earnings with $26 million versus $23 million. Our earnings per diluted share were $1.66 versus $1.49.

Regarding the balance sheet. The company's financial position remain strong in the fourth quarter. Our cash and marketable securities were $273 million, including $209 million from the patient monitoring sales. The company continues to have no debt and had no debt at the end of quarter. We improved our DSOs. We increased from 74 days at the end of Q3, to 71 days at the end of June 30^th. We also increased our inventory turns. Our turns at the end of Q3 were 2.2 times and we increased that to 2.8 times in the fourth quarter. So, not only from the cash standpoint, but from a factor of no debt, an improvement in DSO's and an improvement in inventory controls, we're pretty happy about the balance sheet performance in the quarter.

Regarding our guidance, as indicated in the press release, we expect another strong quarter, with first quarter sales of fiscal 2009, forecasted to grow an excess of 13% and GAAP earnings per share proceed $0.30. At that point, that concludes my prepared remarks and I will pass it over to Nino Laudani.

Nino Laudani

Thank you, Hank. As you-- as being said by Larry and Hank, we end a very strong quarter in Q4, which exceed our expectations. But, it is very much in line with the very positive trend seen in (inaudible) third quarter '08. In Q4 as I said before, we have achieved8 a 12% growth earnings in sales and a 30, a rather 30% (inaudible).

This is very indicative of the fact that while we have been able to grow our top line due to the continue operation, we also been able to manage our expense in a more efficient way. For the total year, we grew 8% including the change (inaudible). Better margins grew before taxes by 80%. Cardiac Assist business in Q4 grew by 10% including exchange rate. The Intervascular is an outstanding quarter with more than 22% growth including exchange rate.

Now, going to the product [ph], Counterpulsation Balloon growth achieved an outstanding growth of 16% in Q4. This follows a great Q3 and I would like also to mention here that the unit growth that we have seen both in Q3 and Q4 at this point is very indicative of the fact that we have been able to re-implement our strategy to grow the therapy. And this is of extremely importance and has no relationship with other element such as ASP increase or exchange rate. So we're very satisfied by the performance of Counterpulsation alone.

On the Pumps side, as said by Hank, we had seen a flat quarter mainly because of the very strong quarter seen in Q4 of last year. This was due to the launch of CS300, our new fully automated Counterpulsation Pump with Fiber Optic technology. And of course, this has fully justified the flat performance of Q4.

On the Graft side, we had an outstanding growth of almost 17% in Q4 versus last year. This is growth coming from growth in mature [ph] market where we have taken market share and growth in new market, developing market where we're expanding our presence. So, again it's another great indicator of our performance and the implementation of our previously announced strategy.

On the Stent side, even if it's not possible to probably properly compare fiscal '08 with fiscal '07, the two quarters because we started to sell the products in Q3 of last fiscal year, however, we have seen just in units about 23% growth and almost 45% growth in dollars. And now, in June, we have decided to apply the Sorin peripheral business and we have now started the process of moving manufacturing to our plant in La Ciotat, in the south of France. For this piece of we do expect an increase in margin and because we wont be able to produce the cost of manufacturing the product.

Just a little point I want to have at this moment is that this – after the divestiture (inaudible) and the d-chem [ph]. So, we are fully covered out of the sources of energy in the current advance of that market. Which is a big market, estimated to be $28 billion, (inaudible) market growing at 10%. And of course, other presence in the cath labs, in the cardiovascular operating tools with our 80% market share, guaranties, of course, our potential for growth.

We want also to spread the fact that we are in the process of implementing the model that we have successfully used in Europe by which we have our sales organization fully integrated our sales organization selling the entire product range and divisional difference. So, this is also an important model that we want to implement outside EMA, Europe Middle East and nothing [ph].

In addition on the cost side, we have finally finished to implement the continuous flow manufacturing model in La Ciotat in our plant in the South of France, which is allowing us to reduce our cost and be more flexible in the manufacture. A similar initiative we have started to implement in our plant of Fairfield, New Jersey.

On Cardiac Assist. Just some more comments on Cardiac Assist I would like to make at this moment. I said before, the Q4 sales increased by 10% and to continue strong worldwide sales growth of intra-aortic balloon in favor which grew by 25%. Due to IV sales, the balloon sales were strong in emerging market. U.S. sales growth was the highest in over eight years. Once again, is the evidence of our continued increase in counterpulsation and therapy utilization. Of course, there is a lower component there coming from market share growth. But, we believe the majority of the growth is coming by the increased utilization of the therapy. The combination of our new business entity in Datascope Japan and our new distributor in USCI in Japan continue to produce a very substantial growth. Although, the portion of the growth is due to the lower sales of our outgoing distributor in Q4. Europe and the rest of the world confuse the long-term trend and double-vision growth.

Just a quick update I want to give on the implementation of our plants in U.S. to support the growth of the therapy. We have formalized [ph] targeting. And to drive the utilization of the therapy, we have started training and certification of our sales reps, in advanced clinical programs, we have given sales incentives and programs to target IUD [ph] growth, we have made cross selling of Safeguards to improve selling in time with decisions. We have a new and even use of course of (inaudible) train and less in service.

This-- the reviews the in-nurses training time, which is of course we're using in the physician-- in the more physician [ph] concept. Our international business is growing and across the board, in Europe's- confused to show a very strong performance. The rest of the world, and this could be mentioned as well, we have very strong a quarter for Latin America and Asia Pacific, and again as I said before, Safeguard is inline with-- our extra patients are growing 25% in all the entire world.

The only less are the more disappointing performances with AVH where I think the (inaudible) range is not updated as we want it, but we have planned and we are planning to improve the quality of our products, and we are planning to launch new products to improve our performance in AVH.

Just few comments on intravascular. Intravascular plays a major role in graft business and is known in both. The graft business is declining from 3% to 5% in national market, but no this time, I think the nature of declining of this market, we've been able to grow the business in natural markets by 19%, of course the majority of the growth is coming from exchange rate, but still is an important growth that comes from Natural market, where the (inaudible) business is declining.

Of course, another important element to underline here, is the growth that we have seen in developing markets, where we have put more resource, product export managers, and the. Thanks to you. We'll now take our questions from the conference call listeners.

Question-and-Answer Session

Operator

Today's question and answer session will be conducted electronically. (Operator instructions). And we'll take first question from Greg Brash with Sidoti & Company. Please go ahead.

Hank Scaramelli

Greg?

Greg Brash – Sidoti & Company

Hello? Just want to see where you were in the process of exploring strategic alternatives for the remainder of the company. You just name me some sort of timeline, and when we can expect an update?

Hank Scaramelli

We're not going to have any comment on that. And when something of a significant emergers and we wish to make a comment then we'll do so.

Greg Brash – Sidoti & Company

Okay. Do you think there maybe something before the end of the year, calendar year?

Hank Scaramelli

We will not going to have any comment as to timing of such those.

Greg Brash – Sidoti & Company

Okay. Fair enough. And then just with your guidance, base on the past two quarters or true, you're both very strong, you know. Seems in your $1.92 seems a little conservative, especially if you take into account that you had that $1.2 million charge here in the fourth quarter. They're just curious what you're expecting here in '09, is there going to be any increase spending on hiring sales reps, or maybe higher R&D, it just seems, especially with the interest income from the patient monitoring sale, your $1.92 seems a little low.

Hank Scaramelli

Well, R&D will go up slightly, especially in the Intravascular business could be stent grafts or peripheral stent and the next generation anti-microbial graft. We expect our expenses to remain pretty steady. Do keep in mind we have a full year of expenses for the Japan business and we had a -- we're coming up a real strong third-fourth quarter, 12% growth. We projected around 13% in Q1, and we really need to see how that holds up, and we need to string a segment of quarters together before we want to raise that full year target up.

Greg Brash – Sidoti & Company

Okay.

Hank Scaramelli

There's nothing happened in the marked gross margins are holding it's to keep by 65% to 66% has failed. R&D is in that 9% range, and SG&A, other than Q1 because the sales drop, we'll be in the 37% and 39% range on SG&A.

Greg Brash – Sidoti & Company

Okay. Great. That's very helpful. And then you mentioned the -- moving the products has the peripheral expense. Since you now own the product versus being a distributor, would you see some gross margin improvement immediately? Since you're not seeing distributor margins on this products?

Nino Laudani

I think not in anything and think we'll uptake two quarters and we'll have levelties [ph] and benefits from the DNO [ph] manufacturing and some of the benefits will come right away. We will see some reduction of cost from our supplier which is still storing, and but the majority of it would come in the next couple of quarters.

Greg Brash – Sidoti & Company

Okay.

Hank Scaramelli

Greg, go back to your prior question.

Greg Brash – Sidoti & Company

Yes.

Nino Laudani

Would this would have pace your monitoring in Mindray, we still are paying Mindray a fee to January to manufacture our balloon pumps. It's approximately $340,000 a month. We planned on being out of that facility by the middle of October where we will control our own pump forecasting and pump manufacturing but the contract we signed does run through January.

Greg Brash – Sidoti & Company

Okay. That's the $2.4 million that--

Nino Laudani

Correct. So, once we got rid of that, the earnings will certainly go up from there.

Greg Brash – Sidoti & Company

Okay. And then, just on the balloon pump side. Obviously, you guys are doing very well with increasing utilization here in the U.S. Can you just walk me through one more time what you're doing differently now? I mean U.S sales have been flat and declining for several years now. So, what's convincing surgeons to use the product more and more frequently. Is it your specific study, better trained sales rep, is it the better incentives that Nino was talking about?

Nino Laudani

Well, I think there's a combination of all those elements. I think, we have started a re-training our sales force. We spend more time with clinicians, more time with convention of cardiologists. We have reviews to time that we uses to do in claiming for pumps for the simple reason that our kind of new pumps are truly automated and require less training. So, we're using this time that we usually spent for training on pumps on supporting the therapy. We also have seen a great synergy between counter and Safeguard. Our people spend more time in the cath lab where they really have the opportunity to promote counterpulsation. So, by dealing Safeguard, we see a synergy with dealing the counterpulsation. Of course, we have started to improve our ending free telecommunications [ph] upon on the supporting reps to support the counterpulsation. So, that's an element, I think the technologies one, the clinical support, the volumes that we have put together to incentivate our people in the field to sell more therapy. Those are the main thing.

Greg Brash – Sidoti & Company

Okay. Nino, do you think, you know, a lot of suggestions out there just weren't aware of the benefits of using Counterpulsation therapy. In your analysis, with your reps staying a little more aggressive, you're just getting that word out to them?

Nino Laudani

I'm not sure I understand your question, can you repeat that?

Greg Brash – Sidoti & Company

Do, I mean, I'm just curious, are there – why a number of surgeons out there who just weren't aware of the benefits of Counterpulsation therapy and maybe now, is your reps being a little more aggressive or pushing some of the clinical data, there just – they're becoming aware of it or using a now more procedures. Is that (inaudible)?

Nino Laudani

I got your question now. So, yeah, I think it's not the decision we're not aware of counterpulsation. They're all trained, surgeons are trained on counterpulsation. They know what is the counterpulsation, and the fact that we are there more time spent time, more time about the benefits of counterpulsation and of course describing those and providing clinical support – clinical studies, is sort of making more, of course, noise around the need for counterpulsation. So once physicians see a patient, they realize and it's easier for them to remember that there is a therapy they can use, which is counterpulsation is there available in the hospital. They have the pump, they have the balloon and by simply reminding and reminding and reminding again that there is a therapy they can use in cardiogenic shock and other conditions, they use more.

Greg Brash – Sidoti & Company

Okay. One final question and hop back in queue. I know, you guys don't want to give anything away, but just any updates on your product pipeline and when we can expect to some new launches?

Larry Saper

I think your preface to the question is also the answer to the question.

Greg Brash – Sidoti & Company

I had to try Larry.

Larry Saper

That was a good try. You nearly caught me.

Greg Brash – Sidoti & Company

Alright. Well, thanks again for taking my questions.

Larry Saper

Thank you.

Operator

(Operator instructions) And there appears to be no further questions at this time. I would like to turn the conference back over to Mr. Larry Saper, Chairman and Chief Executive Officer for any additional or closing remark.

Larry Saper

I just want to thank everybody who are tuned in to the call, and we will see you at the next conference call or hear you at the next conference call. I hope. Thank you.

Operator

And ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.

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