Q4 2006 VIASYS Healthcare Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good evening. Thank you for joining us for the VIASYS fourth-quarter and full-year 2006 earnings release. Certain statements during the conference call and question-and-answer period to follow may relate to future events and expectations, and, as such, constitute forward-looking statements within the meaning of the Private Securities and Litigation Act of 1995. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company in the future to be materially different from the statements that the Company's executives may make today. We assume no duty to update these statements.

(OPERATOR INSTRUCTIONS). It is now with great pleasure to turn the floor over to your host, Mr. Randy Thurman.

RANDY THURMAN, CHAIRMAN, PRESIDENT AND CEO, VIASYS HEALTHCARE, INC.: Thank you very much. I am Randy Thurman, Chairman, President and Chief Executive Officer of VIASYS Healthcare, Inc. Welcome to the VIASYS Healthcare, Inc. fourth-quarter and year-end 2006 conference call. With me this afternoon is Marty Galvan, Executive Vice President and Chief Financial Officer and Head of Investor Relations, and Mr. Ed Pulwer, Chief Operating Officer of VIASYS Healthcare.

During our call today, I will provide an overview of VIASYS performance for 2006 and discuss our outlook for 2007 and 2008. We will also update you on several key initiatives, including our worldwide ERP implementation and today's announced restructuring plan. Marty will then provide financial details for the full year and fourth quarter of 2006, and will discuss specific plans that relate to 2007 and 2008 guidance. We will then address all of your questions.

By now you've seen our earnings release for the fourth quarter and full year of 2006. Revenues were up 18.6% and 19.7% for the quarter and year, respectively. Operating income was up 37.3% and 45.3% for the quarter and full year. Overall core product growth continues in double digits, reflecting our best-in-class products across all segments, and our outstanding global sales and marketing capabilities.

In addition, we are gaining share in most key product areas, and we have made significant progress on key initiatives, such as the global ERP program, improving NeuroCare profitability, gaining leadership in the respiratory clinical services market, and entering the sleep therapy marketplace. Our success is being realized both in the U.S. as well as international markets. Internationally, revenues for the year were up 17%, comprised of both double-digit core growth and the introduction of acquired products.

In addition, we are realizing significant growth from our strategic focus on increasing revenues from medical disposable sales and from our customer service business. Combined, medical disposable sales and revenues from customer service now account for nearly $225 million of annual recurring revenue, or over 30% of Company total revenue.

Lastly, we are very proud of our organization and our people, who have now delivered nine consecutive quarters of earnings at or above estimates.

I will now ask Marty to discuss the financial results in greater detail.

MARTY GALVAN, EVP, CFO AND HEAD OF INVESTOR RELATIONS, VIASYS HEALTHCARE, INC.: Good afternoon, and thank you, Randy. On today's call I am going to be reviewing our fourth-quarter and full-year 2006 financial results, and I will review some of the key drivers that have contributed to these results. I also will provide input and guidance as to our plans and expectations for 2007 and beyond.

Please keep in mind that unless mentioned otherwise, all of my comments will refer to financial results from continuing operations on a non-GAAP basis. The charts in the earnings release that we issued today describe in detail how we have calculated these non-GAAP figures.

Overall in the fourth quarter, revenues versus the same quarter last year were up 18.6% to $184.1 million, driven by strong growth in almost all business units. For the full year, sales were $610.4 million, reflecting 19.7% growth versus last year, with 11.4% from core business and 8% from acquisitions.

Operating income in the fourth quarter was $28.2 million, up 37.2%, and for the full year was $71.3 million, an increase of 45.3% over 2005. Adjusted income from continuing operations was up 40% and 43% for the quarter and full year, respectively.

Diluted EPS was $0.53 for the quarter, compared to $0.39 last year, up 35.9%. For the full year, diluted EPS was $1.32, up 34.7% compared to last year's results of $0.98. Contributing to our earnings growth was the continued strong demand for our products and services, the successful integration of acquisitions, and various business improvement initiatives.

Core products continued to perform well, contributing 16.3% of our 18.6% growth in the quarter. As mentioned previously, the full-year growth of 19.7% consisted of core product growth of 11.4%, and this is after having achieved 13% core growth in 2005.

Let me now comment on each business unit.

Respiratory Care had an exceptionally strong quarter in critical care, diagnostic products and in the clinical services business. In the quarter, we shipped a record number of ventilators, including part of a 2400 ventilator order to the State of California. We expect that the remainder of this order will ship this year. This particular sale is the subject of a separate press release that we issued earlier today.

As we've discussed on previous calls, the critical care ventilation business is one that is often characterized by large, onetime orders, usually driven by government or tender activity, which supplement the more traditional hospital business. While winning the tender-type of business is very important in terms of establishing our global leadership position, the timing of this business can occasionally distort year-on-year comparisons. Even without the California order, our Respiratory Care revenues grew by double digits year-over-year. During the fourth quarter, profits in our Respiratory Care business increased 42% from the previous year.

Next, in our NeuroCare segment, as we've commented all year, our focus has been to solidify our revenue base while significantly improving the profitability of this business. We are pleased with the 81% profit increase in the quarter and the overall 400% increase for the full year.

Our MedSystems business continues to perform well, with revenue growth over the prior year of 6.5% and profit growth of 10.4%. Our two new access products, CORTRAK and NAVIGATOR, ended the year with strong results. And both products continue to show great promise as this technology gains wider acceptance.

Lastly, Orthopedics revenues were up slightly, but operating income decreased by approximately 20%. The decrease in operating profit reflects the orthopedic industry-wide dynamics that included a slowdown in purchases as a result of high levels of inventory held by the OEMs, pricing pressures and increased costs of raw materials. Our Orthopedics business also faced difficult comps due to a very strong 2005. However, the long-term industry outlook remains strong, and we believe that demand will increase throughout 2007. We expect first quarter 2007 revenue and income to be above fourth quarter 2006, the first sequential increase in the last year.

Let's turn to the fourth-quarter income statement. Gross margin was 48.1% in the quarter, which is …