Q2 2005 Arrow International Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Welcome to the Arrow International, Inc., Investor Relations conference call following the release of second-quarter and six-month fiscal year 2005 results. The speakers on the call today will be Carl Anderson, Chairman and Chief Executive Officer, and Fred Hirt, Senior Vice President, Finance, and Chief Financial Officer. Mr. Hirt, you may begin the call.

FRED HIRT, SVP FINANCE AND CFO, ARROW INTERNATIONAL, INC.: Thank you very much Nikki. I'd like to welcome everyone to Arrow's second-quarter conference call and webcast. In the next 30 minutes or so, we will review the financial results of our second fiscal quarter ended February 28, 2005. After our prepared remarks, we will hold a Q&A session. We expect to conclude the conference call by 5:30 PM Eastern time.

The press release with Arrow International's earnings statement and our revenue are both available to the public on our website, www.arrowintl.com/presentations. The press release includes a reconciliation of Arrow International's earnings as reported in accordance with generally accepted accounting principles to Arrow International's earnings before certain charges. Investors should look to the GAAP numbers when assessing the financial condition of the Company.

However, as a supplement to this information, we have added certain non-GAAP financial measures that are net of items traditionally called unusual items. These have been added to assist the investor with further analytical metrics to evaluate the Company's period-to-period operating performance and are reconciled with the most directly comparable GAAP numbers in the press release.

Today's conference call includes statements regarding Arrow International's anticipated financial results and regulatory approvals as well as other forward-looking statements based on current expectations. It is important to note that our actual results may differ materially from these anticipated. Information on factors that could cause actual results to differ materially from these forward-looking statements are contained in Arrow International Inc.'s Form 10-K for the year ended August 31, 2004, and our subsequent quarterly reports filed with the Securities and Exchange Commission and we encourage you to review these carefully. Forward-looking statements are made as of today's date and we undertake no duty to update the information provided in this call.

Today's meeting is a proprietary Arrow presentation. No recording, reproduction, transmission or distribution of today's meeting is permitted without Arrow's consent. This call is being audio simulcast on the Internet via the Arrow International homepage which I mentioned earlier.

I am very pleased at this point to turn the call over to Arrow's Chairman and Chief Executive Officer, Carl Anderson. Carl?

CARL ANDERSON, CHAIRMAN AND CEO, ARROW INTERNATIONAL, INC.: Thanks, Fred, and welcome. Let me add my welcome to Fred's. Today, I'd like to begin with some strategic comments on the state of our business. Then, Fred Hirt, our Chief Financial Officer, will provide further comments on the details of our second quarter and the first six months results.

First, Arrow has been successful and it continues to be successful. Our Company is sound but we think there is room for improvement. Many of you have probably heard me say this before, but I'll say it again. We're not going to be bashful about making changes where they are needed and doing what is necessary to upgrade our operations and processes to ensure Arrow continues providing the highest quality products to our customers and the best value for our customers and our shareholders.

I'm talking about improvements that are not just short-term fixes, but well thought out, deliberate steps that our management team and employees throughout the organization are beginning to implement as part of an overall commitment to operational excellence which I am confident will serve our Company and our customers for a long time to come.

In the second fiscal quarter, the Company experienced a combination of factors that have impacted our results. We will review those factors and then I want to share with you what we're doing to make improvements in that area and throughout the organization.

First, a brief review of our preliminary results. As we stated in our press release, these results are considered preliminary because of an issue with shipping terms which Fred Hirt will cover in more detail later.

Estimated net sales in the quarter increased 4.8%, and for the first six months of fiscal '05 were up 7%. These were mixed by business. Our U.S. business represents nearly 60% of total net sales and was up in the quarter only 0.4% compared to one year ago and 2.4% for the first six months of fiscal 2005.

Our international sales increased 15.5% versus year-ago. Within international, our business in Europe continued its growth trend with sales for the quarter of 19.3% versus a year ago, reflecting the impact of our strength in marketing and sales efforts and the move to direct sales in Italy and Switzerland.

Arrow's sales growth represents a slower rate than the Company has enjoyed for the last eight quarters. We believe the net sales shortfall can be attributed to several factors.

First, we have benefited from significant in-market learning with our AutoCAT 2 WAVE Intra-Aortic balloon pump. Consequently, we are undertaking a significant software upgrade which we believe will increase the overall competitiveness of this device and which we expect will be completed and ready to release this summer. In the meantime, we believe our customers are holding off on their purchasing decision until then and we are feeling the impact of this delay in our sales for the quarter.

I might point out, when we are prepared to make this kind of an improvement in our software, we share that information with our customers, because our customers will invest a fair amount in training on any new piece of equipment and we want to make sure they know what's coming down the pike.

Second, following the recall of the NeoPICC catheters in January, we decided to accelerate the integration of our complete NeoCare line manufacturing operations into the Arrow system. To do that, we have temporarily ceased manufacturing, shipping and selling the entire NeoCare product line. That decision has temporarily affected our revenues. We expect the process of physically moving the NeoCare equipment and the re-evaluation of all processes after installation will be completed in the first quarter of next fiscal year.

Third, we are seeing the growth in sales in our critical care business, principally in the United States, beginning to challenge our manufacturing capacity and our ability to meet customer demand, a subject we will expand upon in a few minutes.

If we compare fiscal 2004 with 2002, Arrow's sales revenue grew over $92 million, or 27%. This increase has been reasonably broad-based across product lines and markets, both domestic and international. It is generating substantial growth in our operating income and our cash flow. We're seeing the positive impact of our efforts to strengthen our marketing and sales capability in both Europe and the United States. This growth underscores the strength of Arrow's global product portfolios and brand franchises and …