Electromed Inc (ELMD) 2011 Q4 法說會逐字稿

Welcome to Electromed Incorporated's fiscal year 2011 fourth quarter and year-end earnings call.

Today's call is being recorded for rebroadcast. All participants are in a listen-only mode. After the presentation, we will give instructions to queue up for questions.

Today's speaker is Mr. Robert D. Hansen, Chairman and CEO of Electromed Incorporated. At this time, I will turn the conference over to Mr. Hansen. Please go ahead, sir.

Thank you very much, Lauren, and good morning, everyone.

My name is Bob Hansen, as indicated. Joining me is Terry Belford, our Chief Financial Officer, and this morning I have asked for some additional guests, Dr. James J. Cassidy is present as our new Chief Operating Officer, along with Mr. Jeremy Brock, who is our controller. I have also invited Miss Eileen Manning to join us, who is Director of the Company's marketing operations.

I do want to wish all of you a very warm welcome to Electromed's fourth quarter and our year-end conference call. Joining me are, I believe, more than 17 different guests. So again, welcome to all of you.

By now, everyone should have access to the fourth quarter and fiscal year-end earnings release for the period ending June 30, 2011. This was released yesterday afternoon. If you have not received the release, it is available on the Investor Relations portion of our website, which you can all find at www.electromed.com. A little reminder that our call is being recorded and a replay will be available on our Company website, as well.

Before we begin, we would like to remind everyone that these prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore, undue reliance should not be placed upon them. These statements are based on current expectations of management and involve inherent risks and uncertainties, including those identified under the heading Information Regarding Forward-looking Statements in our most recently filed 10-K. We do not intend to update any forward-looking statements that may be made in today's call.

To begin today's call, I will provide some highlights of our fourth quarter and fiscal year-end results, and I'd like to provide a general update on our business. Then Terry will provide a more detailed review of the financial results for the 3 months and fiscal year ended June 30, 2011. I will then provide some closing formal remarks and we will open up the call to take questions. All of our guests this morning that are surrounding me here in our boardroom are available to take your questions.

I'm pleased to report that the Electromed's fourth quarter position marked a solid end to what was really a terrific year. Net revenues for our fourth quarter increased to $4.954 million. This was up 36.7%, compared to net revenues of $3.624 million for the same period last year. Our increase in net revenues resulted from an increase of approximately 35.5% in Home Care revenue, an increase of approximately 2.3% in International revenue, and an increase of approximately 101% in Government and Institutional revenue. Our net income for the quarter was $165,000 compared to $71,000 for the same period last year. We achieved earnings per diluted share of $0.02 per share in the fourth quarter, compared to $0.01 per share last year.

We now need to turn to some further highlights drawn from our 2011 fiscal year. Net revenues increased 32.9%. We were up to $19 million, up from $14.3 million in the same period last year. Net income rose to $1.056 million, from $916,000 in the same period last year, which was a 15.2% increase.

Our earnings per share was $0.14 per basic and $0.13 per diluted share, compared to $0.15 per basic and diluted share for the 2010 fiscal year. Earnings per share were, of course, affected by an increase to the number of outstanding shares of our Company's common stock as compared to the prior-year period. This change was due to the Company's completion of its initial public offering in August, 2010. This included the underwriters over-allotment option, a total of 1.9 million shares of Company common stock, which are registered and sold under the public offering.

We continue to maintain a very strong cash position, with total cash and cash equivalents of approximately $9 million as of June 30, 2011. Our current assets were $16.634 million, and our current liabilities were $4.414 million, so we're maintaining about a 4 to 1 current ratio.

Our year-to-date performance reflects continued dedication to our business strategy, which includes developing, supporting, and then maintaining strong sales growth, and continuing to bolster our reputation as an innovative leader in the development and manufacturing devices that provide HFCWO therapy, including the Electromed Inc. SmartVest airway clearance system. Increases to our sales force contributed to that 32.9% increase in net revenues in the 2011 fiscal year compared to 2010. In addition, we've remain committed to research and development, because we believe that it will foster long-term revenue growth.

Let me now turn our presentation over to Terry Belford.

Thanks, Bob.

Our total net revenue for the fourth quarter ended June 30, 2011 was approximately $4.954 million. It was primarily made up of the following 3 sources. Revenue from Home Care sales increased to approximately $4.609 million from approximately $3.402 million in the fourth quarter last year. Our revenue from International sales increased to approximately $107,000 in the quarter, compared to approximately $105,000 in the same period a year ago. Revenue generated from sales to the Federal Government and private hospitals increased to $237,000 from $118,000 last year.

Our gross profit for the quarter increased to $3.6 million, or 72.7% of net revenues, compared to gross profit of $2.698 million, or 74.4% of net revenues, in the same period the prior fiscal year. The increase in gross profit dollars resulted primarily from increase in sales volume. Although gross profit percentage for the quarter was lower than for the 3-month period ended June 30, 2010, it was consistent with the year-end percentages for both 2011 and 2010. The decrease in gross profit percentage for the 3-month period ended June 30, 2011 compared to 2010 was primarily the result of slightly lower reimbursements from the mix of referrals received. Factors such as diagnoses that are not insured of reimbursement, along with insurance programs which present lower allowable reimbursement amounts, for example state Medicaid programs, affect reimbursement received on a short-term basis and tend to fluctuate margins slightly on a quarterly basis.

Our operating expenses were approximately $3.192 million for the fourth quarter, versus approximately $2.457 million in the fourth quarter of the prior year. The increase in operating expenses was primarily driven by higher payroll and compensation-related expenses, and travel and marketing expenses related to increasing the size of our sales force. In addition, patient training costs related to higher sales volume, and general and administrative expenses relating to being a newly public company were other expense drivers. Total operating expenses also included approximately $344,000 of research and development expense during the fourth quarter, reflecting our continued commitment to product development. Operating expenses as a percentage of revenue decreased to 64.4% in the quarter ended June 30, 2011, compared to 67.8% in the same period the prior year.

Pretax income was approximately $368,000, 8% of net revenues, compared to approximately $183,000, or 5.4% of net revenues, during the fourth quarter last year. Income tax expense was $203,000 for the fourth quarter, compared to $112,000 in the fourth quarter of the prior year. This resulted in net income of approximately $165,000 for the fourth quarter, compared to net income of approximately $71,000 in the same period last year.

As Bob stated, earnings per basic and diluted share for fourth quarter were $0.02 on approximately 8.1 million shares outstanding, compared to $0.01 per basic and diluted share on approximately 6.1 million shares outstanding last year. The increase in shares outstanding was due to successful completion of our initial public offering in August of 2010.

Now let me turn to our results for the full 2011 fiscal year, which are characterized by increases in net revenue. For the year, net revenue increased 32.9%, to approximately $19.004 million, from $14.304 million in fiscal 2010. We experienced increases in Home Care and in Government and Institutional revenue, and a decrease in International revenue. Gross profit increased to approximately $13.778 million, or 72.5% of net revenues, compared to approximately $10.378 million, or 72.6% of net revenues, in the previous year. Net income increased to approximately $1.056 million, compared to approximately $916,000 for the prior fiscal year. Earnings per basic and diluted share were approximately $0.14 and $0.13, respectively, compared to $0.15 for both basic and diluted share for last year.

Net income did not increase to the same extent as net revenues, due to the expenses we incurred in connection with increasing the size of our sales force and the number of support and production personnel, as well is an aggressive expansion of marketing activities. We believe these activities are necessary to develop support and maintain strong sales growth.

On our balance sheet, as of June 30, 2011, we had cash and cash equivalents of approximately $4.1 million, which will enable us to remain committed to our business strategy and to take advantage of any strategic opportunities that could arise. Our long-term debt, excluding current maturities, was $1.6 million and our short-term debt, including our line of credit, was $2.2 million, as of June 30, 2011. Working capital increased $7.3 million, from $4.9 million as of June 30, 2010 to $12.2 million at June 30, 2011. Our equity increased $7.2 million, from $7.5 million as of June 30, 2010 to $14.7 million at June 30, 2011.

Now I would like to turn the call back over to Bob for closing comments.

Thank you very, very much, Terry; we appreciate it.

We are very pleased with our fourth quarter and with the fiscal year results. While we do not provide formal guidance, we believe we are well-positioned to meet our goal, established in 2010, of achieving annual sales of $20 million or greater by the end of fiscal 2012. During the 2012 fiscal year, we will remain keenly focused on opportunities for product development, marketing, and sales growth. I think our mission is clear. We must work diligently to maximize long-term shareholder value by achieving our full potential.

Before we take your questions, I would like to conclude by thanking our employees and Directors for all of their very hard work. We are also grateful to our valued customers for their continued support. The encouragement of shareholders is especially important to management, and to the Directors and employees.

As we continue to move forward, I hope that our efforts and our performance will be worthy of your continued support, and I wanted to also express appreciation for [Bel Tel] and Company for the very courageous investments that they made in our Company a year ago. I hope that we have been worthy of their confidence.

Lauren, we are now ready for the question-and-answer portion of this call.

Thank you, Mr. Hansen. (Operator Instructions)

Brian Marckx, Zacks Investment Research.

Hello, guys. Congratulations on another great quarter.

Thank you, Brian.

On the R&D front, is there anything specific that you can talk about relative to products or product enhancements that are in the works, and when you might expect these to come to market?

Brian, thank you for your call regarding whether we can comment on the status of our R&D program. Unfortunately, I cannot disclose that information at this time.

I do believe that it would be accurate to say that we are an innovative leader. We disclosed in our filing for our IPO that a portion of those funds would be allocated accordingly. And I believe that we do have the leading innovative product in the market, and it's my opinion that we are considered the superior choice in patient services, as well. And I think our growth rate reflects those 2 commitments. But expect good things from Electromed.

Okay. Fair enough.

Is the plan for 2012 to continue to incrementally add sales headcount the way that you did in the current year, in 2011?

I have to be a little cautious here that I don't tip too much to our competitor, but I think it would be fair to say that we believe the road to continued exceptional growth is to add exceptionally qualified and motivated salespeople, and support them with superior service.

In our business, service isn't just following up with replacement product if there's a malfunction or something like that; but service for us means being there for patients after they have committed to our product. Everyone that participates in our patient services unit, I think there are 14 people there, all of them are respiratory therapists, and many of our field staff are respiratory therapists. I think we have more than 30 respiratory therapists that are part of our more than 90 full-time employees now.

I think there will be an extension of the strategy that you have seen in the last year. The matter of R&D, and any other surprises, that are intended to enhance shareholder value must, of course, remain under wraps at this time.

Okay.

And just one last one, on the tax rate. The tax rate in the quarter jumped up a bit, but it ended the year around 37%. Is that something that you expect going forward around that range, 37%, 40%?

There is variability there. I will ask Terry to comment on that. Terry, will you comment on that, please?

Yes. Going forward, we would expect the tax rate to be about 37%, 37.5%. The tax rate jumped up in the fourth quarter because of a -- what we did is we revalued our estimate for our R&D tax credit and obviously, we downwardly revalued that. And so that was the reason for the increase in tax rate as of the fourth quarter.

Okay. Thanks a lot guys, and congratulations again.

We appreciate your coverage, Brian.

Thank you.

(Operator Instructions)

Ernie Andberg, Feltl and Company.

Good morning, Bob.

How are you, Ernie? Good to hear your voice.

I'm excellent.

You guys had what I would call a really good quarter in your market. It would suggest that you might see a little seasonal slowdown there, but revenues in that market were pretty much in line with the third quarter. How are your sales guys working out there? Are the new guys starting to get traction? How many are actually selling? I had in my numbers about 23 by the end of the year. Is that about where you ended up?

Thanks for your question, Ernie.

On the sales picture, let me paint it in this way. We have 25 Clinical Area Managers at the present time. They basically are what's sometimes referred to as sales reps. They are now managed by -- in 3 regions, the Western, the Central and the Eastern. Each of those is now -- each of those regions is now assigned a full-time regional sales manager. Each of those 3 people are respiratory therapists. And we made an adjustment, we don't have a national sales manager; these folks report directly to me now. All of the new people that we have are reporting their early stage sales.

I think it would be fair to characterize that it takes 12 to 18 months for a new person -- for a new Clinical Area Manager to really gain traction, in the sense of our target quotas for them. We have had a star or 2 usually emerges very quickly, and then everybody proceeds on the scatter diagram accordingly.

But, as I think I mentioned at our last webcast, if you go back retrospectively 1 year,, you will find that the Company has tended to average approximately $1 million in revenue for the average number of CAMs that are effective for the prior year. Hence, we had 14 average CAMs in 2010 and we did $14.3 million. Is this helpful?

Yes.

So a lot of those people were added in the first half of the fiscal 2011 year, which you are suggesting 12 to 18 months to get fully effective, Bob. We should start seeing that effect as we move towards the end of the first half here, and particularly into the second half. Is that --

That sounds like a good analytical observation. I would add only 1 amendment, and that is that the majority of our Clinical Area Managers were added in the second half of the fiscal year. The first 2 quarters were pretty well colored by our commitment to the IPO and the immediate aftermath of that. And then it was a matter of beginning to deploy into the second fiscal quarter. By the third and fourth quarter, we I think added at 6 or 8 people in that quarter. I'm talking about 6 or 8 Clinical Area Managers.

And of course, it's extremely important to bring up the infrastructure. Because in our Company, we're a third party pay; so it's really important to be selling to the physicians and their staff, to the patients and their families, and then thirdly to the payors, the insurance companies, government agencies and so on.

Okay. While the Home Care business was very strong, both the Government Institutional and the International markets were down sequentially, Bob. Was there anything unusual in the sales in those 2 markets, or are they going to be inherently lumpy on a quarterly basis?

I want to characterize it a little differently than your immediate perception. I know you've got to digest all this, Ernie, you're probably just hearing it.

But our Hospital and Government was up sharply, on a percentage basis. I think it jumped from $100,000 to $200,000 and some. Were making some progress there. But the Government and the Hospital, government hospitals, private hospitals, those are really showcase places where physicians use the product, and often times patients experience the product for the first time in the hospital. And then when they return home, many of these people have chronic conditions, so they need to manage it to keep their health at a high as possible level and to also contain expenses. We had a nice growing surge, albeit on a small basis, in the direct to hospital business.

The overseas business has been characterized by a very slow, challenging, difficult process with 2 factors. Number one, there is very little reimbursement established in overseas countries, because there's been relatively little exposure to our product. The second is that you get into cultural and medical best practices, and there are many people who are involved in using manual chest physiotherapy. Ad if I can introduce a little bit of humor, it's a little bit we're like introducing the cotton gin over there, and a lot of the folks aren't real happy to give up their established patterns there. We're working very hard. I think that eventually the technology imperative will carry for our competitors and for ourselves in those markets, but it is a very slow, grueling process.

In this country, it was probably 10 or 12 years before high-frequency chest wall oscillation became a standard of care. And it was only 5 or 6 years ago that bronchiectasis was introduced for reimbursement. So patient, dogged determination will carry the day there.

Okay. Fair enough.

A couple of questions left on the R&D and SG&A line. You forecasted, or suggested, R&D spending was important. The number bounced up pretty healthily in the fourth quarter. Was there anything unusual there, or is that the run rate we ought to expect going through fiscal 2012, Bob?

Being the expert that you are, Ernie, run rate is just the right way to look at it.

We were 8 years in R&D before we brought out our first product. And we are not seeing that kind of a challenge in some of the projects that we are involved in. But I think that long-term investors should be looking at the Company's investment. What are expenses today, in retrospect are fantastic investments.

And I think of 3 letters. P, R, S. P stands for the public investment. We made a choice. We decided to become a public instrument. Our costs there alone are probably $400,000 to $450,000 a year, in terms of -- and that is an expense burden that we carried this year that we didn't have the prior year. That's the P. The R stands for research. You can see, we were over $1 million in R&D. That was up something like $550,000 over the prior year. So there is $950,000 that management chose to invest. And then the third, of course, is the sales investment. You can imagine bringing on 14 people and the infrastructure that it requires. So that if we just wanted to manage for a big year of earnings, we could have cut back there, I suppose one could argue. But I don't want to get too speculative here.

You can see that very specific investments were made in research, becoming a public company, and very importantly, in sales. And in the SG&A, keep in mind that we carry the expense of our patient services people, those 14 respiratory therapists are included in there. The entire reimbursement department of -- how many, Terry, do we have in reimbursement?

15.

We have 15 people in reimbursement. There's 29 people who are integral and essential. And it's their good work, day in and day out, hour after hour, that builds the reputation of this Company, that I think is just extremely highly rated.

And remember, we're probably the only medical device Company around that carries the joint commission. We were just audited the other day. They just gave us another yellow star, if you will. So that we meet the highest standards of the joint commission, which covers Mayo Clinic and so on.

There is a lot of expense in R&D, but there is a huge amount of coverage. And when you figure, you can buy a great product, but the real question is what happens after that? And service is so important in our Company.

So thank you for picking that out and for understanding how there is a close correspondence between sales and some of these other units.

Okay, Bob, last question.

You and I have had this conversation, and I don't want you to make a forecast, but you have added Jim Cassidy in June, you added Jeremy as a Controller, you added a Manager of Human Resources and some additional regional salespeople. How should I think about the $2.8 million of sales and general, SG&A, expense in Q4 relative to the go forward rate, without pinning you down to a specific forecast?

It's a really, really good question.

It goes always to the issue of trading off near-term expenses for longer-term benefits and so on. But we are managing this Company to do everything we possibly can to remain profitable while we position ourself to become a much larger Company than we are right now. A much larger Company. And that involves considerations that can't be disclosed at this time. But we certainly will have an increase in our fixed costs.

But we are a really, I think, a very exciting, emerging Company with over $20 million in assets and over $14 million of net equity, and a current ratio of 4 to 1, and on and on it goes. I have the responsibility of deploying the financial resources that are available to me to build that company.

As to how it will play out in 1 quarter or 2 quarters, I don't have that -- I can't really say anything. I shouldn't say anything. But the other side of it is when companies are growing at a rapid rate, they can absorb considerable expenses. When I'm growing this rapidly and putting this much traffic across the bridge, I want to make sure I have a real strong bridge under me.

Okay. I did have one other question.

Terry, on a quarterly basis, you've talked about referrals versus -- in your filings, versus revenues. Can you discuss that referrals that came in versus your actual sales in the quarter, right now?

That's a competitive issue.

We've got to confer on that one, because that gets into competitive disclosure, I think, to our competitors. And I know often times they, understandably and rightfully, listen to this presentation.

But is the question what is our yield on referrals?

It is disclosed in the 10-K, part of the MD&A, Ernie. And the referral increase was commensurate with the sales increase.

Thank you.

And our percentage of authorizations for referrals was still approximately the same. And so along with the margins being about the same, it seemed like everything held together, as far as our model goes, for sales. We just had more of them.

Okay. I will look for the hard number when you file your K, then. Thank you. But that is helpful, to outline it.

I just wanted to be cautious on that, Ernie, and I'm sure you appreciate that.

I understand. You disclosed it and that's why I asked the question. But, thank you for your help.

Yes.

Lauren, are there other questions?

Yes, sir. (Operator Instructions)

Dave Hansen, a private investor.

Hello, Bob.

Hello, Mr. Hansen, how are you?

Very good. Congratulations on a sound quarter, and year as well.

Very good.

What I'd like to do is touch a little bit back on that R&D. I think Brian hit on it a little bit earlier. There is a new bill before the President, the Patent Reform bill, and it's effectively overhauling the general idea that from first to invent to first to file is going to be getting patents. They are trying to speed the process up.

Do you see that bill as a positive, and is that going to be able to help the organization start delivering more innovative products, which is, of course, one of the keystones of your organization?

Thank you for your question, Mr. Hansen.

I believe that your point relates to the recent indication that first to file is going to take precedence. And to a certain extent, these are mechanical activities. The important point is who has the innovative genius, who has the will, and who has the money to carry things forward. Any time there's a change like that, one really doesn't know how that plays out in the courts. And patents really are privileges that are conveyed, that are subject to the actions of litigation process in the courts. But I think it will probably convey some -- this is just a personal opinion, it will probably convey some advantage to the very small, innovative firm that maybe doesn't have the resources behind it.

I am going to ask Dr. Cassidy to comment on this. Jim's a specialist in bioengineering. Would you comment on this, Jim?

Mr. Hansen, good morning. This is Jim Cassidy.

I think what the bill will do is as follows. It will, of course, simplify disputes with regard to who is first to invent a particular technology or a particular concept, because it will be dependent upon a filing date rather than coming through the records of different organizations trying to determine who was first to invent. What I've read in the press is that the general public seems to feel that this will be advantageous to larger firms, because they will have the wherewithal to file many, many more patents than smaller companies do.

However, to Bob's point, at the end of the day, patents are dependent upon innovation. And looking historically at the medical device industry, and most any industry in the United States, innovation is driven by small companies, by pioneers in a particular area. There is nothing in the bill that I would expect to change that. We are, of course, cognizant of this change going forward, and we may adjust our patent strategy accordingly to take best advantage of these proposed changes in patent law.

But otherwise, I don't believe that it's going to make a significant change in the playing field. Innovative companies will continue to innovate; and while changes in patent strategy may be necessary, patents will still confer upon those innovators competitive advantage.

Very good. Thank you.

It appears there are no further questions at this time, Mr. Hansen. I would like to turn the conference back to you for any additional or closing remarks, sir.

The only thing I would like to add is that I really appreciate the participation that's been indicated, and the size and breadth of it.

I also want to just take 1 minute to extend warm wishes to Mr. Terry Belford, who has served this Company with great distinction over the last 8 or 9 years, and who had an opportunity to remain or to continue into a plan that he had to retire, apparently. So Terry, thank you very much for all that you have given this Company, and much wisdom and extraordinary expertise that you brought to bear in the accounting functions. And welcome aboard, if you will, to Mr. Jeremy Brock, who for 3 years was the audit manager for Larson Allen, prior to our going into an IPO. Also an indication that I believe we will be coming up with an indication as far as a successor to Terry in the very, very near future.

So thank you, everyone. Any other questions?

There are no additional signals at this time, sir.

Pardon?

There are no additional signals at this time, sir.

Okay. Thank you so much, Lauren, for your help, and have a good day, everyone. Good-bye, now.

This concludes today's conference. Thank you for your participation.