Electromed Inc (ELMD) 2012 Q2 法說會逐字稿

Welcome to Electromed's fiscal year 2012 second-quarter earnings conference call. Today's call is being recorded. 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 the Electromed Inc. At this time, I will turn the call over to Mr. Hansen. Please go ahead sir.

Thank you very much Catherine. Good morning everyone and I hope I'm not the first to wish you all a Happy Valentine's Day.

This is our second quarter report, and joining me today is Dr. Jim Cassidy, our Chief Operating Officer who joined us about seven or eight months ago full time, along with Jeremy Brock, our Chief Financial Officer. I'm also joined by our marketing unit and my executive assistant, [Patty Best].

By now everyone should have access to the second quarter fiscal year 2012 earnings release for the period ending December 31, 2011. It was released at the close of business yesterday, close of the market yesterday. If you have not received a release, it will be available on the investor relations portion of our website at www.Electromed.com. This call is being recorded and a replay will be available on our website as well.

Before we begin, I 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 and in the Management Discussion and Analysis section of our most recently filed 10-K and 10-Q. We do not intend to update any forward-looking statements that may be made in today's release or call.

To begin today's call, I will provide some highlights from our second quarter and fiscal 2012 year to date results, and provide a general update on our business. Then Jeremy will provide a more detailed review of the financial results for the three- and six-month periods ending December 31, 2011. I will then provide some closing formal remarks and we will open up the call to take questions.

I can confirm that Electromed Inc. had a very challenging second quarter, combining both sweet and sour experiences. Net revenues for our first quarter increased to $4,790,000. This was up 2.2% compared to net revenues of $4,686,000 for the same period last year.

Our increase in net revenues resulted primarily from an increase of approximately 1.2% in Homecare revenue and an increase of approximately 24.5% in governmental and institutional revenue, offset by a decrease of approximately 3.5% in international revenue. Our net income for the quarter was a positive $25,000 compared to $292,000 for the same period last year. We achieved neutral earnings per basic share in the second quarter compared to $0.04 for the same period last year.

Inadequate performance by about 20% of the sales staff, most of them recent recruits, nullified planned growth for the second quarter. Management has acted swiftly to displace such staff with high potential successors.

Let me now turn to further highlights drawn from our fiscal year to date 2012 results for the first half of fiscal year 2012. Net revenues increased to $10,169,000. This was up 14.9% compared to net revenues of $8,851,000 for the same period last year.

Our increase in net revenues resulted primarily from an increase of approximately 17.2% in Homecare revenue and an increase of approximately 14.9% in government and institutional revenue. This was offset by a decrease of approximately 36% in international revenue. The net revenue decline resulted from poor second-quarter performance.

Our net income for the fiscal year to date was $270,000 compared to $404,000 for the same period last year. Again, second quarter pulled down comparative net income performance. We achieved earnings per basic and diluted share of $0.03 for the six months ended December 31, 2011 compared to $0.05 for the same period last year.

Sales growth in the first six months reflected investment in the expansion of sales representatives. We are also continuing to add infrastructure with expansion in staff size in reimbursement, in patient services, along with quality assurance. This is an expression of our confidence in maintaining above average growth.

The Company's R&D programs remain a priority and a source of pride and even excitement. Our research and development expenses increased by approximately 14.2% compared to the same period in the prior year. As we continue to advance our products, we expect our future R&D expenses to surpass 5% of net revenue.

I now would like to turn the call over to Jeremy Brock. Jeremy?

Thank you, Bob. Our total net revenue for the second quarter ended December 31, 2011 was approximately $4,790,000 and is composed of the following three sources. Revenue from Homecare sales increased to approximately $4,290,000 from approximately $4,246,000 in the second quarter last year. Our revenue from sales to the federal government and private hospitals increased to $300,000 from $241,000 in the same period the prior year.

These increases are offset by revenue generated from international sales decreasing to approximately $192,000 in the quarter compared to approximately $199,000 in the same period a year ago.

Our gross profit for the quarter decreased to $3,480,000 or 72.6% of net revenues, compared to gross profit of $3,540,000 or 75.6% of net revenues in the same period in the prior fiscal year. The decrease in gross profit percentage was primarily the result of a change in average reimbursement from the mix of referrals during the three-month period.

As always, factors such as diagnosis that are not assured of reimbursement, insurance programs with lower allowable reimbursement amounts, for example, state Medicaid programs, affect average reimbursement received on a short-term basis. These factors tend to fluctuate on a quarterly basis. However, we do not believe the results of the quarter ended December 31, 2011 are indicative of a long-term trend in decreasing margins.

Our operating expenses were approximately $3,380,000 for the second quarter versus approximately $2,970,000 in the second quarter of the prior year. The increase in operating expenses was primarily driven by higher payroll and compensation-related expenses and travel expenses related to increase in the size of our sales force. We also added staff to our reimbursement, patient services, and administrative departments to support the recent and the anticipated increase in sales volume.

In addition, patient training costs rose related to a broader and higher sales volume. Total operating expenses also included approximately $250,000 of research and development expenses during the second quarter, reflecting our continued commitment to product development. Operating expenses as a percentage of revenue increased to 70.6% in the quarter ended December 31, 2011 compared to 64% in the same period the prior year.

Pretax income was approximately $57,000 representing 1.2% of net revenues, compared to approximately $490,000 or 10.5% of net revenues during the second quarter last year. Income tax expense was $32,000 for the second quarter compared to $198,000 in the second quarter of the prior year. The effective tax rate for the three months ended December 31, 2011 was 56.6% compared to 40.4% in the same period the prior year.

This resulted in net income of approximately $25,000 for the second quarter compared to net income of approximately $292,000 in the same period last year. As Bob stated, earnings per basic and diluted share for the second quarter were neutral, or $0.00 per share, on approximately 8.1 million shares outstanding compared to 4% per basic and diluted share on approximately 8.1 million shares outstanding in the same period last year.

Now let me turn to the results for our six months ended December 31, 2011. Net revenues increased 14.9% to approximately $10,169,000 from $8,851,000 in the same period last year. We experienced increase in Homecare and government and institutional revenue, and a decrease in international revenue. Gross profit increased to approximately $7,538,000 or 74.1% of net revenues, compared to approximately $6,474,000 or 73.1% net revenues in the same period in the previous year.

Net income decreased to approximately $270,000 compared to approximately $404,000 for the same period the prior fiscal year. Earnings per basic and diluted share were approximately $0.03 per share compared to $0.05 per share in the same period last year. The decrease in net income primarily resulted from the increase in sales volume offset by increases in expenses designed to develop, support and maintain our higher sales level.

Management continues to believe that the increases in sales force, reimbursement, and production, coupled with expansion of marketing and research and development efforts, will provide an appropriate infrastructure for continued strong sales growth.

On our balance sheet as of December 31, 2011, we had cash and cash equivalents of approximately $1.7 million. Those funds can enable us to remain committed to our business strategy and to take advantage of any strategic opportunities that may arise. Our long-term debt less current maturities was $1.4 million, and our short-term debt including our line of credit was $2.2 million as of December 31, 2011.

During the quarter we renewed, expanded our line of credit and increased our borrowing capacity to $6 million, and extended the agreement until December 31, 2013. Our net equity was $15 million as of December 31. Now I would like to turn the call back over to Bob for closing comments.

Thanks a lot, Jeremy. While we do not provide formal guidance, we believe we are well positioned to continue to grow sales while remaining profitable despite a challenging economy. During the remainder of fiscal 2012 we will remain keenly focused on opportunities for product development, marketing and sales growth.

Our mission has not changed. Management is responsible for maximizing long-term shareholder value by balancing risk and reward. Some of the sales staff we added over the last year disappointed us and hampered rather than contributed to growth. They are now gone and I expect much better performance from their successors.

Before we take your questions, I would like to conclude by thanking our employees and Directors for all of their dedication and hard work. We're also grateful to our valued customers for their continued support.

The encouragement of shareholders is especially important to Management and the Directors. As we continue to move forward, I hope that our efforts and our performance will result in the continued creation of long-term value for our shareholders. We are now ready for questions and answers.

(Operator instructions) Brian Marckx, Zacks Investment Research.

Bob, was there anything other than the underperformance by the sales, some of the sales personnel, that affected sales in Q2 relative to what the environment was in Q1?

No, I would say not. This was a case where some of our players were not able to hit the ball or catch the ball, and we took summary action.

When we bring new people in, we like to give them a fair shake. We gave them a fair shake. And in this particular instance we had a combination of people that were not able to hit the ball consistently.

And number two, we had a couple of illnesses. We also had a resignation of a very good person who was recruited to a large pharmaceutical operation. So we just seem to have all our bad weather hit us at one time, and yet I was encouraged about a couple of other things which I could share. Would you like me to proceed, Brian?

Please, yes. Thank you.

I would characterize it as one of those sweet and sour quarters. We haven't had a bad quarter in six years, quite frankly, where we didn't establish good solid growth. And so this was kind of a test, I think, of our entire management team -- how rapidly could we respond to bad news. We'd had so much good news in the last five, six years.

But here were some things that made the quarter rather sweet. Linde Gas is one of the larger companies in Europe. They're probably the lead provider of oxygen, medical oxygen in the world. After a four- or five-year pursuit of that company for a strategic relationship in Germany, we signed a contract with them in the second quarter.

That was a very sweet moment, and I did fly to Germany to sign that contract. I think in the years to come that is going to prove to be rather exciting. And I think in many ways it is an endorsement of our $20 million Company signing a contract with about an $8 billion or $10 billion company.

We also extended and deepened our relationship in the Middle East through [Leader Health Care] out of Toronto, Canada. And we had a great representation recently at the Arab healthcare conference in Dubai. That's a wonderful area to be doing business and you get paid. Obviously, overseas and parts of Europe, that hurt us with the debt problems they've had.

I'm excited about our R&D program. I don't know -- Jim is here. Jim, do you want to comment just very briefly on our R&D program?

Certainly, Bob. Obviously for reasons of confidentiality there are limits upon what I can say. But having been with the Company now for over eight months, I can say that I am very pleased with the progress that we are making on a number of exciting fronts, and that we are investing appropriate amounts of our operating capital in research and development of new products.

So I am confident that Electromed will continue to be the leader in innovation in this field, and that we will continue to grow the business on the basis of new product introductions.

I'd like to also add that we shifted our management team, our sales management team so that there are three regional managers -- east, west and central. And I think that was a part of our decision to make changes because we could make those changes very rapidly. The six or seven people whom we displaced have already been replaced, and I don't think that would've been possible had we not had our three-member RSM team, regional sales management team.

I should also mention that a source of some expense was a new building that we acquired -- not a new building, we didn't -- we occupied it by virtue of a lease, a five-year lease, just to the west of our current little campus. And this building has been carefully designed to improve our efficiency and effectiveness in the all-important area of reimbursement.

We sell the product to patients who have chronic conditions for the most part. And gaining insurance reimbursement, whether it is private or government, is extremely important. Incremental improvements in our yield on our placements goes very rapidly to our bottom line, so we made a very important decision to expand into that building and that was accomplished during the second quarter as well.

I think as far as putting all of this into one sort of basket and looking at the ribbon and seeing to what it is addressed, is we envision that we're going to do very well on our sales over the next two or three years. But we have to have the foundation before we drop the rest of the building on top of it. And I am encouraged with how we're started this year, how things are going this year.

And I suppose I don't want to get into forward leading violations, but I don't think it is a great secret that when we were at $14 million two years ago, I reread the annual report to shareholders, and at that time I said that I thought we could get through $20 million and remain profitable. And we got to $19 million in one year and we're certainly running at a rate that will take us through $20 million. So that little contract with my shareholders is going to certainly be fulfilled this year, it would appear.

The other thing that I think is real interesting, and then we will move on to other questions, is in some ways the uniqueness of this Company -- we have in our receivables enough cash to carry this Company quite comfortably for the next five to six months, if we didn't have another sale. Then we have our cash, and on top of that we have an extended line of credit up to $6 million through US Bank, and we all know that is one of the strongest banks in the country.

So I think we had a bumpy second quarter. We feel badly about that. We've taken swift and solid corrective action, and we're going into the new calendar year in the second half with a lot of confidence. Other questions?

Yes, a couple if I could. Do you see a lingering effect from the layoffs in the current quarter in Q3, kind of getting the new sales people up to speed and trained? And I know you don't give guidance, but just more of a general sense, can you give us a general sense? Is the second half of the year kind of maybe a $5.5 million run rate quarter -- per quarter year, is that ballpark? (multiple speakers)

I'll ask -- and it's a good question. I mean I know you are a very fine -- and as such you're going to do a good job probing. Why don't you respond, Jeremy, but don't take it to any decimal points.

Well I would say that any time you have new people, there is time that is required to get them up to speed. But I would like to repeat what Bob says. We have confidence in the CAMs that we've brought on board.

The other thing I would add is that you know some people learn from their lessons, others don't. We try to be lifetime learners from our experiences, including some experiences that are not so happy. So we critiqued it, and what we have done and the formula that we are following is we've done the successions on very experienced people and there is plenty of evidence that they're doing a good job, and I expect that it is going to, they will move up faster than others.

Let me give you one example. We had a washout in California basically. One person was sick and the other two didn't work out.

We have our first physician's assistant as a clinical area manager now. Physician's assistants make a very good living; a highly experienced person was the top salesperson and another company that was involved in the cystic fibrosis field, and that person chose to ally with us. I think that is indicative of the expectations that that person has of her future with us, and I just hold that out as hold that out as (technical difficulty).

Another person had 23 years' experience with one company and has chosen to go with us. So, there's a lot of indication that the majority and success potential for these people is very high.

And I can certainly appreciate what you are doing there, trying to get the most efficient people in there. And I have confidence that that is going to happen. And I can certainly appreciate the turnover and wanting to get the best people in there.

Do you have a goal for how many sales people you want to have by the end of the current fiscal year?

Yes, we said that we wanted to get to 25 or 30, and this interrupted that process. This decision interrupted that process. But we think we're going to be at 27, and we're moving into some territories that we haven't covered before.

But what is going to be hopeful is that the market, the medical profession is less in a learning mode about HFCWO and more in a discernment mode regarding whom do they want to run with. Who is the innovator? Who is providing the most comfortable system? Who is on the grow and who provides the service that they can count on? And who has the financial strength to make that warranty a reality?

So, I hope that is helpful. We're thinking now probably 27.

How many do you have now, Bob?

Jeremy, I think we're back up to 23. We were at 24 when we began the winnowing, and it all played out in about two weeks. And within four weeks we were getting very close back up to strength.

Now, this is as of today. At the end of on December 31, I think we were probably at about 20 or 21 and we're now at 23. And we really are very fortunate that we're able to have attracted the quality that we are.

We're not being viewed at $20 million as a scary start-up someplace. And that impacts the type of people that you pick up, you know. You pick up the pioneers and sometimes the stragglers. We're now bringing in a lot of first-line experienced salespeople.

Yes. It's a weeding process, understood. So I've got one last one and then I will get off. The new distribution agreement in Germany that you alluded to previously, are they calling on existing accounts that they can sell the SmartVest to? Or is this sort of a new customer base for them?

I might ask the head of -- our Marketing Director to comment on that, Eileen Manning. They have a subsidiary called -- want to comment on the subsidiary that handles this, the $1 billion subsidiary that we signed this with.

Linde Gas is already and has been well established in Germany for decades. And they are on a daily basis in front of the same types of doctors and clinicians that our domestic team would get in front of. So they have very well-established accounts, and they are in the hospitals and the clinics every single day dealing with the same people for their oxygen needs.

The division -- the subsidiary is called Linde Therapeutics, and we've had some success with them in one or two other countries. But Germany is the ball game, if I can put it that way.

And Germany parallels the United States in that it has quite a bit of private insurance as well as government insurance. And overseas that's always the challenge, because you have single pay deciders. So if you make the cut, so to speak, why you are in really great shape. But if for some reason you don't make the cut or the resistance is too great, whatever, then you've got a big struggle. It's hard to come in the back door because there's very little private insurance out there.

In Germany there is very significant private insurance. The Germans are very careful, measured, deliberate and persevering people, as we all know. And we're just happy that we're in the front seat now with a very serious player.

Have you started shipping to Linde already?

Yes, we have been shipping (multiple speakers) Linde in other countries for a couple of years now.

Yes, in Italy. But as far as Germany, you mean?

Yes.

Is our attorney on the line?

(Operator Instructions).

Okay, I believe those shipments began in the third quarter.

Thanks a lot guys. I appreciate it.

One moment, sir. Your attorney has queued up.

Scott?

Yes, Bob.

I believe that took place in the third quarter. Is it okay for us to have responded?

In the third quarter of this year?

Yes, with respect to our first shipments to Linde, Germany.

No, I don't think we should get into that right now.

Okay, then, we disallow that comment then.

I'm all set with my questions. I appreciate it.

[Ernie Amberg, Felton Company].

Good morning, Bob.

Good morning, I'm in sackcloth and ashes, so, you know, I'm ready.

Just a couple of housekeeping things first; was it some $400,000 of capital expenditures in Q2? And what do you expect is going to happen over the balance of the year?

Yes, it was approximately $400,000. We are in really, really good shape now with our capacity here to serve a significantly higher level of sales over the next two to three years. So we don't anticipate any significant capital expenditures other than those that would apply to any introduction of a new product.

How should I take that comment, Bob? You've been working in R&D on some new product. Would that be significant? And will it happen in the second half here, do you think?

We're in a highly competitive environment with a $1.5 billion competitor, and as much as I would like to respond and as enthused as I am, I can't comment.

Fair enough, thank you.

The sales personnel, you said 23 clinical area managers plus the three regional managers. That's 26 people in total in the area, Bob?

That's correct, Ernie. That was as of today.

Okay and the 27 number, does that correspond to the 23 plus 3? Or are you actually going looking for three or four more sales at clinical (multiple speakers)

Yes, we're endeavoring to add 4 more and we have very active candidates. And again that is forward-looking, so I'll have to pass. But I think you will see that we will be up to 25 very soon.

All right, thank you.

I'm only making reference to the camps, Ernie. Thank you.

That's fair, thank you. This goes back to the earlier question. You are six weeks into the new quarter and you are optimistic that these new reps are going to be good performers. Normally your March quarter is one of your larger quarters through the winter. Any sense of -- that you can give us about how business is going?

All I can say is that I am very comfortable with the people that have been hired. I personally review them, each one now, in considerable detail. And I know they're going to contribute and some already have.

I don't think we have anybody on board that hasn't already had some good experience in providing referrals to us. But I can't get into forward-looking as much as I would like to.

Fair enough. Relative to referrals and billings in your 10-Q each quarter, you give us a number on new referrals and actual prescriptions closed. Can you give us that now?

I'm going to refer you to Jeremy. My understanding is because of competitive concerns that we have, that we reached a little different conclusion. Do you want to advise Ernie on that point, Jeremy, please?

Based on the competitive nature and the market and the size of our Company versus our competition, we've decided not to disclose that in our 10-Q.

Thank you. Okay, the balance sheet, Bob, you made some comments. You have signed a new line. It has expanded to $6 million to the end of next year. You have $1.7 million of cash.

You've got about $2.2 million of current maturities and long-term maturities. I think that's right; current maturities and long-term debt. So you've got $3.5 million or $4 million with the line and $1.7 million in cash.

I agree you've got more receivables that would roll off, but you've got an ongoing business that receivables are going to stay up there. You will put new receivables on as the old ones roll off. (technical difficulty) cash since then and you've got the line, what are the plans there?

We -- and Jeremy you can supplement what I say. We think we're in good shape on cash. We have a $6 million line and I think we're into that line for about $2.2 million. So we have about -- well over $3.5 million. We have another $1.5 million out of that $6 million.

And we are really through our building expansion in this kind of thing. We think we're in good shape. I don't foresee any near-term financing activity on our part.

Because of our relative strength financially, we probably would be looking to debt. As we get through some of our R&D activity and some of that pressure comes off, our situation will continue to get more comfortable. But at some point there will be an opportunity for us to visit the market. But we do not have any immediate plans to seek outside financing.

Okay, thank you Bob. Last question, are the area -- are the managers -- the three guys, are they quota carrying? Or is it just the clinical area managers who are accountable for new referrals?

Yes, we have two male regional sales managers, one in the east and one in the West, and our Central regional sales manager is Sherry Wheeler. They all have the same program. They receive X basic salary and Y as a percent of their total sales for their region. They make their dollars -- their future lies in increasing the sales in their specific regions. And they participate calling on key accounts with CAMS, etc.

I'm just trying to get an idea. So they are participating, but it's the 24 CAMS who are really the sales guys trying to generate referrals.

That's right and that's the emphasis.

Now, of course, I'll give you an example of just how effective the RSM has been and why we were able to make these changes go quickly and upgrade the quality, is because we had the RSM's. We made these decisions together and then each of one with me on their regions as to who was to be culled. And then we were able to focus upon recruiting candidates.

Now, some of these territories went through transition, the regional sales managers themselves being very, very good and effective salespeople have covered those regions that were going through transition. I'm thinking of one region in particular that I won't mention, but the effort of the CAM has actually proved to be an improvement in that particular territory.

So they stepped right on up and do the same things that the CAMs do in terms of servicing accounts and seeking new accounts. But as this moves to the 27 CAMs and three RSM's by the end of the year, their job is stimulating, overseeing, augmenting, encouraging, monitoring and holding accountable their 9 or 10 CAMs under each of their supervision.

Thank you, Bob. That's all I have.

Thank you very much, Ernie. We appreciate your interest and support. Other questions?

Not at this time, sir. (Operator Instructions).

We welcome questions.

Not hearing any further questions, our meeting has been brought to a close. Thank you very much.

You're welcome, sir. And ladies and gentlemen, once again, that does conclude today's conference. We thank you for your participation.