Veru Inc (VERU) 2008 Q4 法說會逐字稿

Hello. Welcome to the Female Health Company year-end earnings conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. An operator will give instructions on how to ask your questions at that time. The statements made on this conference call which are not historical facts are forward-looking statements based upon the Company's current plan and strategies and reflect the Company's current assessment of the risks and uncertainties related to its business including such things as product demand and market acceptance, the economy and business environment, and the impact of government pressures, currency risks, capacity, efficiency and supply constraints, and other risks. Detailed in the Company's press releases, shareholder communication, and Securities and Exchange Commission filings. For additional information, the Company urges you to consider reviewing its 10-Q and 10-K SEC filings.

(OPERATOR INSTRUCTIONS) Please note this this conference is being recorded. Now I would like to turn the conference over to Mr. Parrish. Mr. Parrish you may begin.

Thank you. Welcome to the Female Health Company's fourth quarter and full-year 2008 earnings conference call. Donna Felch, the Company's Vice President and CFO is here with me in Chicago and Mike Pope, our Vice President of UK and Malaysian operations is participating from our London office.

Prior to reviewing the results, I would like to note that it is World AIDS day. The UN estimates there are 33 million people living with AIDS. There will be 2.7 million new cases and two million will have died of the disease this year. The increasing feminization of AIDS is important. Approximately 50% of those living with the disease worldwide are women, and in some African countries more than 70% of those infected are women. The single most important accomplishment of the Female Health Company is providing a unique form of protection against HIV/AIDS and other STDs that is controlled by women. The Female Condom saves lives, reduces human suffering and reduces health care costs. I should note it is the only new prevention product approved by FDA, and in many other countries in the 20 plus years since the epidemic began. Strong financial results permit the Company to develop improved products such as FC2, contribute to programming education and in turn improve shareholder values.

Now we'll review the financial results. In 2008, accomplishments, our outlook and discuss earnings guidance for 2009, and then we will take questions. I would refer to years unless I state otherwise I am referring to the Company's fiscal year which ends September 30. As a manager I like hard data on facts I am usually not given to using superlatives, however in presenting our quarter and year-end results for 2008 I think spectacular is one of the few ways to describe this. This is particularly meaningful given the current economic and market conditions, and the negative results being reported by many companies. Donna, Mike, the FHC team and I are delighted to share these results with you.

Net revenues for the fourth quarter increased 52% to $7.8 million, from $5.2 million in the prior year quarter. Gross profit increased 73% to $3.5 million. Gross profit for the quarter was 44.8% of revenue versus 39.3% for the prior year quarter, reflecting the increasing contributions of FC2 and increasing volume. Operating earnings totaled $1,230,569 an increase of 206% over one year ago. This was our first $1 million quarter in operating earnings.

Prior to commenting on areas I would like to point out that FHC recorded a favorable currency gain noted as such in the P&L, of $893,112 for the quarter. Excluding this which is what we focus on the from the operations standpoint. Our pretax earnings for the quarter were $1,253,385 a 211% increase over the prior year quarter. Including the currency gain, FHC's pretax earnings were $2,146,497, a five fold increase over the prior year. For the quarter net earnings attributable to common shareholders totaled $2,340,291 or $0.09 a share, a 125% increase over the $1,124,967 or $0.04 a share for the prior year's quarter. For the quarter this includes a tax benefit of $218,862. For the full-year, net revenues for '08 totaled $25.6 million, a 33% increase over $19.3 million for '07.

Unit sales for the year totaled 34.7 million, up 34%. Gross profit totaled $10.7 million, a 50% increase over $7.2 million in '07, gross profit totaled 41.9% of sales in '08 versus 37% in '07. I should note the Company incurred some significant one-time expenses in '08 with the preparation and submission of its FC2 PMA to FDA, Sarbanes-Oxley implementation and the expansion of our FC2 manufacturing capacity. In addition incentive accruals were made for the achievement of its plan. Nevertheless expenses as a percentage of sales were 29.4% down three percentage points from 32.4% in '07. Operating earnings for '08 totaled $3,183,725, a 252% increase over $903,397 in '07.

Now excluding this favorable currency gain, which for the year was $966,736, our pretax earnings totaled $3,237,270 or $0.12 a share. A 245% increase over $939,401 or $0.03 a share in '07. As you will probably recall our last earnings guidance was an increase in pretax earnings of 200 and 250% over '07. So at an increase of 245% we were at the upper end of the guidance that we gave a couple of months ago. Including the favorable currency gain and a modest currency loss in '07, FHC's pretax earnings were $4,203,906, a 384% increase over $868,913 in '07. Net earnings attributable to common shareholders totaled $4,829,262 or $0.18 a share versus $1,532,665 or $0.06 a share for '07. This includes a tax benefit of $775,000 for '08 and $825,000 for '07. I should note we have tax loss carry forwards of approximately $85 million in the UK which do not expire, and $63 million for federal and state in the US. To date we have recognized $1.6 million of those per tax benefits.

Turning to our balance sheet, the Company generated $4.2 million in cash from operations during the year. At the end of the year, our cash position was approximately $2.1 million versus $800,000 at the end of '07. Our current cash position is $3.5 million. I should note this is after capital expenditures of $300,000 and stock buybacks of $2.4 million for a total outlay of $2.7 million during '08. FHC remains debt free and has $1.5 million of unused credit lines. Our shareholders equity at the end of '08 increased to $9.7 million versus $7.4 million at the end of '07.

Now I would like to outline some of what I believe are some of the key accomplishments behind the financial results in '08. In '08 the Company shipped product to 90 countries. This breadth of product distribution is seldom seen except for products such as Coca Cola, Wrigleys, and perhaps prescription pharmaceuticals. Our investment in development in India is beginning to impact results.

Manufacturing of FC2 in India with our partner Hindustan Latex Ltd. started at the first quarter of '08. The Government completed its experimental Female Condom prevention program and based on good results elected to expand the program. In addition our partner launched FC2, as a consumer product in India under the trade name Velvet. Royalties attributable to India and FC2 accounted for $100,000 of pretax income for the first quarter. This doesn't mean that we will have that every quarter, but it does indicate that our investment in India is beginning to impact results.

Earlier this year we announced a significant order from Papua, New Guinea, a country with a small population but the highest rate of HIV infection in the Australasian area. This resulted from smaller early orders, coupled with effective programming and education. Also during the year the Company received an order from New York City for two million units for its AIDS prevention program. The Female Condom is now available at 95 locations in New York City. The Female Condom is now contributing to HIV/AIDS prevention from India to New York City to Papua, New Guinea, a truly world wide contribution and opportunity.

Turning to FC2, FC2 accounted for 40% of unit sales in '08 up from 17% in '07. Conversion to FC2 has progressed steadily. The primary remaining country is the US and purchases by US for international development which requires FDA approval. In January, the Company submitted a PMA to FDA for FC2 which was subsequently accepted for review. The Company has been interacting with FDA since and answering questions and discussing its submission. FDA has inspected the Company's FC2 and Malaysian manufacturing facility. As published in the federal register, a meeting of the FDA will be guiding to -- Advisory Committee has been scheduled for December 11, to review the FC2 PMA. Ordinarily such advisory panels make recommendations to the FDA, it could be a recommendation to approve, to disapprove or that more work is required. FDA isn't required to but usually follows the panels recommendation.

Our reference to stock buyback in '07, in January, we initiated a stock buyback program through today we have purchased 1,142,000 shares, and in calendar '08 alone, we have purchased 832,500 shares or about 73% of the total. During the blackout period, which our blackout period which began September 19, it lasts through the announcement here of our earnings, we put a 1051B plan in action so that you can use to buy shares during a blackout period and it can't be changed. And just before we did that, the market meltdown began to occur and to stabilize the market, there were short sales of certain financial securities were prohibited and companies could buy back up to the trailing four week rather than being limited to 25% of the average volume on a trailing four week basis. We were able to structure our 1051B plan to do that and as a result, during that period, we were able to buy about 287,000 shares of our stock. Based on our Boards view of the stock as undervalued at recent and current levels.

In '08, the Company held 41 meetings with investors in New York, Chicago, Philadelphia, Denver, Atlanta, Miami, St. Louis, San Francisco, Dallas, San Antonio, Houston and Mumbai, India. Given the market meltdown, FHC has performed reasonably well which I think is attributed to our results, the confirmation of earnings that we gave, and the stock buyback program. Compared to one year ago, on Friday, at the close on Friday, last Friday, if you go back one year, the DOW was down 34%, NASDAQ down 42, S&P down 39, and FHC was up 3%. While being up 3% is not great compared to the overall market we performed reasonably well.

Turning to the outlook, the outlook for the Company has never been better. There are six reasons. First, the AIDS pandemic continues to grow so does the need for prevention. Second, alternative prevention products, microbicides and vaccines have failed scientifically due to the technical challenges of developing such products. It is unlikely that these products will be available for years, if ever. This has increased the focus on the only two products that prevent HIV/AIDS transmission through sexual intercourse, male and female condoms. Third, we don't have any meaningful direct competition. We are the only game in town. We have a proprietary position.

Fourth is increased funding. In July, the Congress approved and Bush approved the PEPFAR Act which appropriates $48 billion most of it for AIDS treatment and prevention over five years. In June, the UK appropriated $11.8 million for AIDS treatment and prevention over seven years. Just recently on November 10, the global fund to fight AIDS, TB and malaria announced grants of $2.75 billion of which $1.1 billion is devoted to HIV/AIDS to be used other two years. Fifth is the US political climate. There have been indications by the Obama team in the US that the emphasis on abstinence in US programs will be eliminated and the required use of funds to promote abstinence eliminated. This could lead to more money being spent directly on education and the use of both male and female condoms. Six, we have increased conversion to higher margin second generation product.

I am extremely pleased with the performance and the progress we have excellent growth, increasing profitability and we are a very strong financial position with debt and positive cash flow. One thing I would like to note in this call since it is for the end of '08 is as most investors know, good results usually relate to having the right people. I believe our Company has some excellent people who have had the intellect, industry and commitment to make this work and most importantly work together as a team.

You will hear from me at these session but I am only one member of the team. Donna and Mike are key operating leaders, Mary Ann Leeper, a Senior Strategic Advisor along with Mike, prepared, submitted and will present at the December 11, FDA Advisory Committee meeting on FC2. Donna with Bill Gargiulo, assistant, handles investor relations. In addition to Mike, there are three key members of our UK team based in London that handle finance and manufacturing and quality control technology. [Nitt Pudice, Dick Twitchen, and Graham Zorak]. Our global public sector team which focuses on prevention programming, consists of Katy Pepper, the team leader based in Cape Town, South Africa, responsible for sub saharan Africa, Ester Bayliss, based in Phnom Penh, Cambodia and responsible for Asia. Simone Martins based in Sao Paolo, Brazil and responsible for Latin America and [Tonya Nikari] based in France and responsible for Europe, Eastern Europe and French speaking Africa. In addition in the US we have Janet Lee, our Controller, and Jack Weissman, our VP of US Sales. It is really this team that has made these results possible.

Turning to, briefly to earnings guidance, we first began to provide guidance in for '08 on an annual basis. We will continue to provide annual earnings guidance for '09. We will update this on a quarterly basis. In 2009, we expect unit sales to increase 20 to 25% over '08. This year we will provide guidance for operating earnings to exclude the impact of tax benefits or unusual currency impacts and that we're not trying to predict tax benefits or currency. We're trying to predict how well our operations will do. It is our expectation that operating earnings will increase 50 to 60% over the $3,183,724 achieved in '08. I will take some questions from the group.

Okay. Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from [Andrew Love] of Love Savings Holding Company.

Hi, O.B.

Hi, Andy. How you doing?

Congratulations on an outstanding quarter and year.

Thank you.

Would you remind me what the relationship is between royalty income from what you're doing in India and production and sales for your own account? I am sure you've elucidated that before, but I can't remember how that interrelates.

Well, the product that we sell in I India is being produced in India. We give royalties on those sales.

So we are not producing it. They're -- Hindustan is producing it and they're just paying us a royalty?

We are jointly producing it with them in India, they're paying for it and they're paying us a royalty.

Do we also get a profit from the sales in addition to the royalty?

A modest profit.

I got you.

Thank you. Our next question comes from [George Whiteside] of FWS Financial Services.

I too will add my congratulations to a spectacular financial performance and certainly it is very encouraging to see that in this type of market. My question relates to during the Presidential campaign there was quite a bit of commentary about increasing funding for AIDS and malaria. Do you see this having any impact on Female Health?

Yes. Yes, George, I do. I think the funding that's in place from the US for $48 billion is substantial over five years and I think during the current administration and the some of the people on the womens health care portion of Obama's team, there's going be a focus on women's health and with within that context on HIV/AIDS prevention and treatment. It will impact us in two way, one is the direct sales in the US and the other is purchases by US AID for distribution in the developing world.

And my second question is a financial question. You remarked on utilizing some of the net loss carry forward. I may have missed it, the distribution between US and Britain's carry forward.

In the UK it is 84 -- $85 million tax loss carry forwards. And they don't expire in the UK. In the US we have $63 million federal and state and there is an expiration schedule as you know, in the US for tax loss carry forwards.

Yes. And your earnings were butted up against which of those two net operating losses?

Donna, you might answer that.

The $1.6 million is on a consolidated basis and we aren't breaking out the pieces.

I presume that you are probably trying to take advantage as much as you can on the US side?

That's exactly what we do since they expire.

Yes. Thank you.

Thank you. Our next question comes from [Tom Bodine] of Merrill Lynch.

Hi O.B.

Hi, Tom.

Fantastic quarter and year.

Thanks.

Terrific. You may have answered this in the dialogue, I'm not sure, if you did I missed it. What -- can you give me a sense of what portion of our business was repeat business from existing customers if you will?

Actually, most of it was.

Okay.

If you look at we ship to 90 countries. I think in the prior year we shipped to 77 countries. And within that context, some of the, the shipments are like from US AID or UN FDA directly to South Africa.

Yes.

But what you are really seeing here is increasing volume by current customers.

So for the--.

Maybe a few additional new customers but mostly current customers.

That's good evidence that they work.

Yes.

Thank you very much and again terrific quarter and year.

Thanks, Tom.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from [Jerry Faulkner] of R. J. Faulkner and Company.

Hi, O B. and Donna, are you all how doing? Great numbers obviously. Refresh my memory. In Malaysia you have four production lines; is that correct?

We -- yes.

And each production line is capable of producing approximately 7.5 million units?

Yes. And the one in India is also capable of producing about 7.5 million.

Okay. Are all four of those production lines in Malaysia operating at this time?

Yes, they are, off and on, depending on the volume, the demand, they're all operational.

Okay. So the capacity of 7.5 million per line would be if you were to run basically three shifts a day?

Mike, do you want to make a comment on that?

Yes. As O.B. said we are running all four lines, they're capable of running, but we are not running them 24 hours a day. If we were to run them 24 hours a day and six days a week, the multiple of 7.5 million per line, is correct.

Okay. Okay. Thank you very much. And then one other question, O.B. can you bring me up to speed on how much you have remaining under your Board authorization to repurchase shares?

Yes, we have, the Board has authorized currently for time wise to go through the end of calendar '09, and we can purchase up to 2 million shares, we have purchased about 1.15. So that means that we can purchase about another 850,000 shares before we run out and the Board of course, will consider increasing that or extending the time as we go through this year.

Okay. Thank you very much.

Thank you. We show no further questions at this time. I would like to turn the conference back over to Mr. Parrish for any closing remarks.

I would just like to thank everybody for their support and interest and attending the call. We will see you one quarter from now. Thanks a lot.

Thank you. To access the digital replay of this conference, you may dial 1-877-344-7529. Or 1-412-317-0088 beginning at 1:00 p.m. Eastern time today. You will be prompted to enter a conference number which will be 425576. Please record your name and company name when prompted before joining the replay. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.