Veru Inc (VERU) 2009 Q4 法說會逐字稿

Welcome to the Female Health Company fourth quarter fiscal year 2009 conference call. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

The statements made on this conference call, which are not historical fact, are forward-looking statements based on 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 economic 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 communications and Securities and Exchange Commission filings. For more additional information, the Company urges you to consider reviewing its 10-Q and 10-K SEC filings.

I would now like to turn the conference over to Mr. O.B. Parrish. Please go ahead.

Thank you very much, Nikki. Good morning and welcome to The Female Health Company's fourth quarter and full year 2009 conference call. Donna Felch, our Vice President and Chief Financial Officer is here with me in Chicago. And Mike Pope, our Vice President UK and Malaysian operations, is participating from our London office. To begin, I would like to note that tomorrow, December 1, is World AIDS Day. Sadly, the United Nations Joint Program on AIDS, or UNA, have recently reported that more than 25 million people have died of AIDS worldwide. And another 33.4 million are now living with the disease, up from 29 million in 2001.

UN AIDS estimates that there will be 2.7 million new infections in the coming year or about 7,500 new infections per day. And earlier this month, the World Health Organization, or WHO, released the tragic statistics that HIV/AIDS, on a worldwide basis, is now the leading cause of death among women between 15 and 44 years of age. Unfortunately, HIV/AIDS has become devastating for women. Women now make up almost 50% of all cases, with heterosexual intercourse the most common form of transmission. This only increases the relevance of the female condom and its potential contribution to prevent HIV/AIDS and reduced healthcare costs.

Now, we'll review the financial results, 2009 accomplishments, our outlook, provide some earnings guidance for 2010 and take some questions. Now, whenever I refer to years, unless I note otherwise, I am referring to our fiscal year, which ends September 30. As an introduction, I would like to review the FC1 to FC2 transition and how it impacts results. It's a little complicated and I think it's important that we do this prior to going through the results. It will make them more meaningful.

At the beginning of the year, the Company announced that its goal was to transition, worldwide, 100% to FC2. This, of course, was contingent on receiving FDA approval for FC2. We also indicated that given FDA approval, in transition to FC2, there would be certain one-time charges, assuming that production of FC1 in the UK was discontinued. FC2 was approved by the FDA on March 10 of this year and this resulted in the following action. Immediately after FDA approval, the Company announced that it would expand its FC2 production in Malaysia by 150% of capacity. This results in a total FC2 capacity of 80 million to 85 million units on an annual basis. This was completed in September.

And currently, the Company plans the discontinuation of FC1 production in the UK, assuming key customers switch to FC2. There were two key factors and related one-time charges involved. First, in accordance with UK labor law, the Company announced to its UK employees the possibility of the discontinuation of FC1 production. And, with its employees, began the required consultation and evaluation process. Subsequently, with the switch of two additional large customers to FC2, the decision was made to discontinue FC1 production in the UK. The resulting termination of employee contracts resulted in the Company making statutory termination and redundancy payments. The Company incurred a one-time charge of approximately $1.5 million for these redundancy payments and related expenses. This was accrued as a restructuring charge in the fourth quarter and it was completed in November and funded internally.

A second part of the FC1 to FC2 transition was the leased London manufacturing facility. The lease had seven years to run at a total cost of approximately $5 million over this period. Given the global economic conditions, a sublease wasn't possible. However, the Company was able to negotiate an attractive lease buyout arrangement with the facility owner, who wanted to reconfigure the building. The Company will stay in the facility for a minimum of six months and up to one year at the current rent.

It also agreed to buy out the remaining lease with two payments. The first for $987,000, which was made in November. And a second for $493,000, which is due by February 2. The arrangement to pay approximately $1.5 million eliminates $4.3 million in future obligations for future payments. After deducting the buyout payments, this results in a positive cash impact over the period of approximately $2.8 million. This lease buyout and related expenses will result in a one-time charge of approximately $1.7 million, which will be taken in 2010.

Now, while the Company has discontinued FC1 production in the UK, it has not discontinued its business in the UK and it will remain -- it will maintain a significant presence in that country. The net result of all this is that the Company is now 100% FC2, with the production capacity to more than meet demand. The one-time charges have been identified and have or will be funded fully internally. So, in reference to the 2009 financials, please note the $1.5 million one-time restructuring charge attributable to the employee redundancy.

Turning to the numbers, Donna, Mike and I are delighted to share record financial results with you. Net revenues for the quarter increased modestly or about 1%. This was attributable to the continued switch from higher priced FC1 to the lower priced FC2 and the temporary limitations of FC1 production, with some customers still transferring to FC2 during the quarter. You may recall that we elected not to invest in the expansion of FC1 production capacity due to its probable discontinuation of an FDA approval of FC2. Demand by some FC1 customers, particularly the US Agency for International Development, increased significantly during the year. This has now been resolved and all customers, including USAID, have switched to FC2, eliminating any future [officials.]

Gross profit was up 9% on a 1% revenue increase. Excluding a $1.5 million restructuring charge, operating earnings totaled $2 million for the quarter, up 66% over the prior year quarter. I would just like to note that, excluding that restructuring charge, there was a 66% increase in operating, on a 1% revenue increase, which said something about both expenses and cost of goods. If we include that charge, operating earnings were $0.5 million and down 56% from the prior year quarter. In the fourth quarter, we had a currency gain of $92,000 versus a gain in last year's quarter of $893,000. Now, based on our 2009 results and the outlook, we took a tax benefit of $1.6 million in the fourth quarter versus a benefit of $219,000 in the prior year quarter. In other words, we took one benefit at the end of the year in 2009. Last year, the first year in which we took benefits, based on normal practice, we took the benefits quarterly.

Net income attributable to common shareholders was $2.3 million for the quarter, including the restructuring charge or $0.08 a share -- equal to the $0.08 a share for the prior year quarter, in spite of that restructuring charge. Excluding the restructuring charge, debt earnings attributable to common shareholders was $3.8 million, or $0.136 a share, up 70% over the $0.08 per share fourth quarter 2008 figure. Net revenues for the year were up 7% to $27.5 million, reflecting the shift to lower priced FC2. Unit sales increased 16%. As noted earlier, unit sales and revenues were impacted by limitations in FC1 production capacity and increasing demand for FC1 by customers such as USAID. Had we had not had that limitation on FC1, unit sales would have been up significantly more than 20%. Also, as noted, this is now fully resolved with the switch of all customers to FC2. Gross profit increased 26% on the 7% revenue increase, $13.5 million.

Now, excluding the restructuring charge, operating earnings were up 95% to $6.2 million, exceeding our earnings guidance. At the beginning of 2009, the Company provided guidance that operating earnings would increase 50% to 75%, and exclusive of any restructuring charge over the $3.2 million reported for 2008. In our third quarter 2009 earnings release, the Company increased its guidance, indicating the operating earnings would increase 60% to 85% over 2008. With the actual increase coming in at plus 95%, as I just mentioned. Now, even including the $1.5 million restructuring charge, operating earnings were $4.7 million, up 48% over 2008.

On a full-year basis, the Company reported a $276,000 positive currency impact in 2009 versus a positive impact of $967,000 in 2008. As noted earlier, we took a $1.6 million tax benefit for 2009 versus the full year $800,000 tax benefit for 2008. The Company has unused tax loss carry-forwards of $55 million in the US and $56 million in the UK. And I should note, the tax loss carry-forwards in the UK do not expire. Net earnings attributable to common shareholders for the year, including the $1.5 million restructuring charge, were $6.5 million of 34%, over $4.8 million in 2008. I should note, that our net come income margin, including that restructuring charge, was 23.5% versus 19% in 2008.

Earnings per share for 2009 were $0.24 per share, up 33% over the $0.18 per share figure for 2008. If you excluded the $1.5 million restructuring charge, net earnings attributable to common shareholders were $8 million or $0.29 a share, up 61% over 2008. The Company generated $5.8 million in cash from operations in 2009. And we ended the year with $2.9 million of cash versus $2.1 million at the end of 2008. And this, of course, included CapEx expenditures and about $3.8 million for stock buyback costs. As I noted, all restructuring charges will be funded internally.

The Company's cash position as of today, including the fact that, in terms of the lease buyout and the redundancy payments, we have funded about $2.1 million to date in the restructuring payments. Our cash position today is $4 million. The Company remains debt-free and has $1.5 million in unused credit lines. As noted in the press release, based on the Company's outlook, strong cash flow and completion of FC1 to FC2 transition, the Board is considering initiating dividend payments to shareholders in calendar 2010. Shareholders equity at the end of 2009 increased to $13 million, from $9.7 million at the end of 2008.

2009 was a year of some remarkable accomplishments for the Company. We did get FC2 approved and we had a 100% transition from FC1 to FC2. The Company was listed on NASDAQ. It was added to the Russell 2000 Index. It was named by Fortune as one of America's 100 Fast Growing Small Public Companies. And ranking number eight among all companies and number one among healthcare companies listed. FC2 patents issued in Germany, South Africa, Canada, Australia and the People's Republic of China and are pending in the US, Japan and other countries. Our stock price increased 66% from $3.05 a share on September 30, 2008 to $5.05 on December 30, 2009. Versus a decrease of 10.5% for the Dow, 9% for the S&P, and a gain of 2% on NASDAQ during this -- during the same period.

I believe that the outlook for the Company has never been better, for six reasons. First, the HIV/AIDS pandemic, unfortunately, continues to grow. Second, the feminization of AIDS. As noted earlier, it is now the leading cause of death worldwide for women 15 to 44 years of age. Three, the 100% transition to FC2, increasing demand for female condoms and replacing a lower gross margin product with a much higher gross margin product. The figures that I went through, without the restructuring charges, suggest the kinds of margins that we will be able to have with us, say to 100%.

Four, the lack of alternative prevention methods, such as a vaccine or microbicide. Many scientists believe such products are years away, if ever successfully developed. Fifth, we don't have any meaningful direct competition. And sixth, is funding. During the last 18 months, over $60 billion have been appropriated by the US, the UK, and Global Fund for HIV/AIDS for treatment and prevention, over approximately five to seven years. I'm very pleased with the Company's performance, progress and outlook. Securing FC2 FDA approval, expanding Malaysian production capacity, discontinuing FC1 production in the UK and switching all customers to FC2 within a 12-month period. I believe, reflects the remarkable individual talent of our people and particularly their exceptional capacity to work together as a team in terms of execution.

In 2010, we expect unit sales to increase 20% to 25% over 2009. And for operating earnings to increase 35% to 40% over the $6.2 million recorded in 2009, excluding any one-time restructuring charges for both years. I should note, this also excludes any tax benefit in 2009. As I mentioned, we took $1.6 million tax benefit in the fourth quarter of [2010] based on the results and outlook at the time. The Company will consider whether or not to take a tax benefit for 2010 at the end of that year. And now, I'd like to turn it over for questions, Nikki.

Thank you. (Operator Instructions) Our first question comes from Andrew Love of Health Savings Holdings Company.

Good morning, O.B.

Good morning, Andy.

Congratulations on another excellent quarter and year.

Well, thanks very much.

I was a little unclear on this charge. You had indicated there would be an additional charge of $1.7 million net of deferred gain of 650. Is the $1.7 million after the 650, or does the 650 come off the $1.7 million?

It's net of the 650, Andy.

So, there will be another $1.7 million coming?

Definitely.

Okay, thank you.

Our next question comes from Marc Robins of the Robins Group.

Thank you. Congratulations, O.B.

Thanks, Marc.

I missed this. How much -- how many shares did you buy and what was the expenditure of cash on the shares?

During the year, we spent about $3.8 million and we purchased a little bit more than 1 million shares with an average price of $3.82.

And has this run up the authorization -- run out the authorization or -- and is there -- ?

No, the authorization currently is, we can purchase up to 3 million shares, which is about another 800,000, Donna?

Yes.

We have about 800,000 we could purchase and that lasts until the end of 2010.

Very good, thank you.

Our next question comes from George Whiteside of SWS Financial Services.

Good morning.

Good morning, George.

I've got a couple of questions. You had commented about having made the transition from FC1 to FC2. And therefore, I presume you'll need to pin it on the Malaysian capacity, which you've increased during the past year 150%, if I recall correctly. Didn't you mention that you had a certain amount of, not excess capacity but in other words, you can grow your sales with the present Malaysian capacity to a certain extent? And I'm wondering if you could amplify on that?

Yes, sir.

And do you expect that you'll need to expand that capacity in the coming year?

Our current capacity is 80 million to 85 million units on an annual basis. I don't believe we'll have to expand it during fiscal 2010. If we did, it would be a nice issue, a nice problem. If -- we can expand it. It takes about six months from the time we make a decision to where we can expand it. And incrementally, about 7.5 million units a year in terms of capacity, for about less than $0.5 million for that type of capacity. But right now, we could double our sales next year and we'd be okay.

Excellent. My other question relates to an item that appears in the news on a regular basis currently. And that is the value of the dollar versus other currencies. And are you doing any hedging or do you contemplate taking any action to offset any concerns that you might have in that area?

Well, we have -- we are now, with FC2, all of our sales are denominated in US dollars. We still have a business, obviously, in the UK. And we have a facility in Malaysia. So we have the Malaysian ringgit, the sterling and the dollar. And I'd just like to ask Donna to make a comment on what we are we're doing in terms of denominating our sales in the UK.

Yes, starting in fiscal 2009, because the majority of the UK entity's transactions will be denominated in dollars, the UK will also be reporting results in dollars. So, we will be sheltered from some of the FX swings that we've seen in the past years between sterling and US dollars. And the ringgit, against the dollar -- ringgit tracks quite steadily against the US dollar. So, we think our currency exposure here is greatly diminished.

In other words, we're going to be able to actually -- we'll be presenting UK results in dollars.

In dollars.

I presume that your sales are actually in dollars or were and will be in the UK.

Yes.

However, any expenses that you have would be in pounds -- or rather euros or pounds.

Yes, and we would have -- we won't have any cost of goods issues since we're not manufacturing there. We will have administrative expenses.

Right.

Fine, thank you. I'll let someone else ask a question and then, I'll get back in the queue. Thank you.

Thank you. (Operator Instructions) Our next question comes from Tom Bodine of Wells Fargo.

Hi, O.B. It's actually Gary Baker. How are you doing?

Hi, Gary.

I've got a quick question on unit sales. Obviously, you even had an increase in unit sales over 2008 for 2009. Do you know what the blend of FC2 to FC1 in 2008 was and also in 2009?

Yes, approximately in 2008, it was 40% FC2. 2009, it was 51% FC2.

And in 2010, then, with unit sales being I assume 100% FC2, do you see unit sales still growing?

Unit sales?

Yes.

Yes, I would see substantial growth in sales in 2010. In other words, we won't have any limitations of FC1 production.

Right. But that's what I'm saying is -- and this is what my question is ultimately. The buyers of the units, do they usually buy in dollar increments or unit increments? Meaning, they'll buy 50,000 units or do they buy $50,000 worth?

The orders we get are for units. And of course, there is dollars associated with it but they order -- most of the orders we get are for units.

Okay, thank you.

And we have a follow-up question from George Whiteside of SWS Financial Services.

O.B., with your total production being FC2, you have higher margins, although that could result in lower gross, if there is stability in terms of sales. And I know that that's not going to be the case. You will accelerate your sales. Are you seeing, in the case of a number of your customers, ordering larger quantities than they did previously? And will that result in those customers earning further price discounts or concessions?

In reference to the large customers, we, in fact, have seen an acceleration in the quantities and the timing. For example, USAID is one of our largest customers and they have increased the quantities they've been buying. And they have accelerated the numbers of orders of any one given period. And that, of course, was one of the issues with the FC1 production limitation in '09. We have -- we just got an order from them, I think, for [12 million] units was their last order. And depending on the amount, there could could be some additional price concessions but I don't see a lot of them.

Good.

I think the margins are going to stay -- as we've said before, the margins on FC2 are in the very high 50% levels.

My other question is in relationship to your UK operations. I presume that one of the reasons that you'd want to maintain that is to preserve your NOL in the UK. And as you've explained rather well, now and previously, that does not expire, unlike the US NOL.

You are absolutely correct.

Well, it's sort of a prelude. What kinds of activities will you engage in, in the UK? And I presume you want to maintain that presence.

We have a very real presence in the UK. We're not doing it solely to maintain the tax loss carry-forward. In the UK, we have basically all of the technology that's related to manufacturing and the key people that have put that together under Mike Pope and his team. And that will be extremely important as we move forward. One of our projects is continue to reduce costs in Malaysia. That will be one of the key projects we're working on and that technology could come from anywhere in the world. They're also responsible for managing what we call our support group. It's a group of six or seven people around the world that help public sector groups stage prevention programs that include the female condom. So, there are a variety of tasks in the UK that are very real jobs and we'll continue to do that from the UK.

So, what will you do in terms of accommodating that staff as far as space is concerned? I presume that you'll locate some space that is suitable in size for that staff and therefore, will not incur any remarkable costs.

Yes, well, we have the manufacturing facility that we leased, was about 40,000 square feet. And for the space we will need, I would say it might be 5,000 or 6,000 square feet. So, it will be substantially less expensive.

Well, it's certainly reasonable that you have a presence in the UK. I know that many companies do that in regard to research, development, marketing, other activities like that. Thank you.

Our next question comes from David Sandberg of Red Oak Partners.

Hi, O.B. and Donna. Great quarter.

Thanks, David.

I hope it's okay, I figured we're at the end here, so I'll pep you with some house cleaning questions. You tell me when it's too much. I wanted to know, what do you expect -- now that we've done the capacity expansions, what do you think that the 2010 CapEx might look like?

Well, I would say that, as I mentioned earlier to one of the questions, we could double sales during the year without expanding capacity from '09. So, I would look at the CapEx portion of that as only being what you would have a normal CapEx additions in maintaining a facility. That wouldn't be like -- unless we have just a remarkable swing, we shouldn't have any major CapEx expenditures.

So, what is the maintenance CapEx for this business right now, given the capacity you have? Are we talking $1 million or less, more than that?

I would say maybe $200,000, maybe $300,000.

Okay. And I think someone asked about the unit mix for the years. Do you guys have that for this quarter? I'm curious, in this quarter, how much of it was FC1 versus 2?

I don't have the fourth quarter. I have the year, which is 51% versus 40%.

Was that skewed -- in this quarter, was it skewed towards more FC2 by the end of the year?

Slightly more, as I recall.

And what about going forward now? Are we at a point now where we're still going to be shipping some real units in FC1 or when I'm forecasting 2010, am I still thinking we might have 20% of 2010 in FC1?

I'll tell you, we can be very explicit on that. In the third quarter, we made our last shipments of FC1 and there was a total of about 650,000 units and that's it.

Okay, so all 2010 shipments should be in FC2?

Except for the 650,000 units I just mentioned.

Got you. Okay, great. On the NOL's, so to rehash what the prior caller asked, so despite your move-out, the NOL's should be good in both the US and in the UK? The moves and changes don't effect those.

Well, it's our belief in the UK, that we're maintaining a business there. And we've very carefully gone through the entire program and believe we'll be able to maintain those NOL's. In the US, they expire, as you know.

Right. And what is the rough amount? Is it still around $150 million combined?

No, it's $55 million in the US, $56 million in the UK. And of course, that goes up and down based on the exchange rate.

$111 million, okay. And the $12 million -- 12 million unit order you guys got from John Snow, I think that's funded by USAID. Is that John Snow division the same group that typically, or lease last last year that bought, I think was a $6 million or $8 million unit order?

Yes, it's actually -- the USAID contracts with them to do their purchasing for them. And so, they're the ones who we deal with in terms of the actual purchases.

And the timing of that press release was right around, I think, quarter end. Was there much of that order shipment in the fourth fiscal quarter?

No, not a lot of it. A small amount but not a lot.

And then, can I assume, when you mentioned today's cash is $4 million, which is up from quarter end and I believe you guys also had some of the restructuring costs paid --?

About $2 million.

The reason the cash is then up so much is because we -- not only regular business but also parts of that order?

Yes, you're right. You'd have to say it was due to the total business but it's certainly on parts of it.

Okay. And then, two more things here. India, can you guys give me an update and tell me if you do expect growth in 2010?

Yes, I think we expect growth. The Indian government has moved very assiduously but slowly in terms of expanding their program. And we expect -- I wouldn't expect to get triple the business or something but I would expect it to grow.

Okay, and then lastly, you guys have mentioned considering a dividend. Is -- are continued stock repurchases somewhat off the table and you guys have decided a dividend might be the better way to return capital at this point?

I wouldn't say we've taken it off the table. We're looking at -- the Board has been looking at different options and as you know, we're generating substantial cash. And so, they aren't necessarily mutually exclusive. We'll make that decision probably in January or February.

Okay, and I appreciate that. And I know that all of you own quite a bit of stock, so you're aligned with shareholders. I did want to give my input, which is that I think, given there's still so much growth of the Company, that even with the valuation of $140 million to $150 million enterprise. And per your guidance, it would be $8.5 million in operating income, I believe higher, that's a 5.5% to 6.5% free cash flow yield. I think that a buyback would still be highly accretive. So, I understand either way is good option but I did want to pass that along.

Yes, we're happy to have those options.

Listen, I appreciate it. And great quarter again. Thank you.

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Parrish for any closing remarks.

Yes, thank you for your interest and attendance and support.

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