Veru Inc (VERU) 2010 Q1 法說會逐字稿

Hello and welcome to The Female Health Company first-quarter fiscal year 2010 conference call. All participants will be in a listen-only mode. (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 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 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 communication and Security and Exchange Commission filings. For 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 ever to Mr. O.B. Parrish. Sir, please go ahead.

Thank you, PJ. Good morning to everybody and welcome to The Female Health Company's first-quarter conference call. Donna Felch, our Vice President and Chief Financial Officer, is here with me in Chicago and Mike Pope, our Vice President of UK and Malaysian operations, is participating from our London office.

This morning, we will review the financial results, key events, the outlook for the Company and then take some questions. Whenever I refer to years, unless stated otherwise, I am referring to our fiscal year which ended September 30.

The first quarter was a watershed period for the company; it marked the completion of the transition from FC1 to FC2. The final shipment of FC1 occurred in October. This fully completes the FC2 strategy initiated about five years ago.

Our objective was to increase worldwide access to female condoms by lowering the cost of production and the price while concurrently and significantly increasing margins for FHC. I'm pleased to report that we have achieved these goals.

The completion of the transition impacted first-quarter results in four ways. First, the switch from the higher priced FC1 to the lower-priced FC2 resulted in modest revenue growth on significant unit growth; second, there was a sharp drop in the cost of goods on a significant increase in unit volume; third, the higher margin FC2 resulted in a sharp increase in the gross margin; fourth, in the first quarter, we took the second portion of the previously announced one-time charges, $1.9 million, related to the transition, in this case, buying out the FC1 facility lease. The first portion of the charges for employee redundancy was taken in the fourth quarter of 2009.

With this as background, revenues for the first quarter were up 3% to $5.5 million on a 20% unit growth compared with the prior-year quarter. Remarkably, the cost of goods on an absolute basis was down 21% on a 20% growth in unit volume, not something that is seen very often.

Most important, the gross margin was up 31% versus the prior-year quarter. The gross margin for the first quarter was 58.4% of sales versus 45.7% for the prior-year quarter, reflecting higher margin FC2. FC2 accounted for 93% of the business in the first quarter.

As I just noted, we took the previously announced restructuring charge of approximately $1.9 million, which resulted in total operating expenses of $3.8 million. If you exclude that charge and just look at our ongoing operating expenses, they totaled $1.9 million, actually down slightly, about 3% down from the prior-year quarter.

Exclusive of the $1.9 million restructuring expense, operating earnings totaled $1.3 million, up 190% over the approximately $439,000 in the first quarter of 2009. On the same basis, the operating income margin was 23.2% versus 8.2% for the prior-year quarter.

Now including the $1.9 million charge, the Company incurred an operating loss of about $698,000 for the quarter. In the first quarter, we had a modest $49,000 negative currency impact. However, in the first quarter of 2009, there was a positive currency impact of $1.2 million.

Now when looking at the business, excluding the restructuring charge and the currency -- in other words, what is the real business doing -- net income, excluding the restructuring expense and currency in both years, totaled $1.3 million or $0.04 a share versus about $400,000 or $0.01 per share in the prior-year quarter. If we include the restructuring charge and the currency impacts, the Company posted a net loss of about $698,000 or $0.03 a share for the quarter versus net income, including a $1.2 million positive currency impact of $1.6 million or $0.06 a share in the prior-year quarter.

Now in reference to currency, we have just completed a program to minimize future impacts. Intercompany loans were eliminated or changed to equity. All sales are now denominated in US dollars. This includes sales channeled through the UK. The fact that virtually all sales channeled through the UK are US dollar sales, according to UK rules, permits a company to denominate them as US dollars rather than convert to Sterling and back to US dollars, which is what we were doing.

The only remaining exposure that is significant in any way is the cost, of course, of our staff in the UK, which is incurred in Sterling and translated into US dollars. This is a relatively small exposure. As a result, we do not expect to incur significant currency impacts plus or minus in the future and we are pleased about that because it tends to obscure the real results.

I would like to note that in spite of registering a loss and paying out more than $2.6 million in restructuring charges during the quarter, the Company generated a positive cash flow for the quarter. All restructuring charges were funded internally and the Company remains debt-free. Now in 2009 at the end of the year, we took a tax benefit of about $1.8 million. In 2010 at the end of the year, we will consider taking a tax benefit, dependent upon the results and the outlook at the time. The Company currently has $55 million in US federal and state tax loss carryforwards and $69 million in UK tax loss carryforwards, which do not expire.

We are very pleased with the first-quarter results -- a 20% growth in units and a 190% growth in operating income, excluding the restructuring expense. Our earnings guidelines provided at the beginning of the year noted that, for the year, we expected a 20% to 25% growth in units and a 35% to 40% growth in operating income exclusive of the restructuring charge. And so for the quarter, we certainly exceeded our annualized rate of growth in operating income.

Now in our earnings release last December for 2009's earnings, the Company announced that, based on results on the outlook, it was considering initiating a cash dividend program. End of January, the Company announced that the Board of Directors had approved the cash dividend program with a payment of $0.05 per share to shareholders of record on January 29, payable on February 16.

Based on the closing price of $4.72 a share the day before the announcement, the yield at that time was 4.2%. The Company I think is one of the few companies that provides investors with a dividend and significant growth opportunity. This is possible due to the Company's participation on a proprietary basis in a high-growth, global market and its unique business model. As a result, the Company generates more cash than is needed for growth.

Our business model has three features that minimize the need for cash. First, it isn't capital-intensive. In 2009, we increased FC2 production capacity by 150% or about 50 million units for less than $2 million. Second, virtually all production is against specific orders versus investing cash on inventory that we hope will sell.

Third, the Company doesn't conduct classic advertising and marketing programs, which are expensive and involve risk. The Company works with various public sector groups in providing education, training and the related materials in reference to sexually transmitted infection, including HIV-AIDS prevention. These programs are much less expensive and lower risk than classic advertising and marketing programs.

The Company believes it has a great opportunity for continued growth with FC2 while paying cash dividends. In answers to some questions that we have received, certainly the payment of a dividend doesn't exclude the possibility of acquiring a product or other products if they were identified that could capitalize on our unique distribution system.

In summary, the last 12 months have been remarkable for FHC. During that period, the Company has been included in the Russell 2000 list, listed on NASDAQ, named by Fortune Small Business as one of the 100 fastest-growing small public companies in the US ranking number eight, completed the transition from FC1 to FC2, remained debt-free, initiated a cash dividend program, and most important, made a remarkable contribution to preventing sexually transmitted infections, including HIV-AIDS, improving healthcare and reducing healthcare costs on a global basis.

I believe the outlook is excellent for the following reasons -- the continued growing need for HIV-AIDS and other sexually transmitted infection prevention, the availability of significant public sector funding for HIV-AIDS treatment and prevention, the very unfortunate fact that, as announced last November by the World Health Organization, HIV-AIDS is now the leading cause of death among women 15 to 44 years of age worldwide, and related to this, the increasing relevance of the female condom, the Company's proprietary position, and finally, the completion of FC1 to FC2 transition and the impact on future results.

In summary, we have a proprietary product participating in a growing global market, high gross margins, positive cash flow and no debt. Now in reference to 2010, we maintain our earnings guidance that unit sales will grow 20% to 25% in operating earnings, exclusive of the restructuring charges, 35% to 40%. Now we will take some questions. PJ?

(Operator Instructions). Andrew Love, Love Savings Holding Company. .

Good morning, O.B. Just kind of eyeballing it, it looked to me like your unit sales were flat or down on a linked-quarter basis from the fourth quarter of fiscal '09. I wonder if you could quantify that and comment.

They were probably just about even with the fourth quarter of '09, maybe slightly less. And all that reflects, Andy, is a quarter-to-quarter variation on the receipt of orders. In other words, we get large orders from some of our public-sector customers that are shipped in one quarter and perhaps not in the next quarter.

That's what I figured. And then I would imagine there was some friction as you were shifting over from England and FC1 to Malaysia and FC2.

Some of it. We didn't have any major issues in making that switch.

Okay, thanks.

(Operator Instructions). George Whiteside, SWS Financial.

Good morning, O.B. Congratulations on a terrific quarter. And I was particularly encouraged by your initiation of your dividend policy. And I presume that you'll look at your cash position and your cash flow on a quarter-to-quarter basis. Is there any benchmark that you are going to be using in terms of your cash flow that is available and then establish your dividend in the future at higher or perhaps lower levels?

What we do, and we've been doing this right along, is -- in fact, we, in the daily cash report, as to where we sit -- but we look at the forward looking at the cash required for capital expenditures and cash required from working capital and basically calculate what we think will be excess cash and we have a reserve and consider the dividend on that basis, which is what we did this time and we will do that each quarter. And of course, we will look at -- our intent is to maintain the dividend and if conditions warrant it, at some point, we would increase it.

Very good. My second question is do you intend to embark on any retail marketing in the United States since you do have approval from the FDA?

We are currently having an active program in the public sector in the US with a number of cities and there has been some publicity, there will be some additional publicity coming up on that. But as far as the retail market, we have indicated that we would have and we've been having some discussions with people who are in that space on a consumer basis. And to the extent we are able to identify a partner that would take it on and promote it to consumers on a retail basis, we would do that. And we are having some discussions along those lines now.

So it sounds as though you are actively engaged in establishing such a program, but that's going to be dependent on them having a marketing partner. That way you won't overextend yourself vis-a-vis cash flow.

Right, we wouldn't do that. And also our position in terms of, for example, maintaining retail distribution throughout the country wouldn't be strong since that's not the space we are in. Somebody who has that type of retail distribution in other products in that category would be in a much better position to do it.

Good. Well, I'll get back in the queue and allow someone else to ask questions.

Mr. Whiteside, if you'd like to ask your next question, if you have only one more question, you may go ahead, sir.

All right. I noticed that you had just an outstanding quarter and your 190% increase in operating income was splendid, but I noticed that you did not increase your guidance from your 35% to 40% increase in operating income. Is that a matter of being cautious and conservative? It's certainly reasonable. Or are you providing for what you've described as swings in sales due to orders coming in, some of them not predictable as to time?

Well, that's in part, George, in part the quarter-to-quarter swings and also the fact that, as we go forward and we are getting increasing volume going through the year, you're fighting against a higher and higher figure virtually each quarter. But a lot of it is due to quarterly swings and we look at ourselves as being reasonably conservative.

Well, it's certainly understandable that there would -- as you move along, your comparisons aren't going to be quite as dramatic.

Right, it just doesn't -- numbers don't work like that.

Yes, right. Well, keep up the good work.

Thanks, George.

You're welcome.

(Operator Instructions). We show no further questions at this time, sir. This concludes our question-and-answer session. I would like to turn the conference back over to you, Mr. Parrish, for any closing remarks.

I would like to thank everybody for their interest in attending the conference. I look forward to the one next quarter.

To access a digital replay of this conference, you may dial 1-877-344-7529 or 1-412-317-0088 beginning at 12.22 Eastern Standard Time today. You will be prompted to enter a conference number, which will be 437017. You'll be prompted to record your name and company when joining. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.