Veru Inc (VERU) 2010 Q4 法說會逐字稿

Hello, and welcome to the Female Health Company third quarter 2010 conference call. All participants will be in 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 reflects 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 release, shareholder communication, and Securities Exchange Commission filings. For additional information, the Company urges you to consider viewing its 10-Q and 10-K SEC filings. I would now like to turn the conference over to Mr. OB Parrish. Please go ahead.

Thank you, Amy. Good morning, and welcome to the Female Health Company's fourth quarter and 2010 conference call. Donna Felch, our Vice President and Chief Financial Officer is here with me in Chicago, and Mike Pope, Vice President, UK and Malaysian Operations is participating from our office in London. This morning, we'll review the financial results, key factors involved, the outlook, and then we'll take some questions. As usual, when I refer to years I'm referring to our fiscal year which ends September 30th. At the third quarter conference call, we indicated results for the quarter were down sharply due to delay in the receipt of two large orders. We routinely indicated that there can be significant quarter to quarter variations due to the timing of such orders. We also indicated that while it wouldn't make up for the third quarter, the fourth quarter was proceeding normally. And we expected good results. Results for the fourth quarter were excellent, breaking several quarterly records. Unit sales were up 19% to a record $13.8 million. Net revenue was down 1%, reflecting 100% unit sales of the lower priced FC2 versus the fourth quarter of 2009 when 39% of the unit sales were the higher priced FC1. Remarkably, the cost of goods was down 22% on a 19% increase in volume.

The gross margin was up 20%. It was a record 59% of sales versus 48.5% for the prior year quarter, reflecting 100% unit sales of the higher margin FC2. Total operating expenses, excluding the one-time $1.5 million restructuring charge we took in the fourth quarter of last year, were down 14%. Operating income was a record $3.1 million for the quarter. This is the first quarter in which operating income exceeded $3 million. Excluding the restructuring charge that I just mentioned we took in the prior year quarter, operating earnings were up 50%. The operating margin for the fourth quarter was 39%.

Pretax income totaled approximately $3 million. Based on the results for the year and the outlook, the Company elected to take a tax benefit of $2.5 million versus a tax benefit of $1.6 million for 2009. Net income attributable to common shareholders for the fourth quarter totaled $5.5 million, or $0.19 a share, versus $2.3 million, or $0.08 a share for the fourth quarter of 2009. Net income attributable to common shareholders was up 143%, and earnings per share up 133% for the -- over the prior year quarter.

Year-to-date, as predicted in the third quarter conference call, unit sales were approximately even with the prior year. Net revenues totaled $22 million, down 19%. Due principally to the fact 98% of unit sales were the lower priced FC2 versus 2009 when 49% of unit sales were the higher priced FC1. Our cost of goods was down 34% on approximately flat volume. Gross profit was down 4%, reflecting the third quarter. Gross profit for the year was 58.2% of sales versus 49.1% for 2009.

Operating expenses, excluding the restructuring charge we took in the fourth quarter of last year, were down 9% for the year. Operating income totaled $4.3 million, down 8% from $4.7 million in 2009. As I noted, the Company took a tax benefit of $2.5 million for the year versus $1.6 million for 2009. Net income attributable to common shareholders totaled $6.7 million, or $0.24 a share versus $6.5 million, or $0.24 a share for 2009.

We are very pleased with the record earnings results for the fourth quarter. But I would like to note the third and fourth quarter results are an example of the timing of orders. We had a poor quarter followed by a record quarter. This did not reflect any change in demand. Demand simply wouldn't change that quick and to that degree. It's a matter of the timing of orders.

In reference to tax, the Company has $62 million in US federal and state and $69 million in UK tax loss carry-forwards, which may be used as tax benefits in the future, contingent on the results and the outlook at the time. In reference to cash during the year, the Company paid out $4.1 million in dividends and $3.6 million in one-time FC1 to FC2 restructuring charges for total outlay of $7.7 million and ended the year with slightly more cash than at the end of 2009. We remain debt-free and have $2 million in unused credit lines.

We ended the year with $16 million in shareholder equity versus $13 million at the end of 2009. And I would like to note that based on SEC regulation, in accordance with Sarbanes-Oxley, during the year the Company became an accelerated filer. This required for the first time that the independent auditor's review and opine on the adequacy and reliability of the Company's internal controls is a part of the 2010 audit. The auditors deemed the Company's internal controls to be adequate and reliable. No material weaknesses were identified, and they provided an unqualified opinion.

There were five key factors that impacted 2010 and will impact 2011. During the year, the Company completed its conversion to FC2 and the discontinuation of FC1 manufacturing in the UK. All restructuring charges have now been taken. As we go forward, we'll be comparing FC2 revenues to FC2 revenues from the prior periods. Changes in revenue will, in general, reflect changes in unit sales. Third, the Company converted worldwide to denominate all sales in US dollars. This will minimize future currency impacts. Fourth, a number of FC2 patents issued during the year, including the US patent -- all major patents for FC2 have now issued. Fifth, our Malaysian facility is performing quite well and delivering quality product with increasing efficiency. I should note the Malaysian facility and the Company's manufacturing procedures underwent a full inspection by FDA during the year.

Turning to the future, we believe the long-term fundamentals and demand for FC2 remain strong, and there are six factors on which we base this view. First, HIV-AIDS, as per WHO, remains the number one cause of death worldwide among women 15 to 44 years of age, increasing the relevance of the female condom. Second, the US HIV-AIDS goal as outlined by President Obama is to reduce new infections 25% by 2015. Male and female condoms will play a key role in accomplishing this. Third, studies just published in the New England Journal of Medicine reported encouraging results for the use of a retroviral drug, [Tenovafir], for prevention. When dosage compliance was 90%, the effectiveness rate was reasonably high at 73%. However, due to dosage compliance issues, the overall effectiveness rate was 43%. This represents a substantial advance but will not replace condom usage. However, it may increase the short-term focus on prevention and education. In fact in the study of the oral product, condoms were encouraged to be used, and actually, condom usage increased. This was attributed to the increased education received by study participants.

Fourth, the successful 100% completion of the transfer from FC1 to FC2 permits a full application of resources and our management to capitalize on the opportunity to increase access by women to FC2 on a global basis. And fifth, as you will note in the release and the 10-K, the Brazilian Ministry of Health issued a tender to purchase 10 million nitrile female condoms. We submitted our bid through our Brazilian partner. There are a couple of factors regarding this that I would like to note.

First, this is 2.5 times the quantity requested in Brazil's last tender, reflecting an increase in demand for female condoms in Brazil that is substantial. Second, this is consistent with public statements that the United Nations Population Fund and the Brazilian Ministry of Health have made over the last year indicating they plan to sharply increase the availability of female condoms in Brazil. The sixth factor is our proprietary position. FC2 remains the only female condom approved by FDA and cleared by WHO for purchase by UN agencies such as UNFPA.

Now, turning to the outlook, there will continue to be significant quarterly variations. However given the positive fundamentals, we believe the long-term outlook for growth is good. As stated in our release, we expect first quarter to be somewhat below that of the prior year quarter with sales accelerating during the year. Overall for the year, we expect unit sales to increase 15% to 20%, and operating earnings, excluding the restructuring charges, to increase 10% to 15%. And I would like to note here -- to provide some perspective that the principal challenge for us in providing guidance is the timing of orders that represent a significant portion of the Company's annual sales. For example, if the Company is awarded the Brazilian tender, it would be equivalent to 25% of last year's unit sales. If it were awarded, and this occurred in 60 days, or in 120 days, it would be a very positive event for the Company. However, the impact on our reporting and the timing of that could be quite different in terms of quarter to quarter variations. However, the tender reflects increased demand. Given this or other examples that I could cite, but because of this phenomenon, the figures that I just cited could be impacted positively or negatively. But we do believe that the overall opportunity for growth remains strong. Now, we'll take some questions. Amy?

(Operator Instructions) Our first question comes from Nick [Hallam] at Sidoti & Company.

Good morning.

Good morning.

First question I had is you mentioned how you're expecting the first quarter revenue to be lower than previous years. I was wondering if you could put maybe a little bit of a range on that in terms of how much of a decline we can expect?

We haven't given any public range on it. I just want people to realize that it will probably be less than the prior year. We haven't put a specific range on it.

Okay. And then your 2011 guidance, does that -- I'm assuming that includes the two delayed orders, but not necessarily the Brazilian orders? Is that the way you're looking at it?

If you look at it in total, it includes -- if you look at the volume in total, that we will get a portion of outstanding orders.

The next question comes from Graeme Rein at Bares Capital.

Good morning.

Good morning, Graeme.

On some of these larger orders, are you having to make concessions on price at all?

No, not at this point.

Okay. And I guess -- with these large orders coming in -- the Brazil tender. Is it altering your plans for expanding production capacity in any way? Or are you still comfortable with where you are at this point?

We haven't made a decision at this point, Graeme, to do that. We have a capacity right now of 80 to 85 million units a year. We did about 40 million units in the last year. So we have a ways to go. If that were to continue, it would take us about six months, and about -- I think we quoted earlier about $0.5 million to expand by 7.5 million units a year in those types of increments. It would take us about six months to expand the capacity.

Our next question comes from Peter McMullin at IPC, Inc.

Good morning.

Good morning, Peter.

Is there competition for the Brazilian order? And they certainly like to make things in their own country, vis-a-vis the drilling rigs. Any comments on that. And on the gross margin improvement is at 59%, is that sustainable? Or are you still getting more efficiencies from Malaysia?

Well, in reference to the first question, nobody is manufacturing female condoms in Brazil at this point in time. Could there be competition? There are a number of what I would call some peripheral players around the world that are the [tentheded] of all female condoms and certainly could bid on them. There's no way I could guarantee that they wouldn't get the business, but to date, there doesn't seem to be anybody that's capable of delivering that type of quantity, even if they were to disregard the kinds of WHO clearances and so forth. But it is open to anybody who would want to bid.

The last time they did it, was it a 60-day time frame? Or how long would it take them to make up their mind?

Well, that's one of the uncertainties. The tender document, was a 60-page document in Portuguese, and so it takes quite a bit -- it takes a lot to work through that. They gave us a lot of information, and we think the decision will be sooner rather than later. But they don't say exactly when they're going to make it. Your other question, Peter?

Was the gross profit margin.

Gross profit margin of 59%. Yes, I think that's sustainable. One of the things I mentioned is we're getting increasing efficiencies in our Malaysian facility. We are -- Mike, who is on the phone, is definitely involved and working on cost reductions. And while it's not going to jump from 59% to 70%, it might jump to 60% or 61%.

Okay. I'll get in queue for my last one.

Okay.

Next question comes from Andrew Love from Love Savings and Holdings.

Hello, O.B.

Hello, Andy.

Great quarter.

Thanks.

Is this Brazil -- (lost audio).

I'm sorry. Mr. Love disconnected. We'll go on to Mark Williamson, private investor.

Okay.

Good morning, O.B., and greetings from sunny north Florida.

Good morning to you.

My question was I think already answered on the previous caller. But I just wanted to get a little more clarity, if you had any, around the timing of the Brazilian tender. Sounds like there's really not any competition, based on what you said earlier, but you said sooner than later. Do you think that could be in this next quarter? Are we looking beyond that?

I wouldn't want to predict it. We're happy to issue the tender. We're looking forward for quite a while for them to issue that tender. It occurred. We don't see a lot of competition out there. But it is an open tender, and it's going to happen. But I wouldn't want to predict exactly which month.

That's all I had. Continued success. I like the operating performance, and it's nice to see that margin improvement.

Thanks, Mark.

You bet.

Our next question comes from Andrew Love, Love Savings and Holdings.

Hello, O.B., again.

Good.

The two big orders that were slipped -- that slipped in time and that cratered the third quarter. Are those -- have those ever materialized? Or do you expect them to materialize?

One of those was the Brazilian tender.

I see. Okay. Great.

That materialized pretty much like we thought. We thought it would be much larger than anything they had tendered for before, and it was.

How many units have we been selling each year to Brazil in the past?

Brazil in the past has been -- the last tender was for four million units.

Okay. Great.

The next question comes from George Whiteside, SWS Financial.

Good morning. Congratulations on the quarter.

Hello, George.

You had remarked on gross margins at 59%, and then you had commented -- or there were comments on your growth rate at 10% to 15%, and profitability growing 10% to 15%. That would imply that you're not anticipating a winding up for an increase in the profit margin. That the 59% is pretty well the max that you can achieve. Is that a fair conclusion?

No, I think the question would be more the impact would be more the assessment of the timing of how these things might be received than the impact on margin. And we believe that there's a chance to, as I said before, not to radically increase margins, but we can get more efficiency out of the facility. And we're working on that. Like it could go to, as I said, 60% or maybe even 61%. But not 70%.

Well, and I would understand that. And I think you're acting wisely. You're not over-promising. And if you are able to increase margins, all well and good. That will be reflected in improved bottom line.

We're definitely focusing on lowering the costs of production there. As you know, we just got up to -- just completed the facility and had it up fully running. And now that we've done that, it provides an opportunity to focus on efficiency.

(Operator Instructions) Our next question comes from Jerry Falkner at RJ Falkner.

Hello, how are you?

Good, Jerry.

O.B., just wanted a little clarification on George's question that he just asked a second ago. If your gross margins hold steady or improve a bit, and yet you're increasing -- you're estimating that your operating income will increase at a slower rate than your unit sales increase. Are we assuming a reduction in operating profit margins for the year? And does that mean something is happening below the gross profit line that we should know about?

No, what it really -- well, yes. What it means, Jerry, explicitly, is that if we achieve higher results in 2011, we will have higher incentive payments than we had in 2010 where we really had a poor third quarter. And as a result of that, we didn't have any incentive payments.

Okay. Thank you very much.

We tie those incentive payments into getting good results and not having bad quarters.

I like that philosophy.

The next question comes from Peter McMullin at IPC.

Yes, Jerry actually asked my question, but it gives rise to another one. We have talked about unit sales underlying growth more in the 20%, 25% range. Are we being conservative? Or have you ramped that long-term objective down? Or is just a function of the unknown order or two?

I think it's a function of not being able to predict the timing of some of these things. As I said earlier, Peter, if we're awarded the Brazilian tender, it would be equivalent to 25% of the last year's sales. And that creates a huge swing. If that happened early -- earlier, and some other orders happened earlier, we would be higher. If it drags out, we'll be lower, and that's kind of the thinking behind the forecast.

Not a bad problem.

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

I would like to thank everybody for attending and for your interest and support in the Female Health Company, and we'll talk to you next quarter. Thanks, Amy.

To access the digital replay of this conference, you may dial 1-877-344-7529 or 1-412-317-0088, beginning at 12.30 PM Eastern Time today. You will be prompted to enter a conference number which will be 446393. Please record your name and Company when joining. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.