Veru Inc (VERU) 2011 Q1 法說會逐字稿

Hello and welcome to the Female Health Company first-quarter 2011 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 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 Securities 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 over to O.B. Parrish. Please go ahead.

Thank you, Sue. Good morning and welcome to the Female Health Company's first-quarter conference call. Donna Felch, our Vice President and CFO, is here with me in Chicago. Mike Pope, our VP of the UK Malaysian Operations, is participating from our London office. We will review the financial results, some of the key factors involved, our outlook and then take some questions.

As usual when I refer to years, I am referring to the Company's fiscal year which ends September 30.

In our December 3 earnings release and conference call for the fourth quarter of 2010 we noted several key points. First, the fourth quarter of 2010 has set records in terms of unit sales and net profit. Second, that due to the timing of significant orders we expected the first quarter of 2011 to be down from the prior year quarter. Third, that the Brazilian Ministry of Health had issued a tender for 10 million female condoms and that we felt the fundamentals and long-term outlook were strong. The results for the quarter were as expected and we believe the outlook remains strong.

In terms of specifics, revenues decreased 33% to $3.7 million from $5.5 million the prior-year. Gross profit decreased to $2 million from $3.2 million, reflecting lower volume. Operating expenses decreased 59% to $1.6 million from $3.8 million in the prior-year. The prior-year included a one-time FC1 to FC2 restructuring charge of $1.9 million.

Operating income for the quarter totaled $434,000 versus a loss of $624,000 in the prior-year quarter, which included the $1.9 million restructuring charge.

Net income attributable to common shareholders for the quarter totaled $387,000 and $0.01 per share versus a loss of $698,000 or $0.03 per share in the prior year quarter including the restructuring charge I noted.

I should note that while it was a down quarter, the net income margin was 11% of sales, reflecting the profitability of the business.

The Company ended the quarter with a strong balance sheet. The Company generated $2.1 million in cash flow from operations and it remains debt-free. This, coupled with the net margin, reflects the Company's capacity to sustain quarter to quarter variations. Our shareholders equity totaled $15.4 million versus $12.4 million one year ago.

On January 14, the Company announced the payment of a dividend of $0.05 per share on February 7 to shareholders of record by January 31.

The Company has tax less carryforwards of $62.3 million federal and state in the US and $69.1 million in the UK, which did not expire, for use as potential tax benefits. At the end of the year, as we did at the end of 2010, we will consider taking tax benefit based on the results and outlook at the time.

As indicated, the results were consistent with our expectations. The results didn't include contributions from other of the two significantly delayed orders including the tender from Brazil. As you might expect we received a number of requests regarding such delays and the Brazilian tender. Questions such as, does this reflect the lack of command and demand and have we lost the business, is it still active.

First in general in reference to such delays they're usually due to three factors. First, changes in government. Such as, in Brazil there was a change of government in Brazil. This doesn't mean it goes away but there is a bureaucratic change as a result. Simple bureaucracy and politics are other factors that cause such delays. They're usually not due to changes in demand. In fact, as presented in a recent report issued by PEPFAR -- that is the President's emergency AIDS group -- the US government report indicated in some countries there is a shortage of female and male condoms due in part to such delays.

The fact that demand continues to exist and that shortages exist is reflected by the fact that the Company has never lost any significant order that has been delayed. It also, when such delayed orders are received, prompt delivery is usually requested.

So while we have a great deal of positive factors in our business model, such delays that we experience is a negative factor that we live with.

Second in reference to Brazil specifically, there is currently a shortage of female condoms in Brazil. And the tender is still active and we believe that we will be awarded the tender. And of course we will announce it and if we didn't receive it we will also have to announce that.

The basic fundamentals which I mentioned earlier continue to remain strong for six reasons. Just recently, WHO announced that more than 50% of all new HIV cases are now women; 70% of all cases on a global basis and 80% of the US are contracted through heterosexual sex. AIDS remains the leading cause of death worldwide among women 15 to 44 years of age.

All of this increases the relevance of the female condom and the acceptance of FC2.

Our proprietary position, FC2 remains the only available product approved by the FDA and cleared by WHO for purchase by UN agencies for use as an initiative by women that protects against HIV/AIDS, and very importantly, the remarkable interest by US cities in conducting HIV/AIDS prevention programs include FC2, which I will elaborate on in a couple of minutes The related impact in demand by these fundamentals is reflected in the following events.

The Brazil tender which we discussed is for 10 million units which was 2.5 times greater than the prior tender which was awarded to the Company which was for 4 million units.

The increase from previously reported increase in the USAID order which we expect to see increasing unit sales from during the remainder of the year is another factor. As I just noted, the success of the US cities' specific HIV/AIDS prevention FC2 launch programs is another factor. Programs to date have been held or planned in New York City where FC2 is now available, courtesy of the New York Department of Health in 292 locations throughout the city; Washington DC, which resulted in significant positive publicity -- I should note that posters advertising HIV/AIDS prevention and FC2 continue to appear on the inside and outside of Washington DC public buses; Chicago, where AIDS groups now have their own female condom website; and Atlanta.

On Valentine's Day in about a week San Francisco will launch its HIV/AIDS prevention program which includes FC2.

A couple of months after that Houston will be launching a HIV/AIDS prevention program including FC2 and a number of other cities are in various planning stages. We're beginning to see a snowballing effect and an increase within the business in various US cities where HIV/AIDS is an issue.

I would encourage anyone who has an interest in looking at the importance of the female condom and its increasing relevance to visit the United Nations population fund website. This is www.UNFPA.org. I will repeat that. Www.UNFPA.org. Type in female condom.

This independent website provides a comprehensive review of the female condom and its increasingly important global role in HIV/AIDS prevention. I would suggest that you look at that and it will give you a good idea of the increasing demand for this product.

Turning to the outlook, because of the nature of our business we're going to continue to experience quarter to quarter variations as evidenced by pressing the most profitable quarter in our history followed by our profitability with [a down] quarter. Based on the fundamentals however in the key factors noted, we believe the long-term outlook is excellent. We believe we will see the two major delayed orders this year, plus a number of additional orders.

As a result we're maintaining our guidance for the year that unit sales will build up during the latter half strongly and for the year increase 15% to 20% and that operating earnings excluding the restructuring charge will increase 10% to 15%.

Now, Sue, I would like to take some questions.

(Operator Instructions). Nick Halen, Sidoti & Company.

Good morning. First question I had was, I don't know if I may have missed it, I didn't see it in the release. How many units were sold in this past quarter?

We didn't -- we don't reveal the quarterly units.

All right. And I guess can you guys talk a little bit about where we stand in terms of pricing? I guess what that environment is looking right now as opposed to about a year ago. And I guess in addition to that, is that somewhat what is holding up some of these orders that are being delayed?

No. The pricing actually is approximately the same as a year ago. Actually for the average price for the quarter was slightly up over a year ago. But I wouldn't say that is a trend. We expect the pricing to remain approximately the same.

Great, that's all I had. Thank you.

George Whiteside, at SWS Financial Services.

Good morning. You had made mention of the Brazil situation from a political standpoint. How do you --? Do you see any possibility of that being resolved in the near future or should we sort of look to the second half of the fiscal year?

I think you will see the bulk of -- I think, yes, it will be resolved and I think you would likely see the bulk of it in the second half, George. One of the things they've done, which is public, with the new government in reference to healthcare they have established a new department for women's health in Brazil which is a positive event from the standpoint of what we're doing.

But that was -- the mechanism of doing it and establishing it took some time and created some further delay. But basically I think that is a positive.

Excellent. The turmoil in Egypt, do you see any impacts of that in terms of some of your sales?

No. We did have a question though and I don't know if anybody else would have this question but since we -- I will note it. Somebody asked if our product was a petroleum-based product and that we might be impacted if there is a closure in the Canal. Actually FC1, which was polyurethane, is a petroleum-based product.

But FC2 is not so we don't expect any impact from that.

I'm glad that you raised that issue. I wouldn't have seen it being impacted by the Canal so much as pricing of material. So, (multiple speakers).

We don't.

I didn't hear that petroleum-based products have no impact on female health.

No. If we were still with FC1, we might have to say yes.

Exactly, although -- have you totally discontinued FC1?

Yes.

Excellent, thank you.

Marc Robins, HP Securities.

Thank you very much. I'm sorry. Wasn't that three questions? (laughter).

I think you're right.

You have to be careful there. I guess my question is I was kind of interested in the work that you're doing in Washington DC and other parts of the United States. And I guess those are -- I guess those are pseudo government organizations pushing forward the -- or prompting the distribution of the female health condom, FC2.

Has there been -- ? Give us an update if you would please on the commercial aspects what is going on from a commercial standpoint too.

First, I will give you an example of how it works.

In Washington, there was a -- basically a partnership between the Washington DC Department of Health, which is a government organization, with various university groups, various AIDS organizations and women's advocacy groups in Washington. And the MAC Foundation, which contributed some money to AIDS prevention, which is a cosmetic group and female health company and also CVS/pharmacy which agreed to distribute it in their stores in the Washington, DC area.

All of this resulted in an active program for HIV/AIDS among women which featured FC2. That's how the program worked in Washington.

It works a little bit differently in each city but the concept is getting the Department of Health -- like in San Francisco, the program is being directed by the Department of Health. In other cities it could include organizations such as Planned Parenthood, the MAC Foundation again and university groups and the Female Health Company.

One of the things we do in these programs is we provide some samples for them to get going on it, and we also provide training. Education, we send people to the cities and, as a part of the program, train people in these cities which then go out and train other people in neighborhoods. It's like training the trainer. And all of these are picked on the basis of cities that do have HIV/AIDS issues.

Does that give you some idea, Marc?

That does help. I thought in France -- I believe this is right -- in France there might've been a commercial effort to forward the distribution of the female health condom. Anything going on there?

In France, it is doing very well. We have a partner in France that sells it to the public sector; but they also distribute it commercially and on a retail basis throughout the country.

Can you give us a little -- I'm sorry, this is a third question. Can you give us a little better definition of doing well?

Well, I can't -- we don't list the sales by country. But I can tell you that it represents a significant portion of our business.

Thank you. I will get back in queue.

(Operator Instructions). Marc Robins.

I guess my question is then, it looks like there's going to be some pretty significant tightening of federal government budgets. Do you have any thoughts on how that might affect the Company's opportunities?

That's a good question. To date, we have not seen any pullback in reference to AIDS funding. The key element in the US is PEPFAR and the funding for PEPFAR, which is US government money and it impacts principally the US [AID], which distributes product outside of the US from US taxpayer money. We've not seen any cutbacks on that at this point.

We have been concerned for the same reason you had mentioned and at least to date we have not seen a pullback in funding for this particular thing. [Will] that occurs, we will go through the year it's possible. And so far we haven't seen it.

Okay. For my second question I'm not that familiar with Indian and Chinese cultures. Are there opportunities for the FC2 in Asia?

Yes. In fact, we have, in some parts, substantial business. We do have a partner in India where it is slowly developing business but with substantial potential which we think will build over time.

In China, we have not established a partnership yet in China. We would like to but there are of course some issues of operating in China and protecting your technology.

I think that also goes for India as well. Very good, thank you.

George Whiteside, SWS Financial.

I thought your comments that you just made were rather interesting as it relates to budgets. What are your thoughts in terms of your overseas markets and budgets there in view of the turmoil that we're seeing internationally? And certainly we're looking for ways to improve our relationships around the world.

Any thoughts about that?

Well, there are a couple of parts of that. One is the US because the PEPFAR money is really spent for distribution of product outside of the US and we haven't seen any cutback there.

Another major funder is the British government. Yet in spite of substantial cutbacks in their budget, as you've read about, there hasn't been any cutback on their support of HIV/AIDS prevention to date that we're aware of.

We haven't seen any significant cutback in funding in UNFPA to date. So maybe one of the issues is that funding HIV/AIDS prevention actually saves money in the long term and also tends to help people in countries where anarchy may develop when people are suppressed.

So I can't say it won't happen. But so far we have not seen any cutbacks on budgets for it.

That is certainly encouraging and one would think that there could be sort of a geopolitical component to it in terms of generating goodwill.

Definitely. I think that and the fact that you save money and that you are doing something that isn't suppressing people, it is giving them an opportunity may be one of the reasons it hasn't been cut back.

Excellent, thank you.

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

Thanks very much. I would just like to make one final comment. That one of the other motivating factors here in reference to both budgets and to the use of female condoms is the gender equality issue that is going on all over the world. It is receiving strong support from women's advocacy groups and from a political perspective.

I'll just leave that with you and thanks very much for your support and we will talk to you next quarter. Thanks.

To access the digital replay of this conference you may dial 1-877-344-7529 or 1-412-317-0088 beginning at twelve-thirty Eastern time today. You will be prompted to enter a conference number which will be 447806. Please record your name and company when joining.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.