Veru Inc (VERU) 2011 Q4 法說會逐字稿

Hello and welcome to the Female Health Company's fiscal year 2011 operating results 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 plans and strategies and assess 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 additional information, the Company urges you to consider reviewing its 10-Q and 10-K SEC filings. (Operator Instructions). Now I would like to turn the conference over to Mr. O.B. Parrish. Mr. Parrish?

Amy, thank you very much. Good morning. Welcome to the Female Health Company's fourth-quarter and 2011 conference call. Donna Felch, our Vice President and CFO is here with me in Chicago, and Mike Pope, our VP UK and Malaysian Operations is participating from our London office. First, I will address some recent key events that have and will continue to impact the Company's results, then cover the financial results, some key long-term demand factors in the outlook, and then we'll take some questions. As usual, when I refer to years, I'm referring to the Company's fiscal year which ends September 30.

2011 was a challenging year due to the volatility in public sector purchasing, including the two delayed orders for the Republic of South Africa and Brazil. Earlier we indicated these delays would negatively impact 2011 and positively impact 2012. Our premise has been that the demand for FC2 is growing and that this volatility has had a short-term negative impact on results. Recent events confirm this. In fact, the most recent event just occurred this morning, in reference to World AIDS day.

I would just like to read you the release that was related to the British Government. To mark the World's AIDS Day, the British government has pledged UBP5 million for the purchase of female condoms to enhance reproductive health needs of women. At today's exchange rate, that's about $7.8 million. That's been committed by the British Government explicitly for the purchase of female condoms. This will be administered by UNFP or the United Nations Population Fund. It reflects at least the British Government's view of the value of the female condom. It's the first developed country to set aside a substantial amount of money explicitly for the purchase of female condoms. Many other countries have put money together that include the female condom, but this is the first one to announce an explicit commitment to female condoms, which we find desirable.

The second recent event is we know that the award of the tender for up to 11 million units for the Republic of South Africa reflected an increase in demand, compared to the last tender, which was for 4 million units. The Company recently announced it had received an order for 5 million units for delivery as soon as possible, reflecting a shortage of female condoms in the Republic of South Africa. Now, in reference to prior tender orders, the Company has received initial and then follow-up orders. We believe that we will receive follow-up orders for the 5 million unit order for the Republic of South Africa during 2012.

The third item is that the Company has been advised in reference to the Brazil tender for up to 20 million units, that an order will be placed through the United Nations Population Fund, UNFP, and is working on the logistics. We don't know the specific amount. It could be a single or multiple orders. We believe that the Republic of South Africa and Brazil's business will significantly impact 2012 results. In addition, the UNFPA, and the USAID, the US Agency For International Development, have both reported an increase in demand, and have increased orders for FC2. This was reflected in part in the fourth quarter of 2011 and will significantly impact 2012 results.

The fifth item is the US city-specific FC2 programs. They're gaining momentum with a significant increase in unit sales. Sixth, reflecting the interest in FC2, the Washington, DC Department of health conducted a cost effectiveness study of their FC2 AIDS prevention program, to determine is it cost effective, is it cost saving. I know that the results were positive, and this study will be published during the next year. We can't reveal the explicit results until publication occurs, but we believe it will be very positive in terms of its impact on the public sector and cost effectiveness in purchasing female condoms.

The final and more recent event is increased distribution. FC2 is now available in 120 countries versus 114 at the beginning of the year. And you might be interested in some of the new countries. They include Saudi Arabia, Iran, Lebanon, Israel, Angola, and Mexico. So you can see that we are getting clearly into the Middle East with FC2. As an example, with increased distribution in the US, in New York City, FC2 is available in 609 locations, courtesy of the Department of Health versus 292 at the beginning of the year. These events reflect the increasing level of demand for FC2 and will continue to do so.

Turning to the financial results, results for the fourth quarter of 2011 improved significantly from the first three quarters, and were below the fourth quarter of 2010 which was an all-time record quarter for FHC. Revenues total $7.1 million, down 9% from the Company's all-time record fourth quarter of 2010. I should note, this did not include any sales to the RSA, or Republic of South Africa or Brazil Departments of Health. I would like to note the gross margin for the quarter was 59.5% of revenues versus 49.2% for the first nine months, reflecting the increase in volume. Also, that it was slightly higher than the 59% gross margin recorded on record sales in the fourth quarter of 2010, which reflects increased efficiency.

The Company posted operating income of $2.3 million for the quarter. While this was down substantially from last year's record quarter, it was a substantial improvement over the $1 million achieved in the first three quarters and provided an operating income margin of 32% for the quarter. Net earnings for the quarter, including a $2.2 million net tax benefit, totaled $4.5 million or $0.16 a share, down 18% from the $5.5 million or $0.19 a share for the prior year quarter. Turning to the full year, revenues totaled $18.6 million, down 16% from 2010, reflecting the delay in orders. Gross margin decreased to $9.9 million or 53.1% of revenues for the year, reflecting the impact of lower volume.

Operating expenses for the year totaled $6.6 million, down from $8.6 million in 2010, which included a $1.9 million restructuring charge. Operating earnings for the year were $3.3 million, down 24% versus $4.3 million in 2010. Net income attributable to common shareholders for the year decreased 20% to $5.4 million or $0.19 a share, versus $6.7 million or $0.24 per share in 2010. This includes the net tax benefit of $2.2 million in 2011 versus $2.5 million in 2010. The Company has $29.7 million of US federal and $15 million state tax loss carry forwards and $68.5 million in UK tax loss carryforwards, which do not expire and which may be used to offset future earnings.

The Company generated $7 million in cash flow from operations during 2011 versus $4 million in 2010, primarily reflecting a change in operating assets. After paying $5.5 million in dividends, the Company had $4.2 million in cash at the end of 2011 versus $2.9 million at the end of 2010. The company remains debt-free and has $2 million in unused credit lines. While 2011 was a challenge, in terms of volatility, we are very pleased that due to the business model, the Company was able to post significant profits, positive cash flow, pay dividends, and remain debt-free.

Now, in addition to the recent events that I just noted, there are some key factors that will further contribute to increased demand, and these include the following. First, the continued feminization of HIV AIDS. HIV AIDS remains the leading cause of death worldwide among women 15 to 44 years of age. More than 50% of all new cases are women. 80% of all new infections are attributable to heterosexual sex. This increases the relevance of FHC's FC2 female condom, in the battle against HIV AIDS. Second, our continued proprietary position, lack of direct competition, and extensive patent coverage.

Third is a difficulty in developing alternative prevention methods. For example, the National Institute of Health sponsored a three-arm study to evaluate the use of a retroviral product to [NovaCare], which is used to treat AIDS, as a preventive in non-infected people. The three arms consisted of tenofovir oral, tenofovir in a vaginal gel, and tenofovir in an oral combination with another drug in preventing HIV AIDS in non-infected individuals. Unfortunately, the tenofovir oral and tenofovir vaginal gel arms of the study were recently discontinued due to the lack of effectiveness. The combination arm continues. No results have been reported to date. Brilliant people and a lot of money has been spent on this research. What it reflects is a very difficult challenge in developing such products.

Fourth is that FC2 remains the only female condom approved by FDA and cleared by WHO for purchase by UN agencies, and UNFPA is the one that is going to administer the [brief funds] I just mentioned. Fifth is the increasing global advocacy for female condoms, and the accessibility by women to female condoms by multiple women's groups throughout the country. And this is influencing investment in and government action regarding female condoms. In terms of the outlook, based on recent events, and the key factors that I've discussed during this call, we believe the outlook for 2012 is excellent, and that the Company will have an outstanding year.

In terms of guidance, as noted in previous press releases, timing issues regarding the receipt and shipment of large orders can significantly impact our Company's results, positively or negatively. The impact during 2011 was significant, illustrating the difficulty of providing specific revenue, operating earnings and operating earnings guidance. In the future, we intend to provide general comments each quarter regarding the Company's outlook based upon information available to management at the time. We believe that the demand for FC2 will continue to increase as governments, public health agencies, donor groups and women's rights organizations seek more effective protection for women in the global battle against HIV AIDS. This will be reflected in continued long-term revenue and earnings growth for the Company.

Regarding the outlook for 2012, we believe that the Company will post record unit sales for the first quarter, which will beat the fourth-quarter 2010 current record and that revenue and operating earnings for the year will improve significantly from 2011. And now we'll take some questions, Amy.

Thank you. (Operator Instructions). Our first question comes from [Graham Rane at Barris Capital].

I just had a couple questions. In regards to the dividend is there a chance that might increase this year if results continue to improve?

The Board will consider each quarter on paying a dividend and whether or not to pay it and whether or not to increase it.

Okay. What about the level of investment required in inventory as sales increase? Do you anticipate more cash going into working capital, or is it a pretty quick turnaround for the inventory?

Well, two things in that. It's a reasonably quick turnaround, and most of the inventory we make is, in fact, for orders, it's not to place in inventory that we hope we can sell. So there's a pretty quick turnaround on it. We don't anticipate any problems with requiring funding or problems with working capital.

The next question comes from George Whiteside at SWS Financial Services.

Congratulations for a wonderful quarter. I think we would describe it as a makeup quarter.

Yes, it was kind of a makeup quarter.

You have commented about margin improvement. I noticed the difference between the decrease in units and the net revenue decrease, and I presume this is reflective of the improvement in the gross margin. Is this a reasonable assumption?

Yes.

And to what degree would you anticipate being able to increase gross margins any further?

Well, one of our projects has been to reduce costs, and we believe we can get some modest improvements in gross margin. I take you back to what I said during the call that our gross margin for the fourth quarter was 59.5%. And in the fourth quarter of the prior year, 2010, when we had a record quarter and higher volume, it was actually slightly less at 59%. So on lower volume, we've gotten a slightly higher gross margin which does reflect some efficiencies, and we think that we can modestly improve that with volume in the future.

Excellent. My next question is related to Brazil. And I believe in previous calls you've indicated that you anticipate increase in orders, and certainly that appears to be being realized. How has the trend developed in terms of Brazil's distribution, ordering, whatever, of male versus female condoms?

Well, two things. One, the trend in female condoms, their last tender, which we got was for 4 million units. This one is for up to 20 million units. And they've deliberately tried to expand their female condom distribution. Initially they only did it in a certain part of the country, and to certain types of commercial sex workers, and now they're expanding it broadly throughout the country. In reference to male condoms, it's still a relatively small percentage of it, in that they use about 500 million male condoms a year, and so we would anticipate over time as they expand this program, continued increases, not necessarily immediately, but it's going to be an increasing product long-term.

(Operator Instructions). And our next question comes from Marc Robins at Catalyst Research.

Thank you. That was a much better quarter. Congratulations. Help me understand how the American cities, US cities, their demand is taken care of. That's not something that -- that goes through, what, a consumer products company, packaging company?

In terms of manufacturing?

Not manufacturing. Packaging and distribution.

We do all of the manufacturing and packaging of it. In the US, we have two ways of distribution. One, there are a couple of clients we have that we distribute to directly, New York City being one of them. And then we have two distributors that actually distribute to a host of small public clinics throughout the country. And they'd be distributing to a tiny clinic somewhere that might buy a small amount that wouldn't warrant our setting up a distribution organization to do that. So those are the two principal ways of distribution in this country.

But staying on that, so essentially it isn't -- it's distributed through these clinics, or I guess that's the same thing in New York City. It's --

For example, if you were another city we're going to buy right now, most of the other ones would buy from one of these two distributors.

Okay. And you named a number of new countries. Saudi Arabia, Iran, Israel, and I missed a couple of other names.

I have that here. It was Saudi Arabia, Anguilla, Iran, Israel, Mexico. That was that. Lebanon was the other one.

(Operator Instructions). We have a follow-up question from George Whiteside at SWS.

There have been, in the release, I believe, there was comment about being able to ship a partial order to South Africa before the year-end. I presume that you are booking revenue at the time of shipping. Is that correct? And will that be reflected?

Yes, we recognize revenue when we ship.

So we can expect --

There will be some recording of South African sales in the quarter.

Excellent. Related to the question about increasing dividend, what is the status of any share buyback, based on the fact that you evidently have a very bright future and anticipate revenue and profits being up in the future?

Well, we currently have a program in effect where we still have remaining about a million shares that we could buy back, and the Board will consider extending that program and keeping it active so that if we wish to buy back we could.

Excellent. Thanks so much.

Our next question comes from Marc Robins at Catalyst Research.

Thank you. I heard the guidance regarding the first quarter. Did you have any overall guidance for the whole year?

Not specifically. What we said, Mark, if you didn't hear it, was that we expect the first quarter to set a new record, and beat the fourth quarter of 2010, which is the current record. And that we anticipated that revenue and earnings for 2012 would be significantly higher than in 2011.

Just higher. Okay. How would you describe the mix of revenues, is the addition of all the smaller countries and or the smaller clinic business, is that helping to offset some of the gross variability you're getting from, say, the timing issues from the larger country orders?

Well, the question is, we don't have any incremental cost in that distribution, because our customers usually pay the shipping charges. But in terms of volume, the whole thing is a question of volume. And to the extent they contribute volume, that's a plus.

No, no, I understand that, but the business seems to be overwhelmed by this Brazilian order or that South African order. And I was wondering if it was less overwhelmed by the fact that you're now shipping also to, say, Israel or Saudi Arabia or the little clinics or something like that.

I think to the extent that you have volume buildup across a broader range of countries, you reduce the impact of any single country. But I would point out, Marc, that the Brazilian order, or Brazilian tender up to 20 million units is about -- would equal, if we got it all, would equal 50% of our best year.

(Operator Instructions). And this concludes today's question-and-answer session. I would like to turn the conference back over to Mr. Parrish for any closing remarks.

I would just like to thank everybody for your support. I think we'll have a great year in 2012. Have a nice holiday.

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