Veru Inc (VERU) 2012 Q1 法說會逐字稿

Hello and welcome to The Female Health Company first-quarter fiscal year 2012 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 facts are forward-looking statements based upon the Company's current plans 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 Mr. O.B. Parrish. Please go ahead.

Thank you, Amy. Good morning, 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 the office in Chicago. Mike Pope, our Vice President UK and Malaysian Operations, is participating from our London office.

First I will address some recent events that have and will impact our Company's results, then cover the financials, long-term demand factors on the outlook and then we'll take some questions. As usual, when I refer to years I am referring to the Company's fiscal year which ends September 30.

In terms of recent events, during 2011 we indicated that while basic demand for FC2 was increasing, two delayed orders for the Republic of South Africa and Brazil would negatively impact 2011 results, but positively impact 2012 results. Both orders were received in the first quarter and, as predicted, will impact 2012 results.

In November the Company received an order for 5 million FC2 units from the Republic of South Africa for delivery as soon as possible. Shipments began in December. We believe we will receive additional orders from the Republic of South Africa during the year.

Also in December the Company received an order from the United Nations Population Fund from Brazil for 20 million FC2 units, the largest single order in the Company's history. Shipments will begin in March and be completed within 2012 -- fiscal 2012.

In addition, I should note the orders for other countries increased. Also in response to our city specific programs in the US, including extensive training and education, there was a significant increase in US sales.

Turning to the first quarter, as predicted the Company posted record unit sales for the first quarter, up 150% over the first quarter of 2011. Net revenues, also a record, were $8.6 million, up 136% over $3.7 million in the prior year quarter. Gross profit totaled $5 million or 58.1% of sales, up 149% over the $2 million or 55.2% of sales posted for the prior year quarter. The improved margin reflects a significant increase in volume.

Operating expenses increased 41% to $2.2 million. This increase is primarily attributable to the accrual for year-end incentive payments due to the probable achievement of the Company's unit sales and net income goals compared to the prior year when the accrual was minimal.

Operating earnings increased more than six fold to $2.8 million compared to $400,000 in the first quarter of 2011. Net earnings attributable to common shareholders increased more than six fold to $2.7 million or $0.09 per diluted share from $400,000 or $0.01 per diluted share in the first quarter of 2011.

During the quarter the Company posted $1.9 million in cash flow from operations. The Company had $4.6 million in cash at the end of the quarter versus $3.6 million one year ago. As of yesterday the Company had approximately $5.2 million in cash. And as announced earlier, on February 9 we will pay our ninth consecutive quarterly dividend of $0.05 a share.

The Company remains debt-free and has $2 million in unused credit lines. At the end of the quarter shareholders' equity totaled $17 million versus $15 million one year ago.

In reference to tax loss carry forwards, at the end of each year, based on the results of the year and the outlook at the time, the Company considers taking a tax benefit. In the fourth quarter of 2011 the Company took a tax benefit of $2.5 million for the year. We'll consider taking a tax benefit for 2012 at the end of this year.

The Company has US tax loss carry forwards of $15 million state, $29.7 million federal, and a UK cash loss carry forward of $68.5 million for use in offsetting future income. I should note that tax loss carry forwards in the UK do not expire.

In summary, we are delighted with what we believe are outstanding first-quarter results. Most important, the results and recent quarters reflect the increasing demand for FC2 and, in turn, its contribution to HIV/AIDS prevention, women's health and the long term reduction of healthcare costs.

Now there are six key factors that form the basis for a strong first-quarter performance and/or will result in increasing demand for FC2 in the future.

First is the increasingly important feminization of HIV/AIDS. HIV/AIDS is a 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 in women are attributable to heterosexual sex.

Second, directly reflecting the feminization of HIV/AIDS is the increasing advocacy of independent women's groups worldwide for more public-sector investment to provide women with increased access to female condoms.

Third is the Company's proprietary physician based on regulatory approvals, patents, manufacturing capacity and [tactical] know-how.

Fourth is the difficulty, the technical challenge in developing alternate prevention methods. To date all microbicides for which studies have been completed have failed to demonstrate meaningful effectiveness. Products for the oral treatment of HIV/AIDS have been tested for use in prevention in healthy people.

Due to difficulties of dosage compliance, degree of effectiveness and potential side effects when used on healthy people, it is likely to be years, if ever, before such products become broadly available. Today female and male condoms remain the only currently available products to prevent sexual transmission of HIV/AIDS.

Fifth, FC2 is the only FDA approved product for use as initiated by women that can protect against sexually transmitted infections including HIV/AIDS and unintended pregnancies.

Sixth is the public sector funding. As you probably know, the world economic situation, which is difficult, has raised questions regarding the availability of public sector funds and the Global Fund did announce some decreases in donations. Over two recent events indicate funding is now increasing.

First, last week Bill Gates announced that his foundation is contributing $750 million to the Global Fund to fight HIV/AIDS, tuberculosis and malaria. Second, as announced earlier, the British government indicated it was providing the United Nations Population Fund with GBP5 million, or about $7.8 million, explicitly for the purchase of female condoms. These donations reflect the fact that in the long term the treatment and prevention of HIV/AIDS will reduce healthcare costs.

Turning to the outlook, when we released the results for 2011 in December -- last December, we noted that timing issues regarding the receipt of large orders in our business can significantly impact results for a given period, and certainly events in 2011 highlighted the difficulty in meaningfully providing very specific revenue and operating income guidance for a given period.

As a result, the Company indicated then it will provide general comments regarding the outlook at the end of each quarter based on the information available at the time.

Regarding 2012, based on the record first-quarter results and the strongly increasing demand for FC2, we believe the outlook for 2012 is excellent. We expect revenues and operating income for 2012 to significantly exceed the results for 2011. Now Amy, we'll take some questions.

(Operator Instructions). Nick Halen, Sidoti.

Good morning, guys. So sequentially the gross margin was down on -- I mean, it was a little over a 20% increase in sales. Was there any one-time expenses in this quarter that we saw?

No, simply a matter of mix.

It was just -- okay, so it was (inaudible). Okay, so there wasn't anything -- any one-time (multiple speakers)?

(Multiple speakers).

Okay, all right. And then just -- I know typically you don't, but is there any way you can give us some guidance on how much of the order that was put in place by South Africa, how much of that was actually shipped in the quarter?

No, we haven't allocated (inaudible). All I can tell you is that the order will be completed during the course of this quarter.

Okay. So then whatever you had -- whatever was shipped in this last quarter will be finished in this quarter and that will be the end of it?

For the 5 million unit order.

Yes, for the 5 million -- okay. All right, great. Thanks, guys.

Sure.

Andrew love, Love Savings Holdings.

Good morning, O.B., and congratulations on an excellent quarter. I was just curious on that British government announcement, when will we be shipping, do you figure, on that order?

Well, what the British government did, Andy, was to say they were giving the United Nations Population Fund $7.8 million to be used only for the purchase of female condoms. That wasn't an actual order at the time and so you UNFPA will use that money in buying -- it gives them money to buy female condoms during this year as they go ahead.

So we don't have any firm (multiple speakers)?

We don't have a specific order from them except I can say that our -- along with the other things our sales with UNFPA have certainly increased.

And are we doing any good in India or is that just a perpetual manana situation?

I don't think -- we have had no significant progress there at this point.

What's the problem there?

I think it's just the degree of alacrity with which the people are going to approach a problem there.

(Operator Instructions). Marc Robins, Catalyst.

Thank you, very good quarter. Talk to us, O.B., a little bit about the US domestic sales. Can you give us a little more clarity and definition on that?

Yes. Once we got FC2 out we decided we would have city specific programs and that we would go to major cities in which sexually transmitted infections, including HIV/AIDS, were an issue and work with the city Departments of Health, university groups, women's advocacy groups and foundations to have HIV/AIDS prevention programs that would include the female condom.

We have programs now ongoing in New York City, we had one in Washington DC that's ongoing, Houston, San Francisco, Chicago -- we have them planned for Philadelphia, Los Angeles, Atlanta and Baton Rouge. And so far these have worked very well for us.

For example, to give you an idea, in New York City, which was one of our early ones, the female condom is now available in 724 locations throughout the city courtesy of the Department of Health. And I think at the end of last year the figure was like 609 locations. So we're beginning to see that kind of a pickup.

Secondly, in these cities where we've done this we've had distribution in some of the major chains. For example, we have distribution in Walgreens and in CVS in some of these cities where they've permitted us to have distribution in a limited number of stores that relate to those cities. And of course that creates some consumer purchases given the publicity and so forth that occurs with the programs. And the bottom line is that we're beginning to get some substantial increases in business, Marc.

Have we reached 5% to 10% of total sales yet?

No, we haven't reached that yet. I mean, it's sort of like the international sales arrangements, it's very high and the US sales rate is not quite that high but good.

Okay. Talk to us -- and I guess that was a follow-up on the first question, so this is the second question. Tell me a little bit about capacity and the numbers that you're currently producing given where you could go with capacity as you stand today.

Our capacity is to produce -- we can produce currently 80 million to 85 million units per year without any further capital expenditure or substantial capital expenditure. Last year we did, what, about 33 million units. Our best year was 40 million units. And we certainly believe we'll have an excellent year this year. But I don't think we're going to have any issues with capacity.

Thank you.

[Graham Rhine], [Bears] Capital.

Good morning, congratulations on the results. I'm interested in the expense accrual. Can you provide any more details on how that works and just to give us a better idea of what sort of impact a revenue increase will have on the operating expense line?

Yes, as I said, it's principally due to accrual for incentive payments at the end of the year. And the way our incentive program, which I think is described in some detail in our K, works for key people is there are specific net unit sales and operating income goals that are established which represent substantial increases over the prior year.

If those goals are -- if they're not achieved people don't receive a bonus; if they are achieved they receive a bonus and the amount they received is to some extent contingent on the price of the stock at the end of the year which ties into shareholder values. So to the extent that we're going to make the plan, there's going to be an accrual for it. And if the stock price rises then that accrual will probably increase and that's basically the program.

Okay, and so --.

If we don't make the plan there wouldn't be any further accrual.

Right. And so the accrual you made in Q1, is that just based on Q1 performance or is it based on your expectations for the rest of the next three quarters as well?

Yes, it's based on an expectation over the year.

Okay. And I think maybe you mentioned this, but the increase in AR, was that just because orders shipped towards the end of the quarter or was there anything unusual there?

No, it was just due to the timing of orders. In fact, some of them went to South Africa.

Okay, well great. Thanks for taking my questions.

Happy to do it.

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

Thank you for attending this session and for your interest and support. And we hope to be able to report a similar strong quarter when we get to the second quarter. Thanks.

To access the digital replay of this conference you may dial 1-877-344-7529, or 1-412-317-0088 beginning at 1 p.m. Eastern Time today. You will be prompted to enter a conference number which will be 1-000-8925. (Operator Instructions). The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.