Veru Inc (VERU) 2012 Q2 法說會逐字稿

Hello, and welcome to the Female Health Company second quarter fiscal year 2012 operating results. (Operator instructions.)

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 second quarter conference call. Donna Felch, our VP and CFO, is here with me in Chicago, and Mike Pope, our VP, UK and Malaysian operations, is participating from our London office.

This morning, I will first address the Company's financial results, then I'll cover some important recent events that have and will continue to impact our results. Subsequently, I'll review some key 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, unless I indicate otherwise.

This morning, I'm particularly pleased to be able to report remarkable growth and excellent financial results for the second quarter of 2012 and year-to-date. For the second quarter, the Company's unit sales increased 57%. Revenues increased 83% to $7.8 million from $4.3 million in the prior year quarter. Gross profit totaled $4.6 million, up 152% from 58% of revenues versus $1.8 million, or 42% of revenues for the same prior year period.

Operating expenses totaled $2.4 million, up 41% over the prior year quarter. The increase was primarily attributable to (inaudible) for bonus payments. The Company is tracking this year to exceed its 2012 unit sales and operating income goals, which resulted in the approval for bonus. In the prior year, we weren't tracking to achieve our plan due to the order delays that we previously discussed, so the prior year's second quarter bonus accrual was minimal. In addition to the bonus accrual, the Company did invest in increased training and education regarding HIV-AIDS and the use of FC2.

For the second quarter, operating income increased 20-fold to $2.2 million from $101,285 in the prior year quarter. Net income totaled $1.9 million, or $0.07 per diluted share, up 23-fold from $80,998, or $0.00 per diluted share in the second quarter of 2011.

For the first six months, unit sales were up 94% compared to the first six months of 2011. Net revenues totaled $16.5 million, up 107% compared to $7.9 million for the same prior year period. For the first half, gross profit totaled 9.6 million, or 58% of revenues, up 150% over the $3.8 million, or 48% of revenues, for the same 2011 period. Operating expenses totaled $4.6 million, up 41% versus $3.3 million for the prior year period. The increase was primarily due to the accrual for bonus payments that I noted earlier and increased investment in education and programming regarding HIV-AIDS and use of FC2.

Year-to-date operating earnings totaled $4.9 million, up 824% compared to $535,271 for the same prior year period. Net income totaled $4.6 million, or $0.16 per diluted share, up 876% compared to $467,666, or $0.02 per diluted share for the first half of 2011.

Turning to cash flow, during the first half of the year, the Company generated $5.1 million in cash from operations. The Company ended the first half with $6.3 million in cash versus $2.6 million one year earlier. This was after paying approximately $2.8 million in dividends during the first half of 2011, and again during the first half of 2012. As of today, the Company has approximately $9 million in cash. The Company remains debt-free and has $2 million in unused credit lines.

Our shareholders' equity at the end of the first half totaled $17.3 million versus $14.3 million one year ago. As of the end of the first half, the Company had $44.8 million in US state and federal and $68.5 million in UK tax loss carry-forwards, which may be used to offset future profits. And I should note, the UK tax loss carry-forwards do not expire. At the end of each year, based on the results and outlook at the time, the Company considers taking a tax benefit. In 2011, the Company took a tax benefit of $2.5 million, and will consider taking a tax benefit at the end of this year.

Now, there are four events that occurred recently I believe that highlight our progress and what I believe is an excellent future. First, unit sales, revenue, and operating income all set new records during the first half of the year. Importantly, this highlights the Company's position that, while there may be some volatility in order timing, such as we experienced in 2011, the basic demand for female condoms is rapidly increasing.

Second factor is the distribution of FC2 is expanding significantly. FC2 is now available in 130 countries versus 120 at the end of last year. In the US, in New York City, FC2 as of today is available at 895 locations versus 609 at the end of 2011 as a result of New York City's Department of Health HIV-AIDS prevention program.

The third recent event, and perhaps the most important, a major study was published in the journals AIDS and Behavior indicating FC2 is effective at preventing HIV-AIDS and is cost saving. Dr. David Holtgrave, professor and chairman of the Department of Health Behavior and Society at the Johns Hopkins Bloomberg School of Public Health, conducted an economic analysis of the Washington DC's Department of Health FC2 HIV-AIDS prevention program.

Dr. Holtgrave's study showed that the program was not only cost effective, but cost saving. The results indicate that, for every $1 invested in the program, nearly $20 was saved after recovering the investment cost. In total, the study showed that the Washington, DC program resulted in a savings of $8 million after paying for the program cost of $445,000. Dr. Holtgrave said, and I quote, "These results clearly indicate that delivering (inaudible) an education about female condoms is an effective HIV/AID prevention intervention and an outstanding public investment."

The publication of the study in AIDS and Behavior received broad press coverage. We believe the results of the study may favorably impact the start of new prevention programs [in] the use of FC2, as well as the allocation of funds for this purpose.

And the fourth event is reflecting the increased demand for FC2 and the future outlook. The Company recently announced it is expanding its annual FC2 production capacity by 18%, from 85 million to 100 million units per year. I should note, this will be funded from cash on hand.

Turning to demand factors, there are four factors that indicate that demand for the female condom will continue to increase significantly. First, as I have mentioned on other calls and can't emphasize enough, is the increasing importance of the feminization of HIV-AIDS. More than 50% of all new cases are women. 80% of new cases among women are contracted through heterosexual sex. HIV-AIDS remains the number one cause of death worldwide among women 15 to 44 years of age.

And another important point, [as] HIV-AIDS has been feminized, contraception has become an important FHC opportunity. The prevention of HIV-AIDS and unintended pregnancies are linked. The women who contract HIV-AIDS may give birth to children who have HIV-AIDS and-or become AIDS orphans. This increases human suffering and the cost of healthcare. The feminization of AIDS links prevention of the disease and pregnancy, increasing the relevance of and market for female condoms. The British government cited this important factor in its December 1, 2011 pledge to give $7.8 million to the United Nations population fund explicitly for the purchase of female condoms.

A second important factor that will influence demand is increased advocacy on a global basis by independent women's groups for greater investment in and access to female condoms. Third factor, the lack of any practical alternative prevention products. And the fourth factor is the Holtgrave economic analysis that I just referred to that shows not only is FC2 effective in preventing HIV-AIDS, but it is cost saving. Over time, we believe this will have a significant impact.

Turning to the outlook, reflecting record unit sales and operating income for the first half, increasing demand for FC2, and the outlook for the future, the Company's Board of Directors raised the quarterly dividend 20% from $0.05 a share to $0.06 a share. The tenth consecutive quarterly dividend at the new rate of $0.06 a share will be paid on May 9.

Now, in reference to guidance, as we've noted previously, due to the difficulty in predicting the exact timing of the receipt of significant orders and the volatility that we may experience, the Company has elected not to give precise guidance, but will provide general comments regarding the outlook based on conditions at the time. In reference to 2012, we continue to expect to post record unit sales and operating income. And I'd like to provide some figures, all of which are public, that will put this in perspective.

The prior record year for the Company was 2009, when we sold 40.1 million units and had operating earnings of $6.2 million, excluding restructuring charges. During the first half of this year, 2012, our unit sales totaled 29 million units, and operating income $4.9 million. As a result, we expect to very significantly exceed the 2009 record figures of 40.1 million units and $6.2 million in operating income. This in turn will result in a very sharp gain over 2011, when unit sales were 32.9 million and operating earnings $3.3 million.

In summary, we are very pleased with the results for the first half of this year, and we expect outstanding results for the full year.

Now we'll take some questions. Sue?

(Operator instructions.)

Nick Halen of Sidoti & Company.

Good morning, guys. The first question I had was just in terms of the pricing on the production lines in Malaysia. I don't know if you guys broke that out. But I was wondering if you guys were able to get favorable pricing like we saw the last time when you originally made a change to Malaysia.

Well, we haven't broken it out exactly, but we did put in the Q, if you look carefully, that the addition of the two production lines will cost less than $1 million.

Okay, so less than a million? Okay, great.

It's not really -- it isn't very capital intensive.

Okay. And then, also I know historically you don't break down too much, but I was wondering if you could talk a little bit about the breakdown of shipments in the quarter, I guess how many units came from Brazil, or went to Brazil and South Africa, and I guess how many do you still have to ship on both of those orders.

We haven't broken that down, but what we did say was we had a -- in the first quarter we got an order for South Africa for five million units. That's been completed. We had a order for -- in the -- additional one million units, which has been completed. And [since it's] public, we expect we'll probably get some additional orders during the course of the year for South Africa. And South Africa also, which has published a new tender, two-year tender for 15 line units. So that's South Africa.

Brazil, we have shipped four [million] units and have the remainder of the three million to ship.

Okay, great. Thank you.

Graeme Rein of Bares Capital.

Good morning. I'm interested in the expansion of the manufacturing capacity. Is that just because you've got a little bit of capital on hand and that, long-term, you're going to need it, or is it more immediate? Are you sensing that it might be required within the next year?

I think the real reason is that we believe that, during the next year, the demand for female condoms is going to increase. We wouldn't simply, because we have capital, expand the facility. We'd only expand it if we thought there'd be demand.

Okay. And are you seeing any unexpected pockets of demand in new countries or areas where you previously haven't been?

What is interesting, of course, we've seen some substantial increases, like in Brazil, over prior orders, but I think what's important and interesting is that, in some relatively small countries, we've had some relatively significant shipments, countries with relatively low populations. Just thinking that we had sometimes -- get 10,000, 20,000, and then suddenly we have an order for -- like in Uruguay, a relatively small country that was ordering 20,000, 30,000, suddenly ordered 315,000. Sending, I think, 50,000 to Colombia. We had an increase in the countries from over 120 countries to 130, so we're beginning to see a broadening of the take on it.

Okay. That sounds great. Thanks a lot.

Andrew Love of Love Savings Holding Company.

Hi, O.B.

Andy.

Good quarter.

Thank you.

I was curious to see in the quarter and the half an income tax expense of some-odd $200,000 with our big NOLs. What's the explanation for that?

Well, there are two things. We do pay a small tax in Malaysia, but we have some tax loss carry-forwards, and the state of Illinois, due to their economic circumstance, (inaudible) a four-year hiatus on the use of NOLs.

Oh, for goodness' sake.

Okay?

Okay, thanks.

You know, write to the former governor Blagojevich, right?

Yes, right.

Marc Robins of Catalyst Research.

Good morning, folks.

Morning, Marc.

Nice quarter.

Thank you.

Help me better understand the distribution of demand. Now, we have a great big huge -- or we had a fairly large order from South Africa, and it looks like that's going to go from five, six, seven million to 15 million potentially. And then Brazil's popped to 20 million. And then, we were chatting about Colombia and Uruguay going [down] in the hundreds of thousands of units being shipped or demanded. What's the breakdown of that 130 countries. What would the distribution curve look like, to some degree, O.B.? Can you help me better understand that, please?

Well, there's a limited number of countries we haven't [published in], but there are a limited number of countries that would probably comprise -- most of the time we have about 50 -- yes, you have five or six countries that currently have about 50%, and the rest is distributed broadly. And kind of the point I was making, Mark, is that the countries that had the majority are increasing, but we're also getting an increase among this broad range of other countries, and in some additional countries, which in total make up a fairly substantial amount.

Okay. So five or six countries currently [are] demanding 50% of what you're producing, and then the other 125 or 120 are producing the remaining 50%. Is there some other kind of demarcation, would there be, of that 120? Maybe 20 are doing 30%?

Yes, you could take it and cut it down by that, and you would get some other demarcations. But going back to my point, is that some of the ones where we were just getting, you know, 20,000, 30,000 are now ordering in the hundreds.

Yes, are now 10 times the size. Okay. And then, let's see, going back, your reticence about the guidance, on one hand you're talking about exceeding 2009 and so forth. Are you kind of indicating that the future is a little rough to predict for the following fiscal year? Is that how I'm supposed to read this, or are we going to have a choppy -- I guess this is 2012?

Well, we've said that we're going to have a great year this year. The point we're making, Marc, as of, like, last year we had some delays in [the] Brazil and South African order. We didn't lose them, and we never have lost any significant orders. But we had a delay of several months, and so you begin to predict that, and you can't do it precisely. And rather than do that, we'd rather [get] people a broad outlook. Could there ever be volatility in the future? There could be, but we see the overall demand, over time, for the product going up and our overall results being very positive.

Okay. And I understood that. It was just kind of what you're doing, saying hey, because of the lumpiness -- lumpy nature of this business to date, we feel that this year's okay, but next -- in the future it could be. It's a little hard to predict. We're not going to give it (inaudible)--.

--There could be volatility, but if you were to look at it over an extended period, we expect to see continued increases in the business.

Oh, no, I understand that. Very good. Okay, I'll get back into the queue, and thank you. And again, great quarter.

There are no more questions at this time. So, Mr. Robins, if you have another question, please go ahead.

Yes, thank you very much. I guess I didn't understand. It was interesting to me, your response, O.B., regarding the addition of the capacity. You said the plant -- the additional equipment was $1 million, you (inaudible) -- pardon me? Less than that?

A little less than $1 million.

Yes, thank you. And you weren't putting it in because you had the cash. Kind of help me better understand maybe the process as to how the female condoms are manufactured [in MB]. Does it take a long time to assemble the equipment and install them? Is that the reason why you're doing it here in the second calendar quarter of 2012 rather than--?

--I think what we -- in the release we [sent out], we said -- in fact, Mike Pope said that it would be up in the first quarter of 2013 and functional at that time, and that's probably a pretty good estimate of the time required. Which means the only reason we do it, which I'd like to emphasize is not because we have the money, is we think we're going to have the business.

Okay, very good. Hey, thanks ever so much.

George Whiteside of SWS Financial Services.

Morning, O.B.

Good morning, George.

I apologize. I was late on the call, and this may have been asked. I was wondering what the status of manufacturing facilities in Brazil might be.

We have considered, from time to time, manufacturing in other locations. Brazil is one of those. If in fact there was a -- we're not actually doing anything at this point in time, but it's something, given the right commitment and so forth to (inaudible), that we would consider in the future.

Excellent. Thank you.

Marc Robins of Catalyst Research.

I'm sorry to be the Pest from the West. You really are beginning to get some pretty interesting demand, and the characteristics for the outlook are really great. Has there been any real change in the competitive environment in your product arena specifically? I know there isn't a drug alternative right now, and male condoms, there's the ongoing reasons why those aren't satisfactory. Any other kind of changes in the competitive landscape?

Well, we feel -- as you pointed out, there haven't been any practical successful drug alternatives for prevention. There's no other alternative prevention product out there. There's certainly other improvements in the treatment of AIDS. There is no [kind of] cure for it, unfortunately.

In the terms of other female condoms, there's some people trying to develop them, but there isn't any remarkable change in that at this point.

Okay, very good. Thanks again.

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

I'd just like to thank everybody for your support in attending, and we'll talk again next quarter. Thanks.

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