Veru Inc (VERU) 2012 Q3 法說會逐字稿

Hello welcome to The Female Health Company third quarter fiscal year 2012 operating results. All participants will be in listen-only mode. (Operator instructions).

After today's presentation, there will be an opportunity to ask questions. Please note that 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 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 release, shareholder communications and Securities and Exchange Commission filings. For additional information, the Company urges you to consider reviewing its 10-Q and 10-Q SEC filings.

I would now like to turn the conference over to Mr. O.B. Parrish. Please go ahead.

Thank you, Amy. Welcome to The Female Health Company's third-quarter conference call. Donna Felch, our Vice President and CFO, is here in Chicago. Mike Pope, our VP, UK and Malaysian operations, is participating from our London office. Today I will first review the Company's financial results for the third quarter and nine months period. Then I will cover important recent events that will impact the Company's future results. Subsequently, we will review some long-term demand factors on the outlook, and then we'll take questions.

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

I'm very pleased to report record unit sales for the third quarter and first nine months of 2012. As a result, the Company posted remarkable growth and excellent financial results for the third quarter year-to-date.

In reference to the third quarter, unit sales increased 157%. Revenues increased 146% to $8.7 million from $3.5 million in the prior-year quarter. Gross profit totaled $5.3 million, up 192% or 61.2% of revenues versus $1.8 million or 51.6% of revenues in the same prior-year period. Operating expenses totaled $2.5 million, up 82% over $1.4 million in the prior-year quarter. The increase was primarily attributable to an accrual for bonus payments and an increase in expense for training and education for the prevention of unintended pregnancies and HIV/AIDS.

The Company is tracking to significantly exceed its 2012 unit sales and operating income goals, which resulted in accrual for bonus payments. In the prior-year quarter, the Company wasn't tracking to achieve its plan due to the order delays we've discussed previously, so the prior-year third quarter cumulative bonus accrual was reversed.

Operating income for the third quarter increased 523%, or fivefold, to $2.8 million, from $450,000 in the prior-year quarter. Net income attributable to common shareholders totaled $2.5 million, or $0.09 per diluted share, an increase of 512% for FIFO from $417,000 for $0.01 per diluted share in the third quarter of 2011.

Turning to the year-to-date results, for the first nine months unit sales were up 112% compared to the first nine months of 2011. Net revenues totaled $25.1 million, up 119% compared to $11.5 million for the same prior-year period. Gross profit totaled $14.9 million, or 59% of revenues, up 164% over $5.6 million or 49% of revenues for the same 2011 period.

Operating expenses totaled $7.1 million, up 53% versus $4.7 million for the prior-year period. The increase was primarily due to the accrual for bonus payments and the investment in training and education I noted earlier.

For the nine-month period, operating earnings totaled $7.8 million, up 687%, or sixfold plus, compared to $986,000 for the same prior-year period. I should note our year-to-date operating margin was 31%.

For the nine-month period net income attributable to common shareholders totaled $7.1 million or $0.25 per diluted share, up 704% or sevenfold, compared to $884,000 or $0.03 per diluted share for the first nine months of 2011. During the first nine months of 2012, the Company generated $9 million in cash from operations. The Company ended the first nine months with $8.3 million in cash versus $3.3 million one year earlier. This was after paying approximately $4.5 million in dividends during the first nine months of this year and $4.2 million in dividends during the first nine months of 2011.

The Company remains debt-free and has $2 million in unused credit lines. At the end of the nine-month period, shareholders equity totaled $20 million versus $13.5 million one year ago.

In reference to tax loss carryforwards, the Company has $44.8 million in US state and federal, and $68.5 million in UK tax loss carryforwards which may be used to offset future profits. The UK tax loss carryforwards 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 we will consider taking a tax benefit at the end of this year.

Turning to recent events, there are four recent events that reflect the Company's achievements and excellent future prospects. First are the third-quarter and nine-month record unit sales and revenue. It's important because this directly reflects increased demand for and relevance of the FC2 Female Condom on a global basis.

Second, the results are based on broad and increasing distribution, not just orders from Brazil and the Republic of South Africa. FC2 is now available in 137 countries versus 120 countries at the end of 2011. As another example, in the United States in New York City, FC2 is available through the Department of Health in 966 locations, up from 609 locations at the end of 2011, an increase of 59%.

The third recent event -- and this is, I believe, a critical event for the future in terms of opportunity -- is the increasing importance of contraception. On July 10 and 11 of this month, a coalition between the UK government and the Bill & Melinda Gates Foundation held an invitation-only summit on family planning in London. The summit was co-chaired by Melinda Gates and the British Secretary of State for foreign development, Andrew Mitchell. Those who attended the summit, including key public health leaders, country leaders, top executives of companies marketing contraceptives and also British Prime Minister David Cameron attended and made a speech at the summit. Approximately 250 individuals were in attendance. FHC was invited to attend. Mike Pope, Donna Felch and Lucie van Mens, our Director of Program Development and Support, and I attended the summit and/or related events. In addition, I participated on a formal panel discussion at the summit regarding the role of the private sector and private/public partnerships.

What's important is the objective of the UK Gates group is to provide access to contraceptives to an additional 120 million developing country women by 2020. This will reduce child and maternal mortality, improve maternal health including reproductive health and increase HIV/AIDS prevention. It will reduce human suffering and healthcare costs. The concurrent prevention of sexually transmitted infections, including AIDS, in turn, prevents babies from being born with AIDS and the potential for AIDS orphans.

It is interesting to note this is consistent with the British government's donation of GDP5 million or about $7.8 million last December explicitly for the purchase of female condoms. The relationship between contraception and HIV/AIDS was cited as a reason for the donation.

At the end of the summit meeting on July 11, it was announced that the UK government, the Gates Foundation, Bloomberg Philanthropies and other countries and foundations have committed $4.6 billion to fund the eight-year program to provide additional contraceptives. This further broadens the market opportunity for FC2. The UK Gates program and funding will significantly increase the market for all contraceptives. It is important to note here that the Female Condom is the only product whose use is initiated by women that provides dual protection against unintended pregnancies and sexually transmitted infections, including HIV/AIDS. It is ideally suited for this program.

The Company will contribute product and education as part of the program. Participation in the program will contribute to branding FC2 worldwide. Identification as a private partner with the UK and Gates Foundation will be positive for the Company. We believe that this can substantially and positively impact long-term sales growth.

The fourth recent event is the 16th International HIV/AIDS Conference, which was held in Washington, DC last week. Female condoms and FC2 were noted in the opening remarks. FC2 was highly visible and featured throughout the conference. In addition to direct participation by the Company, it's interesting to note that independent women's advocacy groups were spontaneously providing educational demonstrations of FC2 at this conference.

Turning to competition, the second Female Condom or product, named Cupid, has been cleared by WHO for purchase by UN agencies. It has not yet been approved by FDA. In a recent study, it was found to perform in a similar manner clinically to FC2. The degree to which it will be acceptable remains to be seen. The design is quite different. It has a rigid hexagonal top ring and a donut-shaped sponge for internal retention. It is made from natural rubber latex, which could cause latex allergy in users, unlike FC2. It can only be used with water-based lubricants, unlike FC2, which can be used with oil and water-based lubricants. Manufacturing capability is small. Scale up to producing quantities that meet international standards will involve substantial investment of time.

At the London summit on family planning, FHC announced a comprehensive program to support the public-sector contraception program and HIV/AIDS prevention. It includes a price/volume schedule based on total annual public-sector purchases and contribution of 5% and no-cost product based on volume for use in sampling, education and training. In effect, we will have, broadly, worldwide Gates Foundation and the public-sector helping to sample our product and educate people. In addition, the Company has committed to provide education in collaboration with public-sector agencies and training over the eight-year period of the program. It will take any other company a significant period and investment to create such a program.

So in reference to this event, given the remarkable potential for market growth, particularly in view of the UK Gates commitment to contraception, we believe FC2 will remain the number-one product and demonstrate remarkable growth in the future.

There are four key demand factors that indicate the demand for female condoms will continue to increase. First, as I mentioned in virtually every conference call, is the feminization of AIDS. More than 50% of all new cases are women. 80% of new cases among women are contracted through heterosexual sex, and AIDS remains the number one cause of death worldwide among women 15 to 44 years of age.

Second is the contraceptive market opportunity highlighted by the UK Gates Summit on family planning and the commitment of $4.6 billion to fund this program.

Third is increased advocacy on a global basis by women's groups for greater investment in and access to female condoms. And forth is the Holtgrave/John Hopkins economic analysis that I referred to last quarter that shows FC2 is effective in preventing HIV/AIDS and that in the Washington DC FC2 prevention program, for each $1 that was invested, nearly $20 was saved. Dr. Holtgrave of John Hopkins concluded the FC2 prevention program saved money and are an excellent public health investment.

Turning to the outlook, reflecting our excellent outlook, the Company's Board of Directors authorized payment of a dividend of $0.06 a share on August 8 to shareholders of record on August 1. I should note this is the Company's 11th consecutive quarterly dividend.

In reference to guidance, as noted previously, due to the difficulty in predicting the exact timing of the receipt of significant orders, the Company has elected not to give precise guidance but will continue to provide general comments regarding outlook based on conditions at the time. We have previously stated the Company expects to post record unit sales and operating [income] from 2012. However, today, I would like to provide some precise current figures that explain exactly what we mean by record results. The prior record year for unit sales was in 2009, when the Company reported net sales of $40.2 million. During the first nine months of 2012, unit sales were $44.3 million. This is an increase of 4.1 million units, or 10% in nine months over the record 12-month 2009 period figures. The prior record year for operating earnings was 2010 when the Company reported operating earnings of $6.3 million. Operating earnings totaled $7.8 million in the first nine months of 2012. This is an increase in nine months of $1.5 million or 24% over the record 2010 12-months figure of $6.3 million.

We expect to post outstanding unit sales and operating income for the fourth quarter which will be added to the already record nine-month results we reported today. And now, Amy, we will take some questions.

(Operator instructions) Nick Halen, Sidoti & Company.

So the first question I had was I know you guys don't break it down too much, but I was wondering if you could give us a little bit of an update on shipments within the quarter to Brazil and South Africa. I'm just trying to get a sense of what drove, I guess what really drove the growth in shipments in the quarter and I guess what's still left on those two orders.

We have completed three times -- we had 12 million completed to Brazil from the beginning of the year, and we have 8 more to go. We have completed about 6 million to South Africa, and we will have zero this quarter, and we would expect to have some additional shipments during the year to South Africa.

In that, you are talking the additional, that's fiscal 2013, you are saying?

Well, we should have some in the fourth quarter, too.

And my second question, I guess just expanding on that a little bit, I know on the last call, you mentioned South Africa published a new tender for about two years and 15 million units, I believe.

Yes.

Is that a part of what you were just saying in terms of the expected additional shipments?

No. That tender has not been awarded yet. It's supposed to be adjudicated during the month of August.

Okay. And then just lastly, obviously you don't give guidance. And timing is very -- there's a lot of uncertainty regarding the timing. You seem pretty confident in what fourth-quarter numbers are going to be. But is it safe to assume we should see a little bit of a slip, I guess maybe sequentially, on the revenue side, just given such a difficult comp that you saw in the third quarter?

You mean in the fourth quarter, Nick?

Yes, in the fourth quarter. I'm just asking if we could expect revenue sequentially to decline maybe a little bit from what we just saw this quarter.

I wouldn't predict that. As I said, I think we'll have a very strong fourth-quarter and revenues and operating income than I think likely to exceed.

Great. Thanks, O.B., congrats on the quarter.

George Whiteside, SWS Financial.

We very much appreciate the guidance that you have supplied, and congratulations on a splendid trajectory of both sales and earnings. My question deals with Malaysia and your announced increase in capacity. Has that increased capacity been installed yet?

It will be completed by the end of this calendar year.

And?

It's in the process of being installed.

Surely. And then do you anticipate needing to increase the capacity further in 2013?

If we continue to get this kind of growth, it's certainly a possibility. As I've said before, George, it takes us about -- after we make a decision to do it, it takes us about six months to crank it up and get it going. It takes about -- I think we put in our current 10-Q that the cost of the expansion is $665,000. So if we need some additional capacity, we should be able to fund it and increase it, with about a six-month lead time.

Thank you. My second question or observation is -- we continue to see articles on vaccine and other items, including contraception, but we really don't see much in the way of commentary on female condoms. Is there any way to improve that publicity, or is it a matter of working through the various organizations that you are involved with?

I think, in the arena that we exist, we are seeing a sharp increase in that. At the International AIDS Conference in Washington DC last week, you had all sorts of publicity on FC2, publicity in that economic study, and you had literally all kinds of people there from all over the world, thousands, with FC2 banners all over the place. And in fact, we had -- for fun, they had people in FC2 costumes and things pinned on their dresses.

Also, the other publicity was at this London summit. If you want -- you want to look up the Gates -- UK Gates Summit on Family Planning on the Internet, I think you'll go out and you will see quite a bit of publicity, including publicity on female condoms. We were actually on the program there, which was attended by every key public health sector person in the world. So I think that kind of publicity is building.

Well, it sounds as though that's probably the most effective approach, in terms of heightening the awareness. And those are the people that undoubtedly are the movers and shakers in this segment of the market. Thank you very much.

Marc Robins, Catalyst Research.

Congratulations -- very, very stupendous quarter. You said something -- I'm trying to put things back into proper perspective. You said that from the UK summit that the funding will provide contraceptives to 120 females -- 120 million females, additional 120 million females. Do you know approximately the number of contraceptives that are now being provided to what number of women, made available to what number of women?

Yes. They are talking about this program is going to be in 69 developing countries, and in those particular countries there are about 260 million women who currently have access to contraceptives. And their plan is to increase that to 380 million women that will have access to modern contraceptives, including female condoms by the year 2020.

Okay, very good. Okay, that helps. Okay, from 260 million to 2 -- 380?

Million.

Okay, and then since the other question I had was already answered, help me understand a little better what has been essentially the rate of increase of capacity at your Malaysian plant. And where is it going to go by the end of this year?

At the end of this year, we expect the capacity to be approximately, on an annual basis, 100 million units. And it's about an 18% increase or so over what it was.

So you are roughly guessing about 80 million currently?

80 million to 85 million.

80 million to 85 million, okay.

And one other thing to keep in mind, as I've said, is that increase basically costs $665,000, so it's not too capital intensive.

No, no. And so, at the current rate, guessing, kind of adding, tacking on what we've done so far this year and what it looks like we will be doing, we would be about three quarters of the current capacity, three quarters of the 80% of the current capacity?

Yes, that's not too far off.

Okay, hey, thank you. And again, great job.

Andrew Love, Love Savings and Holdings.

Good morning, O.B. Congratulations on an excellent quarter. On this competing product, what's the patent situation with respect to that?

The product would not violate our patents. And as far as any patents they have, they are very limited. As far as I know, I think they have a patent in a couple of countries, but it certainly isn't broadly patented.

Why wouldn't it violate our patent?

It's a different -- our patent is based on design of the circular outer ring, circular inner ring, and they use a hexagonal-shaped -- a rigid hexagonal-shaped ring at the top and a donut-shaped sponge inside. So they have different shapes. Whether or not this is acceptable remains to be seen.

Okay, thanks.

[John Gay], Private Investor.

Hi, OB, very good quarter. I think we've been longing for it, for a long time, I know. With regard to the London summit, I think when you announced that, you said something about female contributing something like $2.3 million to the education, I think, of the women involved. Is that to be spread over the eight-year period, or is that a one-time thing, or (multiple speakers)? How much more is that than what you normally spend, anyway?

Well, what we're doing, we're currently budgeted to spend about $1.4 million on education and training this year. And we will, in collaboration with public sectors -- and what we've done is agreed to continue that. And we would increase it each year because it will increase volume. And during the period of eight years, we expect we will spend a total of about $14 million.

I see, okay.

So you can take that $1.4 million and you can figure out what that increase per year would be. But it's something we would do anyway.

Right. To follow up on the previous question, in regard to the possible competitor, is there an implicit design change on our own product as a result, or are you going to just go with what we have?

No, we don't plan to make any design changes as a result of that. It's well accepted and it's -- one of the issues you have here is we're spending money on training and education because it's important. And once people have learned to use something and are using it well and it's growing, you probably don't want to change it.

It would also seem to me that the competitive product would be a great deal more expensive than what you have.

We don't know their exact cost and whether or not they're going to make money in reference to it. It will depend on how they look at it and what their costs are.

Okay, well, thank you. It was a great (technical difficulty) looking forward to another one this year and maybe a few more next year. Thank you.

So are we.

(Operator instructions) Marc Robins, Catalyst Research.

I know this is somewhat of a silly question, but I'm going to ask anyway. Where are you on your share buyback program? I know you've been -- now, you are building cash and you pay a dividend, which we are all thankful for. What would the Board -- what's the Board's feeling currently about its cash position and shares and so forth?

Well, basically, the Board has authorized the program that will last until the end of December this year, unless it's extended further. And we're in a position to buy about 1 million shares more by the end of the year. We have only purchased a very small amount of shares this year at the right price. And we have that as a possible use of cash. And based on the share price and where we think it may be going, then we can make a decision -- do we want to spend some of that money on buying back shares or not.

And of course, we're also keeping an eye on expanding our capacity and paying for that.

Very good, thank you.

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

Thanks very much, Amy, and I would like to thank everybody for your support and attendance at the call. And I hope we will have another positive call a quarter from now. Thanks.

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