Veru Inc (VERU) 2012 Q4 法說會逐字稿

Hello, and welcome to The Female Health Company fiscal year 2012 operating results 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 on 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 economics 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, CEO and Chairman. Please go ahead.

Thank you, Laura. Welcome to The Female Health Company's fourth-quarter 2012 conference call. Donna Felch, our Vice President and CFO is here with me in Chicago. And Mike Pope, our VP of UK and Malaysian operations is participating from our London office. As announced last month, Donna, due to personal and family reasons, will retire January 1, 2013. However, Donna will continue her affiliation with the Company as a consultant and has been named to our board of directors. Donna's replacement, Michele Greco, who will become VP and CFO on January 1, is also participating today from our Chicago office. I would like to note that Donna's performance and contribution to the Company has been excellent. I have thoroughly enjoyed working with her and I'm delighted she will continue her affiliation with the Company. Michele is an outstanding choice to replace Donna. And I look forward to working with her in the future development for the Company.

This morning, first, I'll cover the financial results for the fourth quarter and 2012. Then I'll address some key events and long-term demand factors that may impact future results and cover the outlook. And then we'll take questions. When I refer to years, I'm referring to the Company's fiscal year, which ends September 30, unless I note otherwise.

I'm delighted to report record unit sales, record revenue, record operating income, and record earnings per share for the quarter and full year. A truly remarkable year. For the fourth quarter, unit sales set a new record, increasing 45% over the prior-year quarter. Revenues increased 39% to $9.9 million, also a new record. Gross margin totaled $5.8 million, or 58% of sales, an increase of 36% over the prior-year quarter. Operating expenses increased 34% to $2.6 million. The increase is primarily attributable to the accrual for bonus payments and increased investment in education and training. In 2011, no bonus accruals were made in the fourth quarter because the Company was not achieving its plan due to delayed orders.

Operating income totaled $3.2 million, a record, an increase of 38% over the fourth quarter of 2011. The operating income margin was 32%. The Company has significant tax loss carry-forwards in the US and UK. As a result, at the end of each year, the Company considers taking a tax benefit based on the current results and the outlook. In the fourth quarter of last year, we took a net tax benefit of $2.2 million. Based on the 2012 analysis, the Company took a net tax benefit in the quarter of $5.1 million. Including this net tax benefit, net income totaled $8.2 million for the quarter, or $0.29 per diluted share, an increase of 81% over the prior-year quarter of $4.5 million, or $0.16 per diluted share.

For the full year, unit sales totaled a record 61.6 million, an increase of 88%, over 32.9 million units sold in 2011. More importantly, it is a 53% increase over the prior annual record set in 2009, when 40.2 million units were sold. Revenue increased 89% to a record $35 million versus $18.6 million in 2011. Gross margin totaled $20.6 million, or 59% of sales, an increase of 109% over $9.9 million last year, or 53% of sales. Operating expenses totaled $9.7 million, an increase of 47% versus $6.6 million. As noted earlier, the increase in operating expenses is primarily attributable to the accrual for bonus payments and increased investment in education and training. Operating income totaled a record $10.9 million, an increase of 232% over 2011.

The Company recorded a net tax benefit for the year of $4.5 million. Net income, including the net tax benefit, totaled $15.3 million, or $0.53 per diluted share; a 183% increase over $5.4 million, or $0.19 per diluted share in 2011. The Company currently has $24.6 million in US federal, $12.4 million in US state tax loss carry-forwards. And $64.3 million in UK tax loss carry-forwards, which, by the way, do not expire, to offset future earnings.

In terms of cash, the Company generated $10.4 million in cash from operations, including a negative impact of $1.5 million due to changes in operating assets in 2012. After paying $6.2 million in dividends and $0.7 million for expanding FC2 production capacity, or a total outlay of $6.9 million, the Company ended the year with $5.3 million in cash and remains debt-free. At the end of 2012, shareholders' equity totaled $24.2 million versus $16.8 million at the end of 2011. 2012 by any standards was truly a remarkable, a great year.

Now I would like to turn to some key events. There were six key events during the year that impacted results for the year and are likely to impact future results. First, FC2 prevention programs were established as cost saving. The publication of the study by Dr. David Holtgrave of Johns Hopkins University, showed a Washington, DC Department of Health FC2 prevention program was not only cost effective, but cost saving. For every dollar invested in the program, nearly $20 was saved. An investment of approximately $445,000 resulted in savings of almost $8 million. Dr. Holtgrave concluded that FC2 prevention programs are an excellent public health investment.

The second event was a significant expansion of FC2 distribution to 138 countries in 2012 from 120 countries at the end of 2011. As another example, in the US, in New York City, FC2 is now available at 1,042 locations versus 609 at the end of 2011. The third event was the expansion of FC2 production capacity by 20% to 100 million units on an annual basis, achieved ahead of schedule and under budget. This enables the Company to promptly meet the increasing demand for FC2.

The fourth event was the reduction of FC2 production costs, which is the result of our ongoing cost-reduction program. The fifth event was the Bill and Melinda Gates Foundation UK government-sponsored Summit on Family Planning held last year in July in London. The Company was one of only 14 private sector companies invited to the London Summit on family planning. We were one of only five companies asked to participate in the Summit panel on private/public partnerships. The sixth event was the Company's private/public partnership program announced at the Summit. The program is a comprehensive, first-of-its-kind private/public partnership program to support public sector sexually transmitted infection, including HIV/AIDS prevention and family planning programs.

Now I would like to turn to what I would consider to be long-term demand factors. I believe there are five factors likely to result in increased long-term demand for FC2. First, as I've mentioned in most of the conferences before, there is a continued feminization of HIV/AIDS. More than 50% of all new cases continue to be women worldwide. 80% of these are contracted through heterosexual sex. And AIDS remains a leading cause of death worldwide among women 15 to 44 years of age. This continues to increase the relevance of female condoms.

The second demand factor is the goals of the Gates Foundation UK Government Summit on Family Planning. Their goal is to provide contraceptives and related training and education material to an additional 120 million women in 69 developing countries by 2020. HIV/AIDS and family planning are related. Women who become pregnant may give birth to babies who have HIV/AIDS and/or become AIDS orphans, increasing healthcare costs and human suffering. The Summit program will obviously increase the market for contraceptives. FC2 is an excellent product for this program in that female condoms are the only product where use is initiated by women that provide dual protection against sexually transmitted infections, including AIDS, and unintended pregnancy. I should note this fact was highlighted at the Summit on Family Planning in London. Used as a contraceptive in addition to disease prevention significantly broadens the market for FC2. Also important, at the end of the Summit, the Gates Foundation and British government announced they had commitments of $4.6 billion to fund the eight-year program.

The third demand factor is our Company's private/public sector program announced at the Summit, which is structured to support the creation of and capitalize an increased demand for FC2. The program has three elements, all major public sector FC2 unit orders will be aggregated at the end of each calendar year and, based on volume, will determine the public sector price for the succeeding year. Each year, the Company will provide, at no cost, FC2 units to the public sector equal to 5% of prior-year purchases. In effect, in a market that is not at all saturated, this results in sampling in branding FC2 throughout the world as a part of education and training programs, which will increase demand. In addition, the Company currently provides education and training. And as a part of this program, we committed to spending $14 million over six years on education and training regarding sexually transmitted infections, including HIV/AIDS and contraception, which we believe will increase demand. This program is unique and a first of its kind.

The fourth demand factor is increased advocacy for female condoms. There has been a dramatic increase by women's groups in advocating increased investment in and access to female condoms. As an example, the National Female Condom Coalition has been formed. It established the first Global Female Condom Day on September 12 of this year, which was celebrated in a number of countries throughout the world.

The fifth demand factor is the PEPFAR blueprint for an AIDS-free generation. In conjunction with World AIDS Day December 1, just a few days ago, Hillary Clinton, US Secretary of State, as a part of the President's emergency plan for AIDS relief, or called PEPFAR, issued a blueprint for an AIDS-free generation. In the blueprint it states, quote, that female condoms are unique in providing a female-controlled HIV prevention option and PEPFAR will work with partner governments and other donors to promote them -- female condoms -- where effective programs can build sustainable demand. In other words, PEPFAR will be promoting the use of female condoms as one element in creating an AIDS-free generation. In summary, the recent events and key demand factors I've noted suggest a significant long-term increase in the demand for female condoms.

Turning to the outlook, as I have noted previously, due to the potential volatility and the timing of public sector orders, the Company doesn't provide precise revenue and earnings guidance. We do provide general guidance regarding the outlook, base and conditions at the time. In considering the outlook for 2013, there are several important considerations. First, we recognize that a part of our 2012 results was due to the catch-up factor of orders from Brazil and Republic of South Africa that were delayed in 2011 and received in 2012. We also realize this catch-up factor will not repeat in 2013. Growth in Brazil and in Republic of South Africa was, of course, dramatic in 2012 versus 2011.

However, I would like to call your attention to a couple of important facts. If you look at the unit sales, other than for Brazil and Republic of South Africa, in other words, if you exclude those sales in those two countries, unit sales in all the other countries grew 30% in 2012 versus 2011. In addition, for the last seven years since the Company became profitable, the average annual compound unit sales growth has been 23%. So while we had a boost from Brazil and the Republic of South Africa in 2012, the rest of the business grew significantly. All key demand factors including, one, the feminization of HIV/AIDS, a contraceptive opportunity provided by the Gates Foundation and UK government, the fact that the female condom is the only product where use is initiated by women that provides dual protection against AIDS and unintended pregnancy, and the recent inclusion of female condoms in the PEPFAR blueprint for an AIDS-free generation, indicate there will be strong long-term growth in demand for female condoms. As a result, we believe the Company will follow its record 2012 year with more modest, but continued substantive growth in unit sales and operating income.

We now will take some questions. Laura?

(Operator Instructions)

Please limit yourself to two questions at a time. If you have further questions, you may reenter the question queue at a later time.

George Whiteside of SWS Financial Services.

First, I would like to congratulate the entire management team for these really superior results in 2012. Although you've amplified in your remarks about some of the reasons -- Brazil and South Africa. But, nevertheless, it's outstanding performance. To further explore this, what you have indicated in your release was that you expected 2013 to show increased sales, and then resulting in increased profits. And now you've commented on it, it may be more modest than we experienced. Do you see this as a result of the acceleration in overall demand? And that perhaps we can look forward to similar, perhaps modest gains in 2014 and '15?

Thank you for your kind comments, George. I think that -- we had an 88% growth this year in units, and we won't have that every year because of the catch-up. But I did say that outside of the growth, and due to Brazil and the Republic of South Africa, to take that out of the equation, the growth of the rest of the business was at 30%. And our compound growth rate in unit sales over the last seven years, which includes everything, is 23%. And so, I would say that we won't have 88% growth this year, but we will have growth in both sales and operating earnings during the year. And, if anything, given the various factors I mentioned, I would expect that in future years, you'll see an acceleration of growth.

Thank you. Now, my second question is -- it's not a very original idea, but we're looking forward to a January declaration of dividend. Is there any disadvantage in the possibility of, in late December, paying that dividend in view of the impending fiscal cliff, which is a possibility?

The Board considers dividends each quarter, and we will be considering that in early December. And we'll make a decision on that at the time. But we haven't made a decision of that nature yet, George.

No, and I would certainly respect the idea that you want to be very deliberative about it, with your splendid performance and cash flow, et cetera. That small difference in timing might be attractive to some.

Yes.

Thank you.

Andrew Love of Love Savings Holdings Company.

Congratulations on an excellent quarter and year. I have two questions. One is, how many shares did we repurchase during fiscal 2012? And as a sub-question to that, are we focusing on the fact that repurchase of shares as a way of getting money to shareholders is probably going to become even more advantageous relatively speaking, as we face higher taxes on dividends? But probably nowhere near as much of an increase in taxes on shares?

Andy, our share repurchase was modest during the year -- only about 44,000 shares. And obviously, depending on the final outcome of what happens, and with taxes and so forth, our Board will consider both the repurchase of shares and the dividend program within that context.

Thank you. That's all I've got.

Marc Robins of Catalyst Research.

Let me add my congratulations to the fantastic year. And the good job that you and your team has done. Just really very quickly, you discussed the Melinda and Bill Gates, and the UK's commitment for, was it $4.8 billion.

$4.6 billion.

Did some of that money dribble out in 2012? And it's a guess as to what the amount might be in 2013?

No, I don't know that much of it was spent in 2012. I doubt it, because they were getting the program up and going. And they haven't advised us as to exactly what they will spend in 2013. But the program is active. They are setting up a group in New York with the United Nations Population Fund as its center.

And actually, you have the Bill and Melinda Gates Foundation, the UK government, the Department of Foreign Development there, and USAID -- United States Agency for International Development -- and the United Nations Population fund have all joined in on this. And they are setting up a management group for this program in New York. And currently are recruiting a Director for it. So, I expect it to become very active, very soon. It's $4.6 billion. It's not going to happen instantly, but I think you'll begin to see some impact on that during the course of 2013.

And help me understand this now -- what I did hear is that you're going to take 5% of your unit sales of the previous year. So, this year, that number was what, 60 million, maybe?

Yes.

And so, you would produce and then hand to various agencies roughly 3 million for sampling.

Yes.

Could that be in conjunction with what the Bill and Melinda, and UK government, funds are doing? So, you teach people about the product, you expand the market, and then maybe they come in behind, and buy and support the programs that you've initiated?

I think you've got the idea down. The market is totally open. Almost all sex acts are unprotected that occur. So, it's not a saturated market. So, as a part of the education programs, you provide this product. And, in effect, the product is being sampled as a part of education and training, which will stimulate demand. And as the program rolls out, I think it will definitely be reflected in increased business.

And, again, this would be done through the auspices of the local country government, though?

It could be. It might vary from country to country. It could be done under the auspices of the United Nations Population Fund. It could be done under the auspices of the British government and Gates. Or it could be done with a particular country.

And may I ask a third question?

Sure, go ahead.

In the past, we've been limited to two. In the United States, or essentially around the world, retail sales of the product have been what in 2012? And did they show much of an increase over 2011?

They increased, but our retail sales are modest. We've looked at having potential partners in that area, but we haven't elected to promote broadly in the retail area since we're mostly in public sector. We do have in cities in the US where we have programs, like in Washington, DC, and New York, where there's a high incidence of AIDS and other sexually transmitted infections. We do have distribution in some CVS stores, and about 900 Walgreen's stores. In addition to that, we're having fairly good increases in the online purchases of the female condom. You can buy it from Walgreen's online. And we're seeing some increases in that.

Interesting. Okay. Very good. I'll get back in queue. Thank you, and again, great quarter.

(Operator Instructions)

George Whiteside.

OB, you've commented on these initiatives. What do you see as a competitive aspect of the AIDS epidemic? I know that here in San Antonio there is an organization that is working on a vaccine, and I'm sure there are many others. I know that there's been concern among investors that there was a possibility of either vaccines or some other preventative mechanism. What are your thoughts about that on a longer-term basis?

There are two things that have been under development. One is, there's been an attempt to develop a vaccine. And a vaccine, of course, would be very useful in inoculating people against AIDS. Unfortunately, in spite of a great deal of money and brilliant people working on it, a practical vaccine that's useable hasn't been developed. And there are some good reasons for that. There's the mutability of the virus. And it's just a very difficult scientific task. There are a number of projects going on all over the world that, in my view and I think the view of a number of scientists, that it's going to be years before such a vaccine is developed, if that ever happens. Some people think it may not be possible. Others think that it is, and they are working on it. But it's not going to happen any time soon.

The second thing that's happened along those lines is they have taken drugs that are used to treat AIDS, and administered them to people to prevent AIDS. And there's some limited success in that. But in that case, you are providing drugs with serious side effects to healthy people. And so, you have that issue to deal with. The effectiveness is marginal at this point, in terms of the number of people. And if you don't take it every single day, it won't be effective. And in addition to that, I think the cost estimates were $10,000 to $15,000 a year to administer this. So, I think they see that perhaps in some cases it would be useful, but it's very unlikely it's going to be broadly distributed on that basis. So, as we look at it right now, I think for the next three or four years, I don't see any alternate types of products like that becoming broadly used.

Now, of course, the other point here that's important for everybody to know is that, going to the Gates Foundation program is, none of these products provide any contraceptive qualities. So, I think we're in a pretty good position right now for quite a while.

That is certainly interesting. And I'm fascinated by your commentary earlier relative to the contraception aspect of it. And being somewhat marketing-oriented, I see that as really a brilliant addition to the disease prevention that you have always had as an objective. Congratulations on that account, as well as your financial results.

And that will conclude our question-and-answer session. Mr. Parrish?

I would just like to thank everybody for their support. And we look forward to another great year in 2013.

Laura?

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