Veru Inc.
Q3 2015 Earnings Call Transcript

Published: 30 Jul 2015

[Operator:]

Hello and welcome to The Female Health Company Third Quarter Fiscal Year 2015 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 that this event is being recorded. The statements made on this conference call that are not historical in nature are forward-looking statements based upon the Company’s current plans and strategies. Such forward-looking statements reflect the Company’s current assessment of the risks and uncertainties related to its business. The Company’s actual results and future developments could differ materially from the results or developments in such forward-looking statements. Factors that may cause actual results or developments to differ materially include such things as product demand and market acceptance, the timing of receipt and shipment of large orders, competition, the economic and business environment, and the impact of government pressures, currency risks, capacity, efficiency and supply constraints, the ability to execute on new business strategies and other risks detailed in the Company’s press release, shareholder communications and Securities and Exchange Commission filings. For additional information regarding such risks, the Company urges you to review its 10-Q and 10-K SEC filings. I would now like to turn the conference over to OB Parrish. Please go ahead.

[OB Parrish:]

Thank you, Ed. Good morning and welcome to The Female Health Company’s third quarter 2015 conference call. Michele Greco, Executive Vice President and CFO, is here with me in our Chicago office. This morning, I’d like to make some general comments regarding the status of the company then I’ll cover the financial results and key factors that may impact future results and the outlook. As usual, on every 30 years, I am referring to the company’s fiscal year evolution September 30, unless I know otherwise. I have three general comments regarding the company. First, during the third quarter and year-to-date the company experienced 1 million FC2 unit sales growth, this is important because it reflects increased global demand for Female products. Secondly, as you would’ve probably noticed in the release the company has experienced a new expense growth year-to-date. A portion of this represents in investment and development, a significant portion of future expenditures will be reduced under Federal line with revenue and return on investment. The third general comment, although the company continues to be profitable and debt-free, the company has experienced a significant decline in shareholder value, as a substantial shareholder I’m acutely aware of this. Because the company is a profitable debt-free company, which I believe that’s good prospects. I believe that it is currently under development, it’s my objective to focus on returns on investment and shareholder value. Turning to the financial results for the third quarter, unit sales totaled $14.4 million up 5% from the third quarter of 2014. Net revenues for the quarter totaled $7.8 million, a decrease of 1% from $7.9 million in the prior year period. Gross profit increased 11% to $4.6 million or 59.7% of net revenues compared with $4.2 million or 53% of net revenues in the prior year quarter. Operating expenses increased $1 million or 48% to $3.2 million, a significant portion of this expense is attributable to Brazilian market development, distributor fees and new import tax. Another significant portion of the increase was attributable to FC2 marketing and the company objective to diversify its product line. Reflecting the increase of expenses, operating income decreased 28% to $1.5 million versus $2 million in the prior year period. The income for the quarter increased slightly to $1.17 million or $0.04 per diluted share, and $1.16 million or $0.04 per diluted share in the prior year quarter. Turning to nine months, unit sales increased 44% to $47.3 million. Revenues increased 34% to $25.4 million. Gross profit increased 45% to $14.8 million or 58% of sales compared to $10.2 million or 54% of sales in 2014. Operating expenses for the nine months increased $3.2 million or 54% to about $9 million. A significant portion of this was attributable to Brazilian market development, distributor fees and the tax that I mentioned earlier. Most of the rest of it was attributable to Semina call, FC2 development and the diversity program. Operating income increased 33% to $5.9 million. Net income increased 21% to $3.6 million from $3 million a year ago. Net income per diluted share increased 30% to $0.13 per diluted share from $0.10 per diluted share in 2014. Turning to cash flow, cash flow from operations year-to-date was a negative $3 million including a negative change and operating assets of $9.5 million. This is attributable to the increase in receivables to the Brazilian tender. Payment has been guaranteed by the Brazilian government and we have received regular payments including one recently that is moved our cash position to $5 million versus $2.6 million in the press release. We have never had any problems over 10 years in getting payments from the Brazilian government and we expect to be fully taped to this receivable. Turning to tax loss carry-forwards. The company has tax loss carry-forwards of $34.3 million in statements that are in the U.S. and $62.9 million in the U.K. which did not expire. The tax loss carry-forwards maybe used to reduce cash payments on cashless charge against future earnings. Now, during the period ending December 31, 2015, cash payments [ph] and SEC’s deferred tax assets was fully reversed. As a result, the company is no longer recognizing significant tax benefits on our profit and loss statements. However, the $34 million U.S. tax loss carry-forwards and $62.9 million U.K. tax loss carry-forwards may be utilized to reduce cash payments against future tax charges. For example, year-to-date, the company has recorded tax expense of $2,261,775 on its profit and loss statement. However, during the same period and has paid only $267,394 of taxes and only 12% of the charges recorded. When you consider the tax-loss carry-forwards, we have maybe used to upset cash payments for future taxes, it is a substantial resource. I’m very pleased with the unit sales growth which reflects increasing demand for FC2. While the company has experienced public sector order volatility and competition remains profitable and debt-free. As I’ve mentioned earlier, I’m not pleased with the decline in shareholder value. I’d like to discuss demand factors that will impact FC2’s future. There are three that indicate long-term growth for the female condom as positive. First, is basic hand which really hasn’t changed until the, only intensified. HIV AIDS remains the leading cause of death worldwide among women of teen to 44 years of age. 50% or more in some countries of all people living with HIV AIDS are women. Unintended pregnancies continue to be a major health and economic issue worldwide. And this is increasing and publicity on is increasing. And second factor is advocacy. The market for female condoms, there is only very few markets I’m aware of, who are into vulcanized groups actively advocate for an accretion investment and availability of a product. And this has sort of increased substantially during the last few years. Well organized and funded women’s groups worldwide are actively advocating for gender equity in reference to disease prevention and prevention of unintended pregnancy. We will increase funding for and universal availability of female condoms. I’d like to cite two examples of such groups. First, is a center for health and gender equity, it’s called Change, which is based in Washington, DC. You can go to their website and see what they have to say about female condoms. Second is the universal access to female condoms group called UAFC based in Netherlands, their level of influence with statement, Female Condoms for All, as of example, very activities UAFC has organized a Global Female Condom Conference 2015. It will be attended by representatives from throughout the world. It will be held December 1st to 3rd in Durban, South Africa. The conference has stated their objective on their invitation, and I’d like to quote it. “Many women and men still do not have access to the only dual prevention method that women could initiate themselves by combining knowledge, experience and expertise, we can make the female condom, accessible, available and affordable for all. The Global Female Condom Conference 2015 will be a vital opportunity to contribute to this mission. Let’s take the female condoms to the next level”. Here is an organization an assembly to worldwide meeting to increase the availability of female condoms. And believe that this will positively impact the market on current. The third factor change is in the market environment, making opportunity to broaden the market through pause including selling directly to consumers under certain circumstances. These changes include the following. In the United States, female condoms are now reimbursable under the Affordable Care Act, ObamaCare. FC2 is now registered and has a UPC code to support reimbursement. There has been increased public focus on preventing unintended pregnancies, the sexually transmitted disease among young women. The world’s social media has increased sharply in marketing to young women and there has been increased online purchasing of many products including condoms and female condoms. And finally, there is an increased U.S. drug retailer interest and contributing to healthcare, as witnessed they’re examples of the in-store clinics and retail shops, the nodulation of cigarettes by CVS, the focus on healthcare, increased centers in providing healthcare advice to people including women. Turning to the outlook, I think it’s positive for several reasons. While the company has competition ex-U.S. for female condoms and market will grow long-term. And we have and will continue to retain a good share of the market on a profitable basis. Opportunities to this to expand the distribution of female condoms, they’re online and selected retail sales. We will pursue such opportunities based on expected return to investors and at a level of risk reasonable for the company. We will accelerate, better focus our diversification project. We’re assuming opportunities based on growth potential and impact on shareholder value. During the recent management change, I’ve had two directors highly experienced and successful in the healthcare industry and with merger and acquisition experience with Revital Systems. Donna Felch and Dave Bethune, Donna will focus on expanding the FC2 market and Dave in diversification. Their backgrounds are included in the press release if you wish to read it. In terms of guidance, due to the volatility of the business we don’t provide specific earnings guidance. We do provide general guidance. The company remains profitable and debt-free. The female condom will grow long - the market will grow long-term and we’ll retain fee. So, we could ensure with growing sales on a profitable basis. Our diversification program is focused to broaden our product line based on growth and impact and shareholder value. And I could assure that management’s focus will be in growth, return on investment and shareholder value. I’m very confident about the future prospects for the company. And I currently believe it’s undervalued at the current price. Now, we’ll take some questions. Ed?

[Operator:]

[Operator Instructions]. Our first question comes from Avi Fischer of Long Cast Advisors. Please go ahead.

[Avi Fischer:]

Hi, good morning OB and Michele. I have two quick questions. First, is it possible that might be best to just take on one thing at a time, say, due to U.S. consumer strategy expansion now and then rethink additional acquisition sometime in the future instead of doing, you’re a small organization maybe putting that up into two separate times and two different things instead of simultaneously?

[OB Parrish:]

Well, I think within that context, that type of solution would be based on the opportunities available on each side. And as we evaluate those if that turns out to be the best choice that’s what we’ll do, but we’re not limiting ourselves to something looking at one opportunity.

[Avi Fischer:]

I guess, as a follow-up to that, because the increased spending on the SG&A line is I presume in the pursuit of both of these things simultaneously? When should we expect the kind of return on that?

[OB Parrish:]

Well, that’s the key question and that’s what we’re looking at. On the G&A line on expenses, some of that is due to the particular, those particular projects. But there are some other expenses in there that are substantially far and one of the points I made initially is that we can typically reduce the federal line than, rather than this and the return on investment. In terms of timing, as we look and make decisions on the consumer project or on the acquisition, one of the key things would be both return on investment and timing. And that will be part of the decision and perhaps literally we focus on one more than other or drop one and not the other.

[Avi Fischer:]

Perfect. And then just finally, you’ve been the kind of publicly traded company for a long time, you know it’s not just about unit sales and revenues but balance sheet management, cash flow management. And they tend to let it in the company about this last year after you cancelled this dividend. But is it possible that your compensation would be based less in the future or could be changed, so it’s not just on unit sales and profitability but also returns on invested capital. Is that something you’d be willing to revisit?

[OB Parrish:]

Let’s tell you that historically my preference has always been to tie intellectual compensations where we see the shareholder value.

[Avi Fischer:]

I hope we get to see that in the next proxy statement. Thank you.

[OB Parrish:]

Thank you, Avi.

[Operator:]

Our next question comes from Tony Sorenza [ph] of Key Equity Investors. Please go ahead.

[Tony Sorenza:]

Thank you, good morning. Given the management and leadership change, does this signal in anyway a change in strategy, the strategy sounds very similar to what it was elucidated before. But is the strategy now significantly different in your mind?

[OB Parrish:]

I don’t think the fundamental strategy is significant different. I think the execution will be substantially different.

[Tony Sorenza:]

Okay. Maybe a question of emphasis or just to actually execution you’d say?

[OB Parrish:]

Well, I think the focus on return on investment and shareholder value is a primary objective that I would have.

[Tony Sorenza:]

Okay. Now, my next question is and it’s a question I’ve spoken to a lot of other shareholders and a little bit confusion on, it’s really the acquisition strategy. As we look at the company’s balance sheet, obviously there is not a lot of cash there to actually do a transaction. And I don’t know if you want to take on that. It would seem to me and I think this is a general reaction, would it make more sense to be involved in a partnership with someone else to help distribute the product or even possibly a sale of the company to someone else who would have better distribution with say in the United States who can more effectively sell the product?

[OB Parrish:]

Well, that’s a good observation. I should point out that in looking at that type of activity, we haven’t eliminated any possibility that would make sense with our shareholders including all the ones which you’ve mentioned.

[Tony Sorenza:]

Okay. So those are all on the table, when you say acquisition, we could look at partnership?

[OB Parrish:]

We’re not necessarily saying that we’re going to do this regardless. We’re looking at any possibility direction that could improve shareholder value.

[Tony Sorenza:]

Okay, great. That’s good to know, I appreciate that. Good luck. Thank you.

[OB Parrish:]

Thank you.

[Operator:]

Our next question comes from Anthony Vendetti of Maxim Group. Please go ahead.

[Anthony Vendetti:]

Thank you. Yes, just a follow-up on the distribution strategy. In healthcare obviously it’s very fragmented and vitally imperative that you figure out a distribution strategy that can best monetize a product that is clearly a product that should be high demand, high need for. So, can you talk a little bit more about what your distribution strategy is and how you see it evolving over the next couple of years?

[OB Parrish:]

Well, there are two parts to this. If you look at distribution of the public sector where we feel the base, we currently have that substantially covered, we currently distribute in various ways to 144 countries around the world. And that also forms a framework if you had another product that fit that distribution system, you would capitalize on it. Secondly, there are other types of distribution business product that might be useful. For example, if you look at non-formal birth-control and so it relates to normally we had breast-cancer and until they were treated, they can’t use the pills they’re looking for, know more normal methods of birth-control, there is another subset of market like that that could be use of where we expand even in the public sector or private sector. As far as distribution of the consumer basis, it could very well be and we’re seeing substantial purchases online of male condoms and we’re beginning to see it on female condoms. And so you could have social media and online purchasing. We’re currently listed on Amazon with purchases. And there could be some special retail applications of it as I’d mentioned earlier. We’re going to be careful in looking at something like it and determining level of risk and potential return.

[Anthony Vendetti:]

Okay. And just a quick follow-up, you mentioned under ObamaCare there is a code that could allow for reimbursement, can you elaborate on that?

[OB Parrish:]

Yes. The ObamaCare, if somebody gets considering from both physician that says female condom, they can get reimbursed for it. And UFA has a code in order for that that’s happening.

[Anthony Vendetti:]

So, you need an actual script from a doctor in order to get reimbursed?

[OB Parrish:]

Right. And we’ve talked to physicians about it and there are a number of physicians that have kept requesting and they have been doing that for a number of reasons.

[Anthony Vendetti:]

Okay, great. Thank you.

[Operator:]

Our next question comes from Peter Mcmullin of IPC Global. Please go ahead.

[Peter Mcmullin:]

Hi OB, how are you doing?

[OB Parrish:]

Peter, how are you?

[Peter Mcmullin:]

Very well, thank you. Do to expect this negative cash flow to reverse and somebody pointed out it’s kind of limiting your options on acquisitions. With over your time and that would look better?

[OB Parrish:]

Well, most of it is good as Brazil time. And we’re good in regular payments. And we hope there would be a big chunk of that by the end of our current fiscal year, which ends in September.

[Peter Mcmullin:]

Okay. And second question was referenced to FC2 product development, and given a more competitive marketplace with some pressure on prices, would you be looking at trying to do it somewhat cheaper or just what direction is product development going?

[OB Parrish:]

Well, there are maybe three different things Peter. One is, of course reducing cost and we’re focusing on that which has something to do with the pricing structure. The second is the types of bidding strategies NY has in reference to time and price and volume. The third is providing different varieties of the product. One of the things that’s come all-in in the public sector includes the reducing use of female condoms and male condoms, just having the variety that captures interest and the story behind is, and have a public sector and hope soon get actual use of the product among the public sector users. So we’re looking both of the types of things we’re looking at.

[Peter Mcmullin:]

Okay, thank you.

[Operator:]

[Operator Instructions].

[Unidentified Analyst:]

Hello. I’m just wondering could you explain all through the foreign exchange charges, I thought we took steps to minimize those years ago, why are the foreign exchange charges so large?

[OB Parrish:]

To minimize what?

[Unidentified Analyst:]

The foreign exchange expenses or gains.

[OB Parrish:]

Well, one of the, there are two parts to that. One is that we did, now that everything is dollars, so we do have one exposure in Malaysia, it was Malaysian Ringgit and the U.S. dollar. And they have been pretty much in lock-step for a long period of time for many years of up to maturation. And recently with the strengthening dollar we’ve had weakening Ringgit, the Malaysian Ringgit next to that and so we got some positive currency in that.

[Unidentified Analyst:]

Do you expect further large swings in that or not?

[OB Parrish:]

Not really.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

And this concludes our question-and-answer session. I would like to turn the conference back over to OB Parrish for any closing remarks.

[OB Parrish:]

Well, I like to thank everybody for their interest in The Female Health Company, and for their attendance. I look forward to entering the call to next quarter. And thank you once again all. Bye.

[Operator:]

You’re welcome. To access a digital replay of this conference you may dial 1-877-344-7529 or 1-412-317-0088 beginning later on today. You’ll be prompted to enter a conference number which will be 10068494. Please record your name and company when joining. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.