Veru Inc.
Q4 2015 Earnings Call Transcript

Published: 1 Dec 2015

[Operator:]

Good day, ladies and gentlemen. And welcome to The Female Health Company’s Fourth Quarter Fiscal Year 2015 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note that today’s event is being recorded. The statements made on this conference call that are not historical in nature are forward-looking statements based on 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 those 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, 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 call over to Mr. O.B. Parrish. Sir, please go ahead.

[O.B. Parrish:]

Jamie, thank you. Welcome to The Female Health Company’s fourth quarter 2015 conference call. Michele Greco, our Executive Vice President and CFO, is here with me in our Chicago office. Before I get started on the FHC report, I would like to note that it is December 1st. It’s World AIDS Day and the 18th Meeting of the International Conference on AIDS, HIV/AIDS and Associated Diseases in Africa is underway in Zimbabwe. We are happy to have that conference and representative and have a program with [indiscernible] and one of those at that conference is looking out the development of PLWHA of evidence-based interventions for HIV/AIDS and Associated Disease in the post-2015. Turning to our report, this morning I will make some general comments regarding the status of the company. Then I will cover the financial results, some key factors that may impact future results and the outlook. As usual, when I refer to years, I am referring to the company’s fiscal year which ended September 30th unless otherwise noted. First, I am pleased to report that the company posted growth for the quarter and 2015. Second, my review of opportunities and challenges, since me assuming this position, we believe the company has a positive future which wants the basis for increasing shareholder value on the long-term basis. For the fourth quarter, unit sales totaled $15.7 million, up 41% from the prior year quarter. Net revenues totaled $7.2 million, an increase of 29% from $5.6 million in the prior year quarter. Gross profit increased 43% to $4.1 million or 58% of revenue, compared with $2.9 million or 52% of net revenues in the prior year quarter. Operating expenses of $3.4 million for the fourth quarter showed no increase over the prior year. Reflecting the increase revenues and flat expenses, operating income totaled $761,317 versus a loss of $482,577 in the prior year quarter. Net income increased to $702,571 or $0.02 per diluted share, from a loss of $556,121 or a loss of $0.02 per diluted share in the prior year quarter. For the 12-month period, unit sales increased 43% to $61 million. Revenues increased 33% to $32.6 million compared to the prior year period. Gross profit increased 45% to $19 million or 58% of sales, compared to $15.1 million or 54% of sales in 2014. Operating expenses for the 12 months period increased $3.2 million or 34% to $12.4 million. The significant portion of the increase was attributable as a result of market development, distribution fees on nitrile, most of the rest was attributable to certain [sum] [ph] payments FC2 developments and diversification. Operating income increased 69% to $6.6 million for an operating margin of 20% versus $3.9 million and operating margin of 16% in 2014. Net income increased 79% to $4.3 million from $2.4 million. Net income per diluted share increased 88% to $0.15 per diluted share from $0.08 per diluted share in 2014. Turning to cash flow, cash flow from operations for the year was a negative $1.5 million, including a negative change in operating assets of $9 million. This was attributable to the increase in receivables due to the Brazilian tender. I should note the Brazilian receivables totaled $9.9 million. This is offset by what we owe them, which is about $1.6 million within a net receivable effect of $8.3 million. We did advise that payment could be received as early as February or as late as April. Our cash position at the end of November is about $4 million. I should note that we have received significant orders from Brazil over 10-year period. During those period, we have experienced late payments for six months or more under some circumstances but never revolt. As a result, we are confident we will be paid. But I should note that our record on all other clients in terms of on-time payment on life of defaulters is very strong. The company does remain debt-free and has an unused $2 million line of credit. Turning to tax loss carryforwards. During the period ended December 31, 2013, the valuation allowance on the company’s deferred tax assets was fully reversed. As a result, the company no longer recognizes significant tax benefits on its P&L statements. However, it is very important to note that the operating loss carryforwards will continue to be utilized to reduce cash payments for taxes charged. For 2015, the company recorded tax expense of $2,341,004 although we paid only $294,441 of taxes or just 13% of the total charge recorded. This resulted in cash savings of $2,046,563. The company’s tax loss carryforwards of $12.6 million in state and $13 million in federal in the United States and $61.9 million in the U.K. which maybe used to reduce future tax payments and save cash. I should note the U.K tax loss carryforwards do not expire. In summary, I’m pleased with the results. The results reflect an increase in demand on a long-term basis in my view in the company’s market leadership and capitalizing on this opportunity. We have five factors that create long-term growth potential for the company and five opportunities to increase shareholder value. First is a basic need which I call routinely, HIV/AIDS remains the leading cause of death among women 15 to 44 years of age. 50% or more of all people living with and new cases of HIV/AIDS are women. And the market for female condoms is only a fraction of market for male condoms, reflecting significant gender equity. The second factor is advocacy. Due to basic market need and gender equity in terms of protection, in [indiscernible] well organized, professional women’s group are actively advocating for increased investment in and availability of seasonal condoms. Very few companies have independent, well funded organized groups advocating for increased use of their products. As we speak, The Global Female Condom Conference 2015 is taking place in Durban, South Africa. The conference was organized by the Universal Access to Female Condoms, UAFC and Durban based advocacy group. Attendees include representatives from throughout the world. The company is actively involved in supporting this meeting by presenting and exhilarating at the board and in panel discussion participation. The sole purpose of this meeting is to create universal access to female condoms. We believe this will contribute to a long-term market growth on a global basis. The third factor is changes in the U.S. market. As a result of these changes, we believe there is an opportunity to sell direct to consumers on a complementary basis to our public sector marketing. These changes include the following. Female condoms are now reimbursable under the Affordable Care Act or Obamacare. There is an increased public focus on preventing unintended pregnancies and sexually transmitted disease among young women. There is an increased role of social media and marketing team of women. There is an increased U.S. drug retailer interest in contributing to health care such as in-store clinics or as we read elimination of cigarettes. There have also been proposals which I believe will be able to leverage in some states soon to promote pharmacies to prescribe birth control. There is also an increase in online purchasing of personal care products. In part, reflecting these changes, FC2 can now be purchased online from a variety of websites including Amazon.com, Walgreens.com, Drugstore.com, MyQuestStore.com and shopfemalehealth.com. The interest on multiple websites in selling FC2 reflects increasing consumer interest. The company’s under process is systematically testing direct to the consumer market here in the U.S. This includes social marketing and in-store promotion. We believe that this could be complementary to public sector marketing and increased overall FC2 public awareness and use in this country. This test will be completed early in 2016. And if favorable, the program will be implemented, which we believe will significantly impact future results in a positive manner. The fourth factor is competition and the relationship of education and training to competition. The company’s head competition involved public sector market for more than three years. The first competitive product was cleared by WHO on June of 2012. To date, the competition hasn’t been able to attain a significant share of the market on a global basis even sometimes with lower pricing. One example may illustrate why we provide significant education and training for the use of FC2. Competition has provided education and training for products of different design in FC2. In one country where competitive products were distributed, the actual use rate result of product was distantly used in FC2 purchase. So it’s not simply the price for product that accounts but the price for protected sex acts. For example, these figures are just hypothetical with 1,000 condoms were purchased for $0.35, but there were only 4,000 protected sex acts across protected sex act would be $1.25. Again, hypothetically, the thousands condoms were purchased for $0.50 and there were 850 protected sex acts across where protected sex acts would be $0.59. And this could be translated onto comparing it to the dollar saved by treatment avoiding this cost from the cost per dollar saved. Matter of fact, product designs, specific education and training is related to the rate of use of a product. And in this case, it could be a barrier to the entry of products with different designs and lesson providing education and training. The fifth factor and probably the most important factor in the long-term is diversification. We have been looking at this for a period of time and recently have been focused on execution. We have identified some specific opportunities, which are proprietary and involve product differentiation, which we believe could positively impact shareholder value and our target is to complete such a transaction in 2016. Now, I’d like to turn to the guidance and outlook for the company. Due to the period-to-period volatility of the public sector business, we don’t provide specific guidance. However, we do provide general guidance regarding the outlook for the company. I believe the outlook for the company is that increased shareholder value is positive for four reasons. The market for female condoms will continue to reflect period-to-period volatility as we have experienced over the past but also will continue to grow in the long-term. Reflecting this trend, today, the company has sold more than 500 million female condoms. Our average annual compound unit sales growth rate for 10 years is 16% per year. Competition has grown, WHO is going to available for more than three years has not significantly penetrated the global market. To date, no other female condom has been approved by FDA. The company is and will continue to be the market leader even with the competition. Secondly, opportunities exist to expand public sector FC2 sales in multiple countries. We have an excellent base to do so, with registration and distribution in 144 countries. This opportunity can be accessed by need related marketing, coupled with gender based advocacy that I mentioned earlier in such countries. Third, changes in the U.S. market that I mentioned provide a new opportunity for our complementary direct-to-consumer with public sector marketing to substantially expand our distribution and unit revenues in the U.S. Just as a side note, we expect FC2 in addition to the websites I mentioned earlier to be available for online purchasing through additional websites, including walmart.com, paymore.com 17

[Operator:]

[Operator Instructions] And we do have a question from Russell Mollen from Nine Ten Capital. Please go ahead with your question.

[Russell Mollen:]

Hello.

[O.B. Parrish:]

Yes.

[Russell Mollen:]

Hey. How are you doing?

[O.B. Parrish:]

Good.

[Russell Mollen:]

Quick question for you. I know in the past you guys have kind of briefly touched on whether or not you think unit sales would be higher or lower in a given forward 12 months or something like that than they were in the previous fiscal year? Is that something that you would be have any insight on today or whether or not you think, you would be doing more than 61 million units in fiscal ’16?

[O.B. Parrish:]

We have a very specific forecast on that Russell, I assume is to what it would be.

[Russell Mollen:]

Got it. Okay.

[Operator:]

[Operator Instructions] Our next question comes from Jerry Falkner from RJ Falkner. Please go ahead with your question.

[Jerry Falkner:]

Hello, O.B. and Michele. How you all doing?

[O.B. Parrish:]

Hello.

[Jerry Falkner:]

Can you hear me O.B.?

[O.B. Parrish:]

Yeah.

[Jerry Falkner:]

Okay. I’m sorry. It’s hard to hear you. I was wondering if you could just elaborate a little bit on the diversification program in terms of whether you are committed to staying in The Female Health space in terms of any acquisitions that you might make [Indiscernible] that company is on the broader basis in just Female Health?

[O.B. Parrish:]

I think in reference to targets, I would break it down like this. To the extent, we have something that’s going to fit in an area where we are currently comfortable and have some expertise such as Female Health, that’s a plus. And some of the specific properties that we’re looking at right now do fit into that category. There maybe other areas that would fit into various capacities we have such as getting approvals or distribution that could also be attractive. But I would like to mention, we have been focusing on execution. We have identified some targets that represent differentiation in terms of [Technical Difficulty] and a proprietary position and some of those too are directly involved in the Female Health.

[Jerry Falkner:]

Okay. Thank you.

[Operator:]

Our next question comes from Eric Weinstein from Chancellor Capital. Please go ahead with your question.

[Eric Weinstein:]

Thanks. Hey, O.B. I wanted you to talk a little bit about other business developments activities that are ongoing, that could help diversify the strategy, shy of doing a large transaction that is -- to what extent, are you talking to or seeking at strategic distribution partners for the current product or having other discussion as to potentially in license other products to distribute in addition to anything you might do on the M&A front?

[O.B. Parrish:]

Right. Okay. It’s a very good point. A couple of points there. First, we are looking at some different version of FC2, which would be attractive, in terms of colors in those things and would enhance the use and perhaps differentiated to some extent from our competition. Definitely, we are also exploring different version of female condom, which could broaden our reach that might provide us something in addition. In a reference to the overall program, aside from making an acquisition or purchase, the problem that we are going through could very well end up towards the possibility of licensing the product or something of that nature. So we are exploited beyond just as simple the acquisition thing.

[Eric Weinstein:]

Okay. Thanks.

[Operator:]

Our next question comes from Peter McMullin from IPC Global. Please go ahead with your question.

[Peter McMullin:]

Hi, OB. It’s Peter McMullin.

[O.B. Parrish:]

Hi, Peter.

[Peter McMullin:]

Staying with the new version of FC2, but I want to talk about the operating expenses which has been running higher than usual. We expect some lowering of this into fiscal ‘16 on an apples-to-apples basis.

[O.B. Parrish:]

Expenses, we’ve been doing some investing in with evolvement some of these additional versions for FC2. We have made some investments to a substantial degree through taking out the diversification programs. If you look at those investments we have made, it is probably over a $1 million for the year and without any immediate returns we take in the long-term will have a substantial return from it. And I’d like to mention we are able to do that and pay for and have different results and being quite profitable. I think on an ongoing operating basis, we could see operating expenses driven within this, it would be more than what we are currently experiencing.

[Peter McMullin:]

Thank you.

[Operator:]

And ladies and gentlemen, at this time, we’ve reached the end of today’s question-and-answer session. I’d like to turn the conference call back over to management for any closing remarks.

[O.B. Parrish:]

Thank you very much for your support and we look forward to talking to you next time. Thanks.

[Operator:]

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending. To access the digital replay of this conference, you may dial 1-877-344-7529 or 1-412-317-0088 beginning at 2 P.M. Eastern Time today. You’ll be prompted to enter the conference number, which will be 10076672. Please record your name and company when joining. Once again today’s conference has concluded. We do thank you for joining today’s presentation. You may now disconnect your lines.