Veru Inc.
Q2 2013 Earnings Call Transcript

Published: 2 May 2013

[Operator:]

Hello, and welcome to the Female Health Company’s Second Quarter of fiscal year 2013 operating results conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by 0. 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 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 Mr. O.B. Parrish. Please go ahead, sir.

[O.B. Parrish:]

Thank you, Maureen. Good morning to everybody and welcome to the Female Health Company’s second quarter conference call. Michele Greco, our Vice President and Chief Financial Officer is here with me in Chicago. Mike Pope, our Vice President U.K. and Malaysian Operations is participating from London Athens [ph]. This morning, I’ll address the financial results, recent events, some long term demand factors that will impact future results and 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 30th unless I note otherwise. I am very pleased to report the results for the second quarter was excellent. Unit sales increased 20% to 16.7 million versus the prior year quarter. Revenue increased 21% to $9.5 million. Gross profit increase 21% to $5.5 million, 585 of sales compared to $4.6 million in the prior year quarter. Operating expenses decreased 10% to $2.2 million compared to the second quarter of 2012. The decrease was due to lower compensation of pools [ph], and onetime expenses occurring in the second quarter of 2012 that did not repeat in 2013, also in part by increased education and training expense. Operating income increased 55% to 3.4 million from $2.2 million in the prior year quarter. Net income for the second quarter increased 83% to $3.5 million or $0.12 per diluted common share compared to $1.9 million or $0.07 per diluted common share for the second quarter of 2012. I should note that unit sales, revenues, operating income and net income were all new second quarter records. Turning to the first half, unit sales increased 16% to 34 million, revenue is increased 18% to 19.4 million. Gross profit increased 20% to 11.5 million from 9.6 million in the first six months of 2012, operating expensed increased 2% to approximately 4.5 million and approximately 4.6 million in the prior year first six months. Operating income increased 41% to $7 million in the first half, and $4.9 million in the first half of 2012. Net income increased 54% to $7 million, or $0.24 per diluted common share from $4.6 million or $0.16 per diluted common share in the first half of 2012. During the first half of the year, the company generated $5 million in cash from operations, including a negative 2.7 million in debt and traders [ph] in operating assets and liabilities. At the end of the second quarter, the company had $6.1 million in cash, and 16% from the end of fiscal 2012 or September 30th of last year after repurchasing 28,125 shares during the second quarter and paid approximately $3.4 million in dividends during the first six months. On March 27th the company announced a 17% increase in its dividend to $0.07 a share payable on May 8th. The May 8th statement will be the company’s 14th consecutive quarterly dividend payment. And I would like to highlight that due primarily to the company’s taxless [inaudible], and does not seek international profits, but a significant portion of the dividends paid is a return on capital and is not taxable. For example, in the year 2012, fiscal 2012, 97% of the dividend was return on capital and was not taxable. This ratio may vary significantly year to year, but this is an important factor in return of the yield, and is perhaps in terms of the recent traders and tax rates. Shareholders' equity totaled $25.9 million versus $17.3 million one year ago. At the end of the first six months, the company has tax loss carried forward, the 24.6 million referrals [ph], 12.4 million stayed in the U.S. and 64.3 million in the U.K., and the U.K. NOL’s non-expire [ph], all of which may be used to offset future income. We’re delighted with the second quarter and first half results. This, I believe is particularly significant following a spectacular 2012. As you know, 2012 results were in part due to the catch up factor of delayed orders from 2011 that we received and recorded in 2012. Following a year such as 2012 with solid growth in 2013, reflects increased demand at a very saleable outlook for FC2 and for the Female Health Company. Turning to key events and demand factors, there are four key factors that will positively impact future demand. First is distribution, FC2 is distributed in 139 countries worldwide. In the U.S., for example in New York City, FC2 is now available at 1,220 locations which is 805 one year ago. This is an increase of 52% in the number of locations for FC2 is available in New York City. The second key factor is summit on family planning. Summit on family planning was sponsored by the Bill and Melinda Gates Foundation of the U.K. government until last July in London. It’s announced at the summit, the goal of the program, is to provide contraceptives to an additional 120 million women in 69 developing countries by 2020. It was also announced that $4.6 million in funding had been committed for the Europe program. This program is making significant progress and has been named FP2020, Family Planning 2020. An Executive Director for the program, [inaudible] has been hired. FP2020 has been quoted of the United Nations Population Funds offices of New York, the United Nations Population Fund will be the principal first patron for the program. I would also like to note that at the end of March, Justine Greening, the Secretary of the British Department of International Development, famous speech regarding women’s health. She cited the influence of the summit on family planning to women’s health and announced that as initial support, the British government was releasing funds for the purchase of 3 million contraceptive implants and 17 million female condoms. Why is this important to FHC and FC2? There’s a relationship between AIDS and contraception. The women who have AIDS where they give birth to babies who have AIDS and or becomes AIDS orphans increasing cost [ph] and give them suffering. The female condom is the only product where use is initiated by women that provides full protection against sexually transmitted infections including AIDS and pregnancy. We have the ideal product for this program. We believe the FP2020 program significantly broadens the market for FC2 will positively impact the future results. The third key factor which I know each time we get together, is a continued feminization of AIDS. It remains the leading cause of death worldwide among women 15 to 44 years of age, more than 50% of new cases in women, 80% of new cases results from heterosexual sex. The fourth key factor is a public private partnership program for female both company announced at the summit. We have implemented that and announced we have implemented as we presented at the summit. And I should note that the summit sponsors, the Gates foundation and the U.K. government are following up at all commitments made at the summit, financial and programs. The Female Health Company recently participated in a survey in a Female Health Company specific conference call regarding our commitments in our program in substantial detail. Commitment in the program that we announced at the summit in terms of execution specifics, we aggregated 2012 both sector unit sales to determine the price based on volume for 2013. We notified public sector customers to the reward of 5% low cost merchandize based on 2012 volume. And as I mentioned before, we see this in effect as a global sampling program that will increase awareness of and use of FC2. Pharmaceutical companies often employ many sales or sample of their products, in this particular program, we have others sampling our product for us. And finally, we indicated we would spend about $2.2 million in education and training in 2013, commitment has been $14 million over a six-year period. Based on our experience, education and training definitely increases demand. The date, the reception to our program among the public sector groups has been very positive. At the end of 2013, we will execute this in the same manner for 2014. Now turning to the outlook, it’s previously noted, due to the potential volatility in 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, on conditions and fact. [Inaudible] Gates, U.K. family planning program and its potential impact in the use of FC2 as a contraceptive, to the continued feminization of AIDS, and three of the factors of female condoms, the only product where use is initiated by one of the site’s dual protection against AIDS and unintended pregnancy. We believe that FHC will continue to experience significant growth in revenues in operating incomes in the year 2013 and on future years. The second quarter and six month results fully substantiate this field. And now, we’ll open it up to questions. Maureen?

[Operator:]

(Operator instructions) Our first question is Andrew Love, Love Savings Holding. Please go ahead, sir.

[Andrew Love:]

Good morning O.B.

[O.B. Parrish:]

Good morning, Andrew.

[Andrew Love:]

Congratulations on another excellent quarter.

[O.B. Parrish:]

Thank you.

[Andrew Love:]

My question is whether you’ve got, or can share with us any feeling as to the level and growth of conventional commercial sales through commercial channels in the United States?

[O.B. Parrish:]

In term of the commercial sales, we distribute in selective Walgreen stores, I think about 700 stores and those are stores located in cities like Washington DC where there’s a high rate of sexually transmitted disease. We had some growth of the sales in those stores, we’ve also had some growth in online sales through Walgreens, also some CBS stores. However, I wouldn’t say that it was, at this point, that it’s substantive.

[Andrew Love:]

Thanks.

[Operator:]

Our next question will be from John Gay, an investor. Please go ahead.

[John Gay:]

Hi O.B. Congratulations to you and the gang on the great quarter, and a great half. Two ideas that I wanted to check out a little better with you. One is the Bill Gates in U.K. family planning, I guess those initiative, the EUR 17 million which you have mentioned at the annual meeting, apparently have been – and I’m trying to figure, is that an annual kind of order? Is it expected to grow? And where do we go from here with it?

[O.B. Parrish:]

No, not necessarily an annual order. And it isn’t necessarily an order. It’s money that the British government has basically given to the United Nations Population Fund to purchase female condoms on their behalf. And we will be the beneficiary, certainly of that. But look at it in the overall context, at the family planning, the British government or in fact, David Cameron, the Prime Minister at the time, committed GBP 500 million over the four year period of the program which is $700 million or $800 million of the current translation rates. So we expect that over this four year period, that there will be additional commitments, not all of that money, obviously, but to the extent we are focusing on female condoms for the additional commitments. We don’t know exactly what the sequence will be. There is GBP 500 million pledged by the British government for the overall program.

[John Gay:]

Okay. So there is, to be following on orders expected sooner or later out of that initiative, I see. The other thing, I thought I heard, did South Africa tender for another purchase?

[O.B. Parrish:]

We’ve had regular orders from South Africa.

[John Gay:]

Was that the 13 million? Was that the units?

[O.B. Parrish:]

In 2011, order was 5 million completed, and we shipped most of that and we shipped additional units on the same basis. In other words, sometimes, you’ll have a tender, that’s fulfilled, and they can continue to order against that tender before they have another one.

[John Gay:]

Okay, okay. Well thank you, O.B. It’s a very bright outlook it seems. Thanks.

[O.B. Parrish:]

Thanks, John.

[Operator:]

Our next question is Mark Robins [ph] Palettes Research, please go ahead.

[Mark Robins:]

Thank you. O.B., just a great quarter. Thank you very much.

[O.B. Parrish:]

Thank you.

[Mark Robins:]

And I also appreciate the news about the dividend being return of capital. I have not realized that, so I appreciate your adding that color to the dividend story. You had a very successful first and second quarter, and I guess my question is kind of a rough one, and I do apologize, but we’re talking about unit sales of 16% to 20%. Would you consider that significant quote-unquote?

[O.B. Parrish:]

You mean the growth figures?

[Mark Robins:]

Pardon me?

[O.B. Parrish:]

You’re talking about the growth?

[Mark Robins:]

The growth figures, yes. I’m sorry. Unit sales increase, right.

[O.B. Parrish:]

Yes. I think, considering that we came off of this year last year, we had an 88% increase. And then if you look, and I think it’s in the queue, and this is kind of how I look at it, over the southern Europe period 2005 to 2012, our fiscal years, the annual compound unit growth rate was 23%. And we have one year where there’s a spectacular growth rate and in 2011, a different year because of the delays of the orders. So we feel very good about following off that year with solid growth this year.

[Mark Robins:]

No, and please don’t get me wrong. I agree entirely. I’m just wondering when you say significant, if significant is 15% to 20%, not 50% to 60%. I’m just trying to put a gauge on some of your comments, that’s all.

[O.B. Parrish:]

Well 50 to 60 would be more significant.

[Mark Robins:]

I would guess so. Second question is, the results that you’ve been producing and the strong balance sheet and a variety of the other factors, this stock just seems undervalued and I mean no criticism, but I was just kind of curious to know if you’ve increased your addressing or work with the street to get more investors in tune with the story.

[O.B. Parrish:]

Yes, we’ve been very active and one thing that’s kind of interesting is that our institutional ownership from about one year ago was about 24% and it’s moved up in the most recent account to about 35% or about 45% of the float [ph]. And I think to the extent we bring more institutional investors in, it will help the point that you just made. And this is probably, you can look it up in the [inaudible] we had advisers in Philadelphia within the last few months we’ve came in and announced about a million shares an $8 million position. And I think if we continue to attract people like that, it’s going to be positive in the long term.

[Mark Robins:]

And I apologize for kind of crowding in, has your shares been purchased by what is it, the prints [ph], down in Florida, the dividend fund?

[O.B. Parrish:]

Not that I’m aware of.

[Mark Robins:]

Okay, okay. Well, it’s a great story and I think it’s getting better discovered and deserves to be so. Thank you very much.

[Operator:]

Our next question, George Whiteside SWS Financial. Please go ahead.

[George Whiteside:]

Good morning. And I’d like to add my congratulations for a wonderful quarter as well as the six months.

[O.B. Parrish:]

Thanks, George.

[George Whiteside:]

The comment about commercial sales and I guess that also might feed into public health local, public health entities, since there appears to be more and more drug resistant sexually transmitted disease issues, are you seeing any pickup in sales from non-AIDS types of situations?

[O.B. Parrish:]

Well yes. One thing that’s happened, I think is, you probably read about the resistance strains in gonorrhea that gotten a lot of this recently, and so the city programs, like the New York City program that I referenced, the Washington DC program in various cities, these programs are more broadly focused on sexually transmitted infections including HIV/AIDS. But among the population, these programs are focused on gonorrhea, and other sexually transmitted disease are common, in fact if you get one, because of the inflammations, you’re more susceptible to get a second one.

[George Whiteside:]

And do you see that adding your volume in the feature?

[O.B. Parrish:]

Yes. Well we currently see and part of it is reflected through public sector volume and in part through the stories that are located in those particular cities, but the overall city of the U.S. line up. An example, in Washington DC, I think it’s the third year, fourth year of their program. And they are out with a new ad campaign, a new television ad campaign on sexually transmitted disease and that ad campaign features FC2 in the ad campaign.

[George Whiteside:]

That sounds certainly positive.

[O.B. Parrish:]

In fact, you can probably access that through the web. We’re going to Washington DC Department of Health in the female condoms.

[George Whiteside:]

Excellent. My second question is related to competition. I’ve understood that there has been some marketing of a female condom manufactured by someone else. Are you seeing much activity in the market place relative to that other organization?

[O.B. Parrish:]

As reported in our filings of what other manufacturers, small Indian [ph] company is – WHO clearance repurchase by UN agencies called CUPID, to date, they have received very limited orders. They have to scale up to large scale manufacturing to pass in the international standards. And at this point, the capacity to do that and also the acceptability of the product is design, the acceptability of the product and the education and training required for a different product, the success or acceptability, that remains to be seen. But to date we haven’t had any significant issue. It doesn’t appear to be anybody else close to any particular type of approval. And on the frontal vaccines unfortunately from the societal standpoint, the NIH just recently announced that major vaccine study was terminated because of lack of effectiveness which suggests a high degree of difficulty to get something like that.

[George Whiteside:]

That’s interesting. I know in the past you’ve commented on competition in Europe [ph]. And is CUPID the same company that had earlier –

[O.B. Parrish:]

Yes. Yes.

[George Whiteside:]

Thank you.

[Operator:]

(Operator instructions) Our next question is Jack Wallace, Sidoti. Please go ahead.

[Jack Wallace:]

Thank you for taking my call and looks like another strong quarter for you guys, O.B.

[O.B. Parrish:]

Thank you, Jack.

[Jack Wallace:]

Just a couple of questions here. And I don’t mean to nitpick, but I noticed that the average revenue per unit was down just slightly and the average cost unit was up just slightly. And I was wondering if you could just give me a little bit of color on that.

[O.B. Parrish:]

The average which?

[Jack Wallace:]

The average price per unit look like it was down slightly maybe 2% and the average cost per unit look like it was maybe just up marginally, 2% or 3% as well. I’m just wondering if there’s any I guess overall trend there. Maybe there’s a larger order that got a discount. And maybe that some of the –

[O.B. Parrish:]

Well, there are two things involved. One is simply mix which could be positive or negative. And the other would be a modest negative in which that’s how we account for the 5% of goods [ph].

[Jack Wallace:]

Got you. Okay. No, thank you. That’s helpful. I was wondering if that was in there as well. And then I also noticed the inventory levels pops up quite significantly from the first quarter to the second quarter. I was wondering if that’s maybe an indication that maybe a larger order might be in the –

[O.B. Parrish:]

Mike, do you want to make a comment on the inventory?

[Mike Pope:]

Yes. We get variations from quarter to quarter on inventory. If we are building an order for a particular customer that might need pre inspection and pre release quality inspection, sometimes we can’t get every single female condom out by the end of each quarter, that’s the first thing. The second thing is in order to give good deliveries to some of our customers, we hold a little bit of strategic stock so that we can give very quick turn around when they place orders. It varies from quarter to quarter. There was a bit of an increase in the quarter that you’ve mentioned but it’s not significant.

[Jack Wallace:]

Okay. Thank you. That’s very helpful. That will be all for me.

[Operator:]

Our next question is a follow up George Whiteside, SWS Financial. Please go ahead.

[George Whiteside:]

Earlier in the call, there was a comment about some projections for the second half. And my question deals with your capacity stated that 100 million units. So it would appear as though maybe for one or two years, you’re not going to need to expand your manufacturing facility. Is that a reasonable conclusion?

[O.B. Parrish:]

Well, I don’t think we’ll have to, this year George. We did 61.6 million units last year as you know. Beyond that I can’t say, in fact, I hope that we would have to expand it. If we do, it takes about six months from the time we make a decision until something can be operational. But we’re certainly okay for this year. And we’re prepared to extend it further if it looks like next year or at any time we need more capacity.

[George Whiteside:]

Well, I’m sure that you as well as those of us shareholders would be delighted if you needed to expand your capacity, because that –

[O.B. Parrish:]

Exactly.

[George Whiteside:]

Yes. That would be a good problem to have. I was glad and interested to hear you describe the tax situation regarding the dividend. And in this area, I noted that your recorded income tax expense is less this year for the quarter as compared to last year. What would have contributed to that?

[O.B. Parrish:]

Michele, do you want to take that?

[Michele Greco:]

There are two main factors contributing there, again, with the mix between domestic and foreign. We were a little down domestic compared to foreign. And second was just timing of some deductible item. The timing of some of those items significantly increase their taxable income last year for this period. And this year it decreased our taxable income.

[George Whiteside:]

Interesting. And I presume your state of Illinois tax situation has been resolved or will be, shortly?

[Michele Greco:]

Well, it used to be NOL suspension last through 2014.

[George Whiteside:]

Thank you for that clarification.

[Operator:]

Our next question would be from Mark Williamson, a private investor. Please go ahead.

[Mark Williamson:]

Good morning and I echo what others have said. What a great quarter and a good start to the year.

[O.B. Parrish:]

Thanks, Mark.

[Mark Williamson:]

Just a quick question, the company is growing at a rapid rate. And I’m just curious what the overall market is in male condoms, what their growth rate looks like? And at what point does the success of female health start to appear and the interest maybe to those on the male side of things. Any comment?

[O.B. Parrish:]

Yes. I think the global market for male condoms on an annual basis is about 13 billion units. About 3 billion of that is in the commercial sector and about 10 billion in the public sector. And so, we represent a miniscule portion of that in total. And women now account for half of all the AIDS cases, so we have a great opportunity. The growth, the United Nations UN AIDS program, projects that I think by 2015 or ‘16, that the market for condoms, public sector market for condoms, all condoms will total about 19 billion units. So there is overall growth projected at least by the United Nations for condoms. And I can’t comment to what extent that would strike, part of those companies and us.

[Mark Williamson:]

Thank you.

[Operator:]

Our next question is Dennis Scully, Essex Securities. Please go ahead.

[Dennis Scully:]

Greetings. Congratulations again.

[O.B. Parrish:]

Thank you.

[Dennis Scully:]

I know one thing that is going to pop up with my client questions. And that is, if last year’s dividend was 97% return of capital, is there any way to gauge what future years dividends return of capital will be?

[O.B. Parrish:]

Michele, do you want to make a comment on this?

[Michele Greco:]

No, we can’t estimate that. But if this year was 97%, last year was approximately 78%; it’s the calculation that’s made at the end of the year after we know the impact of all tax items. The NOL is going to continue and that impacts us favorably. So we believe there is still going to be an impact. It’s not going to be at this level. It will be at reduced level, maybe something similar to last year or even less.

[Dennis Scully:]

Okay. Well, last year’s was 97% right?

[Michele Greco:]

Yes, and the year before it was approximately 78.

[Dennis Scully:]

Okay. So this year it sounds like it will be less than 97%?

[O.B. Parrish:]

Probably.

[Michele Greco:]

Yes.

[O.B. Parrish:]

Probably, but it will still be significant.

[Dennis Scully:]

Understood. Thank you very much.

[Operator:]

Having no further questions, this concludes our question and answer session. I would like to turn the conference back over to Mr. O.B. Parrish, for any closing remarks.

[O.B. Parrish:]

I would just like to thank everybody for their support and interest and some very good questions. And we’ll be on the next quarter. Thanks.

[Operator:]

To access the digital replay of this conference, you may dial, 1-877-3447529 or 1-412-3170088 beginning at 1 PM eastern time today. You will be prompted to enter a conference number, which will be 10028101. You will be prompted to record your name, and company when joining. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.