Veru Inc.
Q4 2013 Earnings Call Transcript

Published: 3 Dec 2013

[Operator:]

Hello, and welcome to the Female Health Company Fourth Quarter Fiscal Year 2013 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 facts 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 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.

[O.B. Parrish:]

Thank you, Amy. Good morning and welcome to The Female Health Company’s fourth quarter and fiscal 2013 conference call. Michele Greco, our Vice President and CFO is here with me in Chicago, and Mike Pope, our VP, U.K. and Malaysian Operations, is participating from our London office. First I’ll cover the financial results for the fourth quarter 2013, then address key events and long-term demand factors that may impact future results, then I’ll cover the outlook and then, we will take some questions. As usual, when I refer to years, I am referring to the company’s fiscal year, which ends September 30 unless otherwise noted. After six consecutive record quarters of growth, results for the third and fourth quarters of 2013 decreased from the prior year, resulting in a modest decrease for the year, but it's important to note that the quarterly and annual decreases were against record prior year periods. As we've previously experienced, discussed and reported in our filings, the decrease reflects public sector purchasing patterns not any change in –(inaudible) or long-term outlook. We've always (inaudible) will probably continue to vary, demand continues to increase. The ongoing increase of demand is directly reflected by the fact that the average annual compound unit sales growth for the last eight years through periods of volatility has been 19%. As a result, we believe demand will continue, we have had these experiences previously when there has been a dip in demand due to different purchasing patterns and then followed by an upswing reflecting the increase in demand and I expect that that will [occur again]. Turning to the fourth quarter, full fourth quarter unit sales decreased 52% over the prior year. Revenues also decreased 52% to 4.8 million. Our gross margin totaled $2.3 million or 48% sales, a decrease of 60% and a decrease in margin reflected lower volumes. Our operating expenses decreased 79% to $0.5 million, operating income totaled $1.7 million, a decrease of 45% in the fourth quarter of 2012. Although, I would like to note that the operating income margin was 36%. Income before taxes totaled $1.7 million, a decrease of 45% over the same prior year period. It is important to note that, given the decrease in unit sales, the company remained profitable with the 36% operating income margin. This reflects our business model and its capacity to successfully (inaudible) volatility and be profitable without incurring debt. The company has significant tax loss carry-forwards to the U.S. and in the U.K. As a result at the end of each year the company considers taking the tax benefit at least in the current results outlook. In the fourth quarter of last year, we took a tax benefit, net tax benefit of $5.1 million. Based on the analysis for 2013, the company took a net tax benefit of $4.9 million. Including the net tax benefit, net income for the quarter totaled $6.6 million or $0.23 per diluted share a decrease of 21% over the prior year quarter of $8.2 million or $0.29 per diluted share. Turning to the year, unit sales totaled 54.8 million, a decrease of 11% compared to the all time record of 61.6 million units sold in 2012. You should note fiscal 2013 was the company's second best year and unit sales grew 36% higher than the previous record year, which occurred in 2009. Revenues decreased 10% to $31.5 million versus $35 million in 2012. Our gross margin totaled $17.5 million, or 56% of sales with decrease of 15% with $20.6 million in 2012 or 59% of sales. Our operating expenses totaled $7.7 million, a decrease of 20% from $9.7 million in the current year and operating expenses decreased from 25% of sales, which is 28% of sales in 2012. Our operating income for the year totaled $9.8 million a decrease of 11% from 2012. Income before taxes totaled $9.9 million, a decrease of 8% from 2012. The company incurred a net tax benefit for the year $4.4 million. Net income including this tax benefit totaled $14.3 million, or $0.50 per diluted share, a 6% decrease from $15.3 million, or $0.53 per diluted share in 2012. The company currently has a tax loss carry-forwards towards our future earnings of $19.2 million of U.S. federal. $17.2 million U.S. state and $63.2 million in the U.K. and as I noted before, the U.K. tax loss carry-forwards do not expire. The company generated $11.8 million in cash from operations in 2013, including a positive impact of $1.5 million due to changes in operating assets. After paying $7.5 million in dividends, and $0.3 million for expanding FC2 production capacity, a total outlay of $7.8 million, the company ended the year with $8.9 million in cash, incurred a $5.3 million in 2012, and I should note the company remains debt free. As I believe many of you know the company's dividend is going to partial return of capital to the shareholders. This portion of the dividend isn’t taxable. The portion of the dividends for 2013 that will be considered and reported as return of capital 57.8% so, that portion of your dividends and consultation of your tax counsel should not be taxable. At the end of 2013, shareholders equity totaled $31.4 million versus $24.2 million at the end of 2012. Interestingly, the total return from appreciation plus dividends for shareholder through fiscal year 2013 was 42% and also the average annual total return to shareholders for the eight years since we became profitable eight years 2005 to 2013, the average total return was 67%. Now given the impact of the modest decline in unit sales in 2013, the overall financial results were solid, $11.8 million in cash from operations, $7.5 million paid in dividends and $9.8 million in operating income, more than 31% operating margin for the year (inaudible) that will impact future results. Distribution continues to increase. FC2 is now available in 143 countries, versus 138 a year ago. In the U.S., we continue to see remarkable increases in New York City as the product is available in 1,436 locations, up 44% from a 1,001 locations a year ago. The second event is the increasing impact of education and training. During 2013, the company's support group conducted 134 training and education (inaudible) regarding HIV and AIDS, Family Planning and FC2. Approximately 19,760 trainers participated. The company's strategy is to train the trainers in central allocation in each country. We return trained people in the trainer's geographic area which creates a multiplier effect. (inaudible) FC2 automations with the user instructions, these were 6.4 million times in 2013 and during the year, we launched a multi lingual English, Portuguese, French and Spanish website, which provides downloadable training and education that is currently being visited more than 1,000 times a month. The third event is the continued increase in efficacy for and awareness of female condoms. There has been a dramatic increase by woman's groups in advocating increased [unrest] and access to female condoms. A National Female Condom Coalition, which was formed a year ago held the Second Annual Global Female Condom Day on September 16th of this year, which was celebrated in countries throughout the world in many cases highlighting FC2. Also in September, the global property project in partnership with a (inaudible) foundation sponsored a concert in central park of the New York City, which included a number of celebrities. Attendance was expected to be 60,000 and the concert was screened worldwide. At the central park concert, the company was recognized for its leadership in supporting the Family Planning 2020 program, which I will discuss more shortly. The fourth event was the integration of the HIV/AIDS and Family Planning programs. The FP Family Planning 2020 Program, initiated by the Gates Foundation and U.K. government a year ago, more than a year ago, as they go on provide access to contraceptives to an additional 121 million and 1600 developing countries by 2020. There is a significant relationship between AIDS prevention and family planning. A woman with AIDS may give birth to babies with AIDS and/or will become AIDS orphans. As a result public sector groups are actively integrating HIV AIDS and family planning programs. This in turn, increases the relevance of the female condom. Now there are four reasons that the demand for FC2 continue to increase. First (inaudible) of AIDS continues and remains leading cause of death worldwide among women 15 to 44. Second is the Family Planning 2020 goals that I just mentioned to provide access to contraceptive to additional 120 million women. Third, we have (inaudible) as a female condom as the only product reduces the (inaudible) by women and provides strong protection against HIV/AIDS and unintended pregnancy. And fourth is the degree of funding coming into this arena $4.6 billion committed to support the FP2020 program through the year 2020, $1.5 billion committed by the U.K. Government over three years for HIV/AIDS, TB and malaria treatment and prevention. Our key factors in terms of funding from programs of those types. I'd also like to mention that during the year, the company was ranked as one of the best 25 companies in America by the (inaudible) pool. It was [renewed] that the company plays a vital role in contributing to health in some of the world's poorest nations while providing a solid return to its shareholders. Other companies in that list are Google, Biogen Whole Foods, Starbucks, IBM and others. In summary, we see there is some key demand factors suggest a significant long-term increase in the demand for female condoms. Turning to the outlook; as we've noted previously, due to the potential volatility and the timing in the public sector orders, we do not provide precise revenue and earnings guidance. We do provide general guidance regarding outlook based on conditions at the time. We believe the market and business over the long-term FC2 will continue to expand. Due to the funding that I just mentioned, those two items that I mentioned the U.K. Government and FP2020 program total of $6.1 billion of funding, the feminization of AIDS, the fact that the female condom is the only product that provides full protection, is also the pending tenders that we are aware of, the specifics of (inaudible) at this point it could have a stronger and significant impact in 2014. We would like to also note that in view of our long-term outlook, we are currently considering space that's adjacent to our current facility than we could obtain possession of which would enable us over a period of time to double our capacity on a modular basis as we needed and we believe this will be consistent with our long-term view of the potential demand and some of the comments by public sector people regarding this demand. So we have here experienced some volatility. We may express some (inaudible) significant upturn in our higher level. So with that we will take some questions, Amy.

[Operator:]

(Operator Instructions) And our first question comes from Jack Wallace of Sidoti & Company.

[Jack Wallace:]

O.B. and Michele, good morning to you both.

[O.B. Parrish:]

Good morning, Jack.

[Jack Wallace:]

Question here in regards to Brazil and South Africa that's traditionally been large customers of yours. Understand as a little bit below here in between orders. Do we have any -- and I understand you talked about large tenders outstanding and some of those are more public and others do we have any idea as what's going on in South Africa? Are things still tied up there and is there any I guess since you gave us on Brazil?

[O.B. Parrish:]

All I can say is that we -- I can't identify any outstanding (inaudible) public at this point, but there are some significant tenders that are outstanding. In South Africa, there has been some similar activity in terms of tender awards and we see some business there [competitive] product -- see some -- and that will play out in terms of who can actually deliver the products and the quality needed and we believe that we will be able to meet all of the standards and deliver a quantity in Northern and South Africa and we are currently having some substantial business during the next 12 months.

[Jack Wallace:]

Thank you there. In previous reports we have discussed there is a large order that was being segregated from the inventory level rising above I guess what would be considered normal, do you have any update on how that order has been progressing? Is that a...

[O.B. Parrish:]

(inaudible) keeping those inventory of their own for us.

[Jack Wallace:]

I believe that was the case, yes.

[O.B. Parrish:]

I will explain that. They came to us and they said, they have a number of small orders that the United Nations' population found there were number of smaller orders that come in and like to be able to fill them quickly and they ask if we would establish an inventory for them, they would pay for that inventory and we would hold the inventory for them and make a draw (inaudible) they wish and we see that -- you will a slight increase in our inventory and even though we have down year and that's going to increase (inaudible) principally to set that up and that is in place.

[Jack Wallace:]

Great. Thank you all. I'll hop back in queue.

[Operator:]

Our next question comes from John Gaye a private investor.

[Unidentified Analyst:]

Hi, O.B. and Michele. I think the question that I was going to ask is always going to asked by the previous questionnaire (inaudible)? Thank you.

[O.B. Parrish:]

Can you repeat that?

[Michele Greco:]

His question was already asked. His question was already asked.

[O.B. Parrish:]

Okay, good.

[Operator:]

Our next question comes from George Whiteside at SWS Financial.

[George Whiteside:]

Good morning and congratulations on a continuing good performance.

[O.B. Parrish:]

Thanks George.

[George Whiteside:]

My question is in relationship to some of the developments and attempts to come up with vaccines etcetera. Could you describe what you see as a competition to the FC2?

[O.B. Parrish:]

Yes, I think that there has been a number of attempts to evolve vaccines. To date they’ve been unsuccessful and that is in the last couple of months or the articles that have come out, some are outlining the difficulties and accomplishing that. There is additional money that's going to go into it. In fact Obama just recently announced an additional $100 million basically for a new approach to obtaining the vaccines. The approaches to date in sales and this is the fundamental approach to try to do it, but if it's successful and nobody knows whether it will be or not, it's going to be a number of years we work something like that would become broadly available. So I wouldn't expect over the next three or four years to see anything of that nature and it's got an impact on us.

[George Whiteside:]

You mentioned the name of competitors in terms of female condoms, what is…

[O.B. Parrish:]

There are two Cupid and the other is (inaudible). The Cupid product does have clearance from WHO. We got that clearance in June of 2012. Since that time, they’ve had very little in a way of business. We believe they certainly have problems in terms of capacity and delivering large scale quantities. They are not attempting to get FDA approval. To date has not -- we've seen very central orders around the world in order they have the clearances.

[George Whiteside:]

Now my second question has to do with your tax benefit. I presume that that is in relationship to your NOL year in the States both federal and state.

[O.B. Parrish:]

That's true. The tax benefit on the (inaudible) personally through the NOLs and it also is in part being led to the ratio of FC2. The sales of that type of nature and we think that initially that will continue, over 50% household, so those are pretax on (inaudible).

[George Whiteside:]

Excellent. Thank you.

[Operator:]

Our next question comes from Jack Wallace of Sidoti.

[Jack Wallace:]

Follow-up here in regards to funding from the U.K. government, we heard back in the second quarter that there is a good amount of money earmarked for female condoms or I believe [additional from sectors] please correct me if I am wrong, have we seen those funds trickle through UNFDA to believe the purchasing agent and was there an impact with that order in this quarter?

[O.B. Parrish:]

There is very significant impact. In fact, there are two different pieces of U.K. funds that are involved here. One was a year ago, the Family Planning by the Gates Foundation in the U.K. Government made the commitment of £500 million for 2020 program. Small pieces of that started to flow through and then more recently and within about two, three months ago, the U.K. government made a conversion of $1.5 billion to our HIV/AIDS, TB and Malaria treatment prevention and to-date, we haven't seen any of that flow through at this point. So there is substantial funding out there for both of these programs at least through the year 2020.

[Jack Wallace:]

Okay. Thank you. And then just wanted to talk a little about the SG&A line item down significantly from last year in the previous three quarters and the comments there in the press release it was just discussed basically incentive compensation. Should we read into this that the majority of SG&A under normal circumstances and a non-down lumpy quarter is going to predominantly incentive bonuses and…

[O.B. Parrish:]

Yes, we -- our incentive program is very largely tied to achieving certain results and so if we have a down period of that nature, the incentive is going to be radically down and as in 2012, we got a great year the incentive was up. We think it's a pretty good way to manage making the cash and expense consistent with the results and the capacity to pay each year.

[Jack Wallace:]

I certainly agree with you there and then also just trying to figure out how much was also spent on education and training in the quarter because...

[O.B. Parrish:]

We've spent about -- yes I can tell you, we spent a little bit better than $1.5 million in 2013 on education and training and this year we expect to spend about $2.1 million to almost $2.5 million.

[Jack Wallace:]

Okay. Thank you. And then lastly here just wanted to talk about the competitive landscape again I understand you have mentioned that in your Q today, the U.S. and the FDA approval they've struggle with those manufacturing capacity, but are you seeing from governments and health organizations on the ground that there is preference for more than one female condom and if so, is that at least a minor headwind in light of all the tailwinds that you spoke earlier about in the call?

[O.B. Parrish:]

I think that the people will probably like also some of the choices of female condoms, the question for (inaudible), as I mentioned there are two. So both of the products share different designs than each other and they are obviously two and so what the question will be that the product-specific training that we provide for our product in terms of its [used] one is unapplicable for the other two products in terms of the design wins they have. Today, they have not been providing any product specific training that is going to require for them to gain acceptance and I think substantial businesses as we require (inaudible) product specific training and that will settle the question of all the required being accepted and to what degree will it be accepted once people learn how to use it.

[Jack Wallace:]

Okay. Thank you. That will be all for me.

[Operator:]

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Parrish for any closing remarks.

[O.B. Parrish:]

Okay. Thank you for your interest and support and we will be on again in one quarter. Bye.

[Operator:]

To access the digital replay of this conference, you may dial 1877-344-7529 or 1412-317-0088 beginning at 12