Vital Farms, Inc.
Q1 2008 Earnings Call Transcript

Published: 8 Apr 2008

[Operator:]

Welcome everyone to the Vital Signs fiscal 2008 first quarter earnings results conference call. (Operator Instructions) For opening remarks and introduction I would like to turn the call over to the Chief Financial Officer, Mr. Mark Mishler.

[Mark Mishler:]

Welcome to the Vital Signs 2008 fiscal first quarter conference call. With me today is Terry Wall, Chief Executive Officer; and Alex Chanin, Chief Information Officer. By now you should have received our press release for the fiscal first quarter ended December 31, 2007. To access the press release online please go to www.vital-signs.com, then click on Investor Relations, then click Press Releases. Before getting started let me read our required disclaimer. All statements in this press release, other than historical statements, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from such statements as a result of a variety of risks and uncertainties, including unanticipated delays in bringing new products to market, regulatory approval of new products, market conditions and competitive responses, as well as, other factors referred to by Vital Signs in its annual report on Form 10-K for the year ended September 30, 2007. The format this afternoon is as follows. I will provide a financial review, Terry will then provide comments, and then we will open up the call for your questions. Fiscal first quarter revenue of $53.4 million increased by 12% over the prior year revenue of $47.7 million. Individual segment revenue and growth figures are

[Terence D. Wall:]

Our sleep segment enjoyed a particularly strong quarter growing 43.3%, driven by our sales of Breas’ intelligent iSleep CPAP systems and the Vivo 30, Vivo 40 bi-level ventilators in Europe. We are now just beginning to sell the Vivo 30, Vivo 40 in the US, focusing primarily on the Atlantic Coast to begin with. We believe the Vivo products have a significant niche between CPAP and the Respironic vision in what is an approximately $300 million non-invasive ventilation field. SSA, which is our sleep lab management business, is continuing to digest two Georgia acquisitions made last year. The revenue went up 37.8% and I’m happy to report that a significant component of the revenue increase is in CPAP growth. We grew the CPAP component of the core SSA business by 19.4% year-over-year and increased the overall CPAP business from $446,000 a year ago to $1.5 million this quarter. It’s good to see that our CPAP strategy is taking hold. I’m also very pleased that we were awarded in January of this year the HPG/Consorta anesthesia contract for anesthesia breathing circuits and face masks, which represents approximately a $15 million potential of new business for us. This is the first time we’ve ever been awarded the anesthesia circuit and face mask contract. We’re already beginning to see initial success with both our LIMB-O and our traditional dual limb circuits in these accounts. We now have anesthesia circuit face mask contracts with all the major purchasing groups including Premier, Novation, MedAssets, HealthTrust, Broadlane, Amerinet, to name a few of them. A significant goal of ours announced last year was to become our own supplier of anesthesia face masks. While we had enjoyed a very long and successful relationship with Respironics, becoming self-reliant is an important step for us. And I’m happy to report to you that the manufacturing operations in our Chinese joint venture are progressing nicely and are on target to supply 100% of our face mask requirements by April. I was slightly disappointed by our lack of respiratory growth this past quarter, which was partially attributable to the emphasis our sales force has been placing on the launch of our three new anesthesia products; enFlow, which is our fluid/blood warming product; SteeLite, our stainless steel single patient use laryngoscope blade; and RediTube, a pre-loaded endo-tracheal tube and stylet combination. Although, it’s too early to see the impact of these new products they represent over $200 million in market potential and will allow us to have a strong third and fourth quarters. Although, our Interventional Cardiology/Radiology Group got off to a slower than anticipated start, we’re still very confident that they will meet our expectations for the year. So therefore we want to confirm our earnings forecast of $2.80 to $2.85 per share for fiscal ‘08. May we open the line to take questions now?

[Operator:]

(Operator Instructions) We will take our first question from Taylor Harris - JP Morgan

[Taylor Harris:]

You talked about the balance sheet and you’ve got a lot of cash on the balance sheet. You could do a big one-time dividend if you wanted to. And I want to ask if that’s a possibility, and if not, then how are you thinking about the cash on the balance sheet? It seems like you’re in a period of digestion on the M&A front. So, what are you thinking about in terms of use of cash?

[Terence D. Wall:]

Taylor, we still want to use the cash for acquisitions. The Sleep segment, SSA, I would agree is not ready to do any acquisitions, or any more acquisitions. However, the other business segments, especially our Anesthesia/Respiratory segment, we feel fully prepared to do acquisitions and we continue to pursue those aggressively.

[Taylor Harris:]

Can you give us the numbers on how Breas did, as well as how SSA did, and what you saw in SSA in particular? How did things trend from the fourth quarter to the first to this quarter?

[Terence D. Wall:]

Are you speaking of sales, earnings, what would you like there?

[Taylor Harris:]

I guess just on the sales front.

[Terence D. Wall:]

Well, the overall was 43.3% and both SSA and Breas were in the 40s.

[Taylor Harris:]

It had seemed like utilization rates in the last couple quarters of fiscal year ‘07 have declined from the first half of the year, and maybe some of that was due to the acquisitions and integration. So, how do you feel about where utilization rates are trending and how the integration of the acquisitions is going at this point in time?

[Alex J. Chanin:]

Utilization rates of our core business are roughly at the same level they were, so they’re increasing very slightly. They’re roughly flat. Now your statement is pretty fair for the acquisitions. As we said, we’re in a lawsuit with one of the acquisitions, the larger one. So the utilization rate there is declining or has declined and we’re now stabilizing it and bringing it back up as well as continuing with our legal process. But for the core business, it has not really declined. It has remained roughly stable.

[Operator:]

Next we will hear from Asim Kaleem - Natixis Bleichroeder.

[Asim Kaleem:]

I wanted to ask, anything specific on SG&A front, looks like it was higher than at least what we were expecting.

[Terence D. Wall:]

One thing to keep in mind is that because we made two acquisitions in the second half of last year, we have incremental $0.9 million of SG&A that we didn’t have in the prior comparable quarter. If you take that away, SG&A would have increased by 7.4%, which is below the sales growth.

[Asim Kaleem:]

Regarding gross margins obviously they were very good and looking forward do you see further improvement in the pharma business’ gross margins.

[Alex Chanin:]

I’m not sure we see a lot of improvement in the pharma business gross margin. We do see some improvement in their revenue side, roughly the same margins. We do see in our other businesses, particularly the anesthesia and respiratory businesses, we continue to pursue our strategy of cost savings.

[Asim Kaleem:]

And how about Interventional Cardiology segment that’s also pretty good. Do you see it going even further from here?

[Terence D. Wall:]

I was actually surprised to see it continue to go up. I think our own internal forecast at the beginning of the year we were projecting it to go down. So, they’re doing well on the gross margin. They had a little vendor supply problem, and the OEM business it’s a little more jagged, with a little more ups and downs than what our traditional Vital Signs Anesthesia/Respiratory single-use business is. So we’re very confident that they’ll be bouncing right back next quarter.

[Asim Kaleem:]

Can you tell us a little bit more about the litigation you are pursuing for Do You Snore, in terms of timeframe or anything, any more color you can give?

[Terence D. Wall:]

I’m not sure there’s really much more color I can give. I think we have filed the lawsuits. I guess we’ll be waiting to hear what the response is. I’m not sure what the time schedules are. And I think we filed in Georgia, if I’m right. I’ve never been involved in a lawsuit in Georgia.

[Asim Kaleem:]

In terms of expenses, mostly is in or are you forecasting more expenses because of that?

[Terence D. Wall:]

We knew we were going to be in the lawsuit when we did our projections. So we have an amount in there. Now, is it possible that they get larger than that? That’s always a possibility, but we also have some plans to start immediately in lowering some of our SG&A cost in the Do You Snore sleep business segment. Quite frankly, that’s not happening fast enough to make me happy. It’s one that our management team at Vital Signs is on the case. We will be correcting or adjusting the SG&A to fit the sales pattern that we now have down there.

[Operator:]

Your next question comes from Greg Brash - Sidoti and Company.

[Greg Brash:]

You mentioned the CPAP sales went from just under $0.5 million to $1.5 million. Is that CPAP sales only in the labs?

[Terence D. Wall:]

Yes. It’s directly related to our labs. We are not actively trying to sell CPAP to other DME people.

[Greg Brash:]

Are you seeing progress in the Maryland labs? I know on the last call you had rolled it out in five hospitals. Are you still in five and how is that progressing?

[Terence D. Wall:]

Well, we’re getting more business than from five. I don’t have the number in my hand, but that’s the one that went up 19.4%. It’s just the SSA, what we call the core business without the acquisition. The acquisitions are the ones that threw it from $446,000 to $1.5 million primarily from the acquisitions.

[Greg Brash:]

Was that 19% growth that was sequential growth?

[Terence D. Wall:]

Yes, year-over-year.

[Greg Brash:]

Could you comment a little bit on the CMS decision to allow reimbursement in home testing, and maybe what effect that could have on your lab business, or do you see an opportunity here, especially with having so much cash, is getting into the home testing market part of your strategy going forward?

[Terence D. Wall:]

Well, Greg, just to make a minor correction, it’s really not passed yet. It’s their recommendation. There was a 30-day period which we responded and a number of other people we know responded. There are so many questions in our mind on how this is all going to work. I thought it created more questions than it had answers. And none of this talked about the reimbursement fee. I think once we see the reimbursement fee, quite frankly, we have done home monitoring for years, especially in the New York area whenever a physician requested it or required it. It’s not as profitable for us in the past. The way the regulations were written in the past, we had to take a full PSG system into a patient’s home, so it wasn’t as profitable. So it’s not something we actively promoted. Depending upon the reimbursement, we’re more than capable. We’re a small company. We can adjust to whatever the regulations turn out to be.

[Greg Brash:]

Looking at R&D, you mentioned it was up a lot year-over-year and a little higher than we expected. Is that a level that we should expect to see going forward through the rest of the year, around $2.4 million?

[Terence D. Wall:]

Well some of it is, because if you remember back, the enFlow, which we’re so excited about, is an acquisition we made for $4.8, $5 million roughly. And with that came an R&D team. So even though we had a little spike of activity in the quarter that we’re releasing the product, the majority of that team will stay in place and we will start working on subsequent. We’re very excited. I don’t know if you noticed, but the whole patient temperature field in the OR, there’s been studies that clearly prove that keeping a patient normothermic in the OR reduces infections. This is one of the areas that the government and insurance companies are saying, if you get infections in the hospital that they’re not reimbursing for it. So we think this is going to be an extremely attractive area for us to pursue development in. We’re excited about the initial reception we’ve gotten to the product, and I think, quite frankly, third and fourth quarters, we should be able to show you the number of hospitals that we’ve gotten into and a run rate here on the [inaudible]. I’ve never seen our sales force as pleased with a new product as I have with this.

[Greg Brash:]

You have very strong growth in the SSA. Is this a function of improving the capacity in some of those labs? I know that was an issue in the past two quarters?

[Terence D. Wall:]

Actually the growth is primarily result of the two acquisitions. That one acquisition, quite frankly, is doing wonderfully. It’s just the Do You Snore one that we’re pulling our hair out.

[Greg Brash:]

What is the progress you’ve made on some of those capacity constraint lines?

[Terence D. Wall:]

I think we have nine accounts that we felt that we were constrained on. I think we made progress in four or five of them and solved the problem.

[Operator:]

And we will now hear from Dalton Chandler - Needham and Company.

[Dalton Chandler:]

First of all, the LIMB-O sales were strong in the quarter, that’s a product that’s had really strong growth for a few years now. Do you think you might be about to come up against some market share constraint on that product?

[Terence D. Wall:]

Actually, I don’t. I think it just continues on. Limb-O was up over 15.6%, but our general circuits were in the 14% area as well. I think our latex-free strategy is clearly working, and it’s going to work for at least the rest of this year. We’re going to be the first anesthesia company that we will only sell latex-free breathing circuits. We deserve a price increase for this. It improves, quite frankly, the safety of the anesthesiologist, the patient, and our employees. And I’m very proud of the fact that we have done our best. We didn’t really get a price increase for it, but I just bit the bullet and said, “Enough. If they don’t want to pay for it, we’ll sell it to them at the same price. But this is important. We need to do it.”

[Dalton Chandler:]

And then on the sleep revenue, do you give your organic growth ex- the acquisitions?

[Terence D. Wall:]

We didn’t, and it’s basically low single digits to flat.

[Dalton Chandler:]

And then I did hear you say that by April, you expect to be fully independent on mask manufacturing, but did you have any constraints there during the quarter, or do you anticipate any before April?

[Terence D. Wall:]

I think I told you the quarter before we were really suffering. I’d say we had very minor problems this quarter, not anything significant. But the one we’re in right now, we are in really good shape. I am very, very happy. There are no problems, and the uptick of the mask coming out of our JV is perfectly on schedule. Our VP of manufacturing, Benn Vennesland, actually came in the office today his first day back from China and he had a glowing report that things are going right on schedule.

[Operator:]

And we will take a follow-up question from Taylor Harris - JP Morgan.

[Taylor Harris:]

You mentioned some downtime for the respiratory machine and that had a margin impact. Did it have a top line impact as well?

[Terence D. Wall:]

Yes. We lost about $250,000 approximately of sales that we just couldn’t. It’s a highly automated packaging for the ABGs. We’ll be carrying more spare parts out in Colorado.

[Taylor Harris:]

Do you get those sales back over the next couple quarters?

[Terence D. Wall:]

Yes. I don’t think we wouldn’t have lost anyone, but obviously in the single-use business, you don’t like to have that happen. You do have distributors that have stocks, but it puts stress on everybody.

[Taylor Harris:]

And would you mind giving us the growth rates for domestic business, international business, and the foreign exchange component?

[Mark Mishler:]

The only foreign exchange component is really within the Sleep Disorder segment. And the sleep segment increased by 43.3%. If we take away foreign exchange, it would have increased 35.4%.

[Taylor Harris:]

I know we’ll get this in the Q, but for our models, the overall international or domestic growth rates.

[Mark Mishler:]

Our overall international growth rate was 33.6%, and domestic was just under 6%.

[Operator:]

And gentlemen there are no further question at this time. I would like to turn it back over to you for any additional or closing remarks.

[Terence D. Wall:]

Thank you very much for participating this afternoon and look forward to talking to you next quarter. Thanks a lot.