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The Female Health Company (NASDAQ:FHCO)

F1Q 2013 Earnings Conference Call

January 30, 2013 11:00 ET

Executives

O.B. Parrish - Chairman and Chief Executive Officer

Michele Greco - Vice President and Chief Financial Officer

Mike Pope - Vice President, UK and Malaysian Operations

Analysts

Andrew Love - Love Savings Holding

Marc Robins - Catalyst Research

Peter McMullen - IPC Inc.

George Whiteside - SWS Financial

Operator

Hello and welcome to The Female Health Company First Quarter of 2013 Operating Results 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 this event is being recorded.

The statements made on this conference call, which are not historical facts are forward-looking statements based upon the company’s current plan and strategies and reflect the company’s current assessment of the risk 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 communications, 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 to O.B. Parrish, Chairman and CEO. Please go ahead.

O.B. Parrish - Chairman and Chief Executive Officer

Thank you, Emily. Good morning and welcome to The Female Health Company’s first quarter 2013 conference call. Michele Greco, our Vice President and Chief Financial Officer is here with me in Chicago; Mike Pope, our Vice President, UK and Malaysian Operations is participating from our London office.

This morning I will address the financial results, recent events and long-term demand factors that will impact future results and then the outlook. After that, we’ll take questions. As usual, when I refer to years, I am referring to the company’s fiscal year which ends September 30 unless I state otherwise.

Turning to the first quarter, unit sales increased 13% to 17.1 million versus the first quarter of 2012. This is a first quarter record and the second best quarter ever compared to 17.3 million units in the fourth quarter of 2012. Revenue increased 15% to $9.9 million, another first quarter’s record. Cost of goods increased 9% on a 15% revenue growth. This reflected the impact of increased volume in the company’s cost reduction program. Gross profit increased 19% to $6 million or 60.2% of sales compared to $5 million or 58.1% of sales in the prior year quarter.

Our operating expenses increased 5.9% to $2.4 million compared to the first quarter of 2012. Operating earnings increased 29% to $3.6 million compared with $2.8 million in the prior year quarter. And net income increased 33% to $3.5 million, another first quarter record or $0.12 per diluted common share compared to $2.7 million or $0.09 per diluted common share for the first quarter of 2012. I should point out that the gross margin figure of $6 million and the operating earnings figure of $3.6 million for the first quarter both set new quarterly records.

Shareholders’ equity totaled $24 million at the end of the first quarter versus $17 million at the end of the first quarter in 2012. At the end of the quarter, the company had tax loss carry-forwards of $24.6 million federal and $12.3 million state in the U.S. and $64.3 million in the UK, and I should note the UK NOLs do not expire, all of which maybe used to offset future earnings. We are delighted with the strong results for the first quarter of 2013, particularly following the record year in 2012. I believe this directly reflects increasing global demand for FC2.

Turning to some key events and long-term demand factors, there are six recent events and long-term demand factors that will impact our future results. First, the 20% expansion of our FC2 production capacity to 100 million units annually is complete and operational. This will permit us to promptly sell orders based on increasing demand. Second, distribution of FC2 continues to expand. It is now available in 130 countries versus 121 countries one year ago. In the U.S., in New York City, FC2 is now available in 1128 locations versus 1001 locations only a few months ago at the close of fiscal 2012 versus September 30th of last year. Third, as noted earlier and reflected in our results, we have been able to reduce some manufacturing costs of FC2. The fourth item is a potential impact of the goal set at the Bill and Melinda Gates Foundation UK government Summit on Family Planning held in London last July. The goal is to provide contraceptives and related education and training to an additional 120 million women in 69 developing countries by the year 2020.

At the end of the summit in London, it was announced that commitments of $4.6 billion have been made to fund the eight-year project. There is a relationship between sexually transmitted infections, including AIDS and conception. Infected woman may give birth to babies who have AIDS and/or become AIDS orphans. The female condom is the only product where use is initiated by a woman that provides dual protection against sexually transmitted infections, including AIDS and unintended pregnancy. This fact was highlighted at the Summit on Family Planning. We believe that FC2 is an ideal product for use in this particular program and that the focus on family planning significantly broadens the market for FC2 used as a contraceptive. The fifth item is the company’s public-private partnership program, which we announced at the Summit on Family Planning.

To remind you, it has three components, all major public sector FC2 unit orders will be aggregated at the end of each calendar year and based on volume we’ll determine the public sector price for the succeeding year. Secondly, each year the company will provide low cost FC2 units to make sure public sector customers equal to 5% of their prior year purchases. The market in this case is totally unsaturated, I just want to say, unlimited opportunity here. So, in effect, this program of low-cost material results in sampling and branding FC2 throughout the world as a part of an education and training programs, which we believe will further increase demand for the product. The third element the company is committed to spending $14 million over six years in education and training, including sexually transmitted infections and AIDS and contraception. Our experience shows that these types of programs increase demand.

We believe that our program is unique that our public-private partnership program will help the public sector achieve its goals and increase awareness of, access to, and demand for FC2. The sixth item that’s one that I point out in every call, it’s the continued feminization of AIDS. More than 50% of all new cases continued to be women, 80% of sexual infections continue to be contracted through heterosexual sex. AIDS continues to be the leading cause of death worldwide among women 15 to 44 years of age. In summary, we believe we have succeeded on some key factors that I just covered will result in long-term global growth demand for FC2.

Turning to the outlook for 2013, as noted previously due to the potential volatility and the timing of public sector warrants, the company doesn’t provide precise revenue and earnings guidance. We do provide general guidance regarding the outlook based on conditions at the time. In considering the outlook for 2013, the following are important considerations. The company had a spectacular 2012 due in part to catch up sales from Brazil, the Republic of South Africa, orders delayed from 2011. We have recognized this catch up factor will not repeat in 2013.

However and importantly due to the continued feminization of AIDS, the Gates UK Family Planning program and its potential impact on the use of FC2 as a contraceptive and the fact that female condom is the only product, where use was initiated by a woman that provides dual protection against AIDS and unintended pregnancy that was more modest on 2012. The company will continue to experience solid growth in revenues and operating income in 2013. And our first quarter results substantiate this feel. Now, Emily, we will take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from Andrew Love of Love Savings Holding. Please go ahead.

Andrew Love - Love Savings Holding

Good morning O.B.

O.B. Parrish

Good morning Andy. How are you?

Andrew Love - Love Savings Holding

Yes, fine. Congratulations on another excellent quarter.

O.B. Parrish

Thank you.

Andrew Love - Love Savings Holding

I was curious if you could give us the figures during the quarter for CapEx and stock repurchases?

O.B. Parrish

For the second half? Our CapEx, it was nominal Andy in the quarter certainly less than $100,000. And on stock repurchases, there is one stock repurchase for $178,000.

Andrew Love - Love Savings Holding

Okay, thanks.

Operator

And our next question comes from Marc Robins of Catalyst Research. Please go ahead.

Marc Robins - Catalyst Research

Hey, thank you, O.B. Good quarter.

O.B. Parrish

Well, thank you Marc.

Marc Robins - Catalyst Research

Congratulations to you and your team. Hey, help me understand something or remember something in the fourth quarter of last year, there was a $5 million tax, I guess, rebate you might say versus the $25,000 and $71,000, could you help me better understand why there was this kind of anomaly?

O.B. Parrish

In terms of the cash benefit we took?

Marc Robins - Catalyst Research

Yeah, the tax benefit?

O.B. Parrish

And you are comparing it to what period, the prior period?

Marc Robins - Catalyst Research

Well, in the first quarter, I believe the benefit was like or the tax was $25,000 and in the first quarter a year ago it was $71,000.

O.B. Parrish

Well, I see which one that you are referring to that. Well, there is an anomaly there in terms of the split between U.S. and international profits and the fact that a year ago, Illinois has suspended its NOLs for a period of four years. And so we have paid tax in Illinois Lilly a year ago. And this year we didn’t have any tax to pay at Illinois, because if you look at just Illinois alone, there was a loss on it, so we didn’t have to pay tax at that time.

Marc Robins - Catalyst Research

And so that was a catch up item then?

O.B. Parrish

It fits the difference between the 71 and the 25.

Marc Robins - Catalyst Research

Okay, but in the fourth quarter, there was it looks like a $5 million benefit?

O.B. Parrish

Well, in the fourth quarter each year we consider taking a tax benefit based on the results at the time and the outlook for the company. And each year, we have been taking a tax benefit and we took one in the fourth quarter which is about $4.5 million.

Marc Robins - Catalyst Research

I got you, okay. So, it was the normal plus the catch up, okay, very good. Thank you. And again excellent quarter.

O.B. Parrish

Thanks.

Operator

Our next question comes from Peter McMullen of IPC Inc. Please go ahead.

Peter McMullen - IPC Inc.

Hi O.B. How are you?

O.B. Parrish

Good Peter.

Peter McMullen - IPC Inc.

Couple of things. First of all, give us a little color on the sales in terms of now maybe new markets or the countries and the second thing is the inventories are up nicely 25% is that some sort of a reflection on future demand, maybe just comment on those two things?

O. B. Parrish

Sure. In terms of the distribution, we actually are in 138 countries now versus 121 a year ago. But I think more importantly and that is we are seeing an increase in certain countries and we are focused on countries in two different ways. One way, there is really populous countries I think it’s for a large scale program. We’ll begin to see increases in those countries are becoming substantial, but also in a different way that we have seen increases in a number of small countries that we ship to. For example country like Uruguay where we ship small orders and then something last year we shipped 300,000 to Uruguay, shipping to Ecuador. We are seeing the quantities that were small are growing in those countries. And if you put them altogether they are meaningful. So, we are getting increased use and that in fact is probably more important at this point than the increased countries.

Peter McMullen - IPC Inc.

And the inventories?

O. B. Parrish

In reference to inventory, the reason you’ll see the increase in the inventory is to fill orders in-house.

Peter McMullen - IPC Inc.

Now you say that again please?

O. B. Parrish

The reason for the increase of inventories is which you applied is to fill orders that we have.

Peter McMullen - IPC Inc.

Thank you.

Operator

Our next question comes from George Whiteside of SWS Financial. Please go ahead.

George Whiteside - SWS Financial

Good morning, O. B. And I would like to add my congratulations to a wonderful first quarter. And in that regard your profit margin really looked excellent at 60% and what is your feeling about your ability to maintain that in light of I am sure you are making investments in enhancing your distribution channels and training, etcetera?

O. B. Parrish

Well, I think we are working assiduously on reducing our cost (indiscernible), which is one of the factors. Another factor is increased volume that influences that. As the volume goes up, if we get we did 61.6 million units last year, it’s something gets up to 200 million to 300 million units, we may have in terms of absolute dollars and more profitable company at a slightly lower margin, but our objective is to keep that margin as high as we can.

George Whiteside - SWS Financial

Excellent, my second item is you commented on the completion of the Malaysia expansion and with your growth prospects, do you have additional capacity in that facility to make further expansions as the demand increases?

O. B. Parrish

Mike you want to make the comment on what our next steps would be?

Mike Pope

Yes, of course. The answer to your question, yes we do have some more space of the, it’s starting to get a little tight. We are looking at additional units in the locality to expand into. There is quite a lot of available space within Malaysia relatively competitively priced, so it won’t be an issue.

George Whiteside - SWS Financial

Well, that’s certainly encouraging and it sounds still you’ve done some forward planning so that when the need raises you will have capability of locating space etcetera.

O. B. Parrish

Thank you very much.

George Whiteside - SWS Financial

That’s not a problem, you have to deliver it.

Operator

Our next question is a follow-up from Marc Robins of Catalyst Research. Please go ahead.

Marc Robins - Catalyst Research

Thank you. O. B., help me understand a little something about your business, have you really detected any kind of seasonality to the quarterly revenue numbers?

O. B. Parrish

I don’t think there was any seasonality in that sense to them…

Marc Robins - Catalyst Research

We have the ebb and flow of orders that…

O.B. Parrish

If you look at it from the standpoint of success and seasonal…

Marc Robins - Catalyst Research

No, no.

O.B. Parrish

And we are going to have that impact, you might have some changes in buying patterns for maybe one country and then the program goes for a while. And then you don’t have any additional buying in these three or four quarters late. So, this is when we talk about the volatility in it. So, you don’t get a linear picture. Overall, you have the nice rising demand that the picture may not be linear in that sense.

Marc Robins - Catalyst Research

And secondly, you had another competitor I want to say India or China, has the landscape, competitive landscape changed any?

O.B. Parrish

Well, we haven’t missed the company is in our 10-K and 10-Q indicated that one other company is secured and we are going to show clearance, but they have substantial work to do to be able to produce and deliver any large quantities of the product. Other than that, I don’t think there is anybody else that’s close to getting clearance from FDA or from WHO.

Marc Robins - Catalyst Research

Okay, very good, thank you, and again great quarter.

Operator

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

O.B. Parrish - Chairman and Chief Executive Officer

I just like to thank everybody for attending and for your support. And we look forward to the next conference call. Thanks.

Operator

To access the digital replay of this conference, you may dial 1-877-344-7529 or 1-412-317-0088 beginning at 1 PM Eastern today. You will be prompted to enter the conference number, which will be 10023963. You will be prompted to record your name and company when joining. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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