Robert Buhrmaster - Chairman
Bryan Phillips - General Counsel and Corporate Secretary
Gary Maharaj - President and Chief Executive Officer
Tim Arens - Vice President, Finance and Interim Chief Financial Officer
SurModics, Inc. (SRDX) Annual Shareholder Meeting Conference Call February 11, 2013 5:00 PM ET
Robert Buhrmaster - Chairman
Good afternoon. Welcome, welcome, my name is Bob Buhrmaster, I’m the Chairman of the SurModics Board of Directors and on behalf of the entire board I welcome you to the 2013 Annual Meeting of Shareholders. We are again pleased to be able to host this year’s Annual Meeting at the company’s corporate headquarters and we very much appreciate your attendance today especially considered wonderful winter weather here in Minnesota, those of us from Florida this is a real shock to the system.
I would also like to be able to extend a special welcome to those listening on the meeting via webcast. As you can see from our agenda following the introduction of the members of the Board of Directors we will conduct a formal portion of the Annual Meeting. Our President and Chief Executive Officer Gary Maharaj will then introduce the company’s Executive Officers and certain special guests that are present here today. Our VP of Finance and Interim Chief Financial Officer Tim Arens will spend a few moments highlighting our financial results and Gary will provide us with an update on our business and each strategic initiatives underway at the company.
What I’d like to do now is introduce the independent members of the Board of Directors. As I call each board member to stand please hold your applause until the last director has been introduced. Our independent directors are Jose Bedoya, John Benson, Mary Brainerd, David Dantzker who is unable to be with us today, Gerry Fischer, Su Knight and Scott Ward. Please join me in thanking these directors for all their contributions to SurModics.
With that, I will now call our 2013 Annual Shareholders Meeting to order. I would like to introduce Bryan Phillips, General Counsel and Corporate Secretary who will conduct the formal portion of today’s meeting. Bryan.
Bryan Phillips - General Counsel and Corporate Secretary
Thank you, Bob and good afternoon shareholders. We will now conduct the formal business as set forth in the notice of meeting and proxy statement which I mail to all persons who are shareholders of record as of December 14, 2012. We previously received an affidavit of distribution establishing the notice of this meeting was duly given. The count of shares present immediately prior to the commencement of this meeting indicated that more than 13.1 million shares or approximately 90% of our common stock is represented today either in person or by proxy. Therefore we have a quorum because of the notice of this meeting was duly given and a quorum is present this meeting is duly convened for purposes of transacting the business to properly come before it.
Let me note that most shares are voted by proxy. If you desire to vote in person you may approach one of the designated individuals located in the rear of the room to obtain a voting card. There are four proposals to be considered during this meeting all of which were described in detail in the proxy statement earnest to shareholders. The first item of business is the Election of Class II Directors; the Board has selected John Benson, Mary Brainerd and Gerald Fischer as it’s nominees for election as Class II Directors. Those shares being voted by proxy consisting of a plurality of the shares represented at this meeting have voted in favor of this proposal. Consequently these three nominees have been reelected.
The second item of business is the determination of the number of directors to constitute the Board. The proposal before the meeting is that the number of directors be set at nine. Those shares being voted by proxy consisting of a majority of the shares represented at this meeting have voted in favor of this proposal. Consequently this proposal has been approved.
The third item of business is ratification of the appointment of Deloitte & Touche to serve as the company’s independent auditors for the company’s fiscal 2013 year. Those shares being voted by proxy consisting of a majority of the shares represented at this meeting have voted in favor of this proposal and consequently this proposal has been approved.
The final and fourth item of business relates to the non-binding advisory vote on the company’s executive compensation program. Those shares being voted by proxy consisting of a majority of the shares represented at this meeting have voted in favor of this proposal and consequently this proposal has received the advisory approval of our shareholders. The final tabulation of the votes for each of these proposals will appear in our required Form 8-K which will be filed with the Securities and Exchange Commission. This concludes the formal portion of our 2013 Annual Meeting.
Before I turn the meeting over to Gary let me remind you that some of the statements made at this meeting may be considered forward-looking. The company cautions investors that results of future operations may differ from those anticipated. We urge you to review the cautionary statements and other information contained in the company’s filings with the SEC including our annual report on Form 10-K for fiscal 2012 which identify certain factors that could cause actual results to differ materially from those projected in any forward-looking statements. Copies of the 10-K and other filings are available through the company or via our website. And with that I will now turn the meeting over to Gary. Thank you.
Gary Maharaj - President and Chief Executive Officer
…here outside Legal Counsel. Thank you. Please also welcome Jason Flynn partner with our independent auditors Deloitte & Touche. We are happy to have all of you here today. At this point I’d like to turn it over to Tim for a review of our fiscal year 2012 financial results and our first quarter fiscal 2013 results. Tim.
Tim Arens - Vice President, Finance and Interim Chief Financial Officer
Thank you, Gary. Good afternoon and thank you all for joining us today. Before I present our financial results from continuing operations for our first quarter fiscal 2013 let me recap several of our key financial highlights from the past year. Our fiscal 2012 revenue and earnings per share performance exceeded our 2012 outlook that we provided in November 2011. In addition we exited the Pharmaceuticals business following the $30 million sale of our pharma assets to Evonik in November 2011. This divestiture enhanced the company’s efforts to focus on our core businesses and deliver these solid results that I just highlighted.
We were also pleased to return $55 million to shareholders in the form of a modified Dutch tender offer that was completed in September of 2012. Our tender, which was oversubscribed allowed the company to retire 16.5% of our outstanding common stock at a price of $19 per share. Our fiscal 2012 performance provided us with many fixed assets that we’ve been highlighting. Here are several that are representative of our year; let me touch on just a few, although it is not often that we are able to mention our customers by name we are fortunate that we can in the case of two recent significant medical device product launches.
In our first quarter of fiscal 2012 Edwards Lifesciences received its first FDA approval for transcatheter aortic heart valve. In our second quarter Medtronic received FDA approval for its next generation coronary stent. I’m pleased to highlight the substantial progress the company made in fiscal 2012 to overcome much of the $6.6 million CYPHER revenue headwind that was created when Cordis exited the drug-eluting stent market. Our 2012 performance benefited from our focus on our core businesses as both our businesses generated solid revenue growth in operating performance.
Moving on to fiscal 2013, let me briefly highlight our first quarter operating results which were described in our January 30th earnings – release in earning conference call. Our financial performance resulted in strong revenue growth and the business generated strong operating income. Revenue for the first quarter totaled $13.9 million increasing 16% from the $11.9 million reported in the first quarter of last year. We delivered operating income of $4.9 million an increase of 51% from the prior year our operating margin was 35% up 800 basis points compared with last year’s first quarter.
And our GAAP EPS was $0.29 for the first quarter compared with $0.12 from the year ago period. Our earnings per share performance in the first quarter benefited from nearly an $0.08 gain on the sale of one of our strategic investments. On our recent earnings call we reaffirmed our full-year revenue outlook in the range of $55 million to $58 million. We increased our outlook for earnings per share from continuing operation as our fiscal 2013 diluted earnings per share benefits from several non-operating impacts including the investment gains that I had mentioned and a lower effective tax rate. EPS is now expected to be in the range of $0.86 to $0.99 per share above our initial range of $0.75 to $0.87 a share.
I now want to provide a few financial highlights in our medical device business. This business consists of our device drug delivery coating offering and a hydrophilic coating which represent the majority of our medical device revenue and are reflected on this slide. In fiscal 2012, SurModics generated record hydrophilic coating revenue of nearly $37 million. In our most recent quarter our hydrophilic coatings, our revenue increased 27% from last year to a record $10.4 million, additionally with our first quarter results our hydrophilic coatings revenue had delivered growth in 12 of last of our 13 quarters.
Moving on to In Vitro Diagnostics business unit, this business unit consists primarily of chemical component for clinical diagnostic test. In fiscal 2012, SurModics generated record In Vitro Diagnostic product revenue of nearly $14 million. In our most recent quarter our diagnostic revenue increased 9% compared with a year-ago period. Additionally, In Vitro Diagnostics business unit has generated nine consecutive quarters of year-on-year revenue growth.
Let’s turn to our balance sheet. SurModics balance sheet remains healthy with $64 million in cash and investments at the end of the first quarter which reflects strong operating cash flow of $5.4 million as well as proceeds of $1.3 million from the sale of one of our strategic investments.
Note, our first quarter cash position does not reflect an additional $1 million recently received from the sale of our OctoPlus investment. Let me also remind you of our recent $10 million share repurchase authorization. This share repurchase authorization reflects in recent financial strength of the company as we continue to generate solid cash flow and demonstrates our commitment to continually evaluate the use of our cash position to create shareholder value.
With that I would like to invite Gary back to the podium.
Gary Maharaj - President and Chief Executive Officer
Thank you, Tim. That was a wonderful recap of a very positive financial result. Today I have three things I’d like to go over with you. The first one is our transformation is working; this is our third year of the transformation of SurModics and as you can see by the results that Tim just recapped certainly strong cash flow, healthy balance sheet and a return to revenue and profitable growth.
The second one is well transformation is not finished, our transformation continues and its ongoing. I’ll give a little color on what that means as a company and the roadmap of where we’re headed. The first thing is this is the third year of our transformation and year three is all about balance and what does balance mean, how do we execute in the year three to get to our long-term vision. But first today is a very exciting day for the company because today is the day before tomorrow and tomorrow, tomorrow we at the Medical Device and Manufacturing Show West in Los Angeles we got to do something very cool, it’s been 10 years since the company has launched a major platform for growth introducing SurModics Serene line of coating. Serene is simply the best hydrophilic coating the minimally invasive devices on the planet.
It's a bold statement and I hope to show you why, it’s certainly that’s a small jump for a gold fish but it’s a huge jumping performance for our customers. SurModics Serene provide low friction and we may ask why is low friction important to our customers. Let’s look at the human body and many of our customers have to navigate their devices with difficult tortuous anatomy to get to places like the brain and the heart, little closer you can appreciate in the coronary vessel and this is a two dimensional representation of what really the three dimensional problem so the catheters going in and out of the plane as it’s circumventing these arteries is a very, very difficult proposition for the proper device placement or device intervention.
The low friction helps into deliverability of our customer devices and it’s still a very important attribute for that. The brain is even a more tortuous path. If you look at the brain the vessels are smaller, they’re more fragile quite, you have quite a few more twists and turns. The SurModics Serene offers our customers the ability to dial in at low friction as they need to get the job done.
SurModics Serene is also low particulate never before has a coating, a hydrophilic coating been able to deliver low friction while at the same time guaranteeing this low particulates on the device, let’s look at that a little closer. When you look for those of you in the webcast I apologize but then when you look at different catheter systems on the market which use different hydrophilic coating you will note that they have a certain range of particulates in the human body or a certain range of friction. The aim of all of these devices is to have very low friction for deliverability while leaving a very low footprint in the human body, recently this has become a very important regulatory issue as the USFDA and others ask about the loading of particulates from these procedures.
So SurModics Serene is the only product that can give you both the low particulates with low friction. SurModics Serene is state-of-the-art and I mean state-of-the-art there has been no other coating technology for hydrophilic coating that has been studied as effectively as we have. It’s thin, it’s a very thin coating it’s one micron or less it’s a thousand of a millimeter, you’re wondering how thin the thousand of a millimeter is, you look at the human hair, a human hair is about 100 microns across that small line you see would represent the SurModics Serene coating, this is a key attribute for our customers as they want the low footprint in the devices high durability and a low footprint in the human body it’s a very thin coating.
It’s also state-of-the-art because some of these thousands of hours the hundreds of experiments and the dozens of formulations that our scientists went through they didn’t only study this on the bench-top we actually took it upon ourselves this is a – the slide you’re looking at is an article in press to be published in biomaterials is unavailable online now but our scientists actually took the effort to do both in vivo testing with this coating to demonstrate its impact on tissue and in fact with some of the world’s leading cardiovascular pathologists demonstrate the appropriateness of this coating. So it’s been well studied even before its launched state-of-the-art.
Low Friction, Low Particulate no trade-off simply the best hydrophilic coating on the planet better than anything we have ever done and we lead the way in this industry. So you can tell our transformation is working not only the financial attributes of the company but the underlying R&D engine is now getting warmed up, this is the first launch I hope of many in the future of the company. Transformation is the ongoing though we’re not finished, we’re not going to rest in our loyal we eventually want to build the company that has consistent long-term profitable growth that has a huge impact in the markets we serve. We serve two markets; we improve devices that they’ll help the detection and the treatment of disease. For all of us here we’d like to see SurModics have even more impact in those markets while certainly meeting our financial goal.
What we are doing is writing a new story, I won’t address the path, but if you look at the last two years you can understand the twist our team here put some stability on the SurModics business in year one. In year two we determined our core and we drove really hard in focus and execution in our core business. Year three where I want to spend a little time on is a pivotal and another transformational year but it comes with a challenge, a challenge of focusing and driving our business while undertaking the activity to lay the foundation be that high growth business that we are proud of in the future. This is the present time and we’ll talk about the future. So the news here is the rewriting is going well and the company is producing good results.
Now if you back off a little bit in a much longer time skill I wanted (indiscernible) you with where we are in this transformation. In the first five years horizon one as we call it it’s all about focus, driving cash flows, creating capability, driving our business results and we are right here. However as we look to expand this business to adjacencies surrounding the core the activities to harvest the results from those activities actually have to start year three that’s what year three is about balance for us.
SurModics like most companies has three years of drive growth certainly our portfolio growth we talk about our positioning in high growth segments like transcatheter valve, structural heart, peripheral and neurovascular markets and we also talk about our immunoassay diagnostic markets as well so the growth profile we get from both. We also take share and share trading will not necessarily the best we’d get growth with superior technology and superior operation of sales and marketing excellence we expect to continue that trend.
The third part will be adding here in the company years is looking definitively at M&A growth. Now we are not going to just go into M&A growth without a really welcomed season and thoughtful strategy that’s one of our agendas for year three. So if you put it all together look at our different horizons we look at all the different years of growth, the point here on this chart and I’m not going to read everything is where we are defines what we do and so it’s important to know where the company is and what its opportunities is in each of the years of growth.
Our transformation is ongoing and there is a roadmap of activities for the future. For year three you make your long-term plan by making each year count and so what is on the agenda for year three, well the year three is about balance. So in year three we are trying to do two things that sometimes weaken our position one, we love these core results we are getting, our cash flow is high or profitable in revenue growth and we intend to maintaining that high level of focus.
But year three is also about laying the foundation for core expansion in future years. If we delay these activities we will actually delay that transformation for expansion that we saw and so on. But the third thing I want to mention here is we can’t get these done without very well disciplined balancing act and I’d tell you balance is not trivial, balance involves many dimension several of them are very obvious, we don’t want to prematurely invest into our expansion, we have to balance that but at the same time we don’t want to excessively mind and drive this core business. Those are the strategic discussions we have as a board and the management team of how we invest our capital, our time and our resources.
Balance is also admitting disciplined choices in cash deployment. As you’ve seen we have a healthy balance sheet and big cash flow. So our challenge is how we chose to allocate capital to grow the business and we will talk a little bit about that. And then finally choosing the few strategic initiatives that count, we can’t rebalance speed and complexity don’t connect and so you have to really winnow down to the few strategic initiatives that will actually move the needle in a big way, we are not going to fall into a trap of trying to do all things at all the time. And then finally I think we all know we have to match the strategy to the execution capacity of SurModics and I’m proud to say SurModics has demonstrated a huge ability to meet the strategic requirements as you’ve seen from our results. This really is a pivotal slide internally for year three. Of course we have to deliver on our financial commitment of course we have to grow, be profitable, but these commitments on this slide lay the foundation really talk about our future so we are commercializing Serene SurModics Serene Coating.
Those may not have a huge revenue impact in this year but they create the conditions for revenue growth in the out-years with our customers. We have to complete the preclinical assessment of our drug-coated balloon technology, that’s an exciting project and to me and to our team represents a return of SurModics the drug delivery technologies which is a huge competency of the company that we haven’t recently exploited.
The third one is to establish a beachhead in molecular diagnostics. Our diagnostics business is well steeped in the immunoassay market. Molecular diagnostics and genetics as you know is a very rapidly evolving field with high growth. So what we’re doing right now is to really ensure that we’re well positioned with our capabilities in that market and I’ll tell you we actually have a few as an example we have unique methods of binding or immobilizing DNA and RNA which is a hallmark of the new evolution in molecular diagnostics.
The fourth one we strengthened our pipeline, the experiments in our pipeline. By that I mean the things that we do today to that out as projects of tomorrow and we have many of those I chose not to discuss them because if any of you from an R&D background you try many, many different things and a few of them will work. So needless to say our R&D team and our R&D engine in both diagnostics and medical device is now warming up and getting many market opportunities and matching into our technology as we speak, that’s a critical deliverable for us in year three.
And then finally this year we really have to define our M&A strategy. Our ongoing strategy and success in these markets will help inform us about what our M&A strategy as well as our cash position, the uses of cash. Those five things define our year to create the conditions for the future.
And everyone always want to know what the balance, the use of cash. As I’ve said before really there are three uses of cash that we see, cash to run the business, working capital, capital expenditures and nice healthy margin in what to be very tough macroeconomic worldwide condition, we want to run the business and serve the business needs with low risk first. The second thing is that as we develop this M&A strategy you will clearly understand what our uses and needs of cash and how much cash do we need to create long-term future profitable growth.
And then finally the definition of excess is what we have there in terms of a commitment to return to shareholders. As you’ve seen in the last six months we certainly have been through to that commitment with a $55 million buyback late last year, the Board authorized 10 million buyback repurchase. So that remains critical aspect of use of cash for us. So, year three is about balance, focusing on the core, laying the foundation to core expansion and understanding the balance as required to be successful. So I’ll leave you with these three thoughts, the transformation is working, our transformation is ongoing and this year is really going to be defined the balance in our team.
Thank you. Now I have to find my way in the script. Okay, once again I’d like to thank all of you for attending today our 2013 Annual Meeting of shareholders and for those of you listening in on the webcast. As you’ve heard we have a lot to be excited about in 2013 and we look forward to updating you at critical points throughout the year. Thank you.
[No Q&A session for this event]
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