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Executives

Nick Laudico - Senior Vice President, Investor Relations, The Ruth Group

Joseph Capper - President, Chief Executive Officer and Director

Ronald L. Rubin - Senior Vice President, Chief Financial Officer and Secretary

Scott I. Verner - Senior Vice President, Sales and Marketing

Analysts

Derek Leckow - Barrington Research

Lawrence Solow - CJS Securities

Tycho Peterson - J.P Morgan

Mathew O'Brian - William Blair and Company

Timothy Hasara - Kennedy Capital

William Driscoll - 1837 Partners L.P.

Home Diagnostics, Inc (HDIX) Q1 2009 Earnings Call May 7, 2009 8:30 AM ET

Operator

Greetings and welcome to the Home Diagnostics First Quarter 2009 Earnings Conference Call. At this time, all the participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions).

It is now my pleasure to introduce your host, Mr. Laudico from the Ruth Group. Thank you. You may begin

Nick Laudico

Thanks operator. On the call with us today is Joe Capper, President and Chief Executive Officer; Ron Rubin, Chief Financial Officer; and Scott Verner, Senior Vice President of Sales and Marketing.

Before starting the call, let me remind you that the statements made in today's conference call all include forward-looking statements and are subject to risks and uncertainties. Such statements are only predictions and reflect the company's expectations and assumptions as of the date of this conference call, based on currently available operating, financial and competitive information.

The actual events or results may differ materially from those projected and such forward-looking statements due to a number of factors, including risks and uncertainties identified in the company's most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission, may differ materially from those projected.

Now let me turn the call over to Joe Capper.

Joseph Capper

Thank you Nick and good morning everyone. Welcome to our first quarter earnings call. I will spend the first part of the call covering highlights from the quarter and providing some insights into our strategy development process. Ron will provide an update on our financial metrics followed by Scott who will update you on our key sales and marketing initiatives.

On our previous call conducted on my seventh day with Home Diagnostics, I expressed my excitement about the possibilities for the company. Since then I have become much more familiar with the capabilities of our company, and in the process have become far more enthusiastic about our potential for growth.

Clearly we have the right offering at the right time, and our first quarter results are beginning to validate this. While we are not completely satisfied with our performance, results for the quarter were solid, especially when compared to the rest of the industry. Total revenue was $24.6 million down 2.1% from a year ago. However, our domestic sales were actually up 2% for the quarter compared to double-digit declines reported by the largest manufacturers in our space.

We believe our success in the quarter is evidence that more people are recognizing the benefits of our value price products especially during these trying economic times. We are seeing excellent acceptance with the launch of TRUEresult and TRUE2go in the national retail chains. We are on track to launch these products in the regional change chains in the second half of 2009, and expect to have CE Mark approval later in the year.

During the quarter, TRUE2go was recognized by Medical Design Excellence Awards or MEDA and received the annual excellence in design award from Appliance Design magazine. These prestigious accolades recognize the innovation associated with the development of this product, the world's smallest blood glucose meter.

In March, we received five 10 K clearance for the TRUEbalance our third no-code meter, a feature that is rapidly become requirement in the industry. It is important to note that this meter uses a test strip produced by the same manufacturing line that generates the TRUEtrack strip, a line that is almost fully depreciated.

An excellent product lines expansion TRUEbalance initially will be deployed in the mail service and DME markets. The clearance of this product also demonstrates our organization's ability to rapidly move a product from concept to commercialization, having initiated the TRUEbalance project only six months prior to FDA approval.

Shifting gears for a moment to our discussions with the FDA regarding the use GDH-PQQ enzyme and the manufacturing of our TRUEtest strips. These discussions that we and other leading manufactures are having with the FDA are centered around the enzymes potential effect on the accuracy of blood glucose readings in patient who received medical treatments or IV therapies that are known to contain maltose and maltose derivatives.

At the end of March, we submitted our plan to the FDA to further mitigate the risk of inaccurate readings that may arise in small groups of patients who are undergoing certain medical treatments. We have a follow-up meeting scheduled with the FDA later this month to discuss our plan.

Moving on to business strategy. Over the past few months, we have been conducting a strategic review and assessment of the organization. We will be allocating resources based on conclusions reached on this comprehensive process. The plan derived from a strategic review will serve to focus senior management attention on a set of specific objectives. Although, the review is still in progress, I would like to share with you some of our thinking at this point.

First and foremost we will allocate the majority of our resources toward the objective of growing vertically within the blood glucose monitoring business. Inspite of the recent growth challenges in the business presented by current economic conditions this remains an attractive market for investment. Specifically we want to expand the size of what we refer to you as the Quality Value or QV segment of the market. We believe there are growing number of customers migrating into this segment. To find us price sensitive shoppers who are not willing to sacrifice on quality or service. This migration is common in the matured category where innovation is no longer producing transformational changes to the product line.

As I indicated during our last call, this is really the sweet spot for Home Diagnostics. Our diverse product portfolio is extremely well positioned to compete against any other industry participant. With the introduction of TRUEresult and TRUE2go, we have demonstrated an ability to deliver high quality no-code technology at a price point well below other brands in the industry providing as much as a 30% saving for the consumer and superior margins for our channel partners.

Our supporting programs are designed to more effectively communicate this benefit to the market. The timing of which could not be more appropriate. Our private label and co-brand programs will remain important tactics in attracting a greater number of consumers to the QV segment.

Our second opportunity is to employ an integrated approach to accelerating the expansion of our international business. We will utilize various combinations of direct sales teams, local distribution partners, strategic alliances, and acquisitions. The appropriate approach for each market will be dictated by factors such as margin, reimbursement, growth potential and barriers to entry.

Currently our share outside the United States is quite small. This presents a considerable opportunity for Home Diagnostic given that many of the international markets tend to be highly price sensitive. We have taken some immediate steps in these areas including hiring additional sales personnel in UK, adding new distributors, Task Force charged with prioritizing near and mid-term opportunities and building the structure necessary to support this initiative on an ongoing basis.

In summary, Home Diagnostics has a strong competency in delivering high quality value price products across the channels in which we do business. We believe this message will resonate in the markets outside of the U.S.

Additionally, our plan will focus on ways to gain access in to portions of the diabetic testing market where we are not effectively competing today. It includes the possibility for commercializing products adjacent to the diabetic testing business and it requires institutionalizing the culture of cost control and cost reduction to ensure we remain competitive well into the future.

I will share more details with you as we build up these initiatives overtime. At this point though, I would like to turn the call over to Ron for a financial update.

Ronald L. Rubin

Thanks Joe, and good morning everyone. Our first quarter results were slightly better than the guidance we provided on our fourth quarter earnings call. Total revenue was 24.6 million, a decrease of 2.1% compared to revenue of 25.1 million in the first quarter of 2008.

Revenue in our retail channel was 8.1 million up 25.2% compared to 6.5 million in the first quarter of 2008. Growth in the retail channel was driven by the continued roll out of our TRUEresult and TRUE2go no-coding meter systems with our major co-branding partners and our TRUEtrack product at Wal-Mart.

We're also encouraged that the out sales unit trends at our major retail partners continued to be strong in the quarter. Our first quarter 2009 test strip unit out sales for our major retail partners were up over 10% in the quarter and meter unit out sales were up over 40% which we believe further validates the strength of our value position in this economy.

Revenue from our mail service channel was up 21.8% to 5.3 million compared to first quarter 2008 revenue of 4.3 million. Mail service results include the first four quarter of sales under our agreement with Liberty Medical to provide them with a private label no coding product. We are very excited about potential contribution from our partnership with the largest mail service provider of diabetic supplies in the country and an active consolidator in the mail service channel.

Revenue from our distribution channel was 9.2 million down 19% compared to 11.3 million in the first quarter of last year. As we discussed on last quarter's call, distribution revenue in the first quarter was negatively impacted by a reduction in inventory days supply by some of the companies wholesale distribution customers. We are currently launching the TRUEtest platform in national distribution and are positioning these products as premium no-code products at higher price points.

At the same time, we are repositioning our TRUEtrack our legacy TRUEtrack product targeting the cash in Medicare and Medicaid patients. As such we have lowered test strip pricing to make these products more competitive.

Out sales in the distribution channel declined in the mid-single digit during the quarter. Out sales growth has been impacted by the continue decline of our photometric test strip business, as customers shift to biosensor systems.

As Scott will discuss we believe the launch of TRUEtest in national distribution along with programs designed to strengthen our value methods will drive improved out sales performance in the distribution channel in coming month.

Moving to our international channel results, first quarter revenue was $2 million, down 32% from 3 million in the first quarter of last year, driven primarily by reduced sales to a distributor in Brazil, which has been negatively impacted by weakened currency and an economic downturn. We're working proactively with this distributor partner on programs and promotions to drive our business in Brazil.

Gross profit for the first quarter of 2009 was $11.6 million compared to $14.6 million in the first quarter of 2008. Our strip to meter ratio declined to 5.7:1 versus 6.9:1 last year, reflecting the meter investment associated with the launch of the new no-code TRUEresult and TRUE2go meters.

Our gross margin decreased to 47.1% compared to 58.1% in a year ago period. As expected gross margin was negatively impact by the continued investment in the roll out of the company's new no-code products in the and retail and mail service channels. Gross margins were also impacted by lower pricing in the mail and distribution channels.

Selling, general and administrative expenses were $12.1 million for the first quarter 2009 as compared to $11.9 million in the first quarter of 2008. The increase in SG&A primarily reflects severance and other CEO transition costs approximately 400,000 offset by lower marketing costs.

Research and development expenses were 1.9 million for the first quarter of 2009 as compared 2.4 million in the first quarter of last year. The reduced R&D expense in the quarter resulted for lower costs related to new product development, following the 2008 launch of our new no-code products.

Operating loss for the first quarter of 2009 was $2.4 million compared to operating income of $0.4 million in the first quarter of 2008.

Net loss for the first quarter of 2009 was $1.7 million or a loss $0.10 per share based on weighted average shares outstanding of $17.3 million. Net income for the first quarter of last year was 700,000 or $0.04 per share based on 19.2 million weighted average shares outstanding. Our weighted average shares outstanding for diluted EPS in the quarter $17.3 million which excludes any dilutive affect stock options due to our net loss in the quarter. At March 31, 2009 we had 17.1 million shares outstanding and 3.8 million total stock options outstanding.

During the first quarter of 2009, we purchased 473,000 shares of our common stock for an aggregate cost of 2.9 million, under our $5 million Board approved share repurchase program.

Moving now on to our balance sheet and operating metrics. At the end of March, we had cash and cash equivalent of $21.5 million and no debt outstanding. In April, we renewed and amended our unsecured revolving line of credit increasing size of the facility from 10 to $15 million. Total equity at March 31 '09 was $107.5 million.

Our cash decreased $8.8 million in the quarter. This primarily reflects $4.6 million of capital expenditures related primarily to our capacity expansion, as well as $2.9 million spend on the share repurchase program and $1.2 million of cash used for working capital and operations.

We're on track with our TRUEtest capacity expansion and have placed purchased orders for a majority of equipment. Construction is underway in our facility expansion and we're progressing on schedule to significantly expand our capacity by early 2010.

For the full year 2009, we expect total capital expenditures to be $17 to $19 million including approximately $12 million related to the expansion. For the first quarter of 2009 total meters distributed where 362,000.Total strips were 2.1 million based on 50 count equivalent units. Our strip to meter ratio for the quarter decreased to 5.7:1 compared to a 6.9:1 in prior year period. This reflects a 29% increase in meters distributed over the first quarter of 2008 driven by the new product launch which positions us well for future test strip sales.

Now turning to 2009 guidance. For the full year 2009, we expect total revenue of approximately $130 to $133 million representing an annual growth of 5% to 8%. We expect 2009 diluted earnings per share to be in a range of $0.36 to $0.40 based on 17.8 million diluted shares. As we stated on our earnings call our guidance assumes a continued investment in the business, which includes rolling out the new products in the retail, distribution and mail channels.

We are also expecting a continued reduction in inventory for some customers particularly in the distribution channel as customers seek to improve liquidity. We also recently modified the purchasing terms of a large national wholesale customer. While on a go-forward this will result in more predictable buying patterns; in the near term the impact of this change will result in lower days supply in 2009, as this customer will no longer be incentivised to make significant stocking orders during the summer trade show season.

Our mail service channel sales will benefit from our strategic agreement with Liberty Medical, which represents a substantial long-term revenue and earnings opportunity. As is usually the case launching a new product with a customer like Liberty, the meter investment requires a bill debate with customers has a negative impact on our gross margin.

We invested in Liberty agreement and we continue to rollout of our new products while the negative impact on gross margin in the full year 2009. Therefore we expect 2009 gross margins to be in the low 50% range. We remained focus on controlling our operating expenses and we expect our SG&A and R&D spending to be relatively flat slightly down in terms of aggregate dollars. As a percent of sales, we expect 2009 SG&A to be 38% to 39% down from 42% in 2008, and our R&D to be approximately 6% to 7% of sales.

Our guidance assumes an overall effective tax rate for the year of 34%. Consistent with last year, we expect the majority of our revenue and earnings to generate in the second half of 2009. This is due to typical business cycles and the ramp up of new product launches. While we're not giving to specific quarterly guidance for 2009, we did want to provide some comments regarding our second quarter outlook.

We expect our second quarter revenue to be relatively flat compared to the second quarter of last year. This is primarily due to a continued reduction in inventory days supply by certain of our large wholesale customers and the impact of the agreement with one of our large distributors that I just discussed.

Gross margins in the second quarter are expected to be in the low 50% range. Our SG&A dollars will be higher than the first quarter due to the economy of marketing expenses for the new product launch as well as trade shows in the quarter. Due to these factors our net income in the quarter is expected to be in the range 1 to $2 million.

I'll now turn the call over to Scott Verner for his comments.

Scott I. Verner

Thank you, Ron. On today's call I'll provide an update on our sales and marketing initiatives and our market share performance. Additionally, I'll also provide an update on our new product launch.

During the first quarter our sales and marketing teams were focused on continuing the launch of TRUEtest. As you might recall, TRUEtest is our high performance no-code strip platform that was launched in late 2008, and we are continuing to roll out this year with additional customers.

We are benefiting from having launched a new strip platform with meters, giving people two meter choices that fit their various testing needs. The TRUEresult meter is a full featured standard size meter while our TRUE2go is the worlds smallest point glucose meter and its half the size of the smallest competitive meter.

Most of our customers are selling TRUE2go for 999 making this a very strong seller during the down economy. We have now launched TRUEtest in Walgreens, CVS, Rite Aid and numerous other chain drug stores including H-E-B and Duane Reed.

In our wholesale distribution channel we've launched with McKesson, Cardinal, and AmerisourceBergen, as well as regional wholesalers. Our co-brand partners are pleased with demand for our products and aggressive commercials we have put in placed. Our promotions include rebates, displays, coupons and circulator advertising all of which have increased our meter unit out sales by over 40% in the quarter.

We are delivering best in class technology and 24/7 customer service while being the value offering in the blood glucose monitoring space. To support our customers, have put behind our efforts it's typically tied by the fact that we now have a strong presence on the retail shelf and in pharma we've positioned in the international advertising.

Retail has stripped unit out sales in our key accounts have increased 11% over the same time period last year. Another exciting opportunity for Home Diagnostics is our partnership with Liberty Medical.

Our first quarter launch with Liberty as a private label offering has gone well. We are featured in both their national advertising as well as on their website. Liberty is the largest mail service company managing over one million customers with diabetes. Liberty continues to expand its patient base by recently acquiring one of our large customers Access Diabetic Supply.

It is no surprise that in the current economic environment, patients are trying to find ways to save money on diabetic supplies and we are focused on communicating our value proposition. On average, our now products are as much as 30% less than competitive products. This is a message that is gaining acceptance with consumers and we are supporting this momentum with promotional campaigns highlighting the value of our co-branded products.

Home Diagnostics also is launching new 25 count test strips box for our TRUEtrack product which has been particularly attractive in the cash markets to patients who are being mindful of the auto biotic cause of managing their diabetes.

TRUEtrack also has a great -- has had a great quarter in Wal-Mart where we launched in 3500 stores. Wal-Mart featured TRUEtrack in their advertising as well as the temporary price reduction which at Wal-Mart is called the roll back promotion.

Our managed care efforts are producing results based on the strategies and initiatives we have implemented to improve pull through including telesales, our increased partnership with our retail partners and our pharmacy educational programs.

IMS data is indicative of the momentum we are experiencing in the managed care market. According to IMS data, Home Diagnostics again achieved double-digit growth of 12.4% over the prior year. We have increased our managed care market share in the last seven quarters and have realized five consecutive quarters of double-digit prescription growth. We also continue to be strong in the cash market.

During 2008, we leveraged our value proposition, strong relationships and our product distribution to enhance our managed care position. We added several new plans with exclusive of Tier 1 status including the cost of regional wins in California providing a solid base of potential new patients for our products.

In 2009, in addition to the continued expansion of our managed care coverage, we are highly focused on pulling our products through in the plants where we know have coverage.

On April 1st, we launched our new Medicare, Medicaid value program. The program is focused on increasing sales and market share with direct and telesales components that are serviced by our national distribution partners. We are very pleased with the early results from the program and expect it to continue to have a positive impact.

In summary, this quarter has been one of many accomplishments. We have successfully continued to launch our new products and acquired more meaningful shelf place within a competitive market place.

We continue to support our legacy platform TRUEtrack with a new 25 count test strip and have received FDA clearance for new meter system through balance. This is our third FDA cleared product in less than one year proving that our customers can count on Home Diagnostics for value, quality and innovation.

I would now like to turn the call back to Joe for closing comments.

Joseph Capper

Thanks Ron, thanks Scott. Again folks, kind of a good quarter in a tough market. We're not fully satisfied with the results for the first quarter, but clearly we think that our message is starting get traction and the organization is moving in the right direction.

At this point, I'd like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is from the line of Derek Leckow with Barrington Research. Please state your question.

Derek Leckow - Barrington Research

Thank you, good morning. Just had a question on the ramp up of production here, can you give us an update as to when we start to see the capacity get up to a level that you can start to like roll the distribution business? I mean is that why the distribution business is not higher? I mean are you seeing capacity constraints there at all?

Ronald Rubin

Hey Derek, it's Ron. No there's not so much of the issue in the distribution channel. First off on capacity, yeah we've got several piece of equipment that will come on line mid year that will get an initial bump in capacity on the new line with the bulk of the increased capacity coming online early in 2010. So we will start to see some improvements based on some new equipment that will coming online. But we've also seen a significant improvement in yield. So we're definitely headed in the right direction from a capacity and production standpoint.

As far as the decline in the distribution channel, I think we stated on the last quarter's call that we expected significant reductions in inventory days supply. Some of the wholesalers had brought significant stocking orders last year in the third and fourth quarters. So, we're starting to see that as 2009 primarily due to one customer is looking to solidify their liquidity and not only days supply but also as I mentioned on the call we've changed the buying terms with one of our large distributors. Now they're no longer be incentivised to make a large stocking order.

So we're anticipating a pretty healthy reduction in inventory. That we believe will lead in long-term into 2010 on a more typical buying patterns.

Derek Leckow - Barrington Research

I guess what I am trying to get out is that you've strategically you have decided to launch these products first at retail and mail and now you're kind of methodically going through the next phase starting to launch products in the distribution channel and I'm assuming that's because of the capacity levels that you currently are able to produce both in the meters and in the strips. Is that a fair assessment or?

Joseph Capper

Yeah, that's a fair assessment.

Derek Leckow - Barrington Research

Okay. And so you just said that you are starting to ramp production, I am sorry the sales growth within the distribution channel should go up, because of the new meter being launched there, I guess in this quarter, is that right. You're just starting launching that or?

Scott Verner

Yeah, Jeff its Scott. We have shipped the product to our distribution partners. But I think it's important even though the company is taking steps to manage their trade show seasons that this is a heavy time of year where they promote as a company to the independent pharmacies and regional chain that they serve.

So a good indicator of how well we're doing in national distribution with the new products, still would be how we do during the trade season and beyond. The products has just been shipped and loaded, but this trade show season which goes through the summer months for the big three will really help us know how well we are doing.

Derek Leckow - Barrington Research

Yeah and were those product shipped to those distributors after the close of the first quarter?

Scott Verner

Some of them have started shipping some of them are getting amount to their individual VCs now.

Derek Leckow - Barrington Research

Okay.

Scott Verner

They have their products.

Derek Leckow - Barrington Research

They have their product. So, I am just trying to gauge. We already see this huge seasonal jump here. And you were saying that this year there is going to be some de-stocking of the -- I guess the older generation products. Is that what you are expecting, because if they are ramping these products for the first time, they are comparing against zero last year. So I'm trying to gauge what should be the right ramp in sequential movement throughout this year?

Ronald Rubin

Yeah Derek, it's Ron. We still expect to see a bump in the third quarter like we have traditionally; I don't think it's going to be as significant because the wholesalers are no longer incentivised to purchase an access of what they expect to sell through the trade shows. So I think we will see a bump in the third quarter. It won't be to the same degree.

And I think also the TRUEtest launch and distribution initially is geared toward some of the smaller chains that are served through distribution. Again it's a higher price product. Its not going to have as broad a application in the distribution channels as we would have seen in the retail, because that's price falling out at 3% (ph).

Derek Leckow - Barrington Research

Okay. May I ask one more question on the TRUEbalance product line? When does that launch occur and what's your strategy as far as which channels that goes into first and what's the progression of that product?

Joseph Capper

Hey this is Joe. We don't see a big launch associated with that product. It's really kind of a product on extension. It allows us to offer a no-code product in some of the more price sensitive markets specifically mail service and DME would have been screening for that product for quite some time now. So I don't see that as a big kind of traditional product launch if you will with a lot of stocking associated with it.

Derek Leckow - Barrington Research

But will this be the only no-code meter in that price point?

Joseph Capper

You mean in the industry or from us?

Derek Leckow - Barrington Research

In the industry.

Joseph Capper

These are the other ones.

Derek Leckow - Barrington Research

Is the other ones that are no-code in that same price level?

Joseph Capper

That's correct. That allows us to be more competitive at that price point.

Derek Leckow - Barrington Research

Okay, great. And then just one more final question for Scott on the managed care front. You alluded to your market share there. Can you share that with us or did you provide that, I may have missed that.

Scott Verner

You mean our total market share or our market share growth?

Derek Leckow - Barrington Research

Your total market share.

Scott Verner

We're up to about 3.7% now at the managed care markets, Derek.

Derek Leckow - Barrington Research

Okay.

Scott Verner

We're doing pretty well and my cavalier about it but it appears that that's the value programs we put in place to drive fall through is not very well.

Derek Leckow - Barrington Research

Okay, great. Good luck. Thanks a lot.

Joseph Capper

Thank you.

Operator

Our next question is from the line of Larry Solow with CJS Securities. Please state your question.

Lawrence Solow - CJS Securities

Hi. Good morning.

Joseph Capper

Good morning.

Lawrence Solow - CJS Securities

In the past you have shared with us an average of what you think day supply is at the distributors and just kind of working where it was last year and where you see it now and where you potentially see it coming down to. You have any view on that?

Joseph Capper

Yeah I think Larry at the end of the first quarter the wholesalers have come down in the range. They're holding about 75 to 90 days supply and that's down from 120 to 150 where they were at the end of the year. So we've seen the drop-off in the quarter.

I think some of the difference that we'll see over last year was they tended to make stocking orders in the second quarter and in the third quarter around the trade show. So days supply in the past has spiked off in that second and third quarter period, and I don't think we'll see a significant increase, because of one the economy and two the change in the buying patterns of one of our large partners.

This is not similar of our victory wholesale partners that have gone to more of a one price model whether its no longer big incentive for them to do stocking order. So and then -- we get outside of '09, we expect to have a predictable buying pattern in the wholesale distribution.

Lawrence Solow - CJS Securities

Okay. And then in terms of TRUEresult and TRUE2go versus TRUEtrack at your key retail partners. Are they more -- I mean, would you say the mix is kind of 50-50. How they're viewing, are they shifting more towards your newer product or what's your outlook on that?

Scott Verner

This is Scott. I would say right now there is heavy promotions running on both. The important things for Home Diagnostics is to create a portfolio of position which is why TRUEtrack is serving very well in the cash and many, many market which is Medicare, Medicaid, and TRUEtest will also pull from those markets, but in addition to be very to attractive to patients wanting no-code technology as well as advanced features set at TRUEresult and TRUE2go. Little early to say what the exact mix, but both are performing very, very well in all of trends we're looking at.

Joseph Capper

Yeah just, we mentioned that our off sales just looking at out sales of the major retailers were up over 10%. The TRUEtrack product, we've done several things, we've launched the 25 count product at retail and that's helping.

So all even our TRUEtrack unit out sales were also up in that 9 to 10%. So we're encouraged that we're attracting new customers and not just eroding the TRUEtrack base.

Lawrence Solow - CJS Securities

Okay. And then, a Scott question for you. You said that your IMS value of that 12%, do you have what the category did?

Scott Verner

I do not in front of me. I pretty just focused on what we did -- the cuts that that we looked at it as we outperformed everybody else in this space, but I haven't looked at all our competitors in depth.

Lawrence Solow - CJS Securities

Got you. And then just last question. On the TRUEbalance, how does that compare with the no-code that you're partnering up with Liberty, is it a similar product and its similar types of each?

Scott Verner

No, it's not. The private label we manufacture for Liberty is based on our TRUEtest platform.

Lawrence Solow - CJS Securities

Got it.

Scott Verner

And the TRUEbalance is based on our TRUEtrack platform.

Lawrence Solow - CJS Securities

Got you.

Scott Verner

The key for us is it gives company a gateway to extend the life of TRUEtrack which is a great product and now that is being a no-code opens up some avenues for us with some other partners in the mail space.

Lawrence Solow - CJS Securities

Okay. Great. Thank you.

Joseph Capper

This is Joe. Whenever you launch a new product, it's tough not to cannibalize a portion of your base.

Lawrence Solow - CJS Securities

Absolutely.

Joseph Capper

So with the way we position these products is essentially on price.

Lawrence Solow - CJS Securities

Right.

Joseph Capper

One is price and a price point lower than the other and that's the legacy product which makes sense for us. So, so far we don't see huge cannibalization on the TRUEtrack product line in favor of TRUEtest and we're fortunate in that regard and we're hoping that it plays safer well in the future.

Lawrence Solow - CJS Securities

Got you. Okay, great. Thanks.

Operator

Our next question is from the line of Tycho Peterson with J.P Morgan. Please state your question.

Tycho Peterson - J.P Morgan

Hey, good morning.

Joseph Capper

Good morning.

Tycho Peterson - J.P Morgan

May be actually just kind of following up on that last point Joe on and do you talked about the pricing strategy, can you just talk more broadly about pricing in the market, what are you seeing competitively from some of larger companies?

Joseph Capper

Well obviously in the market there is a lot of kind of margin compression and price compression. So we see some of the competitors adjusting to that. We are still well positioned in the marketplace relative to any of the large competitors.

Also, our product lines TRUEtest and the TRUEtrack platforms are priced below where the large manufacturers have priced. So we have competitive advantage in that regard. And obviously, I just talked about the price spread between the two. So we think we're well positioned. Will there continue to be price pressure? Absolutely. It's a relatively matured category; there is price pressure everywhere, not just in this category, but everywhere in the marketplace. So, we will continue to battle that.

Tycho Peterson - J.P Morgan

Okay, that's helpful. I think in your commentary, you talked about just in terms of product strategy, some potentially moving into ancillary product or diabetes. Can you give us a sense as to what that might entail and is it the multi-year strategy or something you could do within a year?

Joseph Capper

More -- probably more of a long-term strategy and what we're looking at now is products that we can commercialize through our existing channels and with our existing channel partners that are relatively close to the diabetic market. Tend ensure (ph) or adjacent to the diabetic market which allows us to do a couple of things. One increase sources of revenue, two also broader offering to our partners and hopefully in the process strengthen our existing product line.

I don't think you'll see us do anything near-term as in next 90 days, but we are very attracted to some technologies that we've looked at.

Tycho Peterson - J.P Morgan

Okay. And then for Ron, may be can you give us a sense on the margin side how should we be thinking about expectations for the rest of the year? I mean clearly under pressure here a little bit with the meter launches, but how do we think about margins, I guess next three or four quarters going forward?

Ronald Rubin

Yeah this first quarter is probably the low point in our gross margin, but as we guided, I think on a full year basis we're looking at low 50% margin. I think third quarter traditionally will be a higher quarter but not to the same degree that we've seen in the past because of the impact of Liberty and some of the other new product launches. So overall for the year, low 50s, little bit higher in Q3.

Tycho Peterson - J.P Morgan

And then with regards to liberty any -- is there a kind of initial stocking period here for a couple of quarters? And how do we think about the progression there?

Ronald Rubin

Not so much in the mail channel, they tend to run that, not to hold significant amount of inventory. So you don't have a bid type of pipeline distribution I feel like you'd see in a normal retail environment.

Tycho Peterson - J.P Morgan

Okay. And then your view on the general inventory, the visibility on where levels could go going forward? Do you feel like we're kind of bottoming out in terms of the inventory levels being held there?

Ronald Rubin

Yeah, and just to clarify if we really were we have the most exposure on inventories as in distribution channel. The retailers have run the category very lean 30 days or less because of our efficient manufacturing process. So we don't have issues as much in that retail channel and a good visibility. And in distribution, I think we are hitting the low point this year and encouraged by the new terms that we've entered into with these wholesalers to get to a more predictable buying pattern.

Tycho Peterson - J.P Morgan

And then have you done that with multiple wholesalers or just one or two?

Ronald Rubin

Yeah really two of the three big wholesalers now converted to that framework.

Tycho Peterson - J.P Morgan

Okay, great. Thank you very much.

Ronald Rubin

Okay.

Operator

Our next question is from the line of Mathew O'Brian with William Blair and Company. Please state your question.

Mathew O'Brian - William Blair and Company

Hi, good morning. Just wanted to talk a little bit about this distributor whether any change that you're trying to implement, is that fairly -- it sounds like its going to be more of a one priced strategy across the board during 2010, is that something that's seen with throughout the industry or is that something unique to Home Diagnostics?

Ronald Rubin

We can't speak for the other competitors. But yeah, it is in 2009 exactly converted more to a one price throughout the year as opposed to doing -- just having discounting around this trade show period. So there is no longer that incentive to really pick up to get stock. As far as arrangements of the other competitors, we really can't comment on that.

Mathew O'Brian - William Blair and Company

Okay. So this strategy is something that generally speaking is something that only you guys are implementing?

Ronald Rubin

Look I can't speak for the other companies or modular wholesalers of reaching similar arrangements with the other distributors, other manufactures.

Mathew O'Brian - William Blair and Company

Any anecdotal feedback from that distributor? I mean first of all, how big is that distributor?

Ronald Rubin

Well it's one of the large three distributors. They tend to be more aggressive as they have in the past on stocking up on these discounts, so we think we'll see a more significant impact. But the agreement is more than just 1Q one price, I think also agreed to limit the number of distribution points. So there is going to be more efficiency in the operation. We've also changed some of the sharing on a promotional cost, so but the big impact is going to be this -- to our numbers is going to be just be the impact on their buying patterns.

Mathew O'Brian - William Blair and Company

Okay. And this is an agreement you have into with distributor?

Ronald Rubin

Right.

Mathew O'Brian - William Blair and Company

Okay. And then secondly on the guidance for full year earnings, when I look back at your guidance for coming out of Q4, are you talking about kind of flat net loss per share, excuse me, net income per share during 2009 and now it looks like it's going to be based on your guidance from Q1 a bit lower than that? Is there additional spending that you guys are expecting to incur during 2009 that you hadn't been expecting at the end of the year?

Ronald Rubin

Well Matt, there is a couple of things that go into that. But first off all, we obviously want to be more conservative on the low end given the economy and other factors have got a lot going on with our product launches. But yeah we have an increase, Joe talked about expanding the sales force in UK was also based on investments in -- on the international infrastructure.

So there are some incremental costs that we're now expecting in that international. Some other factors are, we've now got the TRUEbalance meter system approved while talking to be a significant load there is that impact that we'll see as the mail and DME business, heavier meters with fuller margin. And the other factor is just the ramp up in the Liberty business while that drives high, greater top line results it has a negative impact on margin because of the meter investment.

Mathew O'Brian - William Blair and Company

Okay. And then finally, any update on competitive bidding? I know CMS is going forward with kind on 10 MSAs in 2009, any update on your end?

Joseph Capper

No, we're staying close to it. Obviously, we are evolved through a homecare and so we're monitoring as we're active it into the extent we can be activate. But you're right. It looks like as of April, the process is moving forward again all indications are that the process will continue to move forward short of any legislative action to change it.

Some modifications to the rules, but nothing attractively changes the shape of the program. Lot of activities, lot of lobbying from both -- obviously at the manufacturer level, at our level as well as at the provider level. So we'll keep you informed if anything breaks on that.

Mathew O'Brian - William Blair and Company

Okay. Thank you.

Operator

(Operator Instructions). Our next question is from the line of Tao Levy with Deutsche Bank. Please state your question.

Unidentified Analyst

Yeah hi guys this is Sas Rutao (ph). Just two questions. One, I just wanted to see if you could give us a little color on the mail service channel and specifically the Asian competitors. Can you hash out what's going on there?

Joseph Capper

Yeah, we're seeing more activity in the mail and DME channel from the Asian competitors. I wouldn't say drastically more activity. There seems to be some higher level of acceptance in certain segment of the market to the product driven almost exclusively by economic conditions.

So, it's not something that forces us to change strategy or change our course at all, bit it is something that we need to be acutely aware. They are out there. Fortunately for us they're not the best products in the world. But they're FDA approved products, so we have to be aware then we have to deal with them when they come up.

Unidentified Analyst

Fair enough. And then just one I guess more on the manufacturing side. I think historically you've been doing more just in time manufacturing and it seems that with the distributors -- the national distribution channel moving away from the stocking orders, you'll probably have a little more consistent run rate of manufacturing. So any plan to move away from that and if so, should we expect the margin to actually become a bit more consistent I guess in this low 50% range you are talking around?

Ronald Rubin

Yeah I mean you'll its more consistency in the buying patterns and in our production levels. There will always be a spike in Q3, because as long as these trade shows occur, that drives significant demand for the wholesale partners in the third quarter. So you always I think we'll definitely see a spike. It just won't be as significant in that third quarter period.

Unidentified Analyst

Okay, thanks guys.

Operator

Our next question is comes from the line of Tim Hasara with Kennedy Capital. Please state your question.

Timothy Hasara - Kennedy Capital

Yes. Can you tell me what cash flows you expect by throughout the course of the balance of 2009 roughly in a range?

Ronald Rubin

Yeah, obviously our cash came down pretty significantly in the first quarter, we expect that to continue into the second quarter because of a healthy CapEx spend and also finishing the remaining couple of million dollars we have in our share repurchase program. And obviously the operating results and sales profits are more given to the second half.

So, we think we're probably hit lower at the end of Q2 and then turnaround and start to turn free cash flow positive in the second half of the year. All in for the year depending on what capital lease etcetera we think the free cash flow will be flat to down a few million dollars.

Timothy Hasara - Kennedy Capital

Within the entire year?

Ronald Rubin

Right.

Timothy Hasara - Kennedy Capital

Okay. Thank you.

Operator

Our next question is from the line Larry Solow of CJS Securities. Please state your question.

Lawrence Solow - CJS Securities

Hi. Just a quick follow up and obviously I don't we expect the exact answer but just in terms of Liberty and just based on historical launches and what not, what would you kind of assess that you may start not being dilutive and when you can reach a breakeven point and then kind of move from there?

Joseph Capper

Yeah, each quarter the margin on the business will gradually improve as the Liberty business becomes the larger and larger component and we talked about this last quarter on the call, that business because of the significant volumes that they generate, obviously they get a great price at those significant volumes.

So on a go forward basis, we'll start to generate significant EBIT dollars but the makeup of that EBIT is going be a little different, it's going to come in at a lower margin. But below the gross margin line there is not a significant selling and administrative cost managing that account. Its one shipping point they handle all the marketing associated with the program.

So it may -- if it grows as we expect then it will become a more significant component of our business that will have a negative impact on the gross margin line, but not from an EBIT standpoint; it will turn positive.

Lawrence Solow - CJS Securities

Okay, great. Thanks.

Operator

Our next question is from the line of Bill Driscoll with 1837 Partners. Please state your question.

William Driscoll - 1837 Partners L.P.

Good morning gentlemen. I was just wondering if there was any accelerated depreciation in the quarter or if we should expect any in the next quarter?

Ronald Rubin

Yeah Bill there is one piece of equipment with the TRUEtest line from a scale up standpoint that has been giving us some trouble; that hasn't been performing as expectation. So we decided to invest in modifying that piece of equipment and that modification is expected to take place I think in late in the third quarter, early in the fourth quarter and we think that will help improve our -- also our production yields. So as a result of that, there is about $1 million of accelerated depreciation that we're recognizing in 2009, associated with that piece of equipment.

William Driscoll - 1837 Partners L.P.

Okay. Thanks a lot.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Joseph Capper

Thank you everybody. We're going to go ahead and wrap up the call. I just wanted to once again say we appreciate your time and your interest in Home Diagnostics. We'll talk to you soon. Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Home Diagnostics Q1 2009 Earnings Call Transcript
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