The Female Health's CEO Discusses F3Q2013 (Qtr End 6/30/13) Results - Earnings Call Transcript

Aug. 2.13 | About: The Female (FHCO)

The Female Health Company (NASDAQ:FHCO)

F3Q2013 Earnings Call

August 01, 2013 11:00 am ET

Executives

O.B. Parrish - Chairman & CEO

Michele Greco - VP & CFO

Mike Pope - VP, U.K. and Malaysian Operations

Analysts

Jack Wallace - Sidoti & Company

Peter McMullen - IPC

Dennis Scully - Essex Securities

Operator

Hello, and welcome to the Female Health Company Third Quarter of Fiscal Year 2013 Operating Results Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

The statements made on this conference call, which are not historical fact, are forward-looking statements based upon the company’s current plan and strategies and reflect the company’s current assessment of the risks and uncertainties related to its business, including such things as product demand and market acceptance, the economic and business environment, and the impact of government pressures, currency risks, capacity, efficiency and supply constraints, and other risks detailed in the company’s press releases, shareholder communication, and Securities and Exchange Commission filings. For additional information, the company urges you to consider reviewing its 10-Q and 10-K SEC filings.

I would now like to turn the conference over to O.B. Parrish, CEO and Chairman. Please go ahead.

O.B. Parrish

Thank you, Gary. Good morning and welcome to the company’s third quarter 2013 conference call. Michele Greco, our Vice President and CFO is here with me in Chicago, and Mike Pope, our VP, U.K. and Malaysian Operations, is participating from London office.

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

After six consecutive quarters of record results, FHC experienced some volatility and the results for the third quarter decreased from the prior year quarter, although it’s important to note that comparison is against our record third quarter 2012. As previously discussed and reflected in our SEC filings, the result reflects volatility in public sector purchasing. They do not reflect any change in basic demand or the long-term outlook.

We have experienced volatility in the past and may do so in the future, however, it’s important to note that for the last several years since we achieved profitability, including periods of volatility, the average annual compound unit sales growth rate has been 23.7% per year.

Turing to the third quarter, unit sales decreased 17% to $12.6 million versus the prior year quarter. Revenues decreased 16% to $7.3 million. Cost of goods decreased 12% based on the impact of lower volume of material; however, this was more than offset by one-time investments in quality insurance and warehousing.

Gross profit decreased 25% to $3.7 million or 31% percent of sales and $5.3 million or 61% of sales in the prior year quarter. The decrease in margin is primarily attributable to the lower volume and the one-time cost related to investments in quality assurance and warehousing.

Operating expenses increased 7% to $2.7 million compared to $2.5 million of the prior year quarter. The increase was primarily due to the impact of FHC’s higher stock price during the quarter on accruals for incentives.

Operating income decreased 61% to $1.1 million versus $2.8 million in the third quarter of 2012. Net income for the third quarter totaled $0.7 million or $0.03 per diluted common share, compared to $2.5 million or $0.09 per diluted common share of prior year quarter.

Year-to-date, unit sales increased 5% to a new record of $46 million replacing the old year-to-date record of $44 million set in 2012. Revenues increased 6% to $26.7 million compared to $25.4 million year-to-date in 2012. The average FC2 price increased 1% due to customer mix.

I would like to point out we have included a new table in our 10-Q when you look at it, which presents unit sales by quarter for five years. It is an interesting table and it highlights both the volatility we experience as well as rising long-term demand.

Gross profit increased 2% to $15.2 million and $14.9 million in the first nine months of 2012. Operating expenses increased 1% to $7.2 million and $7.1 million in the same prior year period.

Operating income increased 4% to a record $8 million in the first nine months over the prior year-to-date record of $7.8 million in 2012. Net income increased 8% or $0.27 per diluted common share and $7.1 million or $0.25 diluted common share for the first nine months of 2012.

During the first nine months, the company generated $12.8 million in cash from operations including a positive $4 million impact in changes in operating assets and liabilities.

At the end of the third quarter, the company had $11.9 million of cash, up 43% from the same 2012 period after repurchasing 53,125 shares and paying $5.5 million in dividends during the first nine months.

The company has purchased 53,135 shares year-to-date. This compares to purchase of 11,000 shares in the same period last year. The stock repurchase program is still in effect and we authorized currently to purchase up to an additional about 1 million of shares.

In July 15 the company announced a dividend of $0.07 a share payable on August 7th. The August 7th payment will be in the company’s 15th consecutive quarterly dividend. Due primarily to the company’s tax loss carryforwards and domestic international profits split, a significant portion of the dividends paid is a return on capital not taxable. This ratio may vary significantly for the year to year, however, for 2012 97% of the dividend was return on capital and not taxable.

Shareholder’s equity year-to-date totaled $26.7 million versus $20 million one year ago. At the end of the first nine months, the company had tax loss carryforwards of $24.6 million federal and $12.4 million state in the U.S., and $64.3 million in the UK, which do not expire, all of which may be used to offset future income.

At the end of each year the company considers tax (inaudible) based on results and outlook of the time and we will do so at the end of 2013.

There are four key demands vectors which indicate increasing demand on a long-term basis for FC2. First, distribution for FC2 continues to steadily increase. FC2 is distributed now in 143 countries versus 137 one year ago. In the U.S., in New York City FC2 was not available on 1395 locations versus 947 one year ago. This is an increase of 47% in the number of locations where FC2 is available in New York City through and courtesy of the Department of Health.

In addition, in the US's second largest city, the Los Angeles Health Department recently initiated a condom distribution program including FC2 modeled after the New York program. We believe this program will be successful and grow as the New York City program has.

Second, with the FP2020 program, the summit on family planning sponsored by the Bill & Melinda Gates Foundation, and the UK government held last July in London resulted in the creation of the Family Planning or FP2020 Program.

The program’s goal is to provide contraceptives to additional 120 million women who currently do not have them in 69 developing countries by the year 2020. Of particular significance is the fact that $4.6 million in funding has been committed to support this program over the eight year period. The program is making significant progress. An Executive Director, Valerie DeFillipo has been appointed, and UNFDA will be the purchasing agent for the program.

Women who have AIDS may give birth to babies who have AIDS, or become AIDS orphans. The female condom is the only product, where use is initiated by the one that provides dual protection against sexually transmitted infections, including AIDS and pregnancy.

We believe the FP2020 program significantly broadens the market for FC2. And as the program fully develops, it will positively impact the results through 2020, and we expect to see some substantive impact of this in 2014.

The third is a continued feminization of AIDS. It remains a leading cause of death worldwide among women 15 to 44. More than 50% of new cases are women, and 80% of these results are heterosexual sex. This increases the relevance of the female condom on a study basis, and also gives a boost to the development of independent women's advocacy groups, who are advocating worldwide for increased access to and investment in female condoms. (inaudible) that our product has independent groups advocating for investment in our product.

The fourth is the company’s proprietary position that’s been recently noted in a number of articles, I think Motley Fool had one recently added. We have 42 patents covering 56 countries. Also is our track record, the company has sold more than 390 million female condoms, meeting international standards in 143 countries without a recall.

Turing to outlook, as previously noted due to potential volatility and the timing of public sector orders, the company doesn’t provide precise revenue and earnings guidance. We do provide general guidance regarding outlook based on conditions at the time. The volatility we've experienced, it's possible we don’t know it could impact the fourth quarter with significant improvement in the first quarter.

One of the issues we have been predicting is we always have certain orders we are working on and dependent upon the labeling required or securing letters of credit that can fall in one quarter or the other quarter.

Long-term, we believe the market for FC2 will continue to expand due to the first, the Gates UK FB2020 program, the funding of $4.6 million and its potential impact on the use of FC2 as a contraceptive. Two, the continued feminization of HIV AIDS. Three, the fact that the female condom is the only product where use is initiated by a woman, that provides dual protection against AIDS and unintended pregnancy; and four, the company’s strong proprietary position.

Based on these long-term factors and our perspective, we are currently assessing options to further expanding of FC2 manufacturing capacity.

Now, we will take some questions. Gary?

Question-and-Answer Session

Operator

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

Jack Wallace - Sidoti & Company

Thank you for taking my questions, O.B. and Michele.

O.B. Parrish

Sure.

Jack Wallace - Sidoti & Company

Couple of questions from me and I will keep the two, and then hop back in the queue. One, it looks like the inventory level is climbing up again this quarter, its about a million higher than it was in the first quarter as is the volatility with orders as you've commented on. Can we beat in to a larger fourth quarter here? I’m sorry I missed your comment on what might happen in the fourth quarter. Would you mind repeating that as well?

O.B. Parrish

I repeat that. What I said is the volatility we experienced in the third quarter we don't know; it could affect the fourth quarter. One of the things we deal with the uncertainty is the assumption if we don't get orders we are dealing with getting special labeling for a country or letters of credit and sometimes it's going to follow one quarter and other.

In reference to your inventory question, Jack, there is one factor here that it’s important. One of our significant public sector customers asked if we would scale the inventory for them. In other words, we would build a certain amount of material, they would pay for it, and then we will hold the inventory for them and in that manner they would have immediate access for small orders if they would like to have ship to various countries.

So, fundamentally, we have agreed to do that and in part we haven’t had a final order. We expect it will be and we anticipate will be and we've been building some inventory to fulfill that need.

Jack Wallace - Sidoti & Company

And so just to follow-up on that, should we expect higher levels of inventory going forward as part of this agreement, is that kind of a one to two quarter agreement or?

O.B. Parrish

No, it will be the sort of thing that you will build it, you will put a X number of units in place, they would pay for, and then as they order it down you will replenish it.

Jack Wallace - Sidoti & Company

Thank you. And then second question and I will hop back in the queue. I was wondering if you could break out the over the top costs that were associated with those was it retrofitting the warehouse for safety issues? Maybe I missed the comment on that as well.

O.B. Parrish

There are two things. We had one of our public sector customers put in some additional requirements for quality assurance, which we're happy to meet and can meet that, but it did require some additional investment, and we prefer to do that. And the other was in expanding our facility and our warehousing we have some additional one-time cost that we want to capitalize. We haven’t broken this out (inaudible) specific.

Jack Wallace - Sidoti & Company

Okay, thank you. And when is the Q going to be filed?

O.B. Parrish

It's going to be filed today.

Jack Wallace - Sidoti & Company

Great, thank you so much. And I will hop back in the queue.

Operator

(Operator Instructions) Our next question comes from Peter McMullen of IPC.

Peter McMullen - IPC

Hi, O.B.

O.B. Parrish

Good morning, Peter.

Peter McMullen - IPC

How are you?

O.B. Parrish

Good.

Peter McMullen - IPC

I guess could you repeat the comment on the dynamics second quarter versus the third quarter orders that were completed and some comments on the backlog?

O.B. Parrish

In terms of orders that we have completed the delayed orders in Brazil and South Africa that we have both of them completed. In fact, we have some additional orders in South Africa. We announced our backlog annually, we don’t do it quarterly. However, it is public that the Republic of South Africa yesterday tender for 15 million units, which hasn’t been granted or adjudicated at this point.

Peter McMullen - IPC

Thank you.

Operator

(Operator Instructions) Our next question comes from Dennis Scully of Essex Securities.

Dennis Scully - Essex Securities

Good morning. One follow-up question, you mentioned that the inventory build that was helped pending future delivery it was paid for, does that mean that inventory builds that up in the third quarter revenue?

O.B. Parrish

No, what I was saying it was quite -- it's not quite what I said. What I said was one of our key customers ask us to do that. And so, we billed the inventory in preparation for it. We believe that will be finalized. When it does the inventory will be ready for them. They will pay for it and then they can start drawing down on it.

Dennis Scully - Essex Securities

Right, so they paid for what one is essentially when is delivered I presume.

O.B. Parrish

When we sign the arrangement, they will take the possession of the inventory.

Dennis Scully - Essex Securities

Understood. Thank you.

Operator

As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to O.B. Parrish for any closing remarks.

O.B. Parrish

Thank you very much for your support and we will see you in one more quarter. And Gary you might tell them about the follow-ups.

Operator

To access the digital replay of this conference, you may dial 1-877-344-7529 or 1-412-317-0088 beginning at approximately 1:00 PM Eastern Time today. You will be prompted to enter a conference number, which will be 10031850. 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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The Female Health (FHCO): FQ3 EPS of $0.03 misses by $0.05. Revenue of $7.28M. (PR)