The Female Health Company's CEO Discusses F1Q 2014 Results - Earnings Call Transcript

Feb. 3.14 | About: The Female (FHCO)

The Female Health Company (NASDAQ:FHCO)

F1Q 2014 Earnings Conference Call

February 3, 2014 11:00 a.m. ET

Executives

O.B Parrish – Chairman of the Board

Karen King – President & Chief Executive Officer

Michele Greco – Chief Financial Officer & Vice President

Analysts

Jack Wallace – Sidoti & Company

Marc Robins – Catalyst Research

Michael Demaray – Elevated Capital LLC

Operator

Hello, and welcome to the Female Health Company’s First Quarter Fiscal Year 2014 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 facts, are forward-looking statements based on 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 Mr. O.B. Parrish. Please go ahead, sir.

O.B. Parrish

Thank you, Laura. Good morning and welcome to The Female Health Company’s first quarter 2014 conference call. Michele Greco, our VP and CFO is here with me in Chicago; and Mike Pope, VP, U.K. and Malaysian Operations, is participating from our London office. In addition, I’m pleased to introduce Karen King, President and CEO. Late in 2013 we announced that Karen would become President and CEO in January and I would continue as Chairman of the Board. Karen previously worked for the company as Executive VP of Development. So we know her well and I’m delighted that she has joined the company. I believe she’ll provide excellent leadership for the future growth of The Female Health Company.

Considering that Karen assumed the position only two weeks ago, I will make the presentation for this call and Karen will do so starting with the second quarter call. This morning first I’ll make some general comments, then cover the financial results for the quarter. I’ll address key events, long term demand factors that may impact future results and cover the outlook and then 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 otherwise noted.

During the first quarter, while unit sales improved from the fourth quarter, the company experienced a severe decline in unit volume compared to the prior year record first quarter. As we have previously discussed, this volatility is not due to competition or decrease in demand. It is due to public sector purchasing patterns. Demand continues to increase. Reflecting this, the company is currently involved in confidential discussions regarding significant tenders and potential orders for FC2.

In the first quarter, unit sales of 11.8 million were up 41% over the fourth quarter, but down 31% from the 17.1 million units in the first quarter of 2013, which as I noted was a record first quarter. Net sales for the quarter totaled $6.7 million or 32% decrease from $9.9 million in the prior year quarter. Gross profit decreased 38% to $3.7 million or 55% of sales compared to $6 million or 60% of sales in the prior year quarter. The decrease in margin is primarily attributable to lower volume.

Operating expenses decreased 11% to $2.1 million compared to $2.4 million for the prior year quarter. Operating income totaled $1.6 million, a decrease of 56% compared to $3.6 million in the prior year quarter. Net income totaled $1.5 million or $0.05 per diluted share compared to $3.5 million or $0.12 per diluted share in the first quarter of 2013.

It’s important I think to note that during this down period, the company generated $1.2 million in cash flow from operations, including a negative impact of $600,000 and changes in operating assets and liabilities compared with $1 million including a negative impact from changes in operating assets and liabilities of $2.9 million at the first quarter of 2013.The company ended the quarter with $8 million in cash versus $4.3 million one year ago. On February 5, this week, the company will pay a dividend of $0.07 per share, its 17th consecutive quarterly dividend.

In reference to tax loss carry-forwards, the company currently has tax loss carry-forwards of $17 million state, $19 million Federal in the U.S., and $63 million in the UK which do not expire, which may be used to offset future earnings.

In summary, it’s important to note that while experiencing volatility due to purchasing patterns, the company has remained profitable with positive cash flow during these down periods. The company has experienced up and down periods during the last eight years, 2005 to 2013, since becoming profitable. However, the company during this period had an average annual compound growth in unit sales of 19% and a gross profit of 20%. As a result, we remain very positive about the outlook for continued long term growth.

There are three key events that may impact our future results. First is the Family Planning 2020 or FP2020 program. As we noted before, the goal is to provide access to contraceptives to an additional 120 million women in 69 developing countries by 2020. This program was initiated by the Gates Foundation and the UK Government. It’s very meaningful for FHC in that the female condom is the only product where use is initiated by a woman that provides dual protection against HIV/AIDS and conception. I would urge you to go to the FP2020 website and look at -- and learn about the scope of this program and what they have in mind. Also in that website, you will see the list of partners, and FHC is a partner, and you will note that there are only two commercial companies listed as partners in the FP2020 program; one is a large pharmaceutical company, Merck and Female Health Company is the other commercial company. There are no other common companies listed as partners at this point. Valerie DeFillipo, the Executive Director of the program, will be holding a partners meeting later this week, and Karen will participate in that meeting on behalf of the company.

In terms of distribution, we distribute the product in 144 countries, great breadth of distribution. There’s a highlight in the U.S and New York City. Courtesy of the Department of Health, FC2 is available in 1495 locations versus 1128 one year ago. In reference to social media, our YouTube multilingual FC2 animation and instruction site has received 9 million hits during the last year. Our multilingual website that provides downloadable training and education is visited more than 1,500 times per month.

There are five reasons that the demand for FC2 will continue to increase. First, the continued feminization of HIV/AIDs remains the leading cause of death worldwide among women of 15 to 44 years of age. Second, the Family Planning 2020 program that I just reviewed. Third, 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. Fourth is the company’s very unique and highly proprietary position. 42 patents covering 56 countries, the only female condom approved by FDA and cleared by WHO; the only company with a capacity to deliver needed quantities meeting international standards. If you haven’t noted it, the company has shipped more than 400 million female condoms without any issues or recall, all meet international standards. The fifth reason is increased funding. $4.6 billion committed to support the FP2020 program, $12 billion committed to the global fund, including $1.5 billion committed by the UK government over three years for the prevention and treatment of HIV/AIDS, TB, and Malaria.

Turning to the outlook, as noted previously, due to the potential volatility and the timing of the public sector orders such as we have just experienced, we do not provide precise revenue and earnings guidance. We do provide general guidance regarding the outlook based on conditions at the time. Long term, we believe the market for FC2 will continue to expand and the company will experience growth due to several factors. First, the rigorous discussions regarding tenders and potential orders that we are currently involved in. two, the feminization of AIDS; and three, the FP2020 program which I think is just emerging and will be impacting the company perhaps later this year and in 2015.

I’m personally very positive about the future and positive about it under Karen King’s leadership. And before we take questions, I’d like to ask Karen to make just a couple of comments about her background. Karen?

Karen King

Thank you, O.B. Good morning everyone. I am a 30-year healthcare industry veteran. The first 20 years were with Baxter International which is a large pharmaceutical and medical device company. I had the good fortune to serve in a variety of functions there, starting in R&D, moving in to Operations, into Marketing, Sales, eventually Corporate Strategy M&A, and then ultimately was leading several businesses in a General Management role there. Upon leaving Baxter, I joined Female Health for a few years where I was the Executive in charge of commercial activity as O.B. earlier referenced. And then I had an opportunity to join a Dutch company by the name of DSM which is a nutrition and material sciences company and I led their biopharmaceuticals businesses for the last seven years, which was a global set of businesses operating out of Europe and Australia. This opportunity came up last year to come back to The Female Health Company which is a company that I’ve always greatly admired, certainly for its mission and the work that it does, but also for the way that it’s been managed. And I thought this was a fantastic opportunity to come back and join.

O.B. Parrish

Thanks so much, Karen and we look forward to your leadership and continued success for the company. Okay Laura, I think we’re ready to take questions now.

Question-and-Answer Session

Operator

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

Jack Wallace – Sidoti & Company

Good morning guys. Thanks for taking my questions and Karen, glad to have you on board. First question for you here and my apologies if you have to repeat yourself here as my line cut out earlier, can we get a little bit more color on some of the discussions about some of the larger orders potentially coming from the Republic of South Africa as well as Brazil?

O.B. Parrish

We haven’t necessarily or we haven’t discussed in detail the particular tenders that we’re working on. We’re working on certain tenders and orders at this point. It’s not always possible to predict exactly when they’re going to occur. Obviously South Africa and Brazil are substantial potential customers for us and when something materializes specifically in reference to those countries we will of course announce it. But there are countries that we’re constantly involved with.

Jack Wallace – Sidoti & Company

Right. And were there any, I guess, other orders to either of those countries independent of any large tender in the first quarter?

O.B. Parrish

From those countries or?

Jack Wallace – Sidoti & Company

Yes, from specifically those two.

O.B. Parrish

We continue to get -- yes. So the first quarter we had orders from both Brazil and the Republic of South Africa, but not substantial particular orders.

Jack Wallace – Sidoti & Company

Okay. So the 11.8 million units sold in Q1 independent of any large tender does represent a nice increase over your average unit sales to countries -- basically outside of any large tender order to South Africa.

O.B. Parrish

Jack, you’re absolutely right. The first quarter did not involve any large tender business.

Jack Wallace – Sidoti & Company

Okay. So that is a good sign, but considering you had the downturn last quarter, was there any impact, and I know you alluded to there being more of an impact in [process] (ph) second half of this year and certainly next year from the FP2020 initiative.

O.B. Parrish

It’s taken a while. That was initiated in July of 2012 when they had the meeting in Summit and Family Planning in London, and they’ve been working to put the organization together. And in addition you now have not only the British government and the Gates Foundation, but the United Nations Population Fund and also the U.S Agency for International Development are all now collaborating on the FP2020 program. And I think one of the things that is going on there is trying to sort out how they coordinate these different activities in reference to family planning and AIDS prevention across all these developing world countries. This is the first partners meeting, large partners meeting that’s occurring this week which Karen will attend, and I think you’ll begin to see the program will (inaudible). It’s not something that’s going to create an instant effect, but I think over a period of time it’s going to have a very positive effect for us.

Jack Wallace – Sidoti & Company

Okay, thank you. That’s certainly helpful, and I’ll just leave with these last two quick ones. Have you noticed any other competitors getting any substantial orders in the marketplace, and with the operating expenses this past quarter up substantially from the last but down year-over-year, is there anything you can read into the changes there other than that (inaudible) attributed to the changes in revenue volume?

O.B. Parrish

In terms of the expenses, Jack, I think the only -- there’s a turn down on expenses. We still have some accrual for incentives in there to suggest we are hopeful. But there’s nothing unusual in the expenses.

Jack Wallace – Sidoti & Company

And then I guess maybe more specifically as with regards to Cupid, have you noticed Cupid or any of the other competitors winning any substantial orders in the marketplace?

O.B. Parrish

What we have found is this. There are two potential competitors out there. One is Cupid, which does have WHO clearance but not FDA approval and they’re not seeking FDA approval. They have -- it’s interesting they got their clearance from WHO in June of 2012, and I think they’ve gotten some orders directly from South Africa, but to the best of our knowledge, the question is will they be able to deliver quantity that meets international standards. And at this point in time, we’ve been getting business out of South Africa. I think because at least to date they have not delivered any substantial quantities. The second point on Cupid which I think is even more important, South Africa has its own money, so they don’t have to rely on the UN or anybody else. But the United Nations Population Fund, which is a major purchaser and major customer for us in the 18-plus months since this WHO clearance occurred, to the best of our knowledge they’ve only purchased about 200,000 units, which suggests they may have some questions about the product.

The second potential competitor is PATH, and they have what they call a woman’s condom that has not been cleared or approved by FDA. They’re attempting to get FDA approval. We believe that they’re having significant manufacturing problems in terms of meeting the specifications that were used for the product and during clinical studies. They have to meet those same specs or perhaps redo some studies to get clearance. So, at this point PATH isn’t out in the market at all. There is no one else we’re aware of at this point in time that’s doing any science. There are some people that have put out opportunistic products in China, but without doing studies you get no WHO clearance or FDA approval. It’s unlikely they’ll get any significant amount of business.

Operator

And our next question is from Marc Robins of Catalyst Research.

Marc Robins – Catalyst Research

Good morning to you, Karen. Congratulations. I guess the first question that I have is I’d like to better understand how the company defines its customers. And what I mean by that is we have this amorphous blob of folks that order female condoms and there seems to be this really nebulous group of two, three, four folks that come in and go out and come in and go out, which dramatically affects -- that are extraordinarily lumpy, okay? And so I was wondering, do you -- how do you classify the two, three or four different groups? Can you help me with that?

O.B. Parrish

I guess I’m not sure that I’d refer to them as an amorphous blob.

Marc Robins – Catalyst Research

I would because from an outsider standpoint it’s difficult. But I think -- I noticed you’re doing some and I would quote -- use the term retail business vis-à-vis the -- what is it now, 14,000 units or 1,400 units that are making the female condom available. So how does it break down?

O.B. Parrish

Those are dispensable the public sector business now. It’s over 90% public sector at this point in time. Our customers, there are several large customers. For example there’s the United Nations Population Fund, the U.S. Agency for International Development, there’s Population Services International and then there’s some Ministries of Health that buy directly such as Brazil or Republic of South Africa. There are cases where there may be an option where the Ministry of Health might buy or they might want to have it purchased through UNFPA. And some of the complications on why they look at something like that is it relates to perhaps importation duties. It relates to other charges in doing something like that and which would be the most efficient for them in terms of bringing them in to a particular country. Those are complicated discussions, but they can delay the process. So our action can be with distributors.

It can be with the Ministries of Health directly in these countries, and it can be with purchasing of USAID and the United Nations Population Fund. And also we are concurrently working jointly with those organizations and Ministries of Health in terms of training and education in the countries. So we have -- one of the good things, Marc, we have is we do have contacts with the companies large organizations such as UNFPA and they are very helpful in getting us a meeting as to what they see the outlook for the female condom is, which doesn’t mean a specific order at the time. But they have to date been very positive about the long term outlook for the product. They’ve also acknowledged that it’s a very lumpy type of thing due to a lot of the issues that I just covered. But that is the customer spread.

Marc Robins – Catalyst Research

Then I guess what I’ve heard from a previous question-and-answer is that this 11 million unit number roughly could be considered a base number.

O.B. Parrish

I don’t know if I’d consider it a base number. I think the point that was being made was that since we didn’t have any large tender business in that order, that the unit figures were pretty good and we were profitable on it, that if we had some large tenders that came through, it would be perhaps a rate higher than that significantly higher end.

Marc Robins – Catalyst Research

Okay. Let’s talk a little bit about the 2020 opportunity. Is there a gestimate that management has as to what the high and low for volume demand might be for that?

O.B. Parrish

We haven’t made any forecast at this point in time, except that we do know that our product female condom is the only product that has full protection where use is initiated by a woman and we feel that it will be positive. I think we’re going to have a better idea as this plays out during the year. But at this point we haven’t released any forecast on it.

Marc Robins – Catalyst Research

I’ll get back in queue and let me see how I can work this in another way. Thank you.

Operator

(Operator Instructions) And we do have a follow up from Marc Robins.

Marc Robins – Catalyst Research

Karen, as I was listening to your biography, it sounds as if you did quite a bit of development and marketing and the like for other firms as well as R&D and operations and so forth. Would you consider marketing and sales a strength?

Karen King

I do. As you pointed out, I have had experience in many areas, but I would also say that marketing and sales is something that I really enjoy and really gravitate towards. So I consider it a strength.

Marc Robins – Catalyst Research

From an outsider’s opinion, an outsider looking in, do you see that Female Health’s lumpiness is a problem in its operation and something that you could develop -- not develop the lumpiness, but develop ways to remedy some of the lumpiness in one manner or another?

Karen King

I don’t know that I’ll be able to develop a means to get our major clients to change their purchase pattern which is what it would require to really fully eliminate that lumpiness. But certainly what the company will continue to do for all of the reasons that will be outlined is develop markets further and be the supplier to this critical need for both family planning and for infectious disease prevention. So we certainly are going to focus on continuing to grow our unit volume, but the business will be outlined, the public sector business and we don’t know that we’ll be able to really influence the clients in the way that they have their purchasing programs set up.

O.B. Parrish

One thing that might help, Marc, as we go through it is we obviously have significant business with Brazil and South Africa. As we begin to see perhaps other countries which have the potential to have significant business for that to actually materialize and you have a larger group of high volume countries that need maybe a tenancy to offset it a little bit in terms of volume. You have more total volume and you have seven or eight countries that have significant business and there is potential out there for that. And we had -- I think we mentioned the last time Angola is a country that the purchase ratio maybe orders of 100,000, 300,000 and sometimes during the last year we had an order of about 4.5 million. And to the extent you added in countries like that and have the volume, I think the lumpiness wouldn’t go away but it might be mitigated to some extent.

Marc Robins – Catalyst Research

And you know this, O.B. I’ve been following the company since, I’m going to say the ‘90s, late ‘90s. And I can’t but help -- I do believe that there’s a real market for or I do believe there’s a huge opportunity and a real need, but I also think that the stock market use as still horribly experimental. And I’m not saying that the product is, but an experimental kind of device and that this lumpiness augments that feeling of experimentation if you will.

O.B. Parrish

I don’t know if I can say that --- I don’t think our product was experimental, Marc. I think --

Marc Robins – Catalyst Research

No, no. but I mean, but the lumpiness demonstrates -- doesn’t demonstrate something that you expect as an ongoing regular kind of ordinary business. That’s all. It’s not a criticism. It’s not a critique. It’s not a compliment. It is what it is. And I certainly believe that as you bring on more foreign countries, foreign countries that can begin to add either layers of business or orders against the more severe ups and downs, that would be very helpful. Thanks so much. Appreciate it.

Operator

And the next question will come from Michael Demaray of Elevated Capital.

Michael Demaray – Elevated Capital LLC

I was hoping you could talk to me a little bit about how you think about intellectual property. Obviously you can’t do the products. But beyond that, how do you think about expanding intellectual property as a company? Would you ever do with your past to acquire some intellectual property here? How do you think about increasing I guess your mode or your competitive advantage relative to potential competitors down the road?

O.B. Parrish

That’s an interesting question. We have as I said in the little talk 42 patents over 56 countries and the patents are principally on design. And if you look at our product, there are two rings. One is an inner ring that lays against the cervix to enter the device and the other is an outer ring that covers the lips of the vagina. The interesting thing with competitors, the two that we talked about earlier, Cupid and PATH, they attempted to circumvent our patents, which they did, but in doing so they had to use a different design. And that has some interesting ramifications in that if you use a male condom and you use another male condom, they’re all pretty much the same in terms of actual use. If you use our product and you look at the design of Cupid which is different other than PATH which is still different, you can’t use exactly the same product specific instructions as to how to use.

So it complicates that for the introduction of a competitive product in that they’re going to have to put out product specific education and training. It’s going to cost money to do that and it’s going to make it more complex to be implemented. So in effect by circumventing our patents, they may have put in a new barrier entry and part of the new barrier entry would be special designs. And I think that works to our advantage in that we’re out there with a strong product specific training program. As far as the other part, we certainly will continue intellectual property any way we can. And of course in terms of the overall company we have as we said before we’ll look at the possibility of products that might complement our strength and position in the public sector.

Michael Demaray – Elevated Capital LLC

Is there any effort that’s put into reexamining the design or to for instance patenting new configurations that may or may not (inaudible) but you had off?

O.B. Parrish

Good point. We constantly look at opportunities that might turn into perhaps ideas and a little fast way to make it. So we look at other opportunities that are brought to our attention that might represent a difference. To date we haven’t found anything that we think is specific, but we’re constantly looking at that and to the extent we can find something proprietary we’d be very interested.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Parrish for any closing remarks.

O.B. Parrish

Thanks everybody for your attention and for your interest and support and next quarter Karen will be making the presentation for the call. Thanks very much. Bye.

Operator

To access the digital replay of this conference, you may dial 1877-344-7529 or 1412-317-0088 beginning at 12:30 Eastern today. You will be prompted to enter a conference number, which will be 10040138. Please record your name and company when joining. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!