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Medical Action Industries Inc. (NASDAQ:MDCI)

F3Q 2014 Earnings Conference Call

February 5, 2014 10:00 ET

Executives

Brian Baker - Principal Accounting Officer, Vice President, Finance

Paul Meringolo - Chief Executive Officer

Paul Chapman - President, Chief Operating Officer

Analysts

Jack Wallace - Sidoti

Steve Friedman - Wells Fargo

Operator

Good morning. My name is Collier and I will be your conference operator today. At this time, I would like to welcome everyone for the Medical Action Industries’ Fiscal Year 2014 Third Quarter Results Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I’d now like to turn the call over to Vice President of Finance, Brian Baker. You may begin your conference.

Brian Baker

Thanks you, Collier. Good morning and thank you for joining us to discuss results for the third quarter of fiscal year 2014, which were released this morning. With me today are Paul Meringolo, Chief Executive Officer and Paul Chapman, President and Chief Operating Officer.

In the course of today’s discussion, reference maybe made to projections, anticipated events or other information, which is not purely historical. Please be aware that statements made during this call which are not purely historical maybe considered forward-looking statements. We caution you that all forward-looking statements involve risks, unanticipated events, uncertainties and other factors that could cause actual results to differ materially from those anticipated in such statements.

Many of these risks, events, uncertainties and other factors are discussed in our Annual Report on Form 10-K, our quarterly reports on Form 10-Q and other reports and filings with the Securities and Exchange Commission, which are available on our website. To the extent any forward-looking statements are made during this call, such statements are made only as of today’s date and we do not assume any obligation to update any such statements.

It is now my pleasure to turn the call over to Paul Meringolo.

Paul Meringolo

Thanks Brian. Good morning and thank you for joining us today on this snowy day in New York.

I’m excited to discuss our quarterly results today given the progress that has been made and the momentum that has been building during the past year. Our efforts to think more strategically and to evolve Medical Action into a more focused efficient and profitable company or translating into improvements in net sales, gross profit and net income.

Continue to remain focused on building stockholder value by creating solutions for our customers and by providing the right products and services to help our healthcare partners, improve outcomes and reduce costs of course, the entire supply chain.

Our SBU management teams are intent on providing innovative solutions to our customers in the most cost effective manner. This has required a continued focus on being a low cost producer and coupled with the right sales structure and effective expense management has enabled us to improve top line as well as bottom line results.

While I remain impressed with the progress that has been made by our management teams on multiple profit improvement and market positioning initiatives, we continue to pursue many of the sure opportunities for operational improvement within each of the respective SBUs.

Executing on these opportunities remains challenging and acute care market that is experiencing flat utilization. However, given the concentrated focus, dedication and innovation of our management teams, I’m confident that we will continue to build on our performance improvements as we conclude fiscal 2014. I look forward to future earnings call to discuss the progress of our efforts.

I would like to now turn it back over to Brian to discuss our results for the third quarter of fiscal 2014.

Brian Baker

Thanks Paul.

The net sales for the third quarter of fiscal 2014 were $110 million, which represents an increase of $0.6 million or less than 1% compared to the third quarter of fiscal 2013. On a year-to-date basis net sales for the nine months ended December 31, 2013 amounted to $325.5 million, which represents a decline of $8.3 million or 2.5% compared to the comparable prior year period.

The changes in net sales are being impacted by lower hospital utilization and the elimination of some low margin private label business which were partially offset by improved pricing discipline.

Gross profit for the third quarter of fiscal 2014 was $20.2 million or 18.4% of net sales which represents an improvement of $1.1 million or 95 basis points when compared to the third quarter of fiscal 2013.

On a year-to-date basis, gross profit for the nine months ended December 31, 2013 amounted to $56.6 million or 17.4% of net sales, which represents an improvement of $3.1 million or 135 basis points when compared to the comparable prior year period. The margin expansion is the result of improved pricing discipline, cost containment initiatives and the elimination of some low margin private label business. These improvements were partially offset by higher resin cost.

While competitive pricing pressure is in persistent volatility and raw material cost particularly resin, continue to influence our profitability. We have focused on cost reduction, raw material management and productivity improvements as well as managing our sales prices and mix of products sold to provide a positive effect on our gross profit and earnings.

This approach has enabled us to make progress with respect to our margin profile. While the volatility in resin cost remains challenging, we believe that additional long-term margin expansion is attainable given our various strategic and operational initiatives.

Selling, general and administrative expenses incurred during the third quarter of fiscal 2014 was $16.5 million or 15% of net sales, which represents an increase of $0.6 million when compared to the third quarter of fiscal 2013.

On a year-to-date basis selling, general and administrative expenses for the nine months ended December 31, 2013 amounted to $48.1 million or 14.8% of net sales which represents an increase of 0.1 million when compared to the comparable prior year period. The increases in selling, general and administrative expenses are primarily attributed to investments in infrastructure and to the medical device excise tax. These increases were partially offset by the elimination of certain consulting services required under our prior credit agreement and various expense management initiatives.

Net income for the third quarter of fiscal 2014 amounted to $1.9 million or $0.12 per diluted share and $3.3 million or $0.20 per diluted share for the nine months ended December 31, 2013, which represents a significant improvement over the reported results for the comparable period in the prior year.

The improvements in our profitability during the nine months ended December 31, 2013 resulted in sufficient cash provided by operating activities to enable us to repay $11.2 million on our outstanding debt since the beginning of fiscal 2014. As of December 31, 2013, $41.5 million in total debt was outstanding. Working capital was $49 million and we were in compliance with all financial covenants and ratios required under our credit agreement.

In addition, we have $18.9 million available in additional borrowing capacity under our credit agreement, which in conjunction with our anticipated future operating cash flow should enable us to allocate funds for purposes such as required debt payments, capital expenditures, marketing, product development and other general corporate purposes.

I will now turn the call back to Paul Meringolo for closing comments.

Paul Meringolo

Thanks Brian.

Once again, I’m excited about the progress that has been made in our efforts to evolve Medical Action into a more focused efficient and profitable company. Acute care marketplace continues to navigate through a period of significant change. This change is creating numerous opportunities for organizations like Medical Action to develop and execute on adaptable, strategic and operational initiatives and positively impact operational results.

The management teams are implementing and developing such initiatives and I’m confident that they will not only build stockholder value but more healthcare partners improve the outcomes.

Finally, as always, I would like recognize the contributions of all of our teammates whose continued focus, energy, enthusiasm and dedication to Medical Action and our customers are greatly appreciated. In our culture of teamwork, attainability [ph] and collaboration, I expect a recent progress and improvement of our financial results to continue and for our employees to remain focused and to continue to build on our recent achievements through fiscal 2014 and beyond.

I’d like to thank you all for participating on the call this morning. We look forward to discussing our progress with you on the future calls.

At this time Collier, I’d like to invite the security analyst to ask any clarifying questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jack Wallace [Sidoti].

Jack Wallace - Sidoti

Good morning, Pauls and Brian. Thanks for taking my call this morning.

Paul Meringolo

Good morning Jack.

Jack Wallace - Sidoti

Hopefully you can give me a better idea for the expansion at least sequentially in gross margin here. You mentioned a negative impact in resin year-over-year but it was about – excuse me, a 4 point expansion and year-over-year and a little bit more than that sequentially. Where, can you help me break down the difference there, some of this pricing, how much of this was mix and shift mix just a little more color that would be helpful?

Paul Meringolo

Jack, again, I don’t think it’s weighted at any one particular area. I think there are a number of areas not the least of most of which is again our pricing strategies in the marketplace. Again, I think cost containment and cost of goods sold focus on our group has been done very well over the past nine months. And even with the challenges on resin, I think we’ve made great progress in a number of different areas.

Jack Wallace - Sidoti

And have you noticed your competitors have had similar successes being able to raise prices?

Paul Meringolo

I think, again, Jack from a price standpoint we have not, we try to be as reasonable as possible with our customers. They’re going through a significant amount of change and pressure from a core structure as well. So again, it’s not all weighted in just price and a lot of our competitors are private companies. And so it’s kind of hard to see what they’re doing from a price perspective. But I think in an environment where such huge swings in cost to goods due to resin, I would think that we’re not at line with what’s going on in the marketplace.

Jack Wallace - Sidoti

Thank you. That’s helpful. And may be if you can make a comment on surgical procedures in the quarter did that help with the revenue increase in the quarter just looking for a little bit more color. We are looking for an actual decline year-over-year but sequential gain and you went ahead and beat both of those?

Paul Meringolo

Jack, just I want to make sure that would create the right expectation, I mean utilization is flat to down is what we see. So I just think we’re just keen to doing a good job of grinding it out in the marketplace and we just continue to make small steps of progress. And I think in this market which is fairly unstable right now from a utilization standpoint I think that overall that’s good work and good job done by all of our people.

Jack Wallace - Sidoti

Okay. Great. And then lastly was there any noticeable improvement in mix aside from foregoing some of the -- as to your white label [ph] business?

Paul Meringolo

Nothing that I think is material Jack.

Jack Wallace - Sidoti

Okay. Thank you that will be all from me.

Paul Meringolo

Thank you.

Operator

Your next question comes from the line of Steve Friedman [Wells Fargo].

Steve Friedman - Wells Fargo

Good morning, Paul and Brain. Thanks for taking the call.

Paul Meringolo

Good morning, Steve.

Steve Friedman - Wells Fargo

Congratulations on a fine quarter it looks like you beat on both the top and the bottom line. Could I ask you, I think the same question, I’ve asked you a couple of quarters. You continue to improve the gross margin by reducing the unprofitable SKUs I believe and focusing on the once with the appropriate margins. I think you’re still trying to target if I'm not correct that is my question, the historical range that you’ve had somewhere in the 20% plus range would that be a fair assumption?

Paul Meringolo

Of course.

Steve Friedman - Wells Fargo

Okay. And I noticed, you also reduced long-term debt about $11 million plus over the nine months, is that accurate?

Paul Meringolo

That is accurate.

Steve Friedman - Wells Fargo

Okay. I did not see or at least I missed on the call report, did you reduce any further debt in the current quarter?

Paul Meringolo

$5 million.

Steve Friedman - Wells Fargo

Okay. That’s all I have. I think that’s all I have. Thanks again.

Paul Meringolo

Great, Steve. Thank you.

Operator

There are no further questions at this time.

Paul Meringolo

Well, again, for those of you that are caught in the storm, safe travel and we look forward to catching up with you on future calls. Have a great day. Thanks for participating today. Thank you, Collier.

Operator

You are welcome. Thank you, ladies and gentlemen that concludes today’s conference call. You may now disconnect.

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