The Female Health Company's (FHCO) CEO Karen King on F3Q 2014 Results - Earnings Call Transcript

Aug. 2.14 | About: The Female (FHCO)

The Female Health Company (NASDAQ:FHCO)

F3Q 2014 Earnings Conference Call

July 31, 2014 09:00 AM ET

Executives

Karen King - President and CEO

Michele Greco - CFO

Susan Ostrowski - VP, Business Development

Analysts

Jack Wallace - Sidoti & Company

Mark Robins - Canvas Research

Operator

Hello and welcome The Female Health Company, Third Quarter of Fiscal Year 2014 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 that are not historical facts are forward-looking statements based upon the Company’s current plans and strategies. Such forward-looking statements reflect the Company’s current assessment of the risks and uncertainties related to its business. The Company’s actually results and future developments could differ materially from the results or developments in such forward-looking statements.

Factors that may cause actual results or developments to differ materially include such things as product demand and market acceptance, the timing of the receipt shipment of large orders, competition, the economic and business environment, and the impact of government pressures, currency risks, capacity, efficiency and supply constraints, the ability to execute on new business strategies and other risks detailed in the Company’s press releases, shareholder communications and Securities and Exchange Commission filings. For additional information regarding such risks, the Company urges you to review its 10-Q and 10-K SEC filings.

I would now like to turn the conference over to Karen King, CEO of The Female Health Company. Please go ahead ma’am.

Karen King

Thank you, Walker. Good morning everyone. This is Karen King, President and CEO of The Female Health Company and I'd like to welcome you all to The Female Health Company’s third quarter 2014 conference call. Joining me on the call today are the Company’s Chairman, OB Parrish; our CFO, Michele Greco; Susan Ostrowski, our new Vice President of Business Development; and Mike Pope, our VP of Operations.

Before beginning today’s discussion I would first like to acknowledge the lost of a member of our team. Dr. Lucie Van Mens, our Director of Program Development and Support, was a passenger on the Malaysian air flight recently downed over the Ukraine. She was on her way to the International Aids conference in Melbourne. Lucie spent most of her professional career in the fight against HIV Aids and in promoting women’s health and empowerment and was highly respected in our industry. Lucie was our colleague and our friend and she will be greatly missed by all of us.

Turning to our business, I will begin with comments and then I will ask Michele to review the financial results for the third quarter which ended June 30, 2014. Then I will discuss our strategic plans which we announced in the press release two weeks ago. Finally I’ll comment on key factors that may impact future results and afterward we will take your questions. Please note that when we refer to years, it's to FHCs fiscal year which ends September 30th unless otherwise stated.

During the third quarter of 2014, the Company recorded significant increases in unit volumes, revenues and operating income when compared with the prior year third quarter. We are pleased to deliver the strong performance. This quarter’s increase follows several down quarters and is a continuing example of the volatility in ordering patterns experienced throughout the company history and discussed extensively in previous quarterly calls. As I pointed out last quarter, it is inherent in a market segment in which we operate.

Now I’d like to ask Michele to review the financial results.

Michele Greco

Our third quarter fiscal 2014 results; unit sales were $13.7 million, up 9% from $12.6 million units in the third quarter of 2013 and up 88% from the second quarter of 2014. Net sales for the quarter totaled $7.9 million, an increase of 9% from $7.3 million in the prior year quarter. Gross profit increased 11% to $4.2 million, which represents 53% of net sales compared with $3.7 million or 51% of net sales in the prior year quarter. Operating expenses decreased 19% to $2.1 million from $2.6 million for the prior year quarter. Operating income totaled $2 million, an increase of 86% when compared with the $1.1 million in the prior year quarter. Net income increased 60% to $1.2 million or $0.04 per diluted share from $727,000 or $0.03 per diluted share in the third quarter of 2013.

Now a few points about the nine month results. Net sales for the first nine months of fiscal 2014 were $18.9 million, a decrease of 29% from $26.7 million in the first nine months of 2013. Operating expenses in that same period decreased 19% to $5.8 million compared to $7.2 million for the prior nine months. Operating income totaled $4.4 million, a decrease of 45%, compared to $8 million in the prior year nine months.

The cash flow; in the first nine months of fiscal 2014 the Company generated $4.9 million in cash from operations, prior to the negative impact of $3.4 million from changes in current assets and liabilities, which result in $1.5 million in net cash provided by operating activities. This compares with the 2013 nine months results of $8.7 million in cash from operations prior to the positive impact of $4 million from the changes in current assets and liabilities, which results in $12.7 million in net cash provided by operating activities.

At June 30, 2014 the Company’s cash and equivalents totaled $4.1 million after paying out $6.1 million in dividends during the first nine months of the current fiscal year. This compares to cash and equivalents of $12 million on the same date last year.

Inventories totaled $3 million at the end of our third quarter, a 23% increase over year end 2013 value of $2.5 million. The increase primarily reflects longer lead times as many orders now require additional testing that can add up to 4 weeks into delivery time.

Our tax loss carry forwards. FHC has tax loss carry forwards of $17.2 million for State, $19.2 million for Federal in the U.S. and $63.2 million in the UK. The UK losses, I would point out did not expire. Theses loss carry forward maybe used to offset cash payments our taxes due on the future earnings.

In summary, as has been in the case since 2006, the Company has remained profitable with positive cash flows generated during quarters of increasing and decreasing volumes and revenues. The Company has incorporated some flexibility into its manufacturing operations over the years to address swings in our customer ordering patterns.

I’ll turn it back to Karen.

Karen King

Okay thanks, Michele. Now I’d like to turn to our new strategic direction, which we announced two weeks ago. Upon joining the Company at the end of January, I assessed our market opportunity, as well as our strengths and weaknesses in order to develop a plan to grow the Company and address areas for improvement.

The board of directors reviewed the plan and following an in-depth discussion unanimously agreed to this strategy which included the suspension of the Company’s cash dividend. The Company has a two-part strategy moving forward. The first priority is to grow the demand for FC2 female condom in locations all around the world.

There are over 10 billion male condoms distributed through the global public sector each year and while many key procurement organizations have stated a desired target ratio of 10 to 1 four male to female condoms, female condom still represent well under 1% of male condom volumes in the public sector.

The company has historically relied on partners, procurement groups and its own programming and training team to help drive awareness of female condoms through education and training and thereby generate demand for FC2. While this has proven to be a very cost conscious approach we believe it has not delivered on the full potential for the product. Additionally competitive landscape has changed with products out of India and China entering the markets.

While we believe these products are inferior to FC2, we cannot ignore that the competitive landscape is evolving. Accordingly we have begun to significantly ramp up sales and marketing activity to grow sales of FC2 in our core public sector channel and also explore opportunities for further development in the consumer channels.

I’m very pleased to have Susan Ostrowski join our executive team to lead our sales marketing and sales support productivity. Susan brings a wealth of experience and an extraordinary level of enthusiasm to our company. We will further augment her team with two additional experienced sales professionals. Susan is already strengthening relationships with our key customers and partners and I have no doubt that Susan and her team will have significant positive impacts in driving growth of FC2 sales in the future.

The other critical element of our strategy is to diversify and expand our product portfolio. The Company has been a single product company for most of its 20 plus year history with great success since becoming profitable in 2006. However, there are inherent risks associated with being a single product company, particularly when that product is subject to substantial volatility in purchasing. We will systematically explore acquisition candidates that would be complementary to our current offering in market segment, product category or channel aspect, which can further enhance our future revenues growth and the consistency of our earnings.

I do not yet have specific details on the size or type of transaction we will pursue. The focus at this time is on evaluating opportunities for the maximum potential return and the ability to enhance the Company’s growth prospects. The Company has previously stated an interest in looking at potential acquisition opportunities. However this is now a focused initiative with an important element of our business strategy moving forward. While I have completed a number of acquisitions myself throughout my career, we are currently seeking an individual to assist me with the assessment of such opportunities.

We recognize that our new direction has recently put pressure on our share price but we feel strongly that this is the best way to drive future growth and deliver long term value to all our shareholders. By suspending the dividend, the Company will also have the flexibility to utilize a portion of our operating cash flows to strategically buyback shares under our existing stock repurchase program. We believe this represents an additional value generation pathway for our investors that will be available to us under the appropriate circumstance.

During our last quarterly conference call I reviewed the key factors that may influence the demand for female condoms. I think they are worth reemphasizing here; first, the continuing feminization of HIV/AIDS. According to the World Health Organization for women aged 15 to 44 years, HIV/AIDS is the leading cause of death worldwide with unsafe sex being the main risk factor in developing countries. Adolescent girls and young women aged 15 to 24 are twice as likely to be at risk of HIV infection when compared with boys and young men in the same age group. Many countries are starting to see HIV incidents rates nudging back up after several years of the progress.

Second, the continued prevalence of other sexually transmitted diseases in both developing and developed countries. The CDC reported in 2012 that in the U.S. STDs are one of the most critical health challenges with 20 million new infections every year, costing the U.S. healthcare system $16 billion annually and it should be noted that of the 20 million new infections each year, half of them are among young people aged 15 to 24.

Third, there is reinvigorated priority given to family planning services and products in developing countries. This new priority is spearheaded by the FP2020 program, which is funded by the UK government and the Gates Foundation among others. Condoms, both male and female are identified as important components in the contraceptive choices that should be made available to women.

Fourth, the female condom remains the only product where use is initiated by a women that provides dual protection, against HIV/AIDS and unintended pregnancy.

And fifth, we see continued funding for HIV and family planning. To illustrate the level of funding, $8.6 billion HIV funding was disbursed in 2013 to low and middle income countries and $4.6 billion has committed to support to FP2020 program.

A few words about competition which I also highlighted in last quarter’s call. Cupid Limited, an Indian based public company, traded on the Bombay Stock Exchange has introduced a female condom by the same name and has achieved WHO clearance. It does not have FDA approval. We are aware that Cupid was awarded a portion of the last South African tender and has also received some limited orders from UNFPA. This order activity occurred primarily over the last 12 months and it remains to be seen if Cupid has the ability to deliver its product in sizeable quantities.

PATH, a not for profit organization, has been developing the women’s condom. As far as we know, it has not been commercially launched anywhere and we are not aware of PATH achieving any regulatory clearances or approval. There are two Chinese companies offering versions of female condoms under the trade name Pleasure More and Fonar. Again, we are not aware of either of these two condoms achieving clearance or approval by WHO or FDA. The Pleasure More condom did receive a portion of the last South African tender.

A number of years ago there was another Indian product entrant using the brand name VA w.o.w. That product is no longer marketed according to our information. FC2 remains the only female condom to achieve both FDA approval and WHO clearance. FC2 is covered by 38 patents across 50 countries. Over 430 million FC1 and FC2 condoms have been distributed to more 144 countries with no recalls or customer rejected loss. The Company provides education, training and programming assistance across many countries, which has been shown to increase awareness and repeat usage. And finally, the Company has the capacity to produce up to 100 million units annually making it the only manufacturer with the current ability to fulfill very large tenders.

As noted previously, due to the limited disability into the timing of public sector orders, we do not provide revenue and earnings guidance. We do provide a general outlook based on current market conditions at the time.

Long term we believe the market for FC2 will continue to grow and there remains the significant untapped opportunity in usage and demand. We believe FHC will experience growth and continued profitability due to; first, the continued incidents and associated costs of sexually transmitted disease, in both developed and developing countries and the continuing significance of HIV/AIDS; second, the increased global focus on family planning, services, programming and products; third, internal efforts within the company to focus on untapped demand through more conventional sales and marketing initiatives including the hiring of a small but experienced sales and marketing team; and fourth, continued donor support for both HIV/AIDS prevention and family planning.

To summarize my comments today, we have delivered strong quarterly results, we have implemented a new strategic plan designed to drive future growth for the Company, we have initiated a sales and marketing effort for FC2 which includes augmenting our senior management team with an experienced an intelligent sales leader and we are actively searching for product candidates that have the ability to drive sales, diversify our offering and deliver long-term value to our shareholders.

This concludes our formal comments today. Operator, we would now like to take questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Jack Wallace of Sidoti & Company; please go ahead.

Jack Wallace - Sidoti & Company

I’ve got a couple for you. Just in terms of the sequential revenue growth, what areas of the world were you seeing the pickup in order activity?

Karen King

Right at this moment, Jack, we've seeing continuation of where we have our strongest programs, certainly Africa. Brazil continues to be a very strong area for us, and other parts of the world as well. But where we're going to focus for -- where we have identified untapped demand is more of South America and Latin America, and then Eastern Europe as well.

Jack Wallace - Sidoti & Company

Got you. And then the inventory levels, Michele you mentioned were elevated due to the increase in testing and quality control initiatives. It’s that going to be a more steady level in the 3 million plus range or might that level come back down a little bit?

Michele Greco

Now, it may stay around that level. The inventory on hand, at quarter end was either in the queue to be tested, was out being tested or was getting ready to be shipped.

Jack Wallace - Sidoti & Company

And then, going back to Brazil, was there any effect of the World Cup on sales in the quarter, or any specific orders by the country leading up to that event?

Karen King

We had anticipated an order for the World Cup, and there was some discussion around it. We do know that there was quite a bit of discussion around who would be responsible for funding that. In the end we did not see a specific World Cup order. So we have to assume that existing Ministry Of Health inventory was utilized for the event.

Jack Wallace - Sidoti & Company

And is there a -- just for the current political environment in Brazil and obviously things slowing down during the World Cup there, has there been any renewed activity or any timetable or any potential tender there? And also any idea on what the inventory levels are in that country?

Karen King

Jack, as you know, we're never able to discuss when we're currently engaged in tender discussions. It's actually a requirement or a request quite often of the country that issues the tenders. So I would not be able to speak to any ongoing tender discussions.

Jack Wallace - Sidoti & Company

Okay, then any idea on what inventory levels are in Brazil?

Karen King

No, we get some general guidance from the government in terms of what they might be looking at for next purchase quantities, but we don’t have any direct visibility into inventory levels.

Jack Wallace - Sidoti & Company

And then do you have any more color or details on some of the organization, and actually kind of boots on the ground so to speak with the FP2020 initiative, and if there is any demand that's been seen or increase for demand being seen related to that initiative?

Karen King

Right. So as I described last time, we've learned much more about how FP2020 is going to operate. FP2020 is essentially a facilitation body to help assure that these reproductive health programs get implemented in 69 of poorest countries around the world and reach an additional 120 million with both education and programming and commodities for reproductive health choices. And we know that male and female condoms are considered a critical part of that offering. We are aware of several countries who have initiated reproductive health programs under FP2020 guidance and we are aware that female condoms are a part of that program. The procurement for those programs is going to happen through the normal channels that it does today, and so we would not be able to distinguish if the order was for FP2020 or for a typical AIDS program.

Jack Wallace - Sidoti & Company

I guess another way of getting to that, would there be I just any increase in demand, kind of from specific countries where those programs are involved?

Karen King

We have definitely seen orders to those countries following the startup programming in reproductive health, yes.

Jack Wallace - Sidoti & Company

Okay, then lastly, Susan this one is for you. Hopefully you can go into little bit more detail on the new and improved sales and marketing strategy?

Susan Ostrowski

Certainly. We've taken a hard look at the way we go to market and we feel that we need additional resources to really take advantage of all the opportunities that's out there. We are in the process right now of designing our organization and we’ll share that with you when we finalize our plans.

Operator

Thank you (Operator Instructions). Our next question comes from (Michael Demain of Elevyn Capital) [ph]. Please go ahead.

Unidentified Analyst

Good morning first of all I am very sorry about your colleague Lucie. First of all, I applaud you all for suspending the dividend. I may be the only investor out there who feels that way but then I also applaud you guys for reemphasizing the sales channel, especially the public channels. And so from that perspective, what sort of G&A bump should we see from building up that team?

Karen King

So, at this time, we’re planning for a small but again highly experienced team. Our plan right now is for Susan to hire two additional individual sales professionals. And for some of that we expect to be able to divert some of our resources that have been used in other areas and then some of it will be incremental cost. But we’re certainly trying to manage that overall.

Unidentified Analyst

Okay, great. And then maybe if you could talk a little bit more about business development and the acquisitions. I think from an equity holder’s perspective you hear the word acquisition, I think about how are you going to fund that? I look at the balance sheet and obviously cutting the dividend is helpful to accumulate cash. But issuing stock at this level doesn’t make sense in terms of an equity transaction. And then beyond that debt, with our volatility and revenue, it seems like that might be expensive as well. So how are you thinking about potentially financing any acquisitions?

Karen King

So, I think we are aware of all the various options available to us. And some of that will depend on the type of deal that we’re doing and the timing for when that deal is ready to go. Certainly we're considering that. And again at the time we will evaluate all the options available to us and assess what’s the best one.

Unidentified Analyst

Okay, great. And then have you seen any pricing pressure and from your bids now that some of these competitors are actually landing these tenders?

Karen King

Good question. So the one that we have the most visibility in queue was the South African tender, the last South African tender that was awarded in September of 2013. And all of the bids which do get published, the actual pricing, they were all pretty close in terms of pricing. And FC2 was not the highest nor was it the lowest. So it was about in the middle of the pack. So, so-far we have not seen any significant pricing issue. Of course that is a possibility that could change in the future.

Unidentified Analyst

And then one last housekeeping issue. The last few quarters there has been discussion about some big order that may or may not come through. Did that come through in this quarter?

Karen King

So the only order that I'm aware that there might have been discussion around was the World Cup order and as I just mentioned, we had anticipated the World Cup order because some discussion and questions had been pushed to us and I know there was an issue on the funding and then no order came through. But any other very significant orders are usually tied to tenders and we just are not able to discuss tenders that are under negotiations.

Operator

Thank you sir (Operator Instructions). Our next question comes from Mark Robins with Canvas Research. Please go ahead.

Mark Robins - Canvas Research

Thank you for taking the questions. First help me better understand the competitive landscape, because as I remember from previous calls, we kind of knew that there was some product being generated or created but there was no real conversation to my memory about competitive products being actually offered into the tenders. Was this kind of a surprise for you folks in the last three months?

Karen King

So, certainly not in the last three months because that tender was awarded last September, so September of 2013. I think that as I've mentioned when I was discussing the competition, we have seen some competition enter in the past like the VA w.o.w product out of India and ultimately that competition didn’t make it. So now that we have the competition that participated in the South African tender, certainly we’re watching very closely to see if those competitors can in fact deliver the product, if they can meet quality standards, if the product will be accepted. So we’re watching very closely. I think it’s still pretty early to really make any conclusions about the competition.

Mark Robins - Canvas Research

Okay, and then let’s talk about the program, the expansion program. I am a little fuzzy details I guess as I should be because of the limited expressions of where things are going. But so help define for me again kind of the focus of where you're going with the new endeavors.

Karen King

So as I said, we really want to stick fairly close to home on that and we'll be looking at opportunities that complement our market segment -- our channels that we participate in, or the type of category of product that we're involved in. Certainly you can expect that we’ll be looking hard at the female health arena and products directed towards the female health. It also would make sense for us to be examining products related to infectious disease prevention. So those would be two areas for examples that we’ll be putting a lot of focus. But our idea here is to stay pretty close to home.

Mark Robins - Canvas Research

And does that mean that you might push more into the OTC channel, or would you push primarily into the channel where outside organizations are doing the purchasing, or both?

Karen King

No. It could be either one. One of the things that I also mentioned about FC2 that we’re going to be exploring is obviously we're very strong in the global public sector channel. We have some presence in the consumer channel and we really want to be evaluating can we further develop our presence in that consumer channel. So as we think about the next product that we want to bring into our portfolio, I could really see that either channel would make sense for us because it can either assist us in the way that we're hoping to move or just be complementary to what we are already doing.

Operator

Our next question comes from Peter McMillan of IPC Inc. [ph]. Please go ahead.

Unidentified Analyst

I saw the [indiscernible] Gates Foundation were trying fund a different kind of female condom or a lower cost one. Could you just comment on that and how that compares with FHCO plans?

Karen King

Yes, Peter, thank you. Good question. We are definitely aware of the Gates offering $100,000 grant to a contest winners for the design of a different female condom. They have also done the same thing with male condoms. And first of all, the one thing that that really signifies to us is the importance around condoms, the continuing importance of condoms and prevention.

So condoms are a very old product but they are still essential and really do something that no other type of product can do. We are always following new designs and what people are working on. It’s something that possibly we could look at trying to work with someone if there is really a very unique approach or we're also always looking for things that we can do our self. So we're aware of that and we actually support the idea of additional innovation in the whole condom field.

Operator

(Operator Instructions) Our next question is a follow-up from Jack Wallace of Sidoti & Company. Please go ahead.

Jack Wallace - Sidoti & Company

Michele, this one is for you, just in regards to taxes. Every fourth quarter it looks like you take a nice benefit there. It’s been right around $5 million in the last couple of fourth quarters. Do we expect a similar level here in the September at the quarter?

Michele Greco

No Jack, we have been trying to highlight that in the footnotes in the quarters. That was a result of taking down a valuation allowance against our NOLs and we’ve basically completed that at the end of 2013.

Operator

Thank you. And this concludes our question-and-answer session. I would like to turn the conference back over to the management team for any final remarks.

Karen King

Okay. Thank you Rocco. And thanks to everyone for participating today. I just will also add that as in the past, if you have some additional questions and would like to reach out to us, you can give either Michele or I a call and we're happy to take further questions off line. So thank you for participating. Bye-bye.

Operator

Thank you very much ma’am. To access a digital replay of this conference you may dial 1-877-344-7529 or 1-412-317-0088 beginning at 01:00 p.m. eastern time today. You will be prompted to enter a conference number, which will be 10050278. You will then be prompted to record your name and company when joining. This conference is now concluded and we thank you all for attending today’s presentation. You may now disconnect, and have a wonderful day.

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