Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Rochester Medical Corporation (NASDAQ:ROCM)

Q2 2011 Earnings Call

July 28, 2011, 04:30 pm ET

Executives

Anthony Conway - Chairman, CEO & President

Dave Jonas - Director, CFO & Secretary

Analysts

Ernest Andberg - Feltl & Company

Tyson Bauer - Wealth Monitors

Elizabeth Lilly - Gabelli

Operator

Good day ladies and gentlemen and welcome to the third quarter 2011 Rochester Medical Corporation earnings conference call. My name is Melanie and I would be your coordinator today. At this time all participants are in listen-only mode. We will accept your questions at the end of today's conference. (Operator's Instructions). As a reminder today's call is being recorded.

I would now like to turn the call over to Mr. Anthony Conway, President and CEO. Please proceed sir.

Anthony Conway

Hi everyone. Thank you for joining Rochester Medical’s third quarter conference call. I am Anthony Conway, the Company's President and CEO. And with me is Dave Jonas, Rochester Medical’s Chief Financial Officer.

First I will provide a high level review of our third quarter. Dave will then provide you with more details on our financial results and then I will give a quick update on a few items and summarize. And then we will take your questions.

Before starting let me remind you that we will be making some forward-looking statements today and I would refer you to the Safe Harbor statement found in today's press release and also to the risk factors section in the Company's annual report on Form 10-K for the year ended September 30, 2010. These statements further clarify the risks and uncertainties that are associated with the forward-looking statements.

Now, in the third quarter we reported record sales of $14.3 million, a 39% increase over last year on a reported basis and a 35% gain on a constant currency basis. This growth was due in constant currency terms to 46% growth in global direct sales including our acquisition of Laprolan and 1% growth in global private label sales. In terms of GAAP earnings, we reported a loss of approximately $294,000 on a non-GAAP basis excluding acquisition costs and certain non-cash expenses, we reported income of $398,000. Within direct sales we experienced strong organic growth in the US and UK and the addition of Laprolan further bolstered our direct sales.

Overall direct sales in the acute care market which make up 13% of the global direct sales total grew nicely due to a very strong 195% constant currency growth in international acute care sales. However, they were below our expectation in the US. The 12% drop was primarily due to spike last year in Q3 male external catheters sales because of actual orders from a large VA hospital distributor.

Earlier this year we increased the US acute care sales team from 6 to 23. As we have said in previous conference calls, we expect to increase sales force will have a positive impact beginning in Q4. Also we have further strengthened our US acute care sales efforts by adding a clinical nurse specialist to the team, a person who can really arm hospital managers with hard data on reducing infections rate of our catheters.

Home care sales which are 87% of our total global direct sales and which are the leading engine of our growth grew strongly this quarter led by 53% constant currency increase in international homecare sales and a 19% increase in US homecare sales. In homecare, we’ve added 17 people bringing our US homecare sales force to 20, up from 3.

In short in the past year, we have more than quadrupled our combined US sales force. Last year, we had very limited sales coverage of the U.S. and essentially no regional sales management. Today, our sales force substantially covers the major US population centers, and our new regional managers help to better coordinate our sales efforts, both in existing accounts as well as in many new accounts. We firmly believe that all the upfront cost was considerable. This decision was prudent and necessary to growing our company and achieving our long-term financial growth. Now let turn it over to Dave for further details in the quarter.

Dave Jonas

Thanks Jim. I’m going to spend a few minutes highlighting the results reflected in our just released third quarter 2011 earnings. In this discussion, unless otherwise noted all sales information will be discussed in constant currency. I’m doing this to exclude the impact of foreign currency exchange in order to show a true reflection of our sales growth.

Foreign currency add approximately $350,000 to top line results for the third quarter and has added about $330,000 in the nine-month period. As Jim mentioned total sales rose 35% including Laprolan to $14.3 million from $10.2 million a year ago. Organic growth excluding Laprolan was in the lower double digits for the third quarter.

Total sales in the US increased 11% to $4.4 million from $3.9 million in the third quarter of 2010, driven by growth in both our US direct sales and our US private label business. Total sales outside of the US mainly in the Europe and Middle East region or EME grew 49% due to a very robust growth in direct sales and a combination of strong organic growth and Laprolan. This performance was partially offset by a decline international private label sales.

Geographically 31% of our sales in the third quarter were in US compared to 39% last year, with 69% of our sales outside of the US compared to 61% last year. This change is primarily driven by our April 1st acquisition of Laprolan. We were generally pleased with our performance, both domestically and abroad. Total sales for the first nine months of year increased 24% to reach $38.1 million from $30.3 million in same period of last year.

Now turning to direct sales, which as mentioned is the main engine of our current and future growth, total global direct sales increased 46% year-over-year in the third quarter on a constant currency basis. US direct sales for the third quarter totaled $2.6 million versus $2.3 million last year or a gain of 10%. Our intermittent catheter line which represent over 40% of our US direct sales, was the primary driver of this growth rising 34% year-over-year in the same quarter.

However this growth was tempered by both a 4% decline in the MEC sales and by a 5% decline in Foley sales in the third quarter. As Jim discussed earlier, these declines were due almost entirely to the acute care channel.

US FemSoft sales almost tripled in the quarter, so admittedly this was off a small base. On a year-to-date basis, US FemSoft sales are down as a result of a difficult comparison versus the same period last year when we had large orders related to the product launch in the distribution.

Our homecare sales force has been carrying FemSoft in the US for just a few months and we remain optimistic about the potential for this product and conservative in our expectations.

Let me now break down the performance between the two channels we serve through our US direct sales, homecare and acute care. First homecare sales which represent approximately 76% of our US direct business increased 19% year-over-year in the third quarter. This was primarily driven by growth in intermittent catheters and to a less extent Foleys.

For acute-care sales in the U.S. as Jim mentioned, we were disappointed with our performance this quarter as sales declined 12% year-over-year. On a year-to-date basis, acute-care sales are up 3% so that obviously trails our expectations for growth in this channel.

I think it is important to keep everything in perspective here. As we stated back in November when we announced our three-year plan to double sales, we did not and do not anticipate contributions revenue-wise from the new members of our acute-care sales team until later this year.

Turning now to our direct sales outside of U.S. Our direct sales in the EME this quarter were $8.7 million versus $5.4 million last year, an increase of 61% excluding currency. Direct sales performance outside of U.S. is dominated by activity in the EME region and sales to countries outside of this region represent less than 4% of our total international direct sales.

International direct sales growth year-over-year was fueled by growth in the UK and the Netherlands. Combined, our businesses in the UK and Netherlands grew $3.6 million this quarter. Sales of intermittent catheters and male external catheters in the UK were also notably strong, while our Script-easy business posted good growth as well.

Laprolan sales continue to show solid growth, particularly in wound and scar care, stoma anatomy. Our team is working hard to integrate our advanced urology products into this market.

Now let’s take a look at our private label business which represents roughly 22% of our total company sales, two-thirds of which comes from sales in the U.S. with the balance coming from sales in the EME region.

Total private label sales increased 1% year-over-year, led by 13% growth in the U.S. which is offset by 17% decline in the EME region. Private label sales drew the third quarter, by product sub-stream and MECs and intermittent offset by declines in Foleys.

We continue to have a number of excellent private label partnerships around the world, including a newly signed full fledged contract that extends our current male external catheter to another five years.

The ordering patterns in the business are inherently lumpy it’s good to look at year-over-year results four quarter rolling basis. On this basis sales are up 2% in the last four quarter period versus comparable fourth quarter period of the year before that at $11.5 million versus $11.3 million.

Private label sales will remain important and moderately growing business although it will become a small percentage of our mix overtime as our worldwide direct sales business continues to grow.

Now let me turn to review the remainder of the P&L as well as our balance sheet and cash flow. Our Gross margins, third quarter gross margins were 49% down 20 basis points versus last year. Laprolan benefited our margin by roughly a 190 basis points this quarter, but this was offset by a decline in the rest of our business.

That was thunder. Our reasons for this reduction include higher petroleum cost which drove many of our key raw material prices coupled with manufacturing prices related to our Foley and intermittent production and a mix shift in favor of temporarily lower margin intermittent catheters. Nonetheless I still anticipate our margins to slowly improve as volumes of our intermittent and Foley products increase resulting in significantly higher efficiencies and lower per unit fixed cost.

For the first nine months gross margins were 49.3% versus 47.2% last year due cheaply to the inclusion of Laprolan. Our operating expenses, in the third quarter operating expense rose 58% to 7.5 million from 4.8 million last year. This expense was about 200,000 higher than we initially anticipated due to some additional M&A costs related directly to obtaining the audited financial required for our 8K/A filed on June 23 2011.

The M&A costs are now fully behind us so future quarters will near the 7 million expense run rate we are targeting to achieve sustainable operating profitability. Apart from this the increase relative to last year relates largely to costs associated with the added headcount in U.S. and our new our operations in the Netherlands as a result of acquiring Laprolan.

Specifically, sales and marketing costs for the third quarter grew 66% from last year and equated to a ratio of 36.7% versus 30.7% sales in the same period last year. This expansion reflects the aforementioned investment in our sales and marketing efforts in both the U.S. and the Netherlands.

Research and development cost for the third quarter declined 9.3% and 19% lower year-over-year representing 2% of total sales which was down from last year’s 2.4%. This is consistent with our plans for new product development and the costs can vary depending on what part of this cycle our new products are in.

General and administrative cost increased 48% from last year’s third quarter, again due almost entirely from the costs associated with Laprolan.

Finally, for the third quarter we reported after-tax GAAP net loss of $294,000 or $0.02 per diluted share versus an income of 95,000 or $0.01 per diluted share last year. The non-GAAP adjustment shown in the reconciliation section of our press release are very helpful in understanding Rochester Medical’s operating results.

Excluding the tax effective adjustment for material, non-recurring costs, intangible amortization and stock option compensation expense, we reported positive third quarter non-GAAP earnings of $393,000 or $0.03 per diluted share compared to non-GAAP net income of $428,000 or $0.03 per share last year. And for the first nine months of the year, our non-GAAP net income was $246,000 or $0.02 per diluted share compared $714,000 or $0.06 per diluted share last year.

I am also pleased to report that our balance sheet continues to be very healthy with the cash position of $33.8 million down just $600,000 from the previous quarter and down $1.7 million in the prior fiscal year-end. Much of the cash depletion comes directly from the $1.2 million we spent this quarter repurchasing our stock.

We were particularly active during the quarter taking advantage of our undervalued share price. To which we referred just 127,751 shares in the average price of $9.27. This brings our total share repurchase to 413,000 shares out of the 2 million shares authorized.

We continue to focus on improving our working capital management and remain free with our level and condition of inventory and receivables at quarter-end. Our total debt stands at 19.6 million, up slightly from 18.4 million then at the second quarter. Cash generated from operations was used to payoff the debt incurred from our 2006 acquisition in UK in five short years. Laprolan acquisition was financed with our operating line, and we will employ our cash generated from operations to this off as well. Of our $25 million line of credit we currently have $7.5 million available.

To summarize, we are pleased with the quarter’s performance and the significant progress we have made. We are confident that fiscal 2011 is trending inline with our three year plan to doubled sales and generate meaningful profits in fiscal 2012 and fiscal 2013.

I will now hand it back over to Jim for some final comments before we answer your questions. Thank you.

Anthony Conway

Thank you, Dave. I would like to update you on a few other subjects. Let me begin by updating you on the integration of Laprolan into Rochester Medical. Since the transaction closed on April 1st I am pleased to say that everyone has worked together seamlessly such that we feel that the integration is largely complete. This includes the smooth migration of Laprolan into our corporate-wide IT system and most importantly I believe our new employees in the Netherlands are happy and are glad to be a part of the ROCM team and we’re very pleased to have them aboard. This successful integration of Laprolan can be seen in the fact that third quarter results achieved our expectations and they’re on the trajectory that we expected at the outset.

Now brief update on FemSoft. As Dave noted, we’re seeing some encouraging signs of adoption in the U.K. and the U.S. although it’s still early days. Regarding our reimbursement rate from CMS, I really don’t have any new news except to say that we continue to be in communication with them and we do remain hopeful that we will be able to demonstrate the need for higher rate. More and more women are turning to FemSoft for the continence care solution but in the big picture, the numbers are still very small.

Also as Dave mentioned, we recently renewed our contract with Coloplast, one of largest private label customers. The agreement extends for another five years their private label purchases in male external catheters. I do want to say that we’re extremely pleased that 3M invited us to partner with them at their Infection Prevention Leadership summit. We consider it quite an honor. This certainly will allow us to interact with leading infection prevention clinicians from around the world and will give us high visibility as an important part of the infection prevention story.

As I wrap up, I’d like remind you of our role strategy. Going forward we expect direct sales to be our leading engine of growth, particularly in our European and U.S. markets. Most of this advance will be in the homecare market but we do also expect solid acute care gains. We also expect to introduce more product innovations, which will further help us gain share in the 1.5 billion market that our products address.

In summary, we are well situated for solid growth going forward. Looking ahead, consistent with our three year outlook, we are strongly focused on growing that top line, flattening our expenses and generating profits.

Thank you and now we will take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Ernest Andberg with Feltl & Company. Go ahead.

Ernest Andberg - Feltl & Company

Jim, and may be Dave but you had made a comment last quarter that you were hopeful to report a profit in the fourth quarter. You got close this quarter exiting out, it looks there is a right $304,000 of x-ray expenses booked for Laprolan, Dave.

Dave Jonas

Hi this is the little bit more than $200,000 but yeah.

Ernest Andberg - Feltl & Company

The merger and acquisition cost for Laprolan. That’s why I came up with three or four from your press release. But Jim you either got to have some higher sales in the fourth quarter or a little bit better gross margins to get the profitability in the quarter, does it look like, are you still optimistic about getting there?

Anthony Conway

Absolutely we are. We expect higher sales and we expect lower cost because M&A cost are now gone. They are finished.

Ernest Andberg - Feltl & Company

Okay.

Anthony Conway

So we remain very confident Ernie.

Ernest Andberg - Feltl & Company

Okay. And excuse me, Dave you went over very quickly the additions of the sales force. Could you discuss that issue again? I think you said you had 17 direct salesmen in the U.S. I wasn’t sure whether that included both homecare and acute care, or how it was split?

Anthony Conway

Yeah, I was talking about that, Ernie this is Jim and maybe I didn’t make it clear. We split it two ways into acute care and homecare in the U.S., Okay.

Ernest Andberg - Feltl & Company

Yes.

Anthony Conway

In homecare we have a total of 20 and in acute care we have a total of 23.

Ernest Andberg - Feltl & Company

Okay.

Anthony Conway

So overall we have a combined U.S. sales force of 43 people, which is actually been quintupled from when we started this increase. So, it’s been a very, very significant increase.

Ernest Andberg - Feltl & Company

I thought you had more guys there then. You said it was a increase of 17 in the homecare.

Anthony Conway

In the homecare, it was just an increase of 17, correct.

Ernest Andberg - Feltl & Company

How do you judge and measure their progress in starting to become, how should I say it, generating revenues out there in the field, Jim?

Anthony Conway

On a macro level, what we said is we like to see the growth to be North of 20%. You can see we are almost there in the homecare. We are at 19% growth. So, at a macro level, that sales force is doing quite well. Now, clearly at an individual level, we track them individually with a number of parameters to see how each individual is doing. But, as we said earlier, we expected that home care sales force to get off to a lot faster start than the acute care. And they are doing so. The acute care is a very long complicated cell and we expected the new hires would start will start to being productive in the nine to twelve months timeframe and we will see some of that in Q4 and we’ll increase after that. So we are actually very pleased with the progress so far particularly in the homecare.

Ernest Andberg - Feltl & Company

Last question Jim 12% decrease in the U.S. in acute care. Am I getting the numbers right.

Anthony Conway

Yes.

Ernest Andberg - Feltl & Company

And you or Dave suggested that it was largely related to the level of sales last year in terms of I guess pipeline filling. Would that be fair to characterize it? Was there any deterioration in the existing business in acute care?

Anthony Conway

We from a year ago want hospital there was a customer year ago and he is no longer a customer. We expect the VA hospital unit to gain some additional one. No, its not a VA hospital. We sell a lot to VA hospitals but that was the only customer we actually lost but the main reason for the 12% decline in was we have a very large distributor in to all of the VA hospitals for male external catheter.

Ernest Andberg - Feltl & Company

Okay.

Anthony Conway

This distributor is very unique, they do add-on work to our product and then shift to the VA hospital. So depending on their work balance sometimes they order very large or very small shipments. They actually do some packaging. It’s a very unique distributor that hires blind people so the VA favors distribution through them because it helps these people make a living. That was the main reason for the decline but there was also a little bit of a decline in Foley sales that was primarily due to the fact that we lost one hospital and this particular quarter we don't have any new conversions in this quarter.

Ernest Andberg - Feltl & Company

Dave you said that Foleys were off 5%, was that the number you gave us?

Dave Jonas

That's correct. Yeah.

Ernest Andberg - Feltl & Company

Okay, so that's what you are talking about, Jim?

Anthony Conway

Yes, exactly.

Ernest Andberg - Feltl & Company

On, you can't annualize one quarter but this quarter annualizes almost out to about $60 million Jim and my estimate without guidance is a little bit above that next year, is there anything that says you can't get up into that area at this point.

Anthony Conway

We'll be there.

Operator

(Operator Instructions) Our next question comes from the line of Tyson Bauer with Wealth Monitors. Go ahead.

Tyson Bauer - Wealth Monitors

Just going and kind of following Ernie’s question, that last one, we've seen a nice growth pattern in the last few quarters on your top line, it sounds like we should expect an accelerated ramp as we start going forward. Are we to that point where now we are going to see bigger and bigger percentages, are we to that point yet?

Anthony Conway

Part of the big percentage of course as you know is due to the acquisition. So you are going to continue to see big percentages.

Tyson Bauer - Wealth Monitors

Right, I am just sequentially from you know a 11 million in Q1 to 12.8 to 14 plus we can’t (inaudible) forward and then into next year Q1, are we going to continuously see that sequential type ramp that’s or is that going to start have more steep trajectory up?

Anthony Conway

You know I can’t put a number to extent do we expect sequential growth quarter-to-quarter and we are looking ahead to Q4 and we see sequential growth again there.

Dave

And we should see sequential improvement in that gross margin also because of that extra volume.

Anthony Conway

A small amount. Okay.

Tyson Bauer - Wealth Monitors

Yeah, but we know it doesn’t take much to get to the bottom line for you guys. US versus non-US are we still, why has it been so difficult that traction on the US side, that you had such an easy time in the UK and otherwise. It seems like we really are grasping and when you see that domestic markets just take off for you.

Anthony Conway

Well, it’s a good question, but I see two reasons. You know we just increased the sales force a little over six months ago and we knew and we did that but in the acute care we weren’t going to get any traction with that addition for as I said 9 to 12 months. There are other reasons why the acute care is slower. It’s difficult not to crack and we are up against major competitor that owns that mark. In the US homecare market and by the way, that’s about 87% of our US sales I believe and we are up to 19% growth.

So we are moving much faster there. One of the things that it’s good to kind of keep in perspective and I am not using this to ignore it, but the US acute care market which is going to be good for us in the future we believe, today represents only 4% of our total sales. So it’s a very small piece, but it is the most different piece there’s no question to that. Does that answer to your question Tyson?

Tyson Bauer - Wealth Monitors

All right, I'm trying to figure out as far as what the obviously when you’re going against Bard and their products and there they’ve got a larger market share, have you been able to crack that perception issue of whether your product is on par or better or do they still have enough that’s working against you that you have to gain that acceptance?

Anthony Conway

In the customers that we gained, we’ve got that acceptance but it’s a very small percentage. I’ll give you an example that probably describes our difficulties if there’s anything else. And I won’t names, but several months ago we had a very extensive trial in a hospital chain with a group of 20 hospitals and our products were extensively tested in well over half of them with fabulous results I mean really topnotch results. The hospital, the chain was preparing to convert to our product and a top urologist in one of the hospitals just put a hold on all of it and basically is favoring the Bard product. So we do run into that.

Tyson Bauer - Wealth Monitors

And I see you left out the name all of 60 second, so.

Anthony Conway

I meant hospital names.

Tyson Bauer - Wealth Monitors

The mix on the product, do you have a kind of where you are standing with the MEC compared to non-MEC products currently overall and as you grow is that first initial growth really going to come from that intermittent product?

Dave Jonas

I don’t the number right in front of me, but the MEC numbers have been very consistent here over the last couple of years totalwise and we are getting most of our growth really from the intermittent product line. Our intermittent product line worldwide is growing fantastically, well above the rest of our business obviously and that’s also the biggest market we planned and that $1.5 billion Jim talks about you know more than half of it really has been our intermittent business.

Anthony Conway

About 800 million?

Dave Jonas

Right so that’s where we are expecting it, a high percentage of our growth.

Tyson Bauer - Wealth Monitors

And the FemSoft you talked about that in the UK and non-US market taking off a little quicker. You have got the reimbursement there that you wanted as opposed to here domestically.

Dave Jonas

Yes we do have the profit reimbursement in the UK.

Operator

(Operator instructions). Our next question comes from the line [Michael Bugars] with [Bugars] Investment. Please go ahead.

Unidentified Analyst

Can you update us to, tells us about that relationship and did that begin to contribute or is that something to look forward to?

Anthony Conway

Yeah good question. That was one of the major reasons why our acute care business internationally is jumped so significantly actually. They started selling our StrataNF in Europe and started making purchases from us. The relationship is very strong. We are actually looking at ways to expand that.

Unidentified Analyst

Very good. And I am not sure if does Teleflex operated in some of the Asian markets or are they more exclusively in Europe?

Anthony Conway

I don’t know how strong they are in Asia. I know they used to have a fairly strong presence in Japan which then faded away. And I was told that they are in the process of reestablishing that presence, but I really don’t know.

Unidentified Analyst

Okay. I think Dave you mentioned some of the new product R&D cost related to new product development. Can you give us any preview as to the second half of this calendar year if we should expect some progress on that front and maybe in what areas?

Dave Jonas

We are definitely going to have more spending in the second half of this year than we’ve had in the first half as the products that we are bringing to the pipeline started getting some third-party testing done on it and validation. That’s where the extra cost comes in for us. I can let Jim expand on this.

Anthony Conway

Yeah, I think that’s exactly right. Our in-house costs for R&D remain very, very steady. We’ve got basically the same team with the same level of effort all the time. But when we get to a certain point, we have to send these products out for all kinds of you know, cytotoxicity testing, biocompatibility testing, breathe ability testing, and all these kind of stuff and depending on where we are in the cycle, it may fall into one quarter and may not.

Unidentified Analyst

I see. I would anticipate that 3M Conference, one topic might be HAI reduction?

Anthony Conway

Very definitely, that would be the entire focus.

Unidentified Analyst

Okay. And is Rochester participating in the speaking program or just the poster session?

Anthony Conway

We have the very small short presentation that we will be giving and we will have product displays and so on.

Unidentified Analyst

Great, great. And is that at the 3M global headquarters or is that at a different location?

Anthony Conway

It’s at their global headquarters in their innovation center.

Unidentified Analyst

Great, great. Well, congratulation that’s a great opportunity to raise the visibility to technology. You mentioned the finding expenses, is there opportunity on – in terms of some of your commodity input cost to make progress on that front?

Dave Jonas

Absolutely, we are actually working really hard at that. So I would say yes.

Unidentified Analyst

Can you quantify that a little or give us some yardstick to measure in fact would be a material impact or…

Dave Jonas

I don’t really want put a number on it, but it would be an impact that you would see Michael.

Unidentified Analyst

Okay, great. And then in terms of the falling short on acute-care sales I guess domestically, did you fall far short or was it just incrementally short of your expectations and I guess my concern is, not concern but trying to get some little context, you have three very experienced sales managers I believe and you are saying to me that even if you fell short there is – you have, I am sure you have a decibel plan to address some of those shortfalls or to minimize the situation?

Anthony Conway

We definitely do and we already seeing that in Q4, we are starting to see good year-over-year growth again. And as far as the shortfall percentage-wise 12% looks like an awful lot, in actual dollars I believe the shortfall was about $120,000 I think, something like that.

Unidentified Analyst

Yeah. And your selling managers remain in place as your experienced team…

Anthony Conway

Dave just corrected me, actually its only $80,000 shortfall.

Unidentified Analyst

Got you. And those experienced sales managers are remaining in place in the UK and Netherlands and here domestically?

Anthony Conway

Yes, they do.

Unidentified Analyst

Okay, great. Jim would you just take a moment and just maybe share with us any of your thoughts in terms of in times of these uncertain times that perhaps its helpful or not to potential acquisition and it seems like you’ve made two very highly qualitative acquisitions both in the UK and then more recently with Laprolan?

Anthony Conway

We have nothing right now that is far along where we’ve identified that we want to do an acquisition. We are investigating a couple of more European opportunities whether they will turn into actual acquisitions; at this point in time I really don't know at all. But we are looking and continue to look.

Unidentified Analyst

Well, certainly your balance sheet will support that as well as certainly maintain your buyback would you share with us your thoughts at least for the second half of the calendar year, it seems to me that the possibility that this pace of buyback may be maintained?

Anthony Conway

Well, I hope it’s not maintained to tell you the truth, I mean we really do the buyback when we think that the stock has really ridiculously priced and we think that it makes sense then to do it. I am hoping as we go forward that that will strengthen and we will focus our money on purchases for something that is accretive again to us. But if we continue to see weakness I like this we’ll be active going forward.

Unidentified Analyst

Well certainly if ever would be an opportunity as you execute your business plan and having to my understanding your business plan is not really incorporated to dramatically reduce share count and then certainly that would be accretive in that sense?

Anthony Conway

Correct. Now that’s correct and we already get complaints that there aren’t enough shares out there so.

Unidentified Analyst

Very well. Okay, and thank you and good to see all the progress.

Anthony Conway

Thanks very much Mike, appreciate it.

Operator

Our next question comes from the line of Beth Lilly with Gabelli. Go ahead.

Elizabeth Lilly - Gabelli

Good afternoon.

Anthony Conway

Hi, Beth.

Elizabeth Lilly - Gabelli

I have three questions. One I wanted to share – excuse me I have frog in my throat. I wanted to just delving a little bit deeper in to you know the slight decline in gross profit and just the mix issue, I know Dave talked about it. But can you say a little bit more and then as we move forward do you expect gross margins can bounce back-up?

Dave Jonas

Yeah. The mix issue is just really the majority of our growth this quarter and really this year has come from intermittent product sale which have a lower margin than our male external catheter sale. And that is going to draw our margin down until we get enough volume to spread those fix costs or to get those intermittent margin inline and there is no reason our intermittent margin shouldn’t be any worth, they should be just as good as male external catheters a lot better eventually when the volume comes out.

Elizabeth Lilly - Gabelli

Okay. So how far are we ways from getting the volume, I mean what kind of volume are you talking about?

Dave Jonas

Well, I don’t know if I have the exact number for you. We sell over 30 million MEC in a year and we sell a lot less intermittent than that. Obviously we don’t need to get up to 30 million to get there but we have to get up quite a bit. But it will happen in the next two years and I think on our projections for 2013 I think we had a 2% gross profit improvement. That’s part of our plan.

Elizabeth Lilly - Gabelli

I can see now, in the past Jim had talked about, correct if I'm wrong Jim, but you’ve talked getting gross margins up to 60% or 65%. Is that right?

Jim Conway

Yeah, I’ve talked to our theoretical feeling that we should be able to get to is 60% and when I’d said that I looked at where we were with the product mix at the time and then projected out a doubling. I think when we were at $30 million, this is the first time, I did a calculation and said that $60 million, which were about there that our margins would be significantly higher. But I was projecting the same product mix incorrectly, obviously, and our MEC units, which are the high margin and the high volume, basically just growing very slowly and our growth as Dave said is coming from the intermittents, which relatively unit-wise are very small right up to the MEC. So that 60% is still theoretically possible but surely not going to see anything like that in the next two years Beth.

Elizabeth Lilly - Gabelli

Okay, all right. If you look at the business, there’s not any reason to model or assume that gross margins are going to go down from here?

Dave Jonas

No.

Jim Conway

No.

Elizabeth Lilly - Gabelli

Okay, okay. All right and then in term of the revenue growth, in your early, in the beginning comments, Dave talked about organically if we take out Laprolan, what was the growth rate in terms of your revenues?

Dave Jonas

We didn’t really say. We just said it was below double-digits.

Elizabeth Lilly - Gabelli

Okay, okay. Alright, great. Okay, and then my other question is just in terms of 3M, so you have been asked to present at this Infection Prevention conference, are you doing business with 3M right now and how is it that this came about?

Jim Conway

Well, I am trying to figure out how to word this, Beth. Certainly because of their infection prevention and we are in infection prevention we have had many types of discussions with 3M and the fact that we are located so closely to them, kind of makes that easy if you will.

Elizabeth Lilly - Gabelli

Yeah.

Jim Conway

So they know us very well and they know our infection technology very well, and as a result of that they decided to make us one of the four invitees to this conference they felt we fit very well. They see very clearly that, Michael mentioned lower HAIs, and they understand very clearly that 40% of them are caused by catheterization. And they understand that we have the leading technology in that space.

Elizabeth Lilly - Gabelli

So you at this point don’t do any business with them?

Jim Conway

No.

Elizabeth Lilly - Gabelli

Okay, interesting. Okay, that’s fascinating. So, is it open to, who is this conference open to?

Jim Conway

They send out, it’s by special invitation and as a participant we get to invite a number of clinicians that are our customers or people that we feel that would contribute to this conference. So, we get to send lot of bunch of invitations through them, 3M does it and 3M basically covers almost all of the expenses and they put this people up in hotels and they pay the transportation and all this kind of stuff. So, it’s quite an affair, it’s quite a deal. Like a 100 and some of the top specialists from around the world.

Operator

We have a follow-up question from the line of Ernest Andberg. Go ahead.

Ernest Andberg - Feltl & Company

Beth to covered a couple of what I wanted to come back to here but, can you give us an idea of how much increase in oil, petroleum products might have impacted the gross margin in Q3 Dave?

Dave Jonas

Maybe a third of that degradation we talked about.

Ernest Andberg - Feltl & Company

So, it impacted but not a lot. But not significant amounts, overall. Okay.

Dave Jonas

I think it significant but, it’s not the whole thing that’s for sure.

Ernest Andberg - Feltl & Company

Okay are you able at this point in the business cycle to look at pricing to offset that or are you guys going to have to look to volume to?

Dave Jonas

The pressure is really tough for us because many of our products are really based on reimbursement and reimbursement has not got off and it is difficult for us to do this raise prices like the rest of the world but where we can we looked at that for sure.

Ernest Andberg - Feltl & Company

Hi that answers my question. You got to work it thorough by improving volumes basically?

Dave Jonas

Right.

Ernest Andberg - Feltl & Company

Okay, thank you.

Operator

Ladies and gentlemen that does conclude the time that we have available for questions today. I would like to turn the call back over to management for any closing remarks. Please proceed.

Jim Conway

Thanks very much every body and we will see you all next time.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. That concludes the presentation, you may disconnect. Have a wonderful day.

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!

Source: Rochester Medical Discusses Q2 2011 Results -- Earnings Call Transcript
This Transcript
All Transcripts