Theragenics CEO Discusses Q2 2011 Results - Earnings Call Transcript

Aug.11.11 | About: Theragenics Corporation (TGX)

Theragenics Corp. (NYSE:TGX)

Q2 2011 Earnings Conference Call

August 11, 2011 11:00 AM ET

Executives

Christine Jacobs – Chairman and CEO

Frank Tarallo – CFO

Analysts

Brett Reiss – Janney Montomery Scott

Joe Munda – Sidoti & Company

Operator

Greetings. And welcome to the Theragenics Corporation Second Quarter 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce Christine Jacobs, Chairman and CEO of Theragenics. Thank you, Ms. Jacobs. You may begin.

Christine Jacobs

Thank you, Claudia. Good morning. And welcome to our Theragenics second quarter 2011 conference call. Thank you for joining us today. In just a few minutes, I’ll provide some comments on the quarter but first I’m going to ask Frank Tarallo, our Chief Financial Officer to provide the review of the financials. Frank?

Frank Tarallo

Thank you, Chris. This morning we released our consolidated financial results for second quarter of 2011. If you did not receive this new release or if you like to be added to either our fax or email distribution list, please contact Investor Relations at 800-998-8479 or 770-271-0233.

Before I begin my review, please be aware that some comments made during this conference call may contain forward-looking statements involving risks and uncertainties regarding our operations and future results. Please see our press release issued today and our filings with the Securities and Exchange Commission, including without limitation, the company’s Form 10-K and Forms 10-Q, which identifies specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Now onto our results, our consolidated revenue was a record $21.5 million in the second quarter, a 4% increase over 2010. In the first half of this year, consolidated revenue was $41.8 million, another record for us. This was a 2% increase over last year. EPS was $0.04 in the quarter double the $0.02 from 2010. For the first half of this year EPS was $0.05, compared of $0.03 last year.

Let me move now to our segment results, where we had a couple of more records. Revenue in our surgical products segment was $15.5 million in the second quarter, an increase of 4% over last year and a record quarterly revenue for our surgical business. For the first half of 2011, revenue was $29.9 million, a six month record and an increase of 1% over last year.

Operating income in our surgical business was $498,000 in the second quarter, compared to $388,000 last year. For the first half of 2011, operating income was $307,000, compared to a loss of $2,000 in the first half of 2010.

Our gross profit margin on sales in the second quarter was 36% in the surgical business, compared to 39% last year. We did see improvements in margins from Q1 of this year when we had a gross margin of 34%.

Turning to our Brachytherapy business, second quarter revenue was $6.3 million, a 5% increase over last year. This is the fourth consecutive quarter of year-over-year revenue growth in our Brachy business. It’s also our highest quarterly Brachy revenue in two years. For the first half of this year, Brachy revenue was $12.2 million, an increase of 3% over 2010.

Operating income in our Brachytherapy business remained healthy at $1.5 million in the second quarter, compared to $1.1 million last year. For the first half of 2011, operating income was $2.6 million, compared to $2.1 million last year.

Bad debt expenses related to Core Oncology reduced operating income by $215,000 in the first half of 2011, there were no bad debt expenses related to Core in the second quarter of 2011. Last year in 2010, bad debt expenses related to Core totaled $500,000 in both the second quarter and first half of the year.

Returning to consolidated results, our capital expenditures were $1.3 million in the first half of 2011, consisting primarily of expenditures for our new ERP system. We continue to expect total CapEx to be $2.5 million to $3.5 million for the entire year in 2011.

Adjusted EBITDA was $4 million in the second quarter and $6.8 million for the first half of the year. The $4 million in Q2 was our best quarterly adjusted EBITDA in two years.

Cash flow from operations was $3.1 million in the second quarter and $3.4 million for the first half of the year. We ended the quarter with $41 million in cash, cash equivalents and marketable securities. We have $25.3 million outstanding under our credit agreement resulting in a net positive position of $15.7 million.

That wraps up my comments and I’d now like to turn the call back over to Chris.

Christine Jacobs

Thank you, Frank, and welcome back again. I’ve started last quarter’s conference call by saying that the first quarter of 2011 was a world win. This quarter could simply be described as more of the same with record revenues grown on top.

Let me begin with surgical products. Revenue increased 4% over last year’s second quarter. Last quarter, we reported to you that a couple of our larger customers did not order at the same pace as they did over the previous year, especially in the wound closure platform. We saw those customers come back in Q2 and our wound closure revenues were up over last year, as was the revenue in our specialty needle platform.

Open orders at the end of the second quarter were up 14.8 million, compared to the 13 million at the end of last year. This 14% increase reflects a combination of customer order variability and fresh demand from new customers. Orders will fluctuate in this segment, yet we expect double-digit organic revenue growth over time, just as we have delivered over the past two calendar years.

Our backlog in the segment increased to $1.2 million at the end of Q2. We are defining backlog as missed shift dates. There are several reasons for this and all are being addressed. We had delays at certain suppliers. We had variable customer demand and we had a changeover to our new ERP system. All issues are identifiable and solvable.

Now on the surgical product margins and profitability. We saw margin improvement over the first quarter and improvements in profitability. However, at this time, I’ve cautioned against assuming that this is a trend. We expect continue variability in margins and profitability in the short-term for a number of reasons.

On a macro level, we’ve seen continued shift in customer behavior and some of these shifts are, first, many large medical device manufacturers continue to announce layoffs. Second, manufacturing continues to be moved offshore and yes, this is a sad commentary for the country as a whole.

Third, increased customer R&D activity, now this will help us. Fourth, a decline in patient visits to doctor’s offices, this results in softness in demand for medical devices. Fifth, an increased general economic uncertainty especially like what we’ve had this week and lastly, a lack of confidence in our government’s ability to manage macroeconomic policy. All of this translates into continued uncertainty, lumpy demand and unpredictable behavior by our customers, including our large OEM customers.

Now, operationally, we respond by increased spot labor, overtime and other expensive activities in order to meet that demand, all of which is going to impact the margins. So once uncertainties are big, we expect that we’re going to be able to react more predictably.

Here is what we do now? Our customers have identified us as a quality specialty device manufacturer. They place orders and they rely on us to deliver and we expect this to continue. We expect margins and profitability will have opportunities to improve when the mentioned uncertainties subside. Given what’s happening in our economy as a whole and especially in our sector we’ve given guidance to our managers and this is a, "fill the orders first, margin improvement to follow."

Now, I’d like to go onto the Brachy segment. We’ve seen our fourth conservative quarter of year-over-year revenue growth. Second-quarter revenue was up 5% over last year. After many years of well-documented declines in this sector we’re optimistic that we may be approaching later that we’ve been anticipating.

Now, I wouldn’t go so far as to say that we’ve seen a renewed sustainable uptick in procedures, but rather a successful strategy on our part to increase market shares with our partners and our distributors. One such partner is Core Oncology.

While we’ve talked openly about the receivables issue they represent 13% of Brachy revenue in Q2. They bring us market share and they continue to honor our arrangement to fill their orders on a prepaid basis. Profitability in the Brachy segment remains strong and it’s an engine for generating cash flow and profitability.

Notwithstanding the multiple challenges in the treatment of prostate cancer, the unfair reimbursement landscape, and competing technologies, we remain bullish and committed to our Brachy’s segment. Our strategy of increasing market share was and is a solid one.

So in sum, we’re pleased with our first half results. We’ve spoken often about our success and diversifying our product line and one of the objectives of our diversification strategy was to eliminate the probability of extreme highs and lows. And we’re fortunate in this time of severe macroeconomic turmoil that our diversification has allowed us to weather the challenges.

So are we done, no, of course not, we're not done. To take a look at these indicators, we have had record revenue. We have doubled profit over last year. We have got margin improvements in the surgical products group and we had growth in brachy and all of this during an economic meltdown.

Its Theragenics 30th year in business and we've celebrated with two business segments that contribute handsomely to our continued success and success as a quality medical device manufacturer, who not only cures cancer, but improves the delivery of healthcare with every order that we ship.

That concludes my comments. I thank you for your attention. And Frank and I will now take questions. Claudia are you back there?

Question-and-Answer Session

Operator

I am. Thank you. (Operator Instructions) Our first question is coming from Brett Reiss with Janney Montomery Scott. Please state your question.

Brett Reiss – Janney Montomery Scott

Yeah. Hi, Chris. Hi, Frank.

Christine Jacobs

Good morning, Brett.

Frank Tarallo

Good morning.

Brett Reiss – Janney Montomery Scott

I came to the call a little late, so I apologize if you would answer this. The needle tech new facility, can you just give us some color on – is everything up and running smoothly and what kind of utilization is the facility enjoying?

Christine Jacobs

Well, thank you for the question. You might have missed my statement in here about the revenue in our specialty needle platform being up. Now absence some operational specific, we like the trend then we like what's going on in the needle tag in the specialty needle. Frank, you want to add anything?

Frank Tarallo

Yeah. Brett, the only other thing I would add about your question is everything going smoothly, yes it is. We're moved in all that is behind us and we are very pleased with how that factory is operating right now.

Brett Reiss – Janney Montomery Scott

Okay. Now 2012 not too far away....?

Frank Tarallo

Right.

Brett Reiss – Janney Montomery Scott

Do you think CapEx will be in 2012 greater than, less than or about the same of 2011?

Frank Tarallo

Brett, it depends on some of the opportunities that we run into, but generally speaking all things being equal, I think I made the statement in my comments that we expect CapEx to be $2.5 million to $3.5 million this year and I would expect something similar next year in the absence of opportunities that may present themselves.

Brett Reiss – Janney Montomery Scott

Okay. And all of the gross currents with reducing expenses with Medicare, any sense that that's going to play in our favor in terms of greater market share with brachy?

Christine Jacobs

I don't know, Brett there are so many moving parts. I have often said we've got challenges out there because I don't understand what the final impact is going to be for (inaudible) care. But here is what I do know 10,000 baby boomers turned 65 and get on Medicare a day now.

And I think we're missing something if we don't pay close attention to those numbers. And so if you look at what’s happened and I said this on the conference call, I can't say that we are going to point to increase procedures in the prostate brachytherapy. But there are things happening out there that we can't all see. Medicare data to us Brett has a two year delay.

So if we are seeing increased procedures we are not going to be able to confirm that for another year or so. So I think, the overall tenure of my statements and brachy is we've got a lot of headwind, but what we have done and the strategy we put in place is sort of defining the headwinds right now and I think we do have some positive demographics, I just don't want to forecast that yet, does that makes sense.

Brett Reiss – Janney Montomery Scott

Okay. And it's been a while since I looked at your website, if I went there – are you hiring in various surgical product divisions?

Christine Jacobs

Yes. We are hiring, where I'm getting frustrated is that people are underwater on their houses and there is plenty of people they wanted to apply for the job, but that are in other states and they want us to move their houses. They want us to pick up the loss on the house and that is posing a problem, the answer is yes, in selective spots throughout surgical products and even to a degree in Brachy, right Franc?

Frank Tarallo

Yeah. A limited degree.

Christine Jacobs

Limited degree, yeah, I would not say Brett that we are doing massive hiring I am just answering you literally, because I may have mention that when we get capacity constrained with some of these orders in surgical products I would prefer spot labor.

Brett Reiss – Janney Montomery Scott

Right, right

Christine Jacobs

Because I don't want to cover, I don't want to increase the head count in – the overhead expenses right now until I know more about what's happening with demand.

Brett Reiss – Janney Montomery Scott

Okay. That's about it for me. Thank you.

Christine Jacobs

Okay. Thank you.

Operator

(Operator Instruction) Our next question is coming from Joe Munda with Sidoti & Company. Please state your question

Joe Munda – Sidoti & Company

Good morning Christine, good morning Frank

Frank Tarallo

Good morning Joe.

Christine Jacobs

Good morning.

Joe Munda – Sidoti & Company

Congratulations on a great quarter

Frank Tarallo

Thank you.

Christine Jacobs

Thank you

Joe Munda – Sidoti & Company

I just had a follow-up question for the last caller in regards to Medicare and what's going on Christine, I know you have relationship with some of the people in Washington, do you see any headwinds or any indications that there could be possible parody with reimbursement with da Vinci with Brachytherapy, in your best opinion do you foresee a cut in reimbursement for the da Vinci down to a level where Brachy is on the same level or on par with that?

Christine Jacobs

Well, if I had to handicap anything it's not so much the da Vinci robot, I'd may be say IMRK is the one to watch and the reason I say that is because there is well documented over utilization of IMRT and the cost of healthcare. In fact, there was a document that came out here in March of 2011 that was done at Deneb [ph] Harbor, where they're talking about that.

In the United States more expensive – newer and more expensive technologies were rapidly adopted before we knew that they were worthy added cost or the case of robotic surgery, whether they improved benefits over standard treatment. So, my point is, this is well documented. There are some very legitimate clinicians out there, who have drawn attention to it.

And we will wait to see if our government and Medicare respond. What I can also say is that I've talked to the folks up in Washington and as all of the listeners know, nothing is moving up there, nothing is being done. And whether it's Medicare, I mean – there is no movement up there.

What I'm going to be interested in seeing, is our uptick and our forward progress in our Brachy segment, not only is that our strategy of increased market share, but underlying that are there any new procedure trends that we can see at Joe. So that's the part I don't know.

Joe Munda – Sidoti & Company

No. I mean, when I say da Vinci I meant, IMRT I remember the Wall Street Journal article from a couple of months back, really pushing what you've just said.

Christine Jacobs

I haven't seen a change to policy though.

Joe Munda – Sidoti & Company

Well, following up with that, I mean are you actively emphasizing the disparity to your lobbies or with your Congressmen about this different thing, looking at this disparity here and the results are negligible between IMRT and brachy and in some cases brachy being better. Are you emphasizing those points?

Christine Jacobs

Not this quarter.

Joe Munda – Sidoti & Company

Okay.

Christine Jacobs

No, I've been a little silent because I'm waiting to see it dust settle. I'm not actively up there right now Joe.

Joe Munda – Sidoti & Company

Okay. All right. Go ahead. Thanks guys.

Frank Tarallo

Thanks Joe.

Christine Jacobs

Clodi, any other questions.

Operator

I am showing we have no further questions at this time.

Christine Jacobs

All right. Well, with that thank you all for your attention and time spent with us this morning. We will look forward to reporting next quarter. Thank you.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.

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