Theragenics Corporation CEO Discusses Q3 2011 Results - Earnings Call Transcript

Nov. 3.11 | About: Theragenics Corporation (TGX)

Theragenics Corporation (NYSE:TGX)

Q3 2011 Earnings Conference Call

November 3, 2011 11:00 AM ET

Executives

Christine Jacobs - Chairman, Chief Executive Officer

Francis Tarallo - Chief Financial Officer

Analysts

Joe Munda – Sidoti & Company

Operator

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

It is now my pleasure to introduce your host Christine Jacobs, Chairman and CEO of Theragenics. Thank you, Ms. Jacobs. You may begin.

Christine Jacobs

Thank you, Melissa. Good morning all and welcome to Theragenics’ third quarter 2011 conference call. Thank you for joining us this morning. In a few minutes I’ll provide some comments on the quarter and outlook for the remainder of the year, but first Frank Tarallo, our Chief Financial Officer will provide a review of the financial results, Frank.

Francis Tarallo

Thank you, Chris. This morning we released our consolidated financial results for the third quarter of 2011. If you did not receive this news release or if you would 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 $21.1 million in the third quarter, a 3% increase over 2010. In the nine-month period, consolidated revenue was $62.9 million, a 2% increase over last year and the highest nine-month revenue in a fiscal year ever for us. Moving to profitability, EPS was $0.03 in the third quarter, an increase from the $0.02 we recorded last year. Year-to-date, EPS was also up at $0.08 this year compared to $0.05 in 2010.

Let me move now to our segment results. Revenue in our surgical products segment was $15.3 million in the third quarter, an increase of 6% over last year. For the nine months, revenue was $45.1 million, an increase of 3% over last year.

Moving to profitability, operating income in our surgical business was $780,000 in the third quarter, compared to $154,000 in third quarter last year. For the nine-month period, operating income in our surgical business was $1.1 million compared to $152,000 in last year’s nine-month period. Our results in each year were affected by special items. Please see our press release for a listing of these special items.

Turning to our Brachytherapy business, third quarter revenue was $6.1 million, a 2% decrease from last year. For the nine months, Brachy revenue was $18.3 million, a 1% increase over 2010.

Operating income in our Brachytherapy business remained healthy at $1.2 million in the third quarter, compared to $1.1 million last year. In the year-to-date period, operating income in our Brachy business was $3.8 million compared to $3.2 million last year. Our Brachy results were also impacted by special items in each year. These special items are detailed in our press release.

Returning to consolidated results, our capital expenditures were $1.7 million year-to-date, consisting primarily of expenditures for our new ERP systems. Total CapEx for the entire year is currently expected to be about $2.0 million to $2.5 million that is somewhat lower than we had been forecasting previously.

Adjusted EBITDA was a healthy $4.0 million in the third quarter and $10.9 million year-to-date. Cash flow from operations was $3.6 million in Q3 and $7.0 million for the nine months. We ended the quarter with $43.3 million in cash, cash equivalents and marketable securities. We have $24.5 million outstanding under our credit agreement resulting in a net positive position of $18.8 million.

That concludes my comments and I would now like to turn the call back over to Chris.

Christine Jacobs

Thank you, Frank. Last quarter, I spoke of and listed continued uncertainties at a macro level and continuing shifts in customer behavior. Indeed, at a macro level uncertainties, volatility and unpredictable consumer behavior has recently become even more pronounced.

Last quarter’s list was long and sobering and I’m going to spare our listeners a repeat, but in spite of that list we delivered another solid quarter of results. In fact, we are performing quite well while others in the sectors are struggling.

Let me begin with the surgical products business. Revenue increased 6% over last year’s third quarter and we did have larger than usual backorders at the end of Q2 that benefited Q3. But nevertheless we think this kind of growth in this environment is impressive. This next fact is important, all three of our product platforms contributed to the revenue growth in this third quarter.

Our open orders for surgical products at the end of third quarter were $13.7 million. Now this is down from the end of the second quarter because we successfully reduced the backlog and backlogs are orders where we missed the ship dates. Our orders will continue to fluctuate in this business yet fundamental demand remains healthy.

Let me move on to profitability in the surgical products’ segment. Operating income was up year-over-year both for the third quarter and for the nine-month period. This continues the trend that we saw in the first two quarters of the year. Indeed, we did not incur as many special charges in ‘11 as we did in ‘10. Our gross margin on sales was 37% for the quarter, which is where we were in last year’s third quarter. In context though, this represented our third consecutive quarter of improvements in our gross profit margins in the surgical products business. And you may recall that margin improvement is one of the stated goals in this sector.

Echoing my comments from last quarter, I want to caution against assuming anything in this sector is a trend. We expect continued variability in margins and profitability in our surgical business for a number of reasons. First, we see continued declines in patients visits to the doctor offices; second, there are fewer outpatient surgeries; and third, increased macro economic uncertainties.

Many businesses, including many of our own customers’, are hesitant to invest right now in such an uncertain and a volatile climate. That said, we feel good about the fundamentals of our surgical business and expect to see continued growth over time.

Now let me switch to the Brachy business. We saw a 2% decline in Brachy revenue after four consecutive quarters of year-over-year growth. It continues to be our hope that the industry-wide decline in prostate cancer procedures that we’ve seen in the past is beginning to level out, that is approaching (inaudible). We believe there are additional opportunities to gain market share in this industry and it’s our intent to take advantage of any of these opportunities when and if they arise and our balance sheet is going to support us.

So let me give you an update on Core Oncology. We’ve talked openly about the circumstances related to Core. Since early this year, we’ve sold to them on a prepaid basis only. Our primary objective continues to be to maintain as much of the TheraSeed volume that was being sold through Core as possible. Today, no significant Theragenics’ business appears to have been lost due to the issues at Core. Of course, these accounts are subject to the trends of the industry.

So to sum up, our strategy has delivered another solid quarter of results. Yes, much uncertainty remains especially in the macro economy, as well as our two sectors, but our fundamentals are strong. We have weathered. Indeed our business has prospered during a very tough recession that we don’t think is over. Steady as you go right now is the mantra that we have back here. So, with that Melissa I am done with my comments. Frank and I will now open the call up now for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Joe Munda with Sidoti & Company, please proceed with your question.

Joe Munda – Sidoti & Company

Good morning Christine and good morning Frank.

Christine Jacobs

Good morning Joe.

Francis Tarallo

Hi Joe

Joe Munda – Sidoti & Company

Thank you for taking my questions. Just real quick I have a couple of – I know Christine had mentioned it every quarter, any word on reimbursement parity possibly for Brachytherapy as opposed to alternative procedures?

Christine Jacobs

Thanks for asking and no news. Joe, when you talk about parity I have got to help set your expectation. I don’t think we will ever reach parity with IMRT at somewhere between $50,000 and $60,000, I don’t ever see those two reaching parity. I think what I would ask you from an expectation point of view is to sort of – if you want to know about the reimbursement scheme, is how are we doing on reimbursement? We always say it isn’t fair. However, deep cuts bundling – those are the things we worry most about back here. The year-over-year change, the potential for cutting and bundling, and as of right now looking into 2013, I think we are going to be on par with what we had in ’11 – I am sorry 2012. So it would be nice to say ’13, but let’s go with ’12. What we are very focused on Joe is what’s that reimbursement going to be for ’12 compared to ’11? Preliminarily, I saw something this week and Frank you can help me confirm that I believe we are about the same.

Francis Tarallo

Yes.

Christine Jacobs

Which is good news for the sector Joe, Frank?

Francis Tarallo

Yeah, that’s right. The rates for 2012 are very similar to 2011.

Christine Jacobs

Yeah the other thing is that the da Vinci Robot that we have listed out there is competing – as part of competing technology. That is a piece of capital equipment with renewable and disposables and – what are they? – They are the service agreements that go along with these things – that is a totally different business model than ours. And again Joe, I don’t think we will reach parity with them.

Joe Munda – Sidoti & Company

Okay. Is that CyberKnife technology as well?

Christine Jacobs

Well, you can add that to the new list.

Joe Munda – Sidoti & Company

Okay. And what is the reimbursement on that, is that similar to IMRT?

Christine Jacobs

I don’t think it is as high as IMRT and I don’t want to guess on what that is. But you know what, we will take a take a look at that reimbursement.

Joe Munda – Sidoti & Company

Okay. And my other question – you had mentioned opportunities to gain market share, and you mentioned the strength of your balance sheet. Does that mean you guys are looking at acquisitions going forward in that space or what – can you give a little bit more color on that?

Christine Jacobs

Well, I don’t ever comment on rumors or speculation. The longer this industry goes, the more and more folks that we have out there on the competitive landscape that are sort of limping along. And I like keeping our powder dry for any opportunity to pick up market share and not have to pay all those crazy evaluations of five years ago, okay. So I am liking the fact that we have got our powder dry, if at any point there is movement in this industry I want to be able to pick up market share for us, Joe. Now what I am saying today is no different than anything that I have said before, because there is one company in particular that has been off the radar now for two or three years and I predicted their death five years before it happened. So, they just hung [ph] on longer than I thought, they have been out of the picture now for a couple of years. But I think there are opportunities out there. Can’t comment on anything, but I like the fact that if it is there Joe, we can go get it.

Joe Munda – Sidoti & Company

Okay. And my last question for Frank. Frank you had mentioned CapEx for 2011 of $2 million to $2.5 million, is that normalized number we should look at going forward as well for 2012, 2013?

Francis Tarallo

Yeah, I think for 2011 a good chunk of that will be ERP, but I think if you are trying to model us going forward, that is a pretty reasonable number to use for ’12 and ’13, unless of course, you know, other opportunities arise where we might have to invest more, but on a normalized continuing basis as things stand now that’s probably a good number Joe.

Joe Munda – Sidoti & Company

Okay. And Frank, operating income Brachy, despite the decline it has improved, what is plugged to that?

Francis Tarallo

Well, there are two things. One is – last year we had some – what we call special items where we had some pretty large charges related to the situation related to Core, so that’s a big chunk of that Joe – of that. If you take those special items out, you would see that it’s relatively flat I think year-over-year. But the other thing that we are doing – and we have talked about this for a long time – as we pay very close attention to cost – so we pay very close attention costs and try to keep those in line. And then the last thing I would point to would be our license fees. Our license fees are increasing on a year-over-year basis and we have a very little cost associated with those license fees, so they are highly profitable for us.

Joe Munda – Sidoti & Company

Okay. All right thank you guys.

Francis Tarallo

Thanks Joe.

Operator

Thank you. (Operator Instructions) Ms. Jacobs, there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Christine Jacobs

Thank you Melissa, and thank you also to our listeners who have shown interest and jumped on the call today. We look forward to reporting next quarter’s results and year-end. Thank you.

Operator

Thank you. (Operator Instructions).

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