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Rochester Medical Corporation (NASDAQ:ROCM)

F4Q 2011 Earnings Call

November 3, 2011 4:30 PM ET

Executives

Jim Conway – Chairman, CEO and President

David Jonas – CFO, Treasurer and Secretary

Analysts

Shaun Vincent [ph] – Feltl & Company

Tyson Bauer – Wealth Monitors

Larry Haimovitch – HMTC

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2011 Rochester Medical Corp earnings conference call. My name is Ryan and I will be your operator for today’s event. At this time all attendee lines are muted in a listen-only mode. And we will be facilitating a question and answer session at the end of today’s call. Additional instructions will be provided at that time. (Operator’s Instructions) As a reminder this call is being recorded for replay purposes.

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

Jim Conway

Thank you and thank you for joining Rochester Medical’s fourth quarter conference call. I am Jim Conway, the Company’s President and CEO. And with me is David Jonas, Rochester Medical’s Chief Financial Officer.

First, I will provide a brief high level review of our fourth 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.

Now 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, I am pleased to report that we achieved a solid fourth quarter on both the top line and bottom line with record sales and positive net income as we were anticipating. Total sales reached $14.8 million, up 33% over the last year on a reported basis and up 32% on a constant currency basis. This growth was driven by in constant currency rates 43% growth in global direct sales including our acquisition of Laprolan and 15% growth on an organic basis excluding the Laprolan’s contribution. Global private label sales were down 1%.

In terms of GAAP earnings, we reported net income of approximately $407,000 and on a non-GAAP basis excluding certain non-cash expenses we reported income of $822,000. Today’s performance is on track with our expectations. These results are gratifying and are evidence of the solid progress we are making for growing revenues and improving profitability on a sustainable basis. I am encouraged by our performance in fiscal 2011 and optimistic about the future.

Now let me turn over to Dave for further details on the quarter.

David Jonas

Thanks Jim. I’m going to spend a few minutes highlighting the results reflected in our just released fourth quarter 2011 earnings release. 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 added approximately $160,000 to top line results in the fourth quarter and added about $490,000 in the 12-month period. As Jim mentioned, total sales rose 32% in the fourth quarter including Laprolan to $14.8 million versus $11.3 million a year ago. Organic growth excluding Laprolan was approximately 11% for the fourth quarter and there is 11% organic growth consisted of 18% direct organic growth offset by a nearly flat private label quarter.

Total sales in the US increased 9% to $4.9 million from $4.5 million in the fourth quarter of 2010 driven by 30% growth in our US direct sales, somewhat offset by a 10% decline in our US private label business. Total sales outside of the US mainly in Europe and the Middle East region or EME grew 46% led by 48% growth in direct sales. This growth came from a combination of strong organic growth and from our Laprolan acquisition. International private label sales also improved, up 30% over the fourth quarter of 2010.

Geographically 33% of our sales in the fourth quarter were in US with 67% of our sales outside the US compared to 41% and 59% last year respectively. This change is primarily driven by our April 1st acquisition of Laprolan based in the Netherlands. We are pleased with our performance, both domestically and abroad. Total sales for the fiscal year 2011 increased 28% on a reported basis to $52.9 million from $41.4 million in same period of last year. Foreign currency added 150 basis points with total sales growth in the period implying constant currency growth of 26.5%.

Total fiscal year 2011 sales growth excluding the effects of foreign currency and our acquisition of Laprolan was 9%. Turning to direct sales, total global direct sales increased 43% year-over-year in the fourth quarter. Our US direct sales for the fourth quarter totaled $2.9 million versus $2.2 million last year or a gain of 29%. Our intermittent catheter line, which represents 48% of US direct sales in the fourth quarter, was 48% year-over-year in the fourth quarter. This growth was complemented by a 13% increase in male external catheters and 21% increase in Foley catheter sales.

US FemSoft sales posted another quarter of strong growth year-over-year increasing 114% in the period often in Middle East small base. US direct sales for the fiscal year period totaled $10.3 million versus $8.7 million in fiscal 2010, an increase of 18% year-over-year. Intermittent catheter sales growth of 37% year-over-year drove approximately three quarters of the total US direct sales growth over 2010. Male external catheter sales and Foley sales added to year-over-year growth as well increasing 9% and 4% respectively in 2011.

FemSoft sales declined 50% year-over-year again on a very small base as a result of a difficult comparison versus 2010 when we had large distributor orders related to our pilot projects last year.

Let me now breakdown the performance between the two channels we serve through our US direct sales, homecare and acute care. First homecare sales which this quarter represented approximately 80% of our US direct business increased 33% year-over-year in the fourth quarter. This was primarily driven by growth in intermittent catheters and to a lesser extent Foleys.

Acute care sales in the US increased to 18% year-over-year in the fourth quarter driven by strong sales of male external catheters and Foley catheters. For the full fiscal 2011 year, US direct homecare sales increased 23% and acute care sales increased 6% primarily driven by strength of sales of intermittent catheters and male external catheters. Our strategy to strengthen our US sales and marketing team is starting to pay dividends and this team will continue to drive growth going forward.

Turning now to our direct sales outside of the US, our direct sales in the EME this quarter were $8.7 million versus $5.6 million last year, an increase of 48%. Direct sales performance outside of US is dominated by activity in the EME region and sales to countries outside of those region represents just 3% 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 direct businesses in the UK and Netherlands grew $3 million this quarter. Sales of intermittent catheters and male external catheters in the UK were also notably strong, while Foley and FemSoft sales posted good growth year-over-year as well.

Now let’s take a look at our private label business which represented roughly 20% of total company sales in the fourth quarter and 22% this fiscal year. Total private label sales declined 1% this quarter, the 1% decline consisted of 30% growth in the EME region offset by a 10% decline in the US. Global private label sales for the fiscal year 2011 were $11.4 million down 1.7% year-over-year. Private label sales remain an important business although will becoming a small percent 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 margin, our fourth quarter gross margin was 49.4%, up 90 basis points versus last year and up 40 basis points sequentially. Favorable Laprolan gross margins offset slight margin declines in the rest of the business this quarter. The reasons for the slightest decline this quarter include higher optical prices coupled with manufacturing prices related to our Foley and intermittent production and a mix shift in favor of temporarily lower margin intermittent catheters.

Our margins were slowly improve as volumes of our intermittent and Foley products increase resulting in significantly higher efficiencies and lower per unit fixed costs. For the fiscal year 2011 period, gross margins of 49.3% compared favorably to 47.5% last year due mainly to the inclusion of Laprolan.

Operating expenses; in the fourth quarter operating expense rose 36% to $6.7 million from $4.9 million last year. Importantly, this expense is down 10% sequentially. The increase related to last year relates largely to costs associated with the added headcounts in the US and our new operations in the Netherlands as a result of acquiring Laprolan, while the sequential decline reflects the absence of M&A related expenses.

Operating expenses for fiscal year 2011 were $27.8 million, up 42% year-over-year driven by our investments in headcount and our acquisition related expenditures this year. We believe that fiscal 2011 expense level is about right size for our business going forward, so as our history dictates there will be some slight quarterly fluctuations.

Sales and marketing costs for the fourth quarter grew 58% from last year over down 8% sequentially in the period. For the fiscal year period our sales and marketing cost increased 50% to $19 million or 36% of total sales versus the $11.9 million or 29% of sales in fiscal 2010. This expansion reflects the aforementioned investments in our sales and marketing efforts in both the US and the Netherlands.

Research and development costs for the fourth quarter declined 16% year-over-year representing 1.7% of total sales which was down from last year’s ratio 2.7%. R&D costs for the fiscal 2011 totaled $1 million or 1.9% of total sales down 18% year-over-year. This is consistent with our plans for new product developments and the cost can vary depending on what part of the cycle our new products earn in.

General and administrative costs increased 17% from last year’s fourth quarter and rose 22% over fiscal 2010, again due almost entirely from the costs associated with Laprolan.

Now we reported fourth quarter after-tax GAAP net income of $407,000 or $0.03 per diluted share versus an net income of $172,000 or $0.01 per diluted share last year. The non-GAAP adjustments shown in the reconciliation section of our press release are very helpful in understanding Rochester Medical’s operating results.

Excluding the tax effected adjustment for material, non-recurring costs, intangible amortization and stock option compensation expense, we reported positive fourth quarter non-GAAP earnings of $822,000 or $0.07 per diluted share compared to non-GAAP net income of $506,000 or $0.04 per share last year. For fiscal year 2011 our non-GAAP net income totaled $1.73 million or $0.09 per diluted share versus $1.2 million or $0.09 per diluted share last year.

Our balance sheet continues to be very healthy with a cash position of $34.9 million, up $1.1 million from the previous quarter and down only $608,000 from the prior fiscal year-end. Much of the cash depletion comes directly from the $2.5 million we spent this year, $1.2 million in the fourth quarter loan repurchasing our stock.

We were particularly active during the quarter taking advantage of our undervalued share price. We repurchased 156,834 shares with an average price of $8.47 each this quarter. This brings our total share repurchase to 570,000 shares out of the 2 million shares authorized.

We also continue to focus on improving our working capital management and remain pleased with our level and condition of our inventory and receivables at quarter-end. Our total debt stands at $19.4 million, down slightly from the $19.5 million at the end of the third quarter. Cash generated from operations has been used to pay off the debt incurred from our 2006 acquisition in UK in five short years ago. The Laprolan acquisition was financed with our operating line, as long as interest rate stays this low we will continue to use cash generated from operations to pay this off as well. Of our $25 million line of credit we currently have $5.6 million available.

To conclude, we are encouraged with this quarter’s performance and the significant progress we made in fiscal 2011. We expect a strong fiscal year 2012 and remain confident in our ability to deliver the requisite growth our three year plan dictates.

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

Jim Conway

Thanks Dave. Now I would like to update you on a few of our activities. Let me start with my recent trip to the UK and the Netherlands where we have direct sales operations. I am pleased to report that I am feeling great about our operations in both countries, and I am especially encouraged that the people of Laprolan are very happy to be a part of Rochester Medical.

Overall we are fortunate in the high quality of all our UK and Dutch employees. And we have retained every person throughout the Board with a Laprolan transaction. Now I’ll tell you a little bit about the (inaudible) Infection Control Summit that we attended in early October. As you may recall we were one of four companies invited to participate in this symposium for the thought leaders in infection control.

One of two UK’s studies evaluating infection rates of 40 catheters was presented. And it provided new data again showing our StrataNF anti-infection Foley is effective introducing catheter associated infections. Many doctors, nurses and hospital administrators and attendants from around the world gained good exposure to this advanced technology.

Regarding FemSoft, we continue to see early signs of adoption in the US and the UK. And we met last week with CMS about correcting the current reimbursement rate for FemSoft. I believe that we will be successful in securing a more appropriate rate. Our homecare sales force is continuing to detail FemSoft and anecdotal reports from our reps are extremely encouraging.

Finally I would like to highlight that ROCM was recently names 18th in the Minneapolis/St. Paul Business Journal’s fast 50 highest growth companies by revenue. We are once again pleased to be named to this list particularly given the abundance of innovative growing companies in Minnesota. And of note, our fiscal 2011 performance which accelerated from the prior year was not included in the journals tally.

As I wrap up, I’d like remind you of our growth strategy. Going forward we expect direct sales to be our strongest growth driver, particularly in our European and US markets. Most of the improvement in direct sales will be in homecare market with growth also expected in acute care. From a product standpoint, intermittent catheters where our market opportunity is the largest and our share quite modest will be the primary driver.

Our private label business remains stable but quarterly fluctuation can be expected. We expect a good 2012 with solid top line growth and increasing profitability which should put us in a position to achieve our stated 2013 goal which is to double our fiscal 2010 sales bringing the top line to approximately $83 million in sales with the bottom line of $9 million to $10 million.

And with that we’ll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Ernest Andberg of Feltl & Company. Please proceed sir.

Shaun Vincent – Felt & Company

Hi guys, this is Shaun Vincent sitting in for Ernie Andberg. Thanks for taking my question.

Jim Conway

Hi Shaun.

Shaun Vincent – Felt & Company

Hi. Can you tell us approximately how much Laprolan contributed to sales in the fourth quarter?

Jim Conway

$2.3 million.

Shaun Vincent – Felt & Company

$2.3 million. And overall on FemSoft, early signs of adoption in the US and UK are going well. Anything else you can add to that just to give us a little bit more color?

Jim Conway

Well we just attended SUNA, Urological Nurses Association over the weekend in Texas. And a group of nurses came up to the booth and they were very interested in FemSoft. And one of them said I am going to try it right now. And she took some FemSoft went into the bathroom, popped one in, came out wearing FemSoft and told the whole group of nurses how fantastic it was and how comfortable it was and what a great product it was. So that’s just to give you a little flavor.

Shaun Vincent – Felt & Company

Okay. Thanks a lot guys.

David Jonas

Thanks Shaun.

Operator

(Operator Instructions) And your next question comes from the line of Tyson Bauer of Wealth Monitors. Please proceed.

Tyson Bauer – Wealth Monitors

Good afternoon and thanks for giving us the profit.

Jim Conway

Hi Tyson.

David Jonas

Welcome Tyson.

Tyson Bauer – Wealth Monitors

Couple of quick questions. Any early indications you talked about getting better pricing on FemSoft with the CMS adjustment. How about your other products? Are we looking for stable pricing there or what are you expecting as we get towards January?

Jim Conway

We’re not seeking any changes there in reimbursement rates and we don’t expect any.

David Jonas

As long as they don’t go down, we’re all happy.

Jim Conway

We don’t expect that either, we expect them to be stable.

Tyson Bauer – Wealth Monitors

Okay. You talked about the intermittent partially as the key component to growth, reach your targets. Are we going to see an earlier adoption and growth out of international side before we see that in the US and if so what contribution does that relationship with Teleflex play and the success of that occurring?

David Jonas

Well we’re seeing great success in the US and that’s where we added all and may of the sales people we added earlier this year and we’re also seeing great success in the UK where we have already established sales and marketing group that calls on those patients all the time. And we’re working really hard to get our intermittent established all over Europe in every country. So I don’t think it’s going to be faster in Europe than the US. They are about the same size market in total. And also grow about same speed actually.

Jim Conway

Yes, as of right now Tyson, Teleflex sales are male external catheters and our StrataNF Foley catheters under the Rochester Medical brand but they currently do not sell our intermittent catheters.

Tyson Bauer – Wealth Monitors

Is that something that’s possibility in the future?

Jim Conway

I can’t comment on that. What I can comment on is that it’s very likely that we will expand the StrataNF Foley territory from Europe to all of Asia and South America as well. So I think that the relationship is going to be even stronger than it is now.

Tyson Bauer – Wealth Monitors

Okay. Are you seeing a migration towards kits in the clinical situations, the hospitals in Europe that should help give you a boost as far as your dollar sales?

Jim Conway

We’re seeing indications that it’s going to start to change the kits but it’s not really happening yet.

Tyson Bauer – Wealth Monitors

Okay. And last question and will get back in the queue. Looking at your three year plan, looking where you were in ‘010 where you want to accomplish in three years. Do we look at ‘012 as hitting kind of that midpoint, mid 60s towards $70 million revenue as a nice progression, is that fairly back loaded? How should we think about these intermittent years to that end goal?

David Jonas

Obviously we’re not going to give exact guidance how we are going to be in 2012, but I fully expect our direct business will have the same kind of growth that it had in the past and we should make nice progression to that number. And both Jim and I fully expect that in 2013 we’re going to hit our numbers. So I don’t think it’s back loaded. I think we’re going to be in the same trajectory we are now.

Tyson Bauer – Wealth Monitors

Okay, thank you.

Operator

Your next question comes from the line of Larry Haimovitch. Please proceed.

Larry Haimovitch – HMTC

Good afternoon gentlemen, congrats on a very good year.

Jim Conway

Hi Larry, thank you.

Larry Haimovitch – HMTC

This is probably better for Dave although Jim I am sure you can answer the question, looking at the fourth quarter income statement showed a very nice jump in sales but it wasn’t clear for me earlier comment Dave, should we adjust for the Laprolan sales to get sort of an apples-to-apples with last year’s fourth quarter or did I misunderstand?

David Jonas

I guess I don’t understand your question, Laprolan was not in the last year’s fourth quarter.

Larry Haimovitch – HMTC

No, but it’s in this year’s correct?

David Jonas

But in this year, that’s correct.

Larry Haimovitch – HMTC

So the apples-to-apples or same-store sales if you were a retailer would be 14 point something million versus 13 point something not versus 11 something?

David Jonas

That’s correct.

Larry Haimovitch – HMTC

Okay. So now that – it seems to me as a slower growth rate than I’ve remember you’re having some previous quarters, I know but I don’t have my spreadsheet in front of me, I am not in my office now in front of my computer but am I correct that there was a slowdown in the base business?

David Jonas

No.

Larry Haimovitch – HMTC

No.

David Jonas

If you organically if you take Laprolan out of the equation, our direct business is up 18% in the quarter, it’s pretty close to be in line with where we expect and where we’ve been. And our private label is down 1% as we said. So I would not stepping (inaudible).

Larry Haimovitch – HMTC

So there was a little bit noise when you were answering the question, so apples-to-apples adjusting for everything that you reasonably adjust for, what would you say the internal growth rate was in Q4?

David Jonas

It was 18% in our direct business and 9% overall.

Larry Haimovitch – HMTC

Okay, so.

David Jonas

The private label brought it down but if you look at our direct business which is the one that we have the most influence on and the one we’re growing all of our growth through, it was 18% without Laprolan.

Larry Haimovitch – HMTC

So the fourth quarter trend for private label, is it something you expect to continue into the next fiscal year?

David Jonas

We truly believe private labels will probably be flat. We’ve always said it might have modest growth.

Larry Haimovitch – HMTC

Yes. But that’s a business you’re not emphasizing anyway to a less concern there.

David Jonas

Correct.

Larry Haimovitch – HMTC

Okay, great. Thanks guys.

David Jonas

Thank you, Larry.

Operator

And gentlemen, there appear to be no more questions at this time. Let me now turn the call over to Mr. Conway for any closing remarks.

Jim Conway

Well thank you very much for attending. We were very, very pleased with the quarter. We expect a very good 2012. And we’ll talk to you all next time. Thanks again.

Operator

Ladies and gentlemen, that concludes today’s conference call. You may now disconnect your lines and have a nice day.

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