Rochester Medical CEO Discusses F1Q 2012 Results - Earnings Call Transcript

Jan.25.12 | About: Rochester Medical (ROCM)

Rochester Medical Corporation (NASDAQ:ROCM)

F1Q 2012 Earnings Conference Call

January 25, 2012 4:30 PM ET

Executives

Jim Conway – President and Chief Executive Officer

Dave Jones – Chief Financial Officer

Analysts

Ernie Andberg – Rochester Medical

Rishun Jain – Quad Capital

Operator

Good day ladies and gentlemen and welcome to the first quarter 2012 Rochester Medical Corporation earnings conference call. My name is Kisha [ph] and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference (Operator Instructions) as a reminder this conference is being recorded for replay purposes.

I would now like to hand the conference over to Mr. Jim Conway, President and CEO. Please proceed.

Jim Conway

Thank you for joining Rochester Medical’s first quarter conference call. I’m 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 first quarter and then 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 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, 2011. These statements further clarify the risks and uncertainties that are associated with the forward-looking statements.

Okay, we reported first quarter revenues of $13.8 million, up 26% on both the reported and constant currency basis. These results encourage us that our strategy to drive top line growth through our direct sales business on a global basis is firmly working. Specifically, direct sales rose strongly up 45% including Laprolan and up 15% excluding Laprolan.

Total reported sales growth was tempered by 20% decline in private label sales, which as we have noted in the past is a business that fluctuates from quarter to quarter as was the case this quarter. Importantly, we posted 27% and 18% growth respectively in our direct sales businesses in the U.S. and the UK while Laprolan, which we acquired in April 2011, grew modestly from the prior quarter and continues to be a promising addition to our international direct sales business. And Dave will provide more detail on the revenue performance in just a minute.

In addition to our encouraging direct sales performance I believe we managed our expense structure well enabling us to report nearly breakeven net income even on the softness in private label. In terms of GAAP earnings we reported a net loss of $75,000 on a non-GAAP basis excluding certain non-cash expenses we reported net income of $285,000. We are pleased with our start to fiscal year 2012 given the solid performance in our main engine of growth direct sales. Furthermore, we believe that private label sales and direct international distributor sales are on track for the full fiscal year.

I remain confident in Rochester Medical’s growth trajectory and reaffirm our fiscal ’13 objectives to reach $83 million in revenues and $9 million to $10 million in net income. And I will talk more about that after Dave gives you further details on the quarter, which he will do right now. Dave?

Dave Jonas

Thanks Jim. I’m going to spend a few minutes highlighting the results reflected in our just released first quarter 2012 earnings release. And for either 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 minimally benefited our top line this quarter adding approximately $23,000 for revenue.

As most of you have seen exchange rates for the British Pound and the Euro have been quite volatile the last few months. Our foreign exchange risk is limited to our sales into the UK and Holland these sales currently make up approximately half of our current sales and increased pressure on these rates will have an impact on both our top and bottom line results. Our three year plan and projections for this year used a 1.37 exchange rate for the Euro and 1.57 rate for the Pound. While the Pound has hovered around that number all year the Euro has fluctuated from 1.27 to 1.44 just in the last 120 days.

As Jim mentioned, total sales rose 27% in the first quarter including Laprolan the $13.8 million versus $10.9 million a year ago. Organic growth excluding Laprolan was approximately 5% for the first quarter, this 5% organic growth consist of 15% growth in our direct sales offset by a 20% decline in our private label sales this quarter. Regarding U.S. sales total sales increased 8% to $4.7 million from $4.3 million in the prior year’s first quarter, driven by a robust 27% growth in U.S. direct sales tempered by a 15% decline in U.S. private label sales.

Total sales outside of the U.S. mainly in the Europe and the Middle East are EME through 39% led by 53% growth in direct sales, which offset a 30% decline quarter-over-quarter in private label sales. Geographically 34% of our sales in the first quarter were generated in the U.S. with 66% of sales coming from outside the U.S. compared to 39 and 61 last year. This change in global sales mix compared to last year is due mainly to our acquisition of Laprolan in April of 2011. Almost 90% of our international sales are drive from regions in Europe and the Middle East.

Turning to review direct sales, as Jim stated we were pleased with performance in both the U.S. and international markets this quarter. As a reminder, direct sales represents roughly 82% of total sales for the company and is the main engine of our growth. So that point, total global direct sales increased 46% in the first quarter versus the prior year accelerating from the 43% year-over-year growth posted in Q4 of 2011 and driven by solid organic growth and contributions from our Laprolan acquisition last year. I will discuss both in detail now.

In terms of the U.S. direct sales, sales totaled $3 million versus $2.3 million last year for a gain of 27%. By product line this growth was cheaply fueled by a 51% increase in intermittent catheters and supported by a 21% growth in Foley catheters and a 7% gain in male external catheters. Intermittent catheters represent almost half of our direct sales and are our most important pipeline in driving our top line near and longer term.

Let me now break down the performance between our two U.S. direct sales channels home care and acute care. First home care sales accounted for approximately 74% of our U.S. direct business and grew 26% year-over-year in the first quarter, this improvement is a result of the strength of our magic three line of intermittent catheters.

Secondly, our U.S. acute care sales improved 31% in the first quarter led by balanced growth across all three of our key product lines. The expansion of our U.S. sales and marketing team early last year is clearly translating to be solid gains in our U.S. home and acute care businesses.

Turning now to our direct sales outside of the U.S., sales reached $8.4 million versus $5.5 million last year an increase of 53% and very good growth in the EME region offset by a slight decline in the non-EME regions. As a reminder, within the EME region direct sales are concentrated in the UK and the Netherlands. Growth in the UK was particularly notable increasing 18% year-over-year excluding the $2.4 million in incremental revenues from that Laprolan acquisition organic direct sales growth outside of the U.S. was 10%.

Shifting to our private label business, total global private label sales were down 20% this quarter recall private label sales represent just 18% of our total global sales. The decline consisted of a 15% decrease in the U.S. sales and 30% reduction in sales outside the U.S.

As expected, we continue to experience order related lumpiness in our private label business on a fourth quarter rolling basis private label sales are down 4% compared to the corresponding prior fourth quarter period. We expect private label to remain a steady business for us overall where sales do fluctuate on a quarterly basis and will continue to become a smaller percent of our mix overtime as our global direct sales business grow.

Now let me review the rest of the income statements as well as our balance sheet and cash flow performance this quarter. First our gross margins, our first quarter gross margin of 50.3% was 90 basis points quarter-over-quarter. Margin improvement resulted from a combination of Laprolan higher gross margins and the shipment mixed higher margin direct sales admits the decline in private label sales.

Longer term gross margin improvement is expected as we lower our per unit fixed cost to volume growth and as our mixed shifts and favor higher margin direct sales especially led by sales in intermittent catheters. Our operating expenses, reported total operating expense rose 19% to $7 million from $5.9 million. The year-over-year increase is reflection of our expanded sales force in Laprolan.

Importantly, operating expense remained in line with the approximately $7 million quarterly run rate. We continue to target a range of approximately $28 million for fiscal 2012 total operating expenses so we will likely continue to see some modest quarterly fluctuation.

Then total operating expenses sales and marketing costs increased 16% from last year to $4.5 million reflecting the sales force investments in 2011 and the addition Laprolan. Sales and marketing costs represent 33% of revenue versus 36% last year. Research and development growth 35% over last year to 2.7% of total sales versus last year’s ratio of 2.5%.

The way of spending is in line with our commitment to fund the internal development of innovative products. General and administrative costs increased 23% from last year’s first quarter as we continue to integrate the additional cost associated with Laprolan into the P&L. G&A expense picked up modestly from Q4 2011 due to some additional cost of year end activity.

In terms of GAAP net result this quarter we reported after tax loss of $75,000 or $0.01 per share first the net loss of $169,000 or $0.01 per diluted share last year. Especially interesting I believe is the fact that we generated $444,000 of incremental operating income this quarter versus last year.

On a non-GAAP basis, which excludes the after tax adjustments for material non-recurring costs and intangible amortization and stock compensation expense we reported positive first quarter non-GAAP net income of $285,000 or $0.02 per diluted share compared to the same non-GAAP net income of $377,000 or $0.03 per share last year. The non-GAAP adjustments are detailed in the reconciliation section of our press release and show the underlying operating results of our business.

As our direct sales continue to grow and we continue to control our spending income will follow and I’m still confident everything is in place to obtain our 2013 after tax earnings goals of $9 million to $10 million. The balance sheet remains healthy with a total cash position of $33.6 million at the end of the first quarter down $1.3 million from the prior fiscal year end. All of the cash depletion comes from the $1.5 million we spend this quarter repurchasing our stock.

We are active again during the first quarter taking advantage of our undervalued share price. We repurchased 150,900 shares at an average price of $7.22 this brings our total shares repurchased to 721,000 shares over 2 million shares authorized. I’m happy to report our balance sheet health has been further enhanced towards the end of the first quarter as we paid down the remaining $18.3 million balance on our operating line of credit. We remain focused on improving our working capital management and are pleased with our level and condition of our inventory and receivables at quarter end.

Subsequent to the end of the quarter, our balance sheet reflected zero debt and a strong cash balance and we are well positioned in terms of excess capital. To conclude our first quarter performance demonstrates the strength of our global direct sales business and we are building on the momentum generated in this business over the course of fiscal 2011. We expect our private label business to be fairly steady on a full year basis further contributing to what we expect to be a strong fiscal year 2012. We remain confident in our ability to deliver the growth rates 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 some recent developments. As many of you know we’ve been anticipating the publication of the results of a sizeable UK government study comparing infection rates associated with Foley catheter usage in hospital setting.

We understand from the studies, lead investigator that the data have been accepted for publication in The Lancet, in this case in Infectious Diseases Journal. We were expecting publication in January. However, we were just told yesterday, actually day before yesterday that there has been a two month delay. Well Lancet is a leading (Inaudible) medical journal that has been in continuous publication since early 19th century. And while we won’t know the results until we see the publication we are optimistic that this study will mirror the findings in similar studies that are Strata NF Foley demonstrates meaningfully lower rates of hospital acquired urinary tract infection.

Regarding FemSoft we recently learned that the CMS again denied our request for a reimbursement increase. Naturally this is disappointing but on the bright side this reimbursement rate has not been a limited factor with our distribution partners who are finding success in selling FemSoft.

Even though at current rates their margin is below their normal level FemSoft is proven to be a unique product for an unmet need in these distributor’s product offerings. I should note that in some cases private payers are reimbursing at levels above the CMS rate thus helping to bolster distributor’s interest in FemSoft. In short, while not the outcome we would like we remain encouraged by current adoption trends and as convinced as ever of FemSoft’s value in treating the wide spread problem of incontinence in women. It is important to note that our fiscal year ’13 guidance only incorporates very modest FemSoft sales.

In closing, I would like to remind you of our growth strategy. Going forward, we expect direct sales to be our leading growth driver particularly in the European and U.S. markets. Most of the improvement in direct sales will occur in the home care market both domestically and abroad and this will be nicely complemented by strong global growth in acute care.

From a product standpoint, intermittent catheters will be the primary growth driver particularly in light of our currently modest market share, a superior technology and considering there is $800 million global market opportunity for these products. As I said earlier, we expect our private label business to remain stable but quarterly fluctuations should be expected.

We are off to a good start for 2012 and expect a good year overall with solid top line growth and increasing profitability. As I stated we believe these underlying dynamics will enable us to achieve our stated 2013 goals to double our fiscal 2010 sales to approximately $83 million and generating a bottom line profit of $9 million to $10 million.

As we examine Q1 closely and look at the year ahead we see many positives first of all except for the timing issues the first quarter is exactly what we expect it and year-over-year there should be no negative impact from the timing of those orders. Going forward we expect continued strong direct sales performance in the U.S., expanded sales and marketing team is really gaining strength.

We also expect continued solid growth in the UK and with the recently strengthened sales and marketing team we expect Laprolan to also help drive strong organic sales growth. Additionally we are introducing innovative new products that will also drive increased sales and profitability.

And with that we will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) your first question will come from the line of Ernie Andberg with Rochester Medical.

Ernie Andberg – Rochester Medical

Good afternoon Jim, Dave.

Jim Conway

Hi Ernie.

Ernie Andberg – Rochester Medical

As I expected impossible to forecast private label?

Jim Conway

That’s just impossible to forecast in any given quarter, we’ve got a fairly good handle on it year-over-year Ernie as you know.

Ernie Andberg – Rochester Medical

So you feel that the progress in the primary customers there are continuing to sell through your product and it’s just a matter of timing is what I hear you saying?

Jim Conway

Yes, that’s absolutely right. For example, in Q2 it’s just the end of January and we already have as many orders as we shipped in Q1. So just the way it works.

Ernie Andberg – Rochester Medical

Okay, fair enough. That’s good to hear. You pick the gross margin above 50% for the first time in a while. Jim obviously some of that is mix you’ve had an objective of improving that overtime. Do you think that’s what happens to private label if we can continue to see that improve this year?

Jim Conway

I think independent of private label the answer is yes but as our private label goes up again in any given quarter that puts a little bit of pressure on it. So Dave could probably answer this better than me but I think it’s likely that we drift just below 50 again before we go back up again based on that mix.

Ernie Andberg – Rochester Medical

Fair enough. That’s a fair answer. What made you decide to pay off the short term line Dave?

Dave Jones

A number of reasons interest expense savings are obviously one of them we should save about $60,000 to $70,000 this quarter in pretax interest expense. And just another number of things we’ve really never looked at that as a long-term deal we always knew that we are going to pay that off eventually and it’s just the right time.

Ernie Andberg – Rochester Medical

Fair enough. Where does that other things equal puts your cash now related to where it was at the end of the quarter? Roughly?

Dave Jones

$15 million.

Ernie Andberg – Rochester Medical

$15 million.

Dave Jones

Yeah.

Ernie Andberg – Rochester Medical

Okay, thank you.

Dave Jones

Sure.

Operator

Next question will come from the line of Rishun Jain with Quad Capital. Please proceed.

Rishun Jain – Quad Capital

Hi guys, this is Rishi at Quad.

Dave Jones

Hi there.

Rishun Jain – Quad Capital

This the study being delayed is obviously irritating but is there something are people waiting for the study or is there, is this more of an intellectual pursuit to say okay yes it does in backward but it does not, customers aren’t waiting for the study to prove anything.

Jim Conway

Well good question, we are certainly waiting for the study.

Rishun Jain – Quad Capital

Right.

Jim Conway

We think it’s, if it comes out the way we believe it will come out it will be very valuable in helping sales and marketing. We also hope that in the UK that the NHS would see FED to make some kind of a recommendation regarding it. The Lancet is very highly regarded worldwide and not only will it help us in sales and marketing but we believe it will help Teleflex our European partner in selling that same anti-infective technology. So we were very eager to hear, we were disappointed to hear about the delay.

Rishun Jain – Quad Capital

Right.

Jim Conway

And that’s all we know at this point.

Rishun Jain – Quad Capital

So we have no idea how the study has come out I mean that’s.

Jim Conway

Absolutely zero, when we’ve done our very, very level best to try and find out but they are not telling until it’s published.

Rishun Jain – Quad Capital

Interesting, okay second question how much is left on the share repurchase authorization?

Dave Jones

Roughly 1.3 million, we have 2 million and we bought just over 700,000.

Rishun Jain – Quad Capital

$1.3 million?

Dave Jones

Shares.

Rishun Jain – Quad Capital

Shares. Okay, great thank you guys.

Operator

(Operator Instructions) and there are no further questions in queue at this time. I will now like to hand the conference back over to management for any closing remarks.

Jim Conway

Thanks very much you guys for attending today. Look forward to talking to you again next quarter. And we will see you then. Thanks again.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect your lines good day.

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