The Female Health Company (NASDAQ:FHCO)
Q1 2016 Earnings Conference Call
February 2, 2016 11:15 AM ET
OB Parrish – President and Chief Executive Officer
Peter McMullin – IPC Global
Marc Robins – Catalyst Research
Tony Chiarenza – Key Equity Investors
Good day, ladies and gentlemen, and welcome to The Female Health Company’s First Quarter Fiscal Year 2016 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
The statements made on this conference call that are not historical in nature are forward-looking statements based upon the Company’s current plans and strategies, such forward-looking statements reflect the Company's current assessment of the risks and uncertainties related to its business. The Company’s actual results and future developments could differ materially from the results or developments in such forward-looking statements.
Factors that may cause actual results or developments to differ materially includes such things as product demand and market acceptance; the timing of receipt and shipment of large orders, competition, the economic and business environment, and the impact of government pressures, currency risks, capacity, efficiency, and supply constraints, the ability to execute on new business strategies and other risks detailed in the company’s press release, shareholder communications and Securities and Exchange Commission filings. For additional information regarding such risks, the company urges you to review its 10-Q and 10-K SEC filings.
I would now like to turn the conference over to Mr. OB Parrish. Sir, please go ahead.
Thank you, Garry. Welcome to The Female Health Company’s first quarter 2016 conference call. Michele Greco, our EVP and CFO, is here with me in our Chicago office; and Martin Tayler, our EVP of Operations is participating from our London office.
This morning I’ll make some comments regarding the status of the company including some information regarding to the Zika Virus, then I’ll cover the financial results, key factors that may impact future results and the outlook. As usual, when I refer to years, I am referring to the company’s fiscal year, which ends September 30th unless otherwise noted.
There are general observations that reflect our progress and may reflect our future potential. First, the company posted excellent growth in revenues and earnings per share for the first quarter of 2016. Secondly, we have a progress on the identification of specific opportunities to diversify the product line and in our evaluation we’re going to see direct-to-consumer promotion in the U.S. Third, we completed $10 million credit facility with BMO Harris Bank. Fourth is the unfortunate emergence of the Zika Virus epidemic.
Now, I would like to spend just a couple of moments on the outlook [ph] since it’s gotten a lot of publicity. The World Health Organization has declared an emergency regarding the Zika Virus. It is a virus transported by mosquitoes. In recent years, it was detected in Brazil and has now moved into 20 Latin American countries and is epidemic in Brazil. Women who are infected may give birth to babies with brain defects and other deformities.
Brazil, which is also preparing for carnival, which starts on Friday, and the Olympics has initiated programs advising women not to become pregnant. The female condom is an excellent method from preventing pregnancy in view of the Zika Virus. Our Brazilian partner, Semina, has initiated an active program featured FC2 branded as Femidom in Brazil for the prevention of pregnancy. As a part of this program FC2 is feminine was featured for prevention of pregnancy on the most important national TV channel in Brazil, Global TV last Saturday evening. And the show was hosted by Fernanda Oliva, a prominent TV host in Brazil.
Global TV reaches 99.5% potential viewers in Brazil with 122 broadcast stations, delivering programs to 183 million Brazilians. We believe FC2 can play a significant role in preventing pregnancy in Brazil and in other countries in view of the Zika Virus.
Turning to the financial results, unit sales for the first quarter totaled $15.4 million, up 27% for the first quarter of 2015. Net revenues for the quarter totaled $8.2 million, an increase of 24% from $6.7 million in the prior year quarter. Gross profit increased 41% to $5.4 million, or 66% of revenues, compared with $3.8 million, or 57% of net revenues in the prior year quarter. The increase in margin was primarily due to favorable currency impact on our cost of goods and some increased labor efficiency due to higher volumes.
Operating expenses for the first quarter increased $644,000, or 27%, to $3 million. I’d like to note that approximately $500,000 or 17% of total $3 million in expense for the quarter was investment in the future and reference to the expenses for the identification of opportunities to diversify the product line and the evaluation of a potential U.S. direct-to-consumer promotion.
Reflecting the increase in revenues and gross margin, operating income increased to $2.4 million, an increase of 65% over $1.4 million in the prior year quarter. The operating margin was 29% versus 22% in the first quarter of 2015. Net income increased 85% to $1,490,363 for a margin of 18% from $804,917 for a margin of 12 in the first quarter of 2016.
Earnings per diluted share were $0.05 per share an increase of 67% over $0.03 per share in the prior year quarter. In reference to cash flow, cash flow from operations was negative, $431,000 including a negative change in operating assets of $2.9 million. Our Brazil receivables net of what we owe our distributor totaled $12.3 million.
There has been no change in advice from the Brazilian government that we could see payments beginning as early as this month or as late as May. Our company has receive significant orders from Brazil over a 10 year period. During this period we’ve experienced delays in payments but never default. To date no defaults are going to be reported in reference to the situation in Brazil, company’s in Brazil and ex-Brazil are continuing to do business with the government and Brazil.
And important reason for this maybe, the Brazil unlike many other developing countries actually has a strong recorded e-position due to significant foreign currency reserves and therefore the financial restructuring or default some likely [ph].
Another key event was during the quarter, the company announced that subsequent to significant due diligence by the bank. It had completed an agreement with the BMO, Bank of Montreal Harris Bank for $2 million credit facility at lower rates. This compares to the company’s prior credit facility of $2 million. The line of credit maybe used for acquisitions as well as some operations, subject to the terms of the agreement. This significantly expands the company’s financial flexibility. I would like to note that Michele Greco, our EVP and CFO who is here with me in Chicago. He’s responsible for identify and executing this facility with BMO Harris.
In reference to tax loss carryforwards, during the period ended December 31, 2013, the valuation allowance on the company’s deferred tax assets was fully reversed. As a result, the company no longer recognizes significant tax benefits on its P&L statements. However, it is very important to note that the net operating loss carryforwards will continue to be utilized to reduce cash payments for taxes charged.
For the first quarter, the company recorded tax expense of $829,453. However, we paid only $69,856 of taxes or just 8% of the total charge recorded. This resulted in cash savings of $759,157 for the quarter. At the end of the first quarter, the company had tax loss carryforwards of $12.6 million of state, $13 million in federals in the U.S., and $61.9 million in the UK, which may be used to significantly reduce future cash payments for taxes. I should note the UK tax loss carryforwards do not expire.
There are five positive key factors that I believe highlight FHC’s future. First is, BMO Harris in to our facility, which I just mentioned, this does increase our financial flexibility and reflects the banks due diligence. Second is a female condom market, while it will continue to be volatile quarter-to-quarter or year-to-year, we believe it will grow in the long-term for several reasons. HIV/AIDS remains the leading cause of death among women 15 to 44 years of age world-wide. 50% or more of all people living with and new cases of AIDS are women.
The market for female condoms is, however, is less than 1% of the market for male condoms, reflecting significant gender inequality. Due to the market need, and gender inequality in terms of protection, independent well organized for special women’s groups continue to advocate for increased investment in and availability of female condoms. Very few companies have independent, full funded organized groups advocating for increased use of their products.
During the emergence of opportunistic infections, such as the Zika Virus, in reference to the Zika Virus we discussed earlier, we believe FHC can play a different role in preventing pregnancy, during the Zika Virus epidemic, which will result in significant revenues.
The third key factor is diversification. Subsequent to assuming responsibility as a special mission, we’ve diversified the company’s product line. Dave Bethune as a Director has done a good job in identifying specific opportunities, which are now being carefully evaluated. These opportunities are under consideration for proprietary and will significantly diversify and broaden the company’s opportunities for growth, and to increase shareholder value.
The fourth factor is a potential for U.S. direct-to-consumer marketing program. As reported, the company has been evaluating such a program in the United States. More than six monthly evaluations will be completed during this current quarter and a decision made on the program. The evaluation was initiated because due to changes in the U.S. market, we believe there’s an opportunity to sell direct-to-consumers in a way it will be complementary to the public sector market and increase overall product awareness and sales in the U.S. These changes include the fact that female condoms are now reimbursable under The Affordable Care Act or Obamacare. It was an increased public focus on preventing unintended pregnancies and sexually transmitted disease to young among women.
The increasing role of social media and marketing to young women, increased U.S. drug retailer interest in contributing to health care such as in-store clinics, elimination of cigarettes, proposals by some states to promote pharmacies to prescribe birth control and increased online purchasing of such products. FC2 can now be purchased online from multiple websites including Amazon, Walgreens, CVS, Target, Walmart, Drugstore, MyQuestStore and shopfemalehealth.com. The interest by multiple websites are selling FC2 reflects increasing consumer interest.
The fifth factor is the relationship between education, and training and competition. The Company has head competition involved public sector market for more than three years. The first competitive product was cleared by WHO on June of 2012. And to date, the competition hasn’t been able to attain a significant even with lower pricing. The role of education and training is a key factor. The Company provides education and training for the use of FC2. Education and training increases a number of available products actually used reducing the cost for protected sex act. For example, if 1,000 condoms were purchased at $0.35 each, but there are only 400 protected sex acts across protected sex act at $0.88. If on the other hand, hypothetically condoms, 1,000 condoms were purchased for $0.50 each and there were 850 protected sex acts, the cost for protected sex acts is $0.59. In effect, education and training get impact the rate of use. Today, FHC is the only company providing significant and education and training for its product.
Now, I would like to turn to guidance and the outlook for the company. Due to the period-to-period volatility of public sector business we don’t provide specific guidance. However, we do provide general guidance regarding the outlook for the company. I believe the long-term outlook for the company and increased shareholder value is positive for four reasons. First, the market will continue to grow long-term. I like to note that the United Nations Joint Programme on HIV/AIDS or UNAIDS, currently estimates that since the beginning of the epidemic condoms have averted 50 million new cases of AIDS and created substantial economic savings and reduction on human suffering. This gives people an idea of the role that condom is going to play and disease prevention.
Reflecting this trend to date the company has sold more 500 million of female condoms. Our average annual compound unit sales growth rate for 10 years is 16% and then there is a potential impact of opportunistic priorities that may appear such as the Zika virus, which I covered during my presentation. There is a result we believe the market will grow and the company will continue to be a market leader. Second, the increase financial flexibility afforded by BMO Harris $10 million facility; third, the fact that we have identified specific diversification opportunities that could significantly impact the future and fourth, that we will make a discussion this quarter and reference for potential direct-to-consumer marketing program and we’ll be complementary to the public sector marketing program and increase product awareness and sales.
As I mentioned where I reserve this particular position that I would focus on execution in these last two points I referenced the diversification. And the consumer market we are direct-to-consumer market opportunity the things that we have been focused on to execute this and bring to the conclusion and we’re right at that point. Our overall goal is to focus on growth, return to the investment and increasing shareholder value.
Garry, now we’ll take some questions.
[Operator Instructions] The first question comes from Peter McMullin with IPC Global. Please go ahead.
Hey, good morning, OB.
Good morning, Peter.
How are you?
Okay. I will start with two and then recycle. The margin was certainly, amazing as we look at the company we should – should we still be thinking of kind of a high 50s margin on an ongoing basis, rather than the anomaly of currency?
Well, I think that something in the 50s is probably the likely margin. We do have a positive currency impact that boosted the margin up until the 60s as time. We can’t be sure that’s going to continue.
And just so we’re clear what is it related to the U.S. dollar versus the manufacturing cost?
What causes that the specifics are actually we denominate, all of our sales in U.S. dollars, which tends to minimize impacts on currency. All though we do manufacture in Malaysia and so much of our cost both immaterial and labor is in the local currency which is ringgits.
In the long-term, ringgits and the dollar have been in pretty stable relationship. Recently, however, the dollar has increased in value against the ringgit, which has had a positive impact on our cost of goods, I guess would start.
Second question and I’ll get back in queue. With Carnival and the Olympics is coming up, do you have some courage to play in terms of getting some of those accounts receivable paid down quicker. I think it is a little bit of a pale over the stock base?
We are still going with the advice that they gave us, which was we could we see payments as earlier as February aslate as May beginning on payments. One other factor is that if there is an acceleration in the use of the female condoms in Brazil, which there maybe, remember we just sold them 40 million units and another tender comes up, one of the rules are, is one of the rules they have is before they issued another tender they have to pay the vendor any bills that are due.
Well, that’s good. I know during the last Olympics, certainly from the male standpoint there was a lot of condoms used.
Yes and they’re facing both the Carnival and the Olympics coming up and also in face of the Zika virus.
Yes, yes. I’ll get back in line from my other two. Okay.
The next question comes from Marc Robins with Catalyst Research. Please go ahead. Mr. Robins, your line is open.
There, there we go. Thank you very much. Could you again repeat the ways you can purchase the FC2 online, I got Walmart, Walgreen, Amazon, but then I missed the rest.
Okay. Just on second, I’ll give them all to you. It’s available, wearall.com, Amazon, Walgreens, CVS, Target, Walmart, Drugstore.com, MyQuestStore.com and ShopFemaleHealth.com, we’re also working on a couple more that will probably be available within the next month or so.
And then secondly, I know you’re doing the study, but it seems that with the Zika virus and all the evidence that you have preventing pregnancies and HIV that’s direct-to-consumer retail sales, should produce pretty nice incremental sales, it should be help that. Is that kind of how we should read the future?
Well, we really evaluate in this regard six months very carefully. And one of the key factors we’re evaluating is if we – consumer basis, direct-to-consumer, we have initial sales, what will be the repeat sales, how many women will buy or continue to buy on a consumer basis, and what will the frequency be in terms of projecting the results, that’s one of the key things we’re looking in addition to all the other things we would do such as looking at packaging, trade names and promotion.
As a follow-up now that so many of the drug stores out there and even the grocery stores have consulting areas, is that something that could be used to help deploy the FC2?
Yes, so I think there is a drug opportunity in stores that are providing that kind of service. There’s every reason that those people can provide counseling on both disease prevention and prevention of pregnancy. And if you tie that into the fact that in some states, I think it’s official on California, or Oregon, or possibly both, that pharmacists can prescribe birth control products. It’s a natural thing for the storage, we want to do that and provide that, because to the extent those products are determined by somebody who works in the storage, not positively impact the storage revenues.
Got you. I will get back in the queue. Thank you so much.
[Operator Instructions] The next question comes from Tony Chiarenza with Key Equity Investors. Please go ahead.
Good morning everyone. I wanted to ask a little bit of question for clarification on the diversification. You say you are down or you have two or three opportunity that you’ve singled out. Can you give us any more specifics and what areas these opportunities are? And perhaps some kind of magnitude – the impact they’d have on revenues of the company?
I can’t give you specifics regarding the individual things we are looking at. It’s confidential at this point. And for that reason I wouldn’t want to provide you any specifics until there is something to announce. I can say, this is about the things we are looking at, those are the proprietary. They provide differentiation and in all of the cases that we are looking at and they would have a significant impact on the company in potential revenues and shareholder value.
I’ve assumed the area in the women’s health area. Is that correct?
To some extent it’s in the women’s health area and related types of products.
Okay, because I am thinking of something that is sort of complimentary that’s taking advantage of distribution or something that you already have or could it be something that’s completely unrelated? And I’m just…
Well, I don’t want to get into the specifics of it all, because we do have – the things that we are looking at are confidential and for now we would like to keep it like that.
Okay. And one would might – will you expect some kind of announcement, you think it is another three months, six months, nine months before you…
Our goal is certainly you’ll see us something completed during this year.
You mean, completed during this year. Okay, good. Thank you very much.
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Thank you, Garry. I would like to thank everybody for their interest and we will be on next quarter. Bye.
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