Span - America Medical Systems, Inc. (NASDAQ:SPAN)
Q1 2016 Results Earnings Conference Call
February 04, 2016, 10:00 AM ET
Jim Ferguson - President and CEO
Richard Coggins - CFO
Douglas Weiss - DSW Investments
Sam Rebotsky - SER Asset Management
Good morning and welcome to the Span-America Medical Systems' First Quarter 2016 Conference Call. This call is being recorded.
Before we begin today's call, let me remind listeners that this conference call contains statements that are forward-looking as defined within the Private Securities Litigation Reform Act of 1995. We wish to caution the listeners that these statements are only predictions. Actual events or results may differ materially as a result of risks and uncertainties facing the company including the inability to achieve anticipated sales growth in the medical and custom product segments, the possibility of a loss of a key customer or distributor for our products, risks related to international operations and foreign currency exchange associated with our Canadian subsidiary, the possibility of having material uncollectible receivables from one or more key customers or distributors, the potential for volatile pricing conditions in the market for polyurethane foam, raw material cost increases, the possibility that some or all of our medical products could be determined to be subject to the 2.3% medical device excise tax imposed by the Affordable Care Act, the potential for lost sales due to competition from low-cost foreign imports, changes in relationships with large customers or key suppliers, uncertainty about whether or not we will continue to be awarded one-time seasonal promotions with major retailers which can have a large impact on annual revenues and earnings, the impact of competitive products and pricing, government reimbursement changes in the medical market, FDA and Health Canada regulations of medical device manufacturing and other risks referenced from time-to-time in our Securities and Exchange Commission filings.
Span-America is not responsible for updating the information contained in this conference call beyond today or for changes made to this call by the conference call Company or Internet services.
I would now like to turn the call over to Mr. Jim Ferguson, President and CEO of Span-America Medical Systems. Go ahead sir.
Good morning. Obviously if you had a chance to read our release, you know that we had a very good first quarter to start fiscal 2016 as sales were up 36% to $21.5 million, while our net income rose 18% to $1.1 million.
Earnings per diluted share rose 28% to $0.42 per share compared to the $0.32 per share from a year ago. The driving force behind our first quarter results was primarily our consumer business. We shipped a seasonal promotion during November which coupled with our normal everyday business program revenues from 1.9 million a year ago to 9.2 million in the first quarter of 2016.
Our medical business and industrial segment sales were down slightly and primarily due to having really one less week during the quarter that makes obviously a lot of difference to us. Also on the medical side of the business we had $0.5 million order in first quarter of 2015 that did not repeat in first quarter of 2016. That was out in British Columbia and Canada.
However in the medical business we performed pretty much as we expected. With one less week we knew it would be a difficult task to exceed last year's totals, however we had a number of positive things happen, including we have continuing strong performance from our VA sales. We had continuing strong sales to a rental partner MediLogix and we had continuous improvement in our sales to our Canadian distributor partner. All three of those things will be very important to us as we move forward.
In the custom products business, we had a very good quarter primarily driven as I said by the seasonal promotion. Not only did we have that one-time order, but we also had strong orders for the same retail in our everyday business. So those two things coupled with one another really drove that business and we did well.
The industrial segment was down slightly and that was a direct reflection of the one less week in the quarter. And then finally we had a significant reduction in our gross margin during the quarter and I don't want everyone to be alarmed about this because it is a direct correlation to the increase in the consumer revenues and that comes from the - obviously the seasonal promotion. We fully expect the margin to normalize as we move throughout the year.
Now at this time, I'd ask Richard Coggins, our CFO, to give you some more detailed information concerning our first quarter 2016 performance. Richard?
Thank you, Jim and thank you to our listeners. We appreciate you joining us today.
As we normally do, I would like to review the financial results for our most recent quarter and first, I'll go over the financial highlights from our first quarter of fiscal '16 sales and earnings results. And then I'll give you a little information on our balance sheet and cash flow for the quarter and then finally I will turn the call back over to Jim to get his comments and future outlook.
As I hope you saw in our earnings release yesterday, our first quarter sales and earnings performance has given us a solid start to fiscal year 2016. First quarter sales were up 36% to $21.4 million. Our net income was up 18% to $1.1 million and earnings per share increased 28% to $0.42 per diluted share.
As Jim mentioned, most of that growth came from our consumer product lines as a result of a seasonal promotion of our consumer products that we shipped this past November and from regaining our consumer customer that we previously lost to a competitor.
Our Medical business was down slightly in the first quarter of this year, but we made up for that weakness with a high volume of consumer sales. I'll talk more about our earnings in just a few minutes, but first let's take a closer look at the sales performance in our two business segments.
First I would like to cover our Custom Product Segment, which had the largest impact on our first quarter results this year compared with first quarter last year. The custom product segment as most of you probably know is made up of our consumer bedding products and specialty industrial products.
Our total custom product sales more than tripled in the first quarter increasing 248% to $10.1 million in the first quarter this year compared with $2.9 million in the first quarter last year.
All of this sales growth came from our consumer bedding products, which increased 384% to $9.2 million from $1.9 million in the first quarter last year and there were two events that caused the large increase in consumer sales.
First as we reported in the past, we participated in the seasonal promotion of consumer products, which added approximately $6 million in sales in the first quarter of fiscal '16. Second, also as we've reported last year, we regained a consumer customer late in the first quarter of fiscal 2015 that we had lost earlier in that year.
So we had this business with this customer for three full months in our first quarter of fiscal '16 compared with only about one month in the first quarter of fiscal '15. So this new business added approximately $1.6 million in consumer sales in the first quarter of fiscal '16.
So those two events alone, the seasonal promotion and the regaining of the consumer customer gave us $7.6 million in sales growth for the first quarter.
The other part of the custom product segment is made up of our industrial product lines. Industrial sales were down 10% in the first quarter of fiscal '16 to $901,000 compared with $1 million in the first quarter of fiscal '15.
Most of the industrial sales decline came from a customer in the water sports market. We also had a slight decrease in industrial sales to customers in the regional packaging market here in the first quarter. But industrial sales to our automotive customers were still up slightly compared with first quarter of fiscal '15.
Those are the highlights in our custom products segment. Now, let's turn to our medical segment, which is the largest part of the business. Total medical sales were down by 11% in the first quarter to $11.4 million that was down from $12.8 million in the same quarter last year. This $1.4 million decrease in medical sales was about evenly split between our medical beds and pressure management product lines.
At Span-Canada, our sales of medical beds and in-room furnishing products decreased by 21% to $2.7 million in the first quarter of fiscal 2016 and that's compared with $3.4 million in the same quarter last year. Most of the decrease in our Span-Canada sales was related to relatively large order from a customer in British Columbia that was shipped in the first quarter last year, which was not repeated in the first quarter of this year.
Among our pressure management product lines, sales were down by 8% to $8.7 million compared with $9.4 million in the first quarter of last year. Sales of therapeutic support services, which is our largest product line were down by 5% to $6.1 million compared with $6.5 million in the first quarter of last year.
Likewise, sales of our other pressure management product lines, so that's everything besides therapeutics sports services. Sales of that product decreased by 12% during the quarter to $2.6 million compared with $2.9 million in the year earlier quarter.
The sales declines among our pressure management product lines were caused by the combination of slightly lower demand for those products and having one last week of operations in the first quarter of this year, compared with the same quarter last year.
So we did see just a slight drop off in demand for some of our medical products, but that was also compared with a particularly strong and broad-based demand that we saw in the first quarter last year.
And in addition, as Jim mentioned, the first quarter of fiscal 2015 included 14 weeks of business instead of the usual 13 week, because last year, that is 2015 was a 53 week year for Span and this current year 2016 will be a regular 52 week year.
That covers the highlights about our sales performance. Now, I'd like to give you some information about our first quarter earnings results. Our earnings performance for the first quarter was driven mainly by the large increase in sales of our consumer products. However, since our consumer bedding products are relatively low-margin items our rate of growth and earnings during the quarter was much lower than our rate of growth in sales.
Our gross profit level increased $5 million in the first quarter of this year compared with $5.4 million in the same quarter last year. However, our gross margin percentage decreased significantly in the first quarter to 25.6% compared with 34.7% in the same quarter last year.
Now the two reasons for the changes in our gross profit and margin: first, because of the large sales volume from the seasonal promotion of consumer products, our sales mix in the first quarter of this year was shifted significantly toward the lower margin consumer business.
Consumer sales made up 43% of our total sales in the first quarter of fiscal 2016 and that compares with only 12% in the first quarter of fiscal 2015. And as you probably know our consumer products have historically had much lower gross margins than our medical products.
Second. Our medical sales in the first quarter of this year as I mentioned, decreased by 11% and that contributed to a 9% decline in our medical gross profit level. Our medical margin was actually up, but our profit level was down, because of the volume decrease.
And so the combination of these developments gave us overall for the total company a relatively small increase in gross profit level, but a large decrease in gross margin percentage compared with first quarter last year.
Below the gross profit line, our selling, marketing, R&D and administrative expenses in total were down 4% during the first quarter to $3.9 million. All of that decline came in the areas of selling and marketing expenses and was related to lower sales in the medical segment which gave us lower expenses in category such as commissions and shipping cost which are tied directly to sales levels.
So as a result of the combination of the large increase in consumer sales relatively small increase in gross profit and the decrease in our SG&A expenses, our operating income for the first quarter this year increased by 16% to $1.6 million compared with $1.3 million in the first quarter last year.
Non-operating income also increased during the first quarter by 63% to $108,000 compared with 66,000 in the first quarter last year. The reason for the increase was entirely related to foreign currency gains just coming from the normal operations of our Canadian business and it was caused by the continued strengthening of the U.S. dollar relative to the Canadian dollar during the quarter.
Our net income for the first quarter was up by 18% to $1.1 million which was the result of the large increase in consumer sales volume and decrease in SG&A expenses, as well as the higher non-operating income.
Our earnings per share though grew at a faster rate than our net income up by 28%, $0.42 of diluted share and that was the difference in the rate of growth between net income and earnings per share was because of the large stock repurchase that the Board approved in late September last year, right at the end of our fiscal year.
As we have announced before, we repurchased and retired about 9% of our outstanding shares which boosted our earnings per share for the quarter. We'll continue to see the accretive effect of that stock repurchase on our earnings per for the remainder of fiscal year 2016.
That finishes my comments about our first quarter sales and earnings performance. Now let me change subjects and make a few comments about our balance sheet and cash flow for the first quarter of fiscal 16.
As we are easily able to report, our balance sheet at the end of the first quarter continued to be in excellent shape however we did have some unusual changes in a few of our balance sheet categories during the first quarter as a result of the seasonal promotion of consumer products that we have discussed.
For example our accounts receivable were up by $1.5 million or 19%. Our inventory was down $1.8 million or 21% and our accounts payable were down by $1.4 million or 35% and all of those are numbers compared with our first quarter and this year compared with our fiscal year and last year.
All those changes were related almost entirely to the seasonal promotion of consumer products that we completed in November. In addition another unusual change for us is we showed long term debt of $1 million at the end of our first quarter which is an unusual item for us. That was related to a combination of the working capital build up for the seasonal promotion and the $4.6 million stock repurchase that we completed in early October of this past year.
The combination of this working capital build up and the stock repurchase created a large cash need that caused us to use our line of credit during the first quarter. However we did receive the final payment for the seasonal promotion of consumer products just a few weeks ago and we’ve since paid-off this remaining balance on our credit line.
So by the time we get to the end of the second quarter of fiscal year 2016 which will be in March, we should not see any further effects of the seasonal promotion on our balance sheet.
Finally let me mention our cash flow performance for the first quarter of fiscal 2016. In a word our cash flow performance for the first quarter was weak and however there is a good reason for it and the condition is temporary.
Our cash flow from operations was only $23,000 in the first quarter of fiscal 2016 that compares with 975,000 in the first quarter of last fiscal year and the reason in a nutshell was again the effect of the seasonal promotion which was rolling through our balance sheet during the first quarter.
That promotion cost, our accounts receivable to be up and our accounts payable to be down both of which had a negative effect on our cash flow during the first quarter. The result of this is that our cash flow was lower than normal during this just completed first quarter and it’s very likely to be higher than usual in our second quarter as our working capital accounts return to normal levels.
So by the end of the first half of fiscal 2016, we should get a more normalized view of cash flow for the six month period after the effects of this seasonal promotion on our balance sheet has dissipated.
Our largest uses of cash during the first quarter of fiscal 2016 were number one cash dividends paid of $436,000, stock repurchases of $210,000 and then capital expenditures of $182,000. Overall our financial condition is still excellent and we look forward to continuing that trend in the future.
That wraps up my comments on our financial results. I'll now turn the call back over to Jim for his view on the business.
Thank you, Richard.
As we look towards the future, our outlook remains positive. We expect the second quarter of 2016 to be slightly better than the second quarter of '15. It probably will not be quite as good as the first quarter due to a lack of the big promotion from our consumer business but we should see things continue to go well.
I would like to caution that I do have a little bit of concern about the overall economy. We’ve not seen any slow down at this point in time but there is a lot of talk out there. We’re just going to have to kind of play a wait and see attitude but obviously that’s something that’s front and center and we need to keep an eye on as we move into 2016.
As for the medical business, we have a great deal of opportunity in front of us. The normal business from our rental partners, our VA business, as well as our distributor relationships will continue to pay dividends. We also have several one-time corporate opportunities which should present themselves in the second or third quarters. As I’ve said before when we could layer these on top of our normal business we do very well. Two of these are in the U.S. and one is in Canada.
One other item to note is that we are working on a couple of new export opportunities. One would be for mattresses while the other would be beds and mattresses. Don't have a lot to share at this point, but we will report more on this when the things become clear. This is something that we’ve been working on for quite some time and believe there is opportunity out there. We're just not prepared to share a lot of details on that right now.
The last item to note about the medical business is that our Canadian relationship with our major distributor continues to strengthen. They are beginning to move a number of beds for us which has been a major goal of ours over the last couple of years.
For those of you that have followed our business for quite some time are well aware that we have historically sold a number of our mattress products in Canada but it’s been more difficult particularly with the distributors in terms of selling our bed frames. And what we're going to do is we’re going to look to them to help provide that additional strength for us north of the border as they take on a bigger portion of that bed frame business for us.
In the custom products business, we see things as continuing to be positive particularly as we move towards the late second quarter and into the early third quarters. We have programs with two retailers that will begin shipping during this time frame which will add additional volume on top of our normal business. Even though we will not have anything like what we saw in the first quarter, we should see improvements on a quarterly basis.
In the industrial segment, things should begin to accelerate as we get into the new calendar year. The first quarter is usually impacted by the holidays, but once we get into the New Year, our customers begin to gear up. As Richard talked about, one of our big customers who is in the water sports business, they really gear down towards the end of the year and it's hard for us to project how that's going to affect our overall business.
But once you see or what we normally see is that begin to move forward particularly after we get into the first part of the year and they begin to manufacture so they can begin supplying their customers for the spring of the year. This segment has provided nice solid growth over the last couple of years and we expect the same thing this year.
On the operations side of the business, we have quickly paired down our Greenville facility to match our overall revenue volume, which will not obviously include this large consumer volume that we saw in the first quarter. We do expect to add people back as some of these new programs hit in the second and third quarters.
We remain a lien and flexible organization with regards to the Greenville operations. And I would also like to take this opportunity to commend Erick Herlong and his operations group for the great job that they did during the first quarter.
These large promotions are not easy to handle, but they made and shipped everything on time as we had promised to our customers. That was a great job and all of them deserve every bit of credit that they can get.
And finally the last thing that I would like to touch on is material pricing. I know that's a big question for everyone, particularly when you see what oil pricing has done over the last several months, but we have not seen any major reductions due to that decrease in oil prices.
We've had some small ones particularly in our foam drops of maybe 2% to 3% and then also on our plastic bag components are down a few points, but we've not seen any great benefit out of those oil reductions to this point. We continue to negotiate with our suppliers, but they're holding on tightly to their pricing at this point in time.
And now with that, I would like to ask Tim to come back and we will be prepared to take any questions that you might have. Tim?
[Operator Instructions] And we'll go first to Douglas Weiss with DSW Investments.
Good morning. Congrats on a good quarter. My first question is on - you mentioned the economy, was that in reference to your consumer business or is your medical business also economically sensitive?
It is to a certain degree. Everybody looks at it as being recession proof, but what you have to understand is that our business, a big portion of our business is capital goods and capital goods kind of follows their trend of what the overall economy is doing.
People tend to - or our customers, a lot of them will tend to pull in and not spend capital dollars until they get a better picture for how the future is going to be. So again that reflects the capital side particularly with bed frames and large mattress orders you see some of that when the economy gets difficult.
And you've spoken for a few years about customers pulling back a little bit as ACA was ruled out, does that seem to have eased up or people comfortable with especially in these sub-acute space in terms of what -
I understand your question. I believe that to be the case. We saw a lot of this when they went to the prospective payment system and long-term care back in the early 2000. It takes about maybe 12 to 18 month period for the facilities and for the businesses to get a handle on how much money they are actually going to have in order to spend.
And that's why I say, that whole when they had that acute rollout, it stopped. I mean, we literally from April to about October of last year. Things were really, kind of, hairy. Well, actually in 2014, things were really hairy. But it just seems like once we got to October, things eased up a bit and everybody started spending some money.
So this time, it was about a 6 to 7 month time frame. But I think we are over that portion. I do believe that we are over that because the facilities now get to feel for the actual amount of money they are going to have in order to operate with.
Yes. It might be the case that even if the economy slowed a bit, things would juggle on in the medical side.
I don't expect it to get real bad. I’m just saying that with things, there is a lot lag going out there in the economy. Things are moving in both directions. You see some good, some bad. And there's a lot of talk. Obviously, there is a lot of talk in the industry and in the overall business community and we’ll just have to play a wait and see attitude.
We've not seen a great deal of it at this point in time. But I think it's something to keep in the back of your mind.
And then just based on how things are going in the acute space. I think over the last couple of calls, we’ve talked about how the big three bed manufacturers have taken their surface production in-house and that has given them a little bit of a distribution advantage.
So I guess a couple of questions in terms of that. The first is, if that is a tougher area to compete in, are there other things you can do in the acute space to improve your growth outlook there? As I look at your K it looks like your fall protection products, which I know you’ve highlighted in the past, they'll be a tiny percentage of your total sales.
So I'm curious if there are other products that you are focusing on. I guess that’s one question. And the other question is, are there things you can do on the support surface side to better position yourself in acute?
We actually - a number of our products that we’ve developed, particularly ones in the last few years can be utilized in the acute care setting. Up until really we came out with, what is called a [V back] [ph] set of matrices that fit some of our competitors bed frames.
Can't talk about which will actually use but we’ve got products that fits there. We have customers that we work with all the time. We've got a major customer in Florida that we do business with every month.
It’s just not something that's easily, I guess, a sales process for our people. And I’ll tell you what I'm talking about, our sales people can go into an independent nursing home and they can walk out with a order for 5 or 10 mattresses today.
If they go into a hospital, it’s going to have to go to a committee, and it’s probably going to go on valuation. And that valuation process could probably take anywhere from 12 to 18 months before they make a final decision.
So those are things that happen over a longer period of time. We’ve got products that are available there. We’ve got actually a rental roof that we work with there. So we've got our renting surfaces into a long term, I mean to the acute care, as well as we are selling into acute care.
It has become as bigger part as we'd like for it to be but we continue to work around the edges of that business.
What about introducing other products? And I guess the other question I have is far as introducing other products. Is there an opportunity to work more closely with McKesson in terms of - not just distributing new product but may be informing you where there might be opportunity.
They inform us all the time but who we work with McKesson is the primary the long term care group. We don’t work with acute care group very much. We would work with say cardinal on in manner we have a relationships with those guys. We identify opportunities among their sales so there is a lot of their communication back in force but from a McKesson standpoint most of our communications is with their long term care work, not with the acute care group.
Go self group which was part of PSSI, when they purchased them and that’s how this relationship kind of started with McKesson is from that position there.
Right. And then you mentioned an export order is that something you put in more energy into the international area.
And how big could that be overtime?
Can't say right at the moment. I would say we don’t have a lot of detail, I just want you to be aware that we're working long it looks like some opportunity and as we get more clarification on it, we’ll report back to you. I think you've asked a good question but we’ve not made any of that public and would rather kind of wait until we get a better clarity on that before we talk in detail.
Okay and then last question - how much spare capacity do you have, how - where would you max out your sales?
Right now we are running in here in Greenville probably about one in quarter shifts. So we’ve got another shift in two-thirds out of our facility here. In Canada we've got capacity on the manufacturing side but we would need more storage facility if we - we can get to a point where we can run about $15 million to may be $17 million worth of business out of that facility before we had to do something different and we are roughly 12 and change if not little higher.
So we are getting close in Canada but here we still got a lot of capacity.
Okay. All right, great, thanks. We’ll talk to you next quarter
We'll go next to Sam Rebotsky with SER Asset Management.
Good morning Jim, Richard, and I want to thank Doug for so very good questions, it makes my job a little easier. So tell me this overseas order if you get it that would come out of both Canada and the U.S. to coordinate if that happens and -
The mattresses from Greenville and bed frame is out of Canada.
And then if you needed more space you’d have to undertake more space in Canada or et cetera, hopefully you have that problem -
The number of employees you currently have for example at the end of the year you see the number listed was 261 and you probably came down after you shift the order and then you have the flexibility to move up, is that the way I should look at this that that number keeps changing?
The 260 was probably a good number for us right now that rose were reflective - all of that shipped in November. So you know promotion actually shift in November so we had paired everybody down the by the end, so that 260 number and that 260 number those not included in - that we might have to run - but that 260 to roughly 270 number is pretty good for us.
Okay. And the Affordable Care Act I thought the 3.8 Act is intact came out, am I wrong on that or is it, is there a tax bill to take it out or -
The Medial device tax?
We were not subject to that medical device tags.
What he might be saying though is that it did recently get delayed for two years. And so that's a positive sign. It hasn't gone away completely, but it has at the moment been delayed.
Okay. Now, I guess you speak as far as the second quarter you had $0.26, for this quarter last year you had $0.33 and you improved this quarter substantially and we expect to improve over the $0.26. But we sort of have a handle when we could sort of get a higher regular in number. Even though there was one week less, you still had the substantial order. Is there a way where we're shooting for a higher quarterly earnings more consistent?
Higher than the $0.40, $0.43. Is that what --
No. Basically that we spoke that you'd have to - you're not going to do that this year. I think on the last call, we thought maybe a $1.60 might be achievable. It's not, nothing is written in stone, but the question hopefully you could do somewhere not closer - pretty decently higher number than $0.26 you did in the second quarter. But I'm just trying to get a handle where we're going on a regular earnings basis.
And obviously we're looking at something closer to what we did in the first quarter now, which you got to understand is that this thing will ride up and down a little bit from a rollercoaster standpoint. Where we want to hit obviously is on a more consistent basis and what we just came out of and higher on a routine basis, we are going to have some ups and downs.
We are in a capital goods business. And it's hard to project and it's hard to know exactly what's going to be out there. So I understand you want some more clarity on that. I can't be any more specific, but I think where we are shooting for us is try to get to that more consistent where we had $0.40 and above.
When we'll get there in next or this quarter, probably not, but we’re going to do everything, it's not an impossibility and we are going to do everything we can to get there. And we got number of things that we feel like or that are on the table to help us throughout the year. We'll just have to wait and see.
And I guess we have about 10% less shares outstanding, so that sort of partially helps.
Yes. That's helpful in that regards. That was one of the reasons, obviously that helps the remaining shareholders where we've returned that value to the existing shareholders.
And in addition to look, I guess the time is - you're spending a lot of time trying to increase an overseas order increase business. Are there any things that you're looking at as far as acquisitions or is there nothing of substance that you're looking at as far as an acquisition at this point?
We are always working at acquisitions. And those are not things we can talk about because we haven’t made any of that public, but we are always looking at the - I have things come across my desk on a routine basis. It's a matter of finding the right one, the right fit and somebody that's willing to accept what we're willing to pay.
And do you see prices coming down on acquisitions, because things have changed a little bit with the stock market and the affordability. Do you see any more reason above these on the sellers?
At this point in time we'll just have to see, but not right at this point. Because most of the ones we're talking to or small privately held companies, they are not public companies. So that even makes it a little more difficult.
These people have paid less taxes and so they are more conservative and there may be more earnings when they require us. So that’s the other side of the coin. But you guys have done a great job, keep up the good work and hopefully, your story will get out.
Thank you very much.
Have a good day.
And at this time there are no other questions in queue. I’ll turn it back to our presenters for any closing remarks.
Just want to thank everybody for being with us here again. And we look forward to sharing our story again at the end of our second quarter. Have a good day.
And that does conclude today's conference call. We appreciate your participation.
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