Medical Action Industries Inc. F2Q08 (Qtr End 9/30/07) Earnings Call Transcript

Medical Action Industries Inc. (MDCI)

F2Q08 Earnings Conference Call

November 1, 2007, 10:00 am ET

Executives

Richard Satin - VP of Operations and General Counsel

Paul D. Meringolo - President and CEO

Analysts

Matt Dolan - Roth Capital Partners

Mitra Ramgopal - Sidoti and Company

Presentation

Operator

Good morning. My name is Tony, and I will be your conference operator today. At this time, I would like to welcome everyone to the Medical Action Conference Call to discuss the results of operations for the Three and Six Months ended September 30, 2007.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions)

Thank you. It is now my pleasure to turn the floor over to your host, Richard Satin, Vice President of Operations and General Counsel. Sir, you may begin your conference.

Richard Satin

Thank you, Tony. Good morning and thank you for holding. With me on this call is Paul D. Meringolo, CEO and President of Medical Action Industries. The primary purpose of this call is to discuss our results for the three and six months ended September 30, 2007, which were released this morning.

As you know, we must first touch all of the legal bases by noting that both our commentary and responses to your questions may include forward-looking statements.

These forward-looking statements are subject to a number of risks and uncertainties discussed in detail in our report on Form 10-K, annual report to stockholders and our quarterly report on Form 10-Q, all of which have been filed with the Securities and Exchange Commission. The company's actual future results may vary.

It is now my pleasure to introduce Paul D. Meringolo.

Paul Meringolo

Good morning. And thank you for all being on the call today. Nice to be here. As usual I’ll go through the financial results, talk a little bit about what we see for the past and what we see in the future and then open the floor up for questions. So, I’ll begin.

Our net sales for the second quarter reached a record $72,285,000, I think at one time that was a good year. An increase of $30,112,000 or 71% over the $42,173,000 in net sales reported for the three months ended September 30, 2006.

Net income for the period was $3,268,000 or $0.21 per basic share, $0.20 per diluted share, an increase of $295,000 or 10%, as compared with $2,973,000 or $0.19 per basic share, $0.19 per diluted share reported for the comparable quarter in fiscal 2007. All this per share amounts reflect the 3-for-2 stock split in the form of a stock dividend that was paid on February 9, 2007.

Net sales for the six-month ended September 30, 2007 totaled a record $142,531,000, an increase of $61,327,000 or 76% over the $81,204,000 in net sales reported for the six months ended September 30, 2006.

Net income for the six months ended September 30, increased 21% to $6,780,000 or $0.43 per basic share, $0.42 per diluted share, compared with $5,594,000 or $0.35 per basic share, $0.35 per diluted share reported for the comparable six months in fiscal 2007.

Challenging quarter, it’s been a challenging year, we passed the one-year milestone that we own Medegen and we continued down our task of consolidation in moving our Colorado facility into Galloway plant.

We also are well underway to moving Medegen on to our IT system and getting them on to SAP, so that is right around the corner for us and we expect fullest execution on that side.

And these operating results are probably from a street perspective a little less than expected, but I can tell you from an internal perspective, I have not seen this teamwork hard than they have in the last year.

This consolidation of the Colorado plant into our Galloway facility is not a simple task and I’ve never made it a simple task. I’ve always talked to the street and try to temper expectations that is not an easy transition but one that needs to be done. It involves processes, people, equipment, culture and we are well on our way to getting that facility move in-house.

We’re also changing mindset of people in the Galloway plant, there is a lot of work that has been done there, and there’s a lot of work that still need to be done, those are all good things for us because there is tremendous opportunity to get better in that facility.

From a revenue standpoint, topline remains very strong, despite some of the hiccups we’ve had from the service side. We remain very focus on our customer and although we have had some service issues, you know, part of the spend that we have there is to make sure that we are able to supply our customers with product, you know, timely basis.

And so there’s a lot of dynamics this is probably the toughest time and this transition was this quarter and the following quarter, we’ll continue in the following quarter. As a toughest time because we are in a middle of it.

And but I will tell you we remain very excited about the opportunity, we remain very excited about the opportunities to continue to enhance our cost position, enhance our operations in that Tennessee plant and we will stay focused on making sure that we drive cost out of that operation everyday and make it a much better operation.

While we speak we are also investing in equipment and we have talked about that to the street numerous times, that our capital expenditure will continue to increase over the upcoming years as we replace all the equipment with newer equipment and all the molds with new molds.

Again that's going to continue to enhance that operation, make it run better and lower our overall cost and much really what we are driving towards.

And other challenges that we have, China continuous to be a challenge from a cost prospective with currency and so, we've been impacted from a cost prospective but we have done a very little from a price perspective in the marketplace, that will happen later part of the third quarter and going into the fourth quarter we expect to go to the market with increases and we expect to hit the P&L at that time.

So up until this state its been a lot of negative impact to the P&L with very little positive but I can tell you the positive we believe, is just around the corner and as you all know we have executed our plan a pretty well over the last 15 years.

And I have got no reason to believe that what we have in front of us is insurmountable and I think, it’s a extremely durable. And we are excited about the next couple of quarters from an operating side of business. So lot of opportunity to get better and we are going to continue to work, work as all as we can to get it that.

And from an acquisition side again, we remain very focus on another transaction knowing what we have in front of us with this integration and we are, obviously, we’re focused on that, but in the meanwhile we know from the time we are applying the transaction till the time we constantly made a deal its relatively more period of time. So we remain very focused on that front and identifying, and focusing on another transaction.

If you check look at our balance sheet, you could see some best improvements there, not only on the assets side but on the liability side, if you just take look at inventory, inventories are -- they have been managed very well in the first six months of this year.

You can see reductions in inventory to the turn of little over $4 million from year-end until now just take a look at our debt, our debt in down, our share holders equity is up over $10 million or so we are again we continue to remained very focused on the financial principals that got us here and we'll continue to get us to the next level of our growth in the upcoming years so we will not come of that we will stay very focused on those pieces and are excited about the future.

So again we will reiterate and we expect this year to be another record year both in revenue and net income and we believe that the market place and the consolidation as going on in the market place in our balance sheet is a great combination for the future of the Medical Action Industries Inc.

So with that, Tony and I left open the floor for any questions anybody might have.

Question-And-Answer Session

Operator

(Operator Instruction) Thank you our first question is coming from Matt Dolan of Roth Capital. Please go ahead.

Matt Dolan - Roth Capital

Hi guys. Good morning.

Richard Satin

Hi, Matt. Good morning, Matt.

Matt Dolan - Roth Capital

Just couple of question first Richard can you break out the growths in a operating margin experience between Medegen and like we see MDCI business and give Paul your comments on the inefficiencies in the near terms may be help us in terms of growth margin.

Were there are any product mix of coming an impact here in the September quarter how should we look at were we stand and they are going forward.

Richard Satin

I think that if you look at the margins on the Medical Action businesses, that clearly business as usual. And on the Medegen the gross margins will negatively impacted as result for those manufacturing inefficiencies.

If we didn’t incur those which, we don’t have a crystal ball but obviously the margins would have been very close to were they were historically as a combined into this since we acquired Medegen and overall there margins remains exactly were we thought they would be, other than you the head counter we had as a result of the consolidation.

Paul Meringolo

Hi, Matt. Again to a larger extent the Medegens margin's clearly were impacted by this million dollars its clear, as about they are for a medical action side there is a lot of pluses and minuses that have happened over the last three months.

But I would say that the cost impacts that we had from a China side and obviously from a resins side have absolutely put some pressure on margins there. And that’s why we are focused on making sure that we execute a price increase to the marketplace.

And as you know, from previous conference calls and previous price increases we’ve had, from the time they announced, to the time they hit the P&L there’s a big lag there. And it’s a complex process and it happens in pieces.

But you’ve seeing in the past that we had the ability to raise prices keep our sales numbers and stop the bleeding from a core side. And so we expect that trend to continue going forward from here.

Matt Dolan - Roth Capital

And in terms of timing on that price increase and magnitude?

Paul Meringolo

Well, I would think it’s going to -- it’s going to be on the overall book of business a small percentage. But in pure dollars you could be big and it’s -- you talk in the next -- I would say in the next five months.

Matt Dolan - Roth Capital

Okay.

Paul Meringolo

But we expect to see in various stages at the P&L.

Matt Dolan - Roth Capital

Okay. Great. That helps.

Paul Meringolo

That’s the goal.

Matt Dolan - Roth Capital

And finally, on the acquisitions strategy, you may give us an idea of how some of these targets compare to prior deals as it relates to magnitude?

Paul Meringolo

You know, Matt. Just I don’t want to create this expectation. But I can tell you some of the deals that we’re looking at, some are in the lower range of what we’re seeing, some of them are in the $15 to $20 million range. Some of them are much bigger than less transaction that we do.

So they vary in size, in complexity, in markets and products. So again, you know how we operate, we remain very optimistic and we’re pushing -- we are trying to push that envelope as much as we can.

Richard Satin

The point that I’d like to make for you Matt is that. The pipeline is extremely full. We are very pleased with the transactions that we are seeing and they do vary in size from what would be for us a smaller acquisition to a larger acquisition.

Matt Dolan - Roth Capital

Okay. Great. Thanks a lot guys. Take care.

Paul Meringolo

Thanks, Matt.

Operator

Thank you. Our next question is coming from Mitra Ramgopal of Sidoti. Please go ahead.

Mitra Ramgopal - Sidoti and Company

Hi. Good morning, guys.

Richard Satin

Good morning, Mitra.

Mitra Ramgopal - Sidoti and Company

Just want to…

Paul Meringolo

Congratulation, Mitra.

Mitra Ramgopal - Sidoti and Company

Yes. Thanks. Just trying to get a sense with the Medegen consolidation. What’s your best sense given where you stand today? As to, when you pretty much expect that to be full integrated?

Paul Meringolo

The integration, we expect to be fully integrated, again a big chunk of it by January, February timeframe the latter March, April. I think will be beyond that integration.

Mitra Ramgopal - Sidoti and Company

Okay. And given your experience with Medegen now, I know you mentioned you potential looking at larger transactions. Is there anything here that sort of make you to take a step back before doing smaller deals or it doesn’t matter?

Paul Meringolo

Well, you know, Mitra. Again our fourth process was a Medegen, a three-year procedure deal, we figured first year we would make money. The second year, we would be well on our way to taken of course that, so when we have this conversation next year and the comparisons look much better and it would be a little different conversation.

And in the third year, when the debt is being significantly paid off and all that interest expense that we’ve incurred goes into income, it will be that’s really where we are going to see the value of the transaction.

So, I don’t think Medegen has changed our mind at all in our approach. I think, we learned a lot in this first year. We learned a lot about the manufacturing operations. We learned a lot about the culture.

We are adjusting, we are changing, we are investing and I think, we own it and we need it for the long-term and we are not about deal on it, we are about to get more heavily trenched. So I think we just got to remain focussed on executing the plan and get going.

Mitra Ramgopal - Sidoti and Company

Okay. Thanks. And asset -- your gross margins if you look at just the base list in the different product lines, I think you are pretty pleased across the board with what you saw in the quarter?

Paul Meringolo

That's a tough question to ask me because I am not -- but I think overall the business is absolutely moving in right direction. Could we do better in other product lines, absolutely we are working on it everyday.

Absolutely, I think the sales growth, we're extremely happy about and I think we are going to focus on cost. We're going to continue to focus on price and we are going to continue to focus on better penetration in our existing markets those are all great upsides for us going forward.

Mitra Ramgopal - Sidoti and Company

Thanks. And finally just one last question. How much do you have available on your credit facility in terms of looking at new transactions?

Richard Satin

You know, we look at it a little differently. Our borrowings on the transaction for Medegen, we did in the term loan that we are paying off. We keep a relatively small revolving credit agreement. It's only $15 million but as you know we don't like paying unused portion fees.

Mitra Ramgopal - Sidoti and Company

Okay. Thanks.

Operator

Thank you. (Operators Instruction) Thank you. There appear to be no further question. I would now like to turn the floor back over to management for any further or closing remarks.

Paul Meringolo

Well, we appreciate your participating. And we look forward to talking to you next quarter or before. And I appreciate all your support and look forward to talk to you next time. Have a great day.

Operator

Thank you. This does conclude today's Medical Action teleconference. You may now disconnect your lines at this time and have a wonderful day.

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