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Executives

Alan Levy - CFO, Vice President - Finance, PrincipalAccounting Officer, Treasurer, Secretary

Frank A. Newman - Chairman of the Board, Chief ExecutiveOfficer

Analysts

Gary Giblen - Goldsmith & Harris

Joe Goldsmith - Goldsmith & Harris

Dick Edelman - Standards & Morris

William Pike - Pine Street Securities

Medical Nutrition USA, Inc. (MDNU) F3Q07 Earnings Call December 12, 2007 11:00 AM ET

Operator

Good morning. My name is Tiffany and I will be yourconference operator today. At this time, I would like to welcome everyone tothe Medical Nutrition third quarter conference call. (Operator Instructions) Iwould now like to turn the call over to Mr. Alan Levy, CFO. Sir, you may beginyour conference.

Alan Levy

Thank you, Tiffany. Good morning. Most of you should havereceived a copy of our earnings press release. If you did not receive a copy,it is posted in the investor relations section of our website at www.mdnu.comand other financial websites.

This call is being broadcast live on our website. Replayswill be available on our site for the next 90 days.

And now for the required forward-looking statements comment;this conference call may contain forward-looking statements that are subject tocertain risks and uncertainties. Although the company believes that theexpectations reflected in any of its forward-looking statements are reasonable,actual results could differ materially from those projected or assumed. Risksand uncertainties that could cause or contribute to such material differencesinclude, but are not limited to, general economic conditions, changes incustomer demand, changes in trends to the nursing home, renal care, healthfood, and bariatric surgery markets, changes in competitive pricing forproducts, and the impact of its competitors' new product introductions.

The company’s future financial condition and results ofoperations, as well as any forward-looking statements are subject to change andinherent risk and uncertainties. Other important factors that may cause actualresults to differ materially from those expressed in the forward-lookingstatements are discussed in the company’s Securities and Exchange Commissionfilings, including the report 10-KSB for the period ended January 31, 2007 asfiled with the Securities and Exchange Commission on May 16, 2007 and Form10QSB for the quarter ended July 31, 2007 filed September 14, 2007.

With me this morning is our Chairman and Chief ExecutiveOfficer, Frank Newman, who will make some comments. Then Frank and I will openthe call to your questions.

I am going to review the quarter and nine months endedOctober 31, 2007 in comparison with the prior period. Everyone should have thepress release with the details so I will only be reviewing the highlights.

Sales for the quarter ended October 31st were $3.4 millionas compared to $2.7 million the prior year quarter, 25% increase. Sales ofbranded products for the current quarter were $2.7 million as compared to $2.2million for the prior year quarter, a 23% increase in line with our forecasts.

Private label sales increased to $673,000 for the currentquarter versus $496,000 for the prior year quarter, also in line with ourforecast. Gross profit was consistent at 52% margin in both quarters. Selling,general, and administrative for the quarter was $1.5 million, or 44% of sales,as compared to $1.1 million or 39% of sales in the prior year quarter. Theincrease of percentage of SG&A comes from our increasing the size of oursales force and adding additional markets.

Income before income tax for the quarter was $369,800 versusnet income before income tax of $200,700 for the quarter ended October 31,2006. The company had no interest expense for the current fiscal quarter ascompared to $83,000 in the prior year quarter. The decrease is a result of thecompletion of the amortization of debt discount related to the company’s 2003convertible promissory notes and warrants, all of which have been convertedinto common stock as of January 31, 2007.

The company reported an income tax provision of $149,800 forthe quarter ended October 31, 2007. In the prior fiscal year, the company hadprovided a valuation allowance for the full amount of the deferred tax assetsand the provision for income tax consisted only of state franchise taxes.

Net income for the fiscal quarter was $220,000, or $0.02 pershare, compared to net income for the quarter ended October 31, 2006 of$196,400, or $0.01 per share.

For the nine months ended October 31st, sales increased 26%to $9.6 million; branded sales increased 30% to $8 million; gross profit was aconsistent 53% of sales in both nine month periods; net income was $434,000, or$0.03 per share versus a loss of $2.2 million or $0.23 per share in the priorperiod.

We ended the quarter with a very strong balance sheet withover $9.5 million in cash and short-term investments, reflecting over 98% ofour receivables in 30 days with no short or long-term debt.

It is now my pleasure to turn the call over to Frank Newman,our Chairman and Chief Executive Officer.

Frank A. Newman

Thank you, Alan and good morning to all of you. I just wantto make a couple of comments before fielding your questions.

There were two statements included in the press release, oneregarding our expansion of our sales force and the other regarding a stockbuy-back that I’d like to comment on briefly.

First of all, with regard to the sales force, just to putthis in perspective for you, what we have announced is the plan to increase ourfield sales force by approximately 45% between now and the middle of next year.What that will bring us to is approximately 19 area managers from the 13 areamanager slots that we have today, which compares to approximately 10 areamanager slots at this time last year. In the prior year, Q4 to Q4, we’ve alsoadded a regional manager position in addition to those area managers. So itreflects a substantial increase in our sales force and reflects the results ofthe sales optimization process that we’ve been -- well, it’s really acontinuing process but that we’ve intensified over the last few months and whatwe’re discovering is that the -- we don’t have enough feet on the ground todayto fully capitalize on some of the opportunities available to us, mostparticularly in the Midwest and mid-Atlantic areas, where we see much morepotential than we are capturing within the time period in which we would liketo capture it. So that’s the focus of the acceleration of the sales force.

That will -- obviously hiring people is expensive and thatwill cost us some -- what otherwise might have been reported to the bottom lineduring the next year but we think it’s an absolutely prudent investment and willpay significant long-term dividends in terms of increased distribution of ourproducts.

The other announcement that we made concerns the company’sintention to repurchase up to 500,000 shares of common stock in the open marketor in private transactions over the next 12 to 24 months.

Now, as all of you are aware, whenever you have a stockrepurchase, the actual number of shares repurchased and the timing of suchrepurchases depend on a number of factors, not the least of which is thetrading price of the company’s stock and the general market conditions. Anddepending on what happens with both price and market conditions, the repurchaseactivity could be suspended or discontinued at any time.

Having said that, at our last recently concluded board meeting,the board determined that repurchasing shares with the principal objective ofmitigating the dilution from employee stock and option grants, which a numberof you on the line have commented about in the past, is a good use of excesscash and we are sitting on a lot of cash that we don’t have other immediateneeds for and we think this repurchase is sized to a level that accomplishesthat objective while also maintaining more than adequate reserves in order tocontinue growing our business.

So with that said, we are pretty pleased with the quarterand look forward to the benefits of expanding our sales force even further. Andbefore taking your questions, one other comment; you should be aware, and Ithink we conveyed this to most of you, but we are intensifying our investorrelations efforts in the coming months and we’ve asked the equity group toorganize several road shows for us. So if you would like to schedule a meeting,please contact Lena [Katty] at The Equity Group and additionally, obviouslyAlan and I are available for conference calls with investors and analysts as weare able to schedule them.

With that, Tiffany, if you’ll ask for questions, we’d beprepared to answer them.

Question-and-AnswerSession

Operator

(Operator Instructions) The first question comes from theline of Jay Harris with Goldsmith & Harris.

Gary Giblen -Goldsmith & Harris

It’s actually Gary Giblen sitting here with Jay. A couple ofquestions; the inventory looks good. It’s up 6% versus up 25% on revenues, so whatled to that good inventory performance? Could you explain a bit?

Frank A. Newman

I don’t know that we -- that there was anything particular,Gary. What we try to maintain is based on the lead times that we have with ourprincipal manufacturers, a sufficient cushion so that interruptions in supplydon’t imperil sales performance.

We brought on a second manufacturer during the -- towardsthe end of the quarter. Their initial shipment was somewhat delayed as theywere processing -- it is actually because of some packaging issues that theyhad that they were unable to deliver it on time and so I think that dipped ourinventory a little bit lower than would otherwise have been the case withoutthat minor interruption, which has not been resolved.

Gary Giblen -Goldsmith & Harris

Okay, great. That’s helpful. And the -- should we think interms of 25% to 30% revenue growth until mid-’08 when you get the increasedsales force productive?

Frank A. Newman

We don’t get terribly specific on that, Gary, as you know. Imean, we were during the road show that we had a week before last, I think wewere talking about in the range of 20% increases and I think that’s about asspecific as we’d want to be at this point on that.

Gary Giblen -Goldsmith & Harris

Okay, so that’s a better number. And what are the largestelements of the marketing expense, other than the cost of salaries of peoplethat -- is it travel, is it entertainment, is it training? What are the biggeritems?

Frank A. Newman

It’s all of the above but certainly the salaries and bonusesare far and away the largest percentage there. The next category would beT&E. Obviously these are people who are on the road virtually all the timeand so those expenses mount.

The other thing that’s included in our sales and marketingbudget is advertising, which would be the next largest item, and then the otherexpenses related to training and holding sales meetings and printed materials.

Gary Giblen -Goldsmith & Harris

Okay, and have you increased your advertising per area or isit just you are just operating -- calling on more accounts?

Frank A. Newman

No, I think part of the analysis that we did on salesoptimization is that all of our advertising -- 90% of our advertising isnational advertising. We advertise in the periodicals and journals that areimportant to our target audience and so I think what’s happening, what we’veconcluded is that there are certain areas in the country in which we need morefeet on the ground in order to capitalize on the advertising as opposed tousing advertising to stimulate additional sales, since as I say we areadvertising nationally now. We just think we can do a better job of followingup on that in certain areas.

Gary Giblen -Goldsmith & Harris

Okay, and just one more quick one, at least for me is the --what was the stock compensation expense for the quarter?

Frank A. Newman

Alan, do you have that?

Alan Levy

Yeah, it was approximately about $0.25 million.

Frank A. Newman

Keep in mind that that doesn’t change quarter to quarterexcept with regard to forfeitures, because we only, for all intents andpurposes, issue equity based compensation once a year and then that isamortized, as you are aware, over the life of the -- on pretty much a straightline basis, over the life of the grant, which in our case is typically threeyears and divided equally over each of the four quarters. So that does notfluctuate much quarter to quarter.

Joe Goldsmith -Goldsmith & Harris

Frank, Joe Goldsmith, just briefly. Is the repurchasing planonly to neutralize the number of shares or are you going to go beyond that?

Frank A. Newman

Well, I think the principal, the catalyst for it was clearlyto be responsive, frankly, to comments that people such as yourself and otherinvestors have made with regard to not wanting to be diluted or at least tominimize dilution that results from equity grants. I think everyone understandsthe motivational benefit of equity grants to employees but if not managedcarefully, it can lead to sort of creeping dilution that is not a friend to anyshareholder. So that is clearly the catalyst for it and all other things beingequal, that would be its intent.

That’s not to say that we could find ourselves in a positionwhere we consider, depending on what happens to the market, that buying MDNUstock is the best use to which we could put our money. If the stock becomesdevalued, I suppose that could change that but as I say, absent anything --absent that kind of a condition, the purpose is to, as we stated, mitigate thedilution that might otherwise occur from employee stock plans.

Alan Levy

We’ll come back after you’ve had a chance to ask otherpeople questions.

Frank A. Newman

Are you reserving the floor?

Operator

(Operator Instructions) You have a question from the line ofDick Edelman with Standards & Morris.

Dick Edelman -Standards & Morris

First off, I apologize; I had another meeting and I got intoyour conference call late, and I’m new to the idea of Medical Nutrition as apotential investment, both for myself and my clients. And you probably alreadyanswered this question but you are talking about buying back stock when thethinness of the stock really doesn’t allow us to do anything as far as gettinginvolved in the first place. Aren’t they contradictory to some degree? And ifyou’ve already answered this, I really apologize.

Frank A. Newman

No, Dick, that specific question hasn’t been asked and Ithink it’s a -- it’s clearly a good question and we wrestled with thatourselves and we’re trying to serve two masters here. One is to increaseliquidity in the stock so that people such as yourselves can invest in thecompany. We think the best way to do that, and you may have missed thesecomments also, is to do a more intensive job of investor relations andobviously continue to post positive results, that that will have the greatestimpact on liquidity and trading float.

The other master we are trying to serve here is to mitigatethe dilutive impact on our existing shareholders of our ongoing employee equitygrant program. And I think the way we’ve sized this, which is up to half amillion shares over 12 to 24 months in and of itself is unlikely to have amaterial impact on liquidity and that’s part of why -- it was considering allof those factors that we’ve concluded that A, it was advisable and B, that itwas sized carefully enough that in and of itself, it should not negativelyimpact liquidity and --

Dick Edelman -Standards & Morris

Frank, I would normally agree with you. I’m an officer inanother -- actually, a director in another public medical device company and sowe go through these things from time to time and the 500,000 shares is not thesignificant thing. But it would appear that unless the stock goes way down, Iwould hope you wouldn’t buy it, number one, because that does take stock out ofthe market. And number two, as you say, a more expressive IR/PR operationcertainly would help. Hopefully that these folks can do a good job -- I mean,they got me interested but I haven’t done anything because I can’t buy thestock. And obviously I look at, as I’m sure the rest of your brokers andpotential buyers out there look at market capitalization to revenues and goodbalance sheet situation and the fact, first off, that you are making money andso many companies of your size don’t make any money, and you are paying taxesbesides.

But damn, there’s no way to buy any stock.

Frank A. Newman

No, I thank you for your comments. They are not takenlightly and that was a key part of our deliberation.

Let me just make one comment -- first of all, we are -- withregard to taxes, and if you are new to the stock, you may not be aware of this,we actually have significant NOLs and so while we report taxes on our earnings--

Dick Edelman - Standards& Morris

It’s a non-cash flow item, of course.

Frank A. Newman

Correct.

Dick Edelman -Standards & Morris

I realize that.

Frank A. Newman

Those are actually deferred.

Dick Edelman -Standards & Morris

But you are building your cash position, which is helpfulwhen you are building a sales force as aggressively as it sounds like you aredoing.

The other question is the direct sales force, are theseactually employees or are they factory reps?

Frank A. Newman

They are company employees.

Dick Edelman -Standards & Morris

Company employees -- so these are guys that typically takesix months to learn the product, or -- I mean, is this -- this is an expensiveproposition that you are following right now, isn’t it?

Frank A. Newman

It is and that’s why we think of it as an investment ratherthan an expense. And as to how quickly area managers come up to speed, a greatdeal of it has to do with their experience, the familiarity with the nursinghome market and their familiarity with the geography into which we put them.And obviously it’s those factors that are the principal determinants when weare looking to hire someone.

They come up to speed -- assuming they have long-term careexperience and are familiar with the market, the learning curve is prettyquick. Ours is not a hugely difficult story to understand and we are --

Dick Edelman -Standards & Morris

What is your number of products that they are having to work--

Frank A. Newman

That’s what I was going to say; we’re blessed with havingrelatively few products. The Pro-Stat line, I mean, if you include flavors andunit does, different package sizes, it probably has about 20 SKUs but in fact,it’s really four different, five different products. And then we haveFiber-Stat, which is a liquid fiber, and then we’ve got -- we will have atleast one more product introduction next year, so it’s a relatively conciseline. Our people are able to take pretty much a rifle shot approach to bothlearning it and also to selling it.

So we look for about a 90- to 120-day initiation period forour new sales people to get fully up to speed.

Dick Edelman -Standards & Morris

And what’s the number, what’s the count right now, Frank?

Frank A. Newman

We have 13 slots, 13 identified positions right now. We’removing that to 19. We actually have three openings right now. We just had someturnover, one about --

Dick Edelman -Standards & Morris

You mean I can get a job?

Frank A. Newman

You can. One of our sales people decided not to come backfrom maternity leave or even things like that, but --

Dick Edelman -Standards & Morris

Well, my point in asking that obviously is where you standin the marketing side and I’m going to presume that the nature of yourbusiness, unlike the medical device area which I’m more familiar with, does notallow for a salesman to be of the higher income range and as such, there may bemore turnover in the categories that you are involved with. Is that right or isthat wrong?

Frank A. Newman

I think that’s wrong. I don’t know how we would compare tomedical device, but we do know that our compensation package is more than competitivewith people like Novartis and --

Dick Edelman -Standards & Morris

All right. I didn’t mean any disrespect in that regard. Iwas just --

Frank A. Newman

Please don’t. They may be listening.

Dick Edelman -Standards & Morris

Okay, anyway, that’s about all I’ve got right now. I guessI’m -- my quandary is the ability to acquire the stock at a reasonablevaluation, which is, as you are well aware, is nigh impossible at thiswrite-down here.

Frank A. Newman

I would advise you to talk to The Equity Group about that.We’ve had some discussions with them as to how that might be accomplished andLena and Bob can probably help you in that regard.

Dick Edelman -Standards & Morris

All right, and are you going out on the road at all?

Frank A. Newman

We will be. As I mentioned, you may have missed that --

Dick Edelman -Standards & Morris

Yes, I did, unfortunately.

Frank A. Newman

We’ve asked The Equity Group to schedule several road showsand so, should you wish to meet with us, please get a hold of Lena Katty andmake sure --

Dick Edelman -Standards & Morris

All right. Well, I’m down in Dallas and I e-mailed with hertoday, so --

Frank A. Newman

Okay, great.

Dick Edelman -Standards & Morris

All right. Thank you very much.

Operator

Your next question comes from the line of William Pike withPine Street Securities.

William Pike - PineStreet Securities

You answered some of my questions. I want to hear more aboutthe expanded sales force. Are we talking new territories you’ve never been inor different facilities in the territories? Give us a little color on that. AndI was also going to ask how long it takes to get up to speed. You’ve addressedthat already but for that matter, how long to get these salesmen -- you know,we got in the stock and by the way, I agree with the prior gentleman; I don’tobject to a little bit of dilution. In a rapidly growing company, that’s to be expected.The liquidity trade-off, sometimes I’m on that side of the equation. This time,I guess I’m more on the I’d like to see a little more liquidity, but that asidecould you give us a little more color on the expansion of the sales force?

And for that matter, the departures, I understand the ladywho didn’t want to come back after maternity but I’ve always felt this is acompany for whom 25% growth is actually not impressive, given your product.Someday there is going to be a [hockey stick boiler], if you will, where salesare going to double for two or three quarters in a row and I’m wondering if --are salesmen leaving you because for some reason it’s a tougher sale than weexpect or are the new salesmen going to be doing something different? Give us alittle color on that, if you would.

Frank A. Newman

Sure. Let me address the turnover first and there were -- itjust happens to be coincidental, I think, that these three occurred in the samequarter but we did have one area manager who loves the company, loves her job,but loves her new child more and we fully understand that and respect it and isdesirous of coming back as her child grows.

We had one other person who left because her husband’s jobchanged and required extensive travel on his part, which curtailed her abilityto travel as extensively as we required. She actually remains a consultant tothe company in order to deal with some of the key accounts in her area. Sowhile she has gone down from full-time status to part-time, she remains part ofthe fold.

And the third one was a relatively new hire that by mutualagreement was best suited to a different job. So they are completely unrelated.I don’t think there is anything endemic in terms of that kind of turnover. It’sexpected and those issues are going to occur and hopefully they don’t typicallyoccur all at once but they will I’m sure occur in the future.

With regard to the optimization of territories, I mentioneda little earlier that the principal markets into which we are going to putthese additional people are the Midwest, both the upper and lower Midwest, andthe mid-Atlantic. And those are markets that we are in right now but they are-- we don’t feel we have adequately exploited the opportunities available to usthere. Clearly on a dollar basis, they represent, as nearly as we candetermine, significant potential for us.

And so principally, those additional people will result inmore pairs of feet, if you will, in existing markets but along with that, therewill be some expansion of the markets. For example, right now we have an areathat’s Michigan, Illinois, and Wisconsin. We will probably add parts ofMissouri to that area as we bring on additional people. We have another,Kentucky, Indiana, and Ohio. We will add parts of neighboring states and maybea couple of additional states into that area as we bring on board additionalpeople.

So it’s more a question of making sure we have sufficientnumbers of people to match the potential by market.

So I hope that answers your questions.

William Pike - PineStreet Securities

It does. Thank you.

Operator

Mr. Newman, I am showing half-past the hour. Would you liketo continue with questions?

Frank A. Newman

Let’s take one more, if we can, Tiffany.

Operator

Okay. Your next question comes from the line of Dick Edelmanwith Standards & Morris.

Dick Edelman -Standards & Morris

Have you given any guidance at all, Frank, or are you goingto be doing any guidance?

Frank A. Newman

Not really. Earlier in the call, the question was asked asto what we are looking at in sales for next year and I think the range that wehave pointed to as recently as a couple of weeks ago during investor meetingsis give or take 20% sales growth.

Dick Edelman -Standards & Morris

Okay, with a margin roughly the same kind of growth or [doyou want to] get that far?

Frank A. Newman

Well, let me just tell you our strategy is not to maximizemargin in the short-term but to maximize top line growth --

Dick Edelman -Standards & Morris

Revenues, of course, and that is more important.

Frank A. Newman

And so we are not looking for material expansion.

Dick Edelman -Standards & Morris

All right, and lastly, the gentleman asked about thepenetration. Is your penetration 99% into the nursing home arena or other areasthat you are going after?

Frank A. Newman

Our focus is on nursing homes primarily. We also have avibrant business in dialysis clinics, for which our products are ideallysuited. But we have -- there is so much potential to us available in thenursing home industry. There are 17,000 nursing homes in the country.

Dick Edelman -Standards & Morris

And there’s a lot of good occupancy.

Frank A. Newman

Correct, and so we are attempting to focus not exclusivelyon that but certainly as far and away our number one priority and the otherbusiness that is available to us, we’ll welcome, we embrace and appreciate butour real direction is to get to a level of becoming the standard of care in thenursing home industry before seriously exploiting other markets.

Dick Edelman -Standards & Morris

Thank you very much.

Operator

Mr. Newman, are there any closing remarks that you have?

Frank A. Newman

No, other than to say thank you for your participation. Alanand I are available should you need to call us with any follow-up questions,and let me just remind you to contact Lena Katty of The Equity Group should youwish to participate in our upcoming road shows. Thank you very much and have agood day.

Operator

This concludes today’s conference. You may now disconnect.

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