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Kensey Nash Corporation (KNSY)

Q3 2008 Earnings Call Transcript

April 29, 2008 9:00 am ET

Executives

Joe Kaufmann – President and CEO

Wendy DiCicco – CFO

Analysts

Dave Turkaly – SIG

Jim Sidoti – Sidoti & Co.

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Kensey Nash third quarter earnings release conference call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for questions and instructions will be given at that time. (Operator instructions) As a reminder, this conference is being recorded. I will now turn the conference over to your host, President and CEO, Joe Kaufmann. Please go ahead, Sir.

Joe Kaufmann

Thank you. Good morning, everyone. Welcome to the Kensey Nash fiscal third quarter conference call. Joining me today are Doug Evans, our Chief Operating Officer, and Wendy DiCicco, our CFO. And we will start with the Safe Harbor.

Wendy DiCicco

Good morning, everyone. The statements made by Kensey Nash and its representatives in this conference call will contain certain forward-looking statements, including financial forecasts that are based on the current beliefs of management as well as assumptions made by and information currently available to the management team. Wherever possible we will try to identify these forward-looking statements by using words such as believe, expect, anticipate, forecast and similar expressions. Please note these words are not the exclusive means for identifying such statements. Please see today's news release and Kensey Nash's SEC filing, including our annual report on Form 10-K for the year ended June 30, 2007, particularly the information under the caption 'Risk Factors' for a discussion of risks, uncertainties and other factors that could cause actual results in the remainder of 2008 and beyond to differ materially from those expressed in or implied by our forward-looking statements.

Joe Kaufmann

Great. Thank you. I'm very pleased to report our results for the third quarter. Our total revenues of $20.6 million increased 9% to a record high in the third quarter. EPS of $0.28 represented a 47% increase over the prior year. Our revenue for the quarter was at the midpoint of our guidance, while our EPS of $0.28 exceeded the high end of our guidance which was at $0.27 a share. Sequentially, revenue increased 5%. This was primarily due to the strong performance of our Biomaterials Group and EPS increased 33% sequentially, continuing the strong performance for Kensey Nash throughout this fiscal year '08.

Looking at our nine months to date results, we've had revenue of $57.8 million. This is up 10% from the prior year, on net sales growth of 13% and royalty growth of 5%. Endovascular products of $4.6 million are up 54% year-over-year and biomaterials products have increased 13%. Pro forma EPS on a year-to-date basis of $0.64 a share has increased 49% for this nine -month period. Royalties were $6.5 million in the quarter, up 2% year-over-year. Our Angio-Seal royalties were essentially flat. However, our royalties on Orthopedic products increased 19% year-over-year.

I would like to discuss our Biomaterials performance for the quarter and also year-to-date. Our Biomaterials Group continued its outstanding performance in this quarter. Sales of $12.6 million were 8% above prior year and on a year-to-date basis, are 9% over the prior year. Our sales of Cardiovascular Biomaterial products for the quarter increased 4% year-over-year. However, this component of our Biomaterials Group is down 19%. This is the result of our sales of our Vascular Component products to St. Jude Medical. We had expected that our sales in this category were going to be down on a year-over-year basis because of the purchasing that took place in our prior fiscal year. This was totally expected and actually the 4% growth that we've had in the recent quarter was a little bit better than we had expected.

Our sales of Orthopedic products have continued strong in the quarter, up 8% year-over-year and have increased 33% year-to-date. This is again just excellent performance in this sector of our business and this is reflected throughout all our product lines, particularly in our bone void filler products and sports medicine. Both have had outstanding success throughout this fiscal year and we expect that is going to continue for the foreseeable future.

On the Endovascular side of our business, sales were $1.6 million for the quarter. This represents a 49% increase over the prior year. They are up 54% year-to-date. Our sales growth in Endo has been significant despite the decline in our US field sales personnel. US sales in the quarter were approximately $1 million and we had a total of approximately 18 people in the field during this quarter. In our December quarter, our US sales were actually $1.1 million with approximately 27 people in the field. If you look at the decline in the number of personnel that we had available in the March quarter and you look at what we have achieved in sales for that quarter, I think it was an outstanding performance by the remaining sales team and the productivity that was delivered for these particular products.

On the international side of our Endo business, sales were approximately $600,000 in both the March quarter and the December quarter, with field personnel at about five in both quarters. So you can see that the products are doing well in the marketplace when we have the number of people that are available in the field to sell those products and improving the productivity.

Now, as noted in our press release today, our strategic review of the Endo business is continuing and has actually accelerated over the past 60 days. This has certainly impacted the stability of our US sales team. However, our products have done very well in the marketplace as evidenced by the growth. If you look at our International Group for the quarter, the third quarter sales of our International team were up 104% over the prior year and on a year-to-date basis, our International team is actually up 160% year-over-year. If you also look at the growth in the productivity by our US sales team, again, I think this confirms that the QuickCat, the ThromCat and the Safe-Cross products are certainly exciting products in the marketplace and have, once they are used by the physicians not only in the US but outside the US, you can see the outstanding performance that can be achieved with the right number of salespeople in the organization.

Now, I would like to turn it over to Wendy to make some comments on our cash position and also on our balance sheet.

Wendy DiCicco

Good morning, everyone. In addition to the strong performance we are having obviously on the income statement side, the company continues to generate cash on an operating basis, generating for the quarter $3.5 million net income, cash from operations of over $5 million. This was offset, however, by our continued activity in the share repurchase plan. During the quarter, we had activity under the share repurchase plan of $8.5 million and capital expenditures of $1.5 million for a total of $10 million net cash flow, $4.5 million cash outflow. So the net decline in cash in investments from $60 million in the December quarter to $56 million at the end of the March quarter is solely attributable to cash from investing activities, not cash from operations.

Also of note, I guess on the balance sheet just on the inventory side, the inventory has built moderately from the December timeframe and this is really as a result of our Biomaterials sales and the success we are having there and our increase year-over-year in sales and our plan for continuing growth on that side of the business. Although our endovascular inventory, we continue to plan for success on that side of the business, we want to make sure everyone is clear, the growth on the inventory side is not excess endovascular inventory. We are planning accordingly and managing that side of the balance sheet, the inventory levels on the endovascular side.

Joe Kaufmann

Great. Thank you. You can also see, as far as the expenses are concerned, our R&D expenses are down significantly, both in the quarter and year-to-date. This is primarily the result of a decision that was made last year to discontinue the Embolic Protection product line. So, we have had a significant reduction as anticipated in this segment of our spending. And also I think if you look at our spending overall, we have put into place many different controls. Our actual manpower or employees, at June of last year, we had approximately 375 employees at Kensey Nash. And today – at the end of June, 375. And today, we now have 340 employees at Kensey Nash. So we were able to accomplish the reductions here not only – obviously some of those took place in our field salespeople, but, also if you look at our R&D and our manufacturing team, we have been able to reduce the number of people essentially through attrition here and some with the reduction in the Embolic Protection. But, that's also taking into consideration the significant improvement I will say in sales. So this has certainly been reflected in, as you can see, in the earnings per share with the leverage we are seeing on the bottom line with our sales growth and then, of course, with the expense reductions.

Now regarding guidance, we will not be providing guidance for Endo business today as stated in our press release. We just don't feel comfortable in doing that for the quarter. However we can provide you with the Biomaterials and royalty guidance. We expect our Bio sales in the fourth quarter to be in the range of $12.7 million to $12.9 million. This represents 31% to 33% year-over-year increase. And royalties, we expect to be at 6.6% to 6.8%, 2% to 5% increase. And again, with the royalties, because of what we are seeing, primarily with the Angio-Seal essentially flat with modest growth there, that's why the royalty numbers are a little bit lower than previously estimated.

With that, I would like to turn it over for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question is from the line of Dave Turkaly with SIG. Please go ahead.

Dave Turkaly – SIG

Thanks a lot. When we look at the Biomaterials sales, I know that MacroPore was in there and had a pretty good contribution. As we kind of look ahead, I know you have a lot of great partners, you've got big guys across a lot of the – particularly on the spine and the orthopedic side – of those products, are you guys now at a point where you think you have more visibility going forward in terms of how these companies order? And which of the products, if there is one, could you highlight, do you think might be the biggest opportunity for Kensey Nash on a go-forward basis?

Joe Kaufmann

I think, Dave, if you look at our numbers and our guidance over the last several quarters and with our partners, I think the visibility and the guidance has been really outstanding. We've put into place some time ago a good communication system with certainly all of our partners. So we feel very good about how the inventories are being managed here at Kensey Nash and how the guidance is prepared. In terms of the products going forward, we are excited about several different products here with Kensey Nash. One of our partners recently announced the launch of the bioactive product, Orthovita. So, we are expecting that is going to be a significant product for both of us. We also have high hopes for the product that we engaged in the deal with Biomed about a year ago for the Bone Void Filler product that actually at the AAOS was we thought very well received and a lot of interest in that product and the future of that product down the road for other indications, expanded indications, in the cartilage area. So we are very excited about that particular product. If you look at the – one of the areas that has – we've seen a significant comeback in this past year is within the sports medicine field with Arthrex, one of our long-term partners. So this business in general, this year, has shown a lot of resiliency. It's performing extraordinarily well and we are very happy with how business has grown this year and it's about where we thought it was going to be in all the areas, may be a little bit better than we thought so in [ph] the orthopedic space.

Dave Turkaly – SIG

Great. And when you look ahead at orthopedics, I know you're not really prepared to give a kind of guidance for next year and beyond but, over time, I imagine that these products, given the partners are who they are, I mean you have some products that – could they be $10 million plus products for Kensey Nash, down the line?

Joe Kaufmann

Well, we certainly, if you look at the product categories, yes, we absolutely believe that. We believe these partnerships, some of our partners, we already exceed $10 million with a few of our partners. But, when you look at the – some of the new products, potential products, yes, we feel that we certainly have products in development that can exceed $10 million for Kensey Nash.

Dave Turkaly – SIG

Great. And then on the vascular side, obviously, pretty good results without the reduction in sales force. Did that change your thinking about it at all? Do you think given the strength there that it's more likely that you'd stick with that or does it not really impact the decision given how much time you kind of spent on the review?

Joe Kaufmann

At this time, I just can't give any comment or visibility on the Endo side of the business other than what I've stated today and what is in the press release.

Dave Turkaly – SIG

Okay. Last one, the Angio-Seal units – I know guidance is kind of flattish, are the units on a year-over-year basis, are they flattish, are they down, or what exactly in the quarter were the unit numbers for Angio-Seal?

Joe Kaufmann

I believe they were actually – total they were up for us, but there's a difference between the mix in terms of international and domestic. And, again, this is my personal opinion here in this market. This is one where I believe everyone is aware of what has happened with interventions over the last nine months to a year because of the COURAGE trial and how there has been somewhat of a slowdown or a shift temporarily, I believe, in intervention. So as a result, we have fewer sticks taking place in the last year and that is going to result in fewer procedures and fewer cases where you are going to be using puncture closure devices. And I think that's what has happened in the US for everyone. Now, I also believe that that has kind of bottomed out and we should start seeing a return to, I believe, growth in that particular market with interventions increasing and again, the favorable demographics as we move on to '09 and beyond.

Dave Turkaly – SIG

Great. Thanks a lot.

Operator

Our next question is from Jim Sidoti with Sidoti & Co.

Jim Sidoti – Sidoti & Co.

Good morning, Joe. Good morning, Wendy.

Joe Kaufmann

Jim.

Wendy DiCicco

Good morning, Jim.

Jim Sidoti – Sidoti & Co.

Couple of details on the income statement. On the other income line, you went from positive to a loss there. Is that interest on the $30 million mortgage you took out?

Wendy DiCicco

Actually, Jim, no. We had some investments or an investment actually that had been in a loss position for quite a long period of time and we took on a strategy to – a vast majority of the rest of our investment portfolio was in a gain position, so we sold that one particular bond mutual fund at a loss and began selling some of our investments to offset that at a gain. And we hadn't quite completed that strategy at the end of the quarter to completely offset the loss on that one mutual fund.

Jim Sidoti – Sidoti & Co.

Okay. So going forward, we expect that back in the positive?

Wendy DiCicco

We think by the end of this quarter that will be certainly back into positive and offset that balance of that loss on that one particular security.

Jim Sidoti – Sidoti & Co.

Okay. And you said that CapEx for the quarter was around $1.5 million. Is that a good run rate going forward?

Wendy DiCicco

Yes. I think so. For the rest of '08, I think that would be a good number for the fourth quarter, yes.

Jim Sidoti – Sidoti & Co.

If you look at just the Biomaterials business, is that good '09 number in that $1.5 million, $2 million a quarter?

Wendy DiCicco

Yes. I do believe that would be about – we haven't quite looked at giving '09 guidance yet, but I think a $6 million run rate, $6 million to $8 million is probably not a bad – it's been our average over the past three years. So I don't think it's a bad shake at next year as well.

Jim Sidoti – Sidoti & Co.

All right. And the last question on the Endo line. I know you are limited in what you can say, but can you just say, is it a package or is there a chance that you would split it up either by products or by geography?

Joe Kaufmann

Jim, I just can't comment on whether to confirm what you just said or not confirm any of that. So, we are just looking at all the strategic options right now and Dave's earlier question, one thing I just wanted to add to that is that if you look at these products again, I think that the – what we're seeing in the field and with the productivity of the individuals that are in the field, I think the products speak for themselves and I think they have a very, very bright future in the marketplace.

Jim Sidoti – Sidoti & Co.

All right. Thank you.

Operator

Thank you. (Operator instructions) Mr. Kaufmann, we have no further questions.

Joe Kaufmann

Okay. That's great. I appreciate everyone listening in and look forward to getting back to you certainly with our fourth quarter results, if not sooner, with some other data or information and when we can we will provide you with further guidance. Again, I'd just like to say that we think we have had a great quarter and so far, a great year and we are looking forward to closing off the year on a very strong note and looking forward to fiscal year '09. Thank you.

Operator

Ladies and gentlemen, this conference will be available for replay after 11 AM today through midnight, Tuesday, May 6. You may access the AT&T Executive playback service at any time by dialing 320-365-3844 and using the access code 918341. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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