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Executive

Bruce Wood - President and Chief Executive Officer, Director

Joseph Baty - Executive Vice President and Chief Financial Officer

Kirsten Chapman - Lippert/Heilshorn & Associates Senior Vice President, Principal/San Francisco Office

Analyst

Kevin Kendra - Gabelli & Company

[Nick Jendal] - B. Riley & Company

Gary Giblen - Goldsmith & Harris

Schiff Nutrition International, Inc. (WNI) F4Q08 Earnings Call August 12, 2008 11:00 AM ET

Operator

Welcome to the fiscal 2008 fourth quarter and year-end Schiff International conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Kirsten Chapman.

Kirsten Chapman

By now you should have received a fax or e-mail of the press release, but if you have not please contact us at Lippert/Heilshorn & Associates, at 415-433-3777, and we will forward a copy to you immediately.

As a reminder, this call may contain forward-looking statements, the risks of which are those, the same as described in the Safe Harbor language in the press release and those detailed in the company’s SEC filings. Actual results may differ materially from those described during the call.

With us from management today are Bruce Wood, President and Chief Executive Officer, and Joe Baty, Executive Vice President and Chief Financial Officer.

It is my pleasure to introduce to you Mr. Wood.

Bruce Wood

We continue to remain focused on our long-term goal of profitably growing our Schiff branded business or exploring new growth opportunities. We were encouraged with our fourth quarter sales performance.

Our net revenues increased almost 17% on a quarter-over-quarter basis driven by very solid branded growth and a substantial sales increase in our private label business. We were also satisfied with our earnings performance in the fourth quarter, taking into consideration the significant year-over-year increase in advertising investment and certain unusual expenses which Joe will detail for you in his comments.

The overall branded joint care business registered a solid year-over-year net sales increase in Q4, as did our other Schiff branded business, while our Tiger's Milk Nutrition Bar revenues remain stable. At the same time our private label Q4 net sales surged as we started to ship many newly acquired skews to certain major customers.

In our focus category joint care, competitive pricing activity remained high. The food, drug mass segment measured by IRI and this data excludes Wal-Mart and club stores was up 10.5% in volume and 2.1% in dollars for the 12-week period ending June 29, reflecting this competitive intensity.

During this period our Schiff Move Free brand outperformed the category and most major competitors as measured by IRI, as we were encouraged with the consumer acceptance of our new Move Free Advanced MSM plus Vitamin D line extension, which reached broad distribution among FDM retailers during the fourth quarter.

We supported the Move Free brand during Q4 with National TV and print advertising, FSI couponing, product sampling and accounts specific promotions. Our overall consumer marketing investment in Move Free was significantly ahead of year ago levels in the fourth quarter and comparable to year ago levels for the full year. We expect to continue to invest behind Move Free as we enter fiscal ‘09.

We were encouraged with a to-date sales performance of our new Schiff MegaRed Krill Oil product, which remained in test with a major customer during Q4, based on the results so far we expect to broaden Schiff MegaRed’s distribution into major mass market retailers early in fiscal ‘09. We will comment further on our fiscal 2009 first quarter call.

Finally during the fourth quarter we aggressively pursed a major acquisition opportunity, which ultimately proved to be non-viable valuation wise. Joe, will provide some detail on the fourth quarter impact of this initiative in his comments, but this venture underscores are intend to explore significant strategic initiatives, which we believe will enhance stockholder value.

Looking ahead, we remain confident in our ability to compete over the long-term and based on our increasingly strong cash position we believe we have the resources to invest in our base business and to explore other strategic business development opportunities.

I will now turn the call over to Joe, for his comments.

Joseph Baty

Earlier today we announced our financial results for the fiscal 2008 fourth quarter and our year ended May 31, 2008. Fiscal 2008 fourth quarter net sales increased approximately 16.8% to $50.4 million from fiscal 2007 fourth quarter net sales of $43.2 million. The quarter-over-quarter net sales change reflects a 7% increase in overall branded sales and an approximate 56.8% increase in private-label sales. Aggregate branded sales amounted to approximately $37.1 million and $34.7 million respectively, for the fiscal 2008, 2007 fourth quarters.

Fiscal 2008, 2007 net sales were $176.9 million and $172.7 million respectively. Branded net sales were $139.2 million and a $136.1 million respectively and private label sales were $37.7 million and $36.6 million respectively.

The overall 2.3% increase in branded sales was primarily due to an increase in joint-care category business coupled with the test launch of MegaRed partially offset by incremental price discount like promotions. The overall 3% improvement in private-label sales was primarily due to incremental business awarded during the fourth quarter.

Gross profit as a percentage of net sales was 41.7% for the fiscal 2008 fourth quarter compared to 43.9% for the fiscal 2007 fourth quarter. Gross profit percentage was 42.1% for fiscal 2008, compared to 39.8% for fiscal 2007. The gross profit percentage increase was primarily due to lower joint-care raw material cost partially offset by the incremental price discounting promotions. Current overall market conditions reflect upward pressure on raw material prices.

The total operating expenses were approximately $16.8 million or 33.3% of net sales for our fiscal 2008 fourth quarter compared to $12.8 million or 29.5% of net sales for our fiscal 2007 fourth quarter.

Selling and marketing expenses increased to 18.4% of net sales from 16% of net sales for the prior year fourth quarter, primarily resulting from a planned increase in advertising cost. Selling and marketing expenses as a percentage of net sales were 17.7% and 18.6% respectively for fiscal 2008 and 2007. The approximate $1.7 million quarter-over-quarter increased for other operating expense net was primarily due to recognition of approximately $1.4 million and M&A related costs and an unusual compensation charge associated with the special dividend.

As previously disclosed including $0.6 million recognized in the fourth quarter, fiscal 2008 operating expenses include approximately $4.9 million in non-cash unusual compensation cost associated with the first quarter special dividend. Fiscal 2007, total operating expenses were favorably impacted by approximately $1.9 million in unusual litigation settlement income and our reimbursement of the import-related cost.

As reported operating income for the fiscal 2008 and 2007 fourth quarters was $4.2 million and $6.2 million respectively, and for fiscal 2008 and 2007 was $16.4 million and $17.7 million respectively. The quarter-over-quarter operating margin decline reflects the impact of the increase in advertising cost as well as the M&A and special dividend related cost.

The fiscal 2008 operating margin as compared to fiscal 2007 reflects the impact of the $4.9 million in unusual compensation charges and $1.4 million in potential acquisition related cost among other factors. Other income net primarily consisting of interest income net of interest expense $0.3 million income for the fiscal 2008 fourth quarter as compared to $0.8 million income for the fiscal 2007 fourth quarter.

Reported quarterly other income continues to reflect the impact of the first quarter special dividend, which was funded from cash and liquidation of certain short-term investments. The effective tax rates of 38.3% for the fiscal 2008 fourth quarter and 38.2% for fiscal 2008 approximate expectation.

As reported net income per diluted share was $0.10 for our fiscal 2008 fourth quarter compared to $0.13 for our fiscal 2007 fourth quarter and $0.40 for fiscal 2008 as compared to $0.45 for fiscal 2007. The unusual compensation charge relating to the special dividend coupled with fourth quarter M&A related cost impacted fiscal 2008 diluted earnings per share by approximately $0.14.

In regards to the balance sheet working capital was approximately $81.5 million at May 31, 2008 compared to $104.9 million at May 31, 2007. The overall reduction in working capital was primarily due to the first quarter payment and/or accrual of the special dividend, which aggregated approximately $44.9 million. Approximately $1.2 million in accrued dividends are currently unpaid and are subject to future vesting of outstanding stock awards and/or receipt of the shares.

The year-over-year increase in inventories reflects an increase in finished goods for new products, including both private label and branded Schiff’s as wells as the decision to carry incremental qualities of certain other inventory items. Inventories amounted to approximately $31.4 million at February 29, 2008.

Regarding our short-term investments and our investments overall, we currently hold approximately $1.3 million in auction rate securities valued at fair value, which approximates cost, and at May 31, 2008 are classified as long-term. Stock-based compensation expense amounted to approximately $0.9 million for both fiscal 2008 and 2007 fourth quarters and approximately $3.7 million and $3.9 million for fiscal 2008 and 2007 respectively.

Depreciation expense was approximately $0.8 million and $0.9 million for the respective quarters and approximately $3.5 million and $3.3 million for fiscal 2008 and 2007 respectively. Capital expenditures were approximately $3.2 million and $4.4 million for fiscal 2008 and 2007 respectively. Subject to the ongoing impact of competitive pricing pressures including private label among other factors, we are currently forecasting an upper single-digit net sales increase for fiscal 2009 as compared to fiscal 2008.

We believe the overall increased will be primarily due to incremental private label business together with expanded distribution of new products. However, while MegaRed moment at Costco is positive and while our overall forecast anticipates broader distribution, it is premature to claim success in Walgreens or other FTM accounts. We are currently forecasting fiscal 2009 gross profit percentage to approximate 38% to 41% compared to 42.1% for fiscal 2008.

The potentially modest decline reflects an anticipated sales mix change from an increase in private label sales in certain assumptions regarding raw material cost increases among other factors. Selling and marketing costs as a percentage of net sales are currently forecast to approximately the fiscal 2008 percentage subject to new product sales results and competitive pricing pressures.

Other operating expenses net excluding the impact if any, of certain to be determined long-term management incentive plans, may approximate $19 million to $21 million. We are currently forecasting a double-digit operating margin for fiscal 2009.

Capital expenditures for the next 12-months currently approximate $4 million and our expected tax rate for fiscal 2009, currently approximates 38% to 40%. Actual results for fiscal 2009 may vary and are subject to among other factors, the factors noted herein and in our public filings. Our forecast will probably change as fiscal 2009 plays out.

Again thank you for participating here with us this morning, and now I will turn the time back to our President, Bruce Wood.

Bruce Wood

To summarize, we’re optimistic about our prospects. We've remained committed to investing in our Schiff branded business, and other opportunities which contribute to our goal of long-term profitable growth.

We are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Gary Giblen - Goldsmith & Harris.

Gary Giblen - Goldsmith & Harris

What are the factors behind inventory being up slightly more than sales, inventory up 41%, sales up 17%?

Joseph Baty

What are the factors?

Gary Giblen - Goldsmith & Harris

Yes

Joseph Baty

Well to summarize there are two or three fold, one of which is as you pickup from our comments, we are looking to build and have secured some additional private label business associated with there is a need to carry a little more in inventories. In addition, we’ve made reference to MegaRed and we’ve certainly have a little bit more of a build up in certain finished goods for our branded business, and in addition given the Olympics over in China and the fact that a lot of raw materials are sourced out of China, we certainly made a conscious decision to buy a little bit more forward on certain raw materials. So, we aren’t running into any issues with the Olympics over there.

Gary Giblen - Goldsmith & Harris

On gross margin, I understand that it’s a mix in raw materials. I have seen a pretty clear pick up in the amount of [bogoing] throughout the vitamin industry in the last three months or so, so is that a fact there in your gross margin as well, increased bogo expense, but with that at SNM not even your cost of goods

Joseph Baty

Well, I mean sure there is other factors besides the ones I noted. Let’s say for purpose of the range that we gave is currently forecast for roughly ’09. The key considerations are the fact that we do expect a little higher mix of private label sales in FY ’09 as compared to FY’08 and we have made certain assumptions regarding our raw material cost. To some degree, the potential for a little bit more higher promotional type cost will come into play, but as we see here today, the primary reasons for the margin decline or the higher raw material cost assumptions coupled with the change in mix.

Gary Giblen - Goldsmith & Harris

Okay and then finally with the change of management of Liner and so forth, I mean is that transition creating opportunities for you to get more private label business as well as Liner’s and..?

Joseph Baty

Yes, I mean the short answer is yes. Over the opportunities to secure some additional business from Liner so if it’s really started the four bounties acquisition of Liner and certainly we are looking and have secured some additional business from that and we’ll hope to a secure additional business going forward.

Gary Giblen - Goldsmith & Harris

Yes, have all competitors and private label gotten, more competitive in order to win the upper graphs Liner business, in other words paragon etc; is it better to say that…?

Bruce Wood

Again I would say that it maybe unclear as to whether there is a lot of business up for graphs private label rises, the function of the Liner transaction. At the same time of course we have very solid customer relationships and we certainly understand customers concern about diversifying their private label base of suppliers and therein lies the opportunity and it certainly reflected in our fourth quarter results. I would say that, the private label side of the business in general will be as competitive as the branded side going forward and we as noted view it as an opportunity.

Operator

Your next question comes from [[Nick Jendal]] of B. Riley & Company.

[Nick Jendal] - B. Riley & Company

Hi guys, thanks for taking my call. Just a couple of brief questions; first on the Krill Oil product I don’t know if you can provide this or not, but can you give any more detail, or any more color on just how receptive Costco has been on the product and any reorder data or anything else you can provide there?

Joseph Baty

Well Nick, the results have been I think consistent with their expectations of a product that they would expect to maintain in permanent distribution and of course its always a fluid processes to what products make the cut permanently and otherwise but right now we are I think demonstrating that the product can and should continue to been in distribution for the foreseeable future in Costco, no guarantees though.

[Nick Jendal] - B. Riley & Company

Right, no I understand and then did this quarters results include any sort of initial selling that would cause some sort of spike in the revenues on that that would maybe have partially contributed to the revenue growth in Q4?

Joseph Baty

Modestly so, yes but not any dramatic impact in Q4.

[Nick Jendal] - B. Riley & Company

Okay, and then on the raw materials, is there any specific area that you’re seeing particular pressure in or is it pretty much just across the board?

Joseph Baty

Well, there’s certainly specific items that seem to be under a little more pressure than others, but just generally speaking, what we’re seeing is pressure on the raw materials coming out of China and source from a couple of other places as well.

Operator

Your next question comes from Kevin Kendra - Gabelli & Company.

Kevin Kendra - Gabelli & Company

There was an acquisition announced or potential acquisition on nutria care; their plan is a Japanese company buying a LG Research Group. So I was wondering if you have ever had any thoughts with those parties and whether you saw the acquisitions, what your thoughts on that were and also related to that whether you’re seeing increased interest from Ex-U.S. companies, specifically Japanese ones coming into the nutritional supplement market?

Bruce Wood

We don’t comment on any specific M&A activity in an overview sense and from an observational point of view with respect to the transaction you mentioned, I’m not familiar with that in any detail.

Kevin Kendra - Gabelli & Company

On potential expansion of the company, are you guys looking to expand internationally and how would you go about doing that; would you be more likely to do it through acquisition or more so partner with another company?

Bruce Wood

Well, we believe that the best and most immediate opportunity is to grow organically with our major customers and we have a small, but fairly robust growth trend on our export business, now that is primarily with the Costco International organization, but others as well and we continue to believe that that represents a sold growth opportunity for us in a partnership sense as opposed to say an acquisition strategy sense.

Operator

You have no further questions at this time.

Bruce Wood

Thank you listeners for your interest in Schiff. We do look forward to reviewing our first quarter fiscal ’09 results in late September.

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