Medical Nutrition USA, Inc. F2Q09 (Qtr End 07/31/08) Earnings Call Transcript

Medical Nutrition USA, Inc. (MDNU)

F2Q09 Earnings Call

September 10, 2008 11:00 am ET

Executives

Frank Newman - Chairman and Chief Executive Officer

Alan Levy - Chief Financial Officer

Mary Ellen Posthauer - CEO of NEP Health Care

Analysts

Gary Giblen - Goldsmith & Harris

Jess Thomas - Global Metrics

[Tommy Poec]

Presentation

Operator

Welcome to the Medical Nutrition second quarter fiscal year 2009 earnings conference call (Operator Instructions). I would like to turn the call over to Mr. Levy, Chief Financial Officer.

Alan Levy

Good morning, most of you should have received a copy of our earnings press release. If you did not receive a copy, it’s posted in the Investor Relations section of our website at www.mdnu.com and other financial websites. This call is being broadcast live on our website. For the first time we have a slideshow presentation to go along with the call, so we encourage you to log on to our website to access it.

Replays will be available from our site for the next 90 days. Now I am going to make the normal forward-looking statements comment. This conference call may contain forward-looking statements that are subject to certain risks and uncertainties. Although the company believes that the expectations reflected in any of these forward-looking statements are reasonable, actual results could differ materially from those projected or assumed.

Different uncertainties that can cause or contribute to such material difference include, but are not limited to general economic conditions, changes in customer demand, changes in trends of nursing home, renal care, health food and bariatric surgery market, changes in the competitive pricing for our products and the impact of its competitor’s new product introductions.

The company’s future financial condition and results of operations, as well as any forward-looking statements are subject to change and inherent risk and uncertainties. Other important factors that may cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the company’s Securities and Exchange Commission filings, including the report Form 10-KSB for the year ended January 31, 2008 as filed on April 29, 2008, and form 10-Q for the quarter ended April 30 as filed on June 16.

With me this morning is our Chairman and Chief Executive Officer, Frank Newman, who will make some comments and then we will open the call to your questions. I am going to review the quarter and six months ended July 31, 2008 in comparison to the prior year.

Everyone should have the press release with the details, so I’ll just be reviewing the highlights. It’s also featured as highlights on our website. Sales of branded parts for the quarter were $3.1 million as compared to $2.8 million for the prior year, a 10% increase in line with our forecast. Unit sales for the period were up 27% which was offset by the price reductions we previously announced. Overall sales for the quarter were $3.3 million as compared to $3.4 million in the prior year, a 1% decrease. Private label sales decreased 224,000 for the current quarter versus 537,000 in the prior quarter.

Gross profit remains consistent at 53% of sales with the result of increased higher margin branded sales offset by the price reduction that took place in March 2008. Selling general and administrative expenses for the quarter was $2.1 million or 62% of sales as compared to $1.5 billion or 46% of sales for the prior year quarter. The increase in percentage of SG&A is from the increase of our sale force and additional sales and marketing activity. Loss before income tax for the quarter was 244,900 versus net income before income taxes of 270,900 quarter ended July 2007.

Net loss for the quarter was 183,700 or $0.01 per share compared to net income of 160,500 or a positive $0.01 per share. EBDTA which is earnings before income taxes, depreciation, amortization and stock based compensation was 29,000 compared to 437,000 for the quarter last year. This is an important figure as it reflects the fact that despite the significant investments we’ve made in sales and marketing we are still generating positive cash flow.

Sales of branded products for the six months, was six million as compared to $5.3 million for the prior six months, a 13% increase in line with our forecast. Unit sales for the period were up 29% which again was offset by price reductions previously announced. Overall sales for the six months was $6.6 million as compared to $6.2 million for the prior year a 7% increase. Private label sales decreased to 642,000 versus 899,000 in the prior year.

Gross profit decreased to 53% of sales versus 54% in the prior year, which is the result of increased higher branded margin sales offset by price reductions. Selling, general and administrative for the quarter was $4 million or 60% of sales as compared to $2.9 million or 48% sales for the prior year. Net loss was 305,100 or $0.2 per share compared to net income for the six months of 214,200 or $0.2 positive per share. EBDTA was a 130,000 compared to 838,000 in the prior year.

Net cash provided by operating activities of the six months ended was $504,000 versus $710,000 in the prior year which reflects strong growth in branded sales, 29% more units sold this year than last year and the additional SG&A expenses to meet previously mentioned.

Investing activities include a 102,000 in capital expenditures mainly for technology, free (Inaudible) of $21,000 and a pack of course of $20,000. The main component of financing activities is stock repurchase plan. The plans during the quarter end of July 31 purchase 80,700 shares at an average price of $2.34. The plan overall purchased 448,000 shares at an average price of $3.15 per share for a total cost of $1.4 million. The board resolution for the plan expired on July 31. Our balance sheet remains strong with over $9.1 million in cash in short term investments.

It’s now my pleasure to turn the call to Frank Newman our Chairman and CEO.

Frank Newman

I hope you all are enjoying the webcast. For those of you who haven’t signed on to the webcast there are slides there that we have been referring to and will continue to refer to.

First of all the highlights so far this year, I think Alan covered the numbers pretty well but let me give you a little bit of flavor. Our results reflect I think the ongoing and very successful implementation of the plans we announced earlier in the year to accelerate market penetration through expanding our sales force by 45% and instituting more aggressive pricing.

As was mentioned unit sales for the quarter increased 27% over last year and importantly 12% over the first quarter bringing our year-to-date unit sales increase in branded products to 29%. Now these strong results were driven both by the increased nursing home penetration that we are achieving as well as sales to existing customers.

Revenue in both periods was obviously impacted by the approximately 12% weighted average price reduction that we initiated in the middle of Q1 and was in place throughout Q2. I must tell you we are very pleased with the way in which the new additions to our sales force have gained attraction and we are very proud of this group of talented professionals and we expect them to begin contributing materially to sales beginning in Q3.

As we have stated previously we expect branded product revenue to increase in a range of 25% to 30% in Q3 and 35% to 40% in Q4 as a direct result of the plans we implemented in the first half of the year. We are also very excited by the successful introduction of our new UTI-Stat product; the proprietary formulation that helps support urinary tract health and that is now available through most of our distributed network.

Trials conducted in ten long term care facilities in five states show that 92% of residence with the history of urinary tract infection remains symptom free while taking UTI-Stat. We’ll discuss UTI-Stat in a little more detail later in the call with the help of Mary Ellen Posthauer, one of our clinical advisers who was instrumental in the early trials on UTI-Stat and who I will introduce you to shortly.

We expect sales to continue to benefit from our more aggressive marketing strategy and also from increased sales of UTI-Stat in the third quarter and fourth quarter and also from the third quarter introduction of enhanced Pro-Stat flavors which are being rolled out as we speak. We will provide more guidance on our expectations for next year for Q1 and Q2 when we released Q3 results in December.

We expect private label sales to continue to fluctuate. As was evident in the first and second quarter these private label business is fluctuating. We expect that as I said to continue over time in line with our long term strategy to deemphasize private label sales in favor of branded product sales. As I think is evident, overall we are very please with our performance for the quarter and the year-to-date.

As part of our growth strategy we continue to be a leader in clinical research that both supports our existing products and leads to new product development. We expect the publication of two important trials in the coming months will support the benefits of Pro-Stat in achieving nitrogen balance in older women and of the inter dialectic administration of Pro-Stat to hemodialysis patients.

In addition, we have additional products in development and expect to introduce at least one and possibly two next year and our plans for the retail distribution of certain of our products by the first quarter of next year remain on track. We believe that retail distribution represents a significant growth opportunity beyond the existing potential for our products in nursing homes and dialysis clinics and as we announced previously we also expect to begin Canadian market distribution next year.

As you can tell I think we have a lot going on and we look forward to updating you with more specifics on each of these initiatives over the balance of the year and more specifically in conjunction with our third quarter earnings release. It’s now my distinct pleasure to introduce Mary Ellen Posthauer, one of our eminent clinical advisers. Mary Ellen is a consultant dietitian and the owner and CEO of NEP Health Care.

Mary Ellen’s full CV is on the slide before you for those who are following on the webcast, but for those not viewing the webcast she is the author of over 200 publications and presentations, she’s the past President of the National Pressure Ulcer Advisory Panel, she is a member of the Hall of Fame of the Perdue University School of Foods and Nutrition and she has been an extremely valuable advisor to the company for a number of years now and was instrumental in the early trials that lead to the decision to market UTI-Stat. Mary Ellen welcome.

Mary Ellen Posthauer

Thank you Frank it’s a pleasure to be here and to tell you about UTI-Stat, UTI-Stat is a unique product that was developed to address a serious problem for women and in particular for all older residents in nursing home. Urinary tract infections are the second most common infection in the United States accounting for $1.6 billion in health care costs annually.

UTI’s frequently reoccur, so it isn’t unusual for an individual to have three or more infections in one year which is not only painful but increases healthcare cost. Antibiotics are the drug of choice once an infection has been confirmed; they do kill the pathogenic bacteria but depletes the good bacteria in the stomach, so the down side of antibiotic is increase in diarrhea, appetite decline and GI distress and frequent antibiotic usage results in resistance to the antibiotics. So the goal of UTI-Stat is to reduce the incidence of UTI symptoms and increase hydration thus flushing out this bad bacteria.

UTI-Stat with Pro Antiknocks is a combination of five key ingredients that together act as a natural urinary tract cleansing complex, reducing the frequency of symptoms associated with UTIs. E. Coli is the culprit; when it clings to the bladder wall it causes inflammation and discomfort. The cranberry concentrate which is the equivalent of drinking 16 eight ounce glasses of cranberry juice inhibits the ability of the bacteria to adhere to the wall of the urinary tract.

E. Coli doesn’t grow well in an acidic environment, so the addition of Vitamin C helps establish urine acidity. D-Mannose is a natural occurring sugar found in cranberries. It absorbed slowly and is poorly metabolized. As the D-Mannose passes in the urine the E. Coli becomes sugar coated by the Mannose and can no longer stick to the bladder wall. FOS is a pre-biotic which stimulates the growth of the good bacteria and decreases the E Coli growth.

The fifth ingredient Bromelain is the extract of pineapples which has an anti-inflammatory action. Though UTI-Stat has many features and benefits, its natural, its gentle, its effective and it does help to reduce the ideation of the infection causing bacteria but most important it is a natural cranberry taste with a very pleasing effect on the pallet and a small dosage that’s required, just one ounce twice a day followed by four ounces of water to increase the hydration is very effective.

A part of any product development was to establish the clinical proof that this cranberry concentrate complex liquid when combined with increased hydration would prevent the reoccurrence of UTI symptoms in residence of long term care facilities and this was the objective of the multistate multicenter interventional prospective trial.

The setting occurred in ten long term care facilities in five states. The subjects were 124 residents with a history of UTIs in the past twelve months. A convenient sample of male and female subjects from the ten long term care facilities received one ounce of our cranberry concentrate Proantinox which was given twice a day with the goal to increase their fluid intake to at least six or seven eight ounce glasses of fluid a day.

The primary outcome measure was the prevention of UTI symptoms and a secondary measure was the compliance with the fluid intake which would help to flush out the bacteria. The results of 88 residents who completed the three months study; they remained symptom free 92% which is a very high percentage.

Also 80% exceeded the fluid target of the six to seven glasses of fluid a day and although it wasn’t an outcome measures, there was evidence to show a reduction in the incidence of fall as reported by the long term care clinicians. So this study does support the efficacies of the cranberry concentrate complex liquid Proantinox, when combined with increased hydration prevents the reoccurrence of UTI symptoms in residents of long term care facilities.

So this initial study does support the science behind the formulation of UTI-stat and additional studies will be used to determine the minimum dosage that this overall one trial was certainly very positive for the residents who were fortunate enough to participate in this long term care trial.

Francis Newman

Mary Ellen, thank you very much. If you could stay on the line for just a while in case there are specific questions relating to UTI-Stat, I would appreciate it.

Mary Ellen Posthauer

That’s fine, I’ll be happy to.

Frank Newman

And at this point we’ll open up the call for questions-and-answers.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Gary Giblen – Goldsmith & Harris.

Gary Giblen – Goldsmith & Harris

I have several questions about the product lines that go to nursing homes and dialysis patients, cariatric surgical centers etc; is there much of a range in gross margins on the various products you are selling now?

Alan Levy

Not private label but the proprietary products.

Frank Newman

There is not a huge range, no. The best way I can describe it is that they are all within a fairly tied range. The highest gross margin products are those that tend to be the more unique and complex products and the simpler ones tend to be lower gross margin, but it’s not the kind of a thing that would have a material impact on our reported gross margins Gary.

Gary Giblen – Goldsmith & Harris

Okay, the impact of the expanded sales organization will first start to be quite visible in the next quarter you report and over the next 12 months; can you discuss those plans, pipeline issues etc, which could possibly maintain a high growth rate beyond this twelve month outlook?

Frank Newman

Beyond the next twelve months?

Gary Giblen – Goldsmith & Harris

Yes, in other words, it seems to me as your penetration of the nursing home market increases then you have to look elsewhere for a rapid growth and I wondered if there was a pipeline of opportunities that would maintain that or should we look at a slowing of growth rate in the clinic market if you want to label it that way after the next twelve months?

Frank Newman

First of all you got the -- let me couch this by saying we have not completed plans in any detail for the period of time that you are talking about Gary, but to a certain extent the law of large numbers will begin to impact our rates of growth on the existing products, so I think it would be reasonable to assume that over time the percentage increase in sales will decline; however, the nominal increase in sales -- yes we are still a long way from what we would consider to be maximum penetration.

The other element that we will contribute to sales obviously is new product development, so UTI-Stat is completely new revenue, not dependent or not cannibalistic with regard to existing revenues, so the extent that those kinds of product extensions can be introduced and that would also support longer term growth and of course as a company that’s part of the role that we expect retail sales to play also and I think going back two or three years we have stated that eventually retail sales would become more important as a contributor to positive results in exactly the way that you’re talking. So as to the extent of whether it’s the law of large numbers or eventual, approaching of saturation of the retail market stands as a substantial potential offset to that.

Gary Giblen – Goldsmith & Harris

Would you have to staff up significantly to start to offer products outside of the US and Canada?

Frank Newman

Our plans at this point are to use distributor patients in those locals as supposed to putting resident NNI people in place.

Gary Giblen – Goldsmith & Harris

And when on a time scale would you start to focus on non-North American opportunities?

Frank Newman

After next year.

Gary Giblen - Goldsmith & Harris

Let me hop in, its Gary Giblen of Goldsmith & Harris, so let me take advantage of the presence of Mary Ellen to ask a few questions; to what extent is the UTI study that you described which is clearly positive enough to drive a purchasing decision by a nursing home or a hospital and are there other bench marks specifically or you know that can be modified in terms of what another study would have to show to drive another level of purchasing behavior?

Mary Ellen Posthauer

Well, I think the product is very positive in terms of -- the urinary tract infections are also a very high level in nursing homes surveys. So there are certain areas that nursing homes surveys focus on, pressure also is being one of them, urinary tract infection is being another one.

So the fact that when they come out on the quality indicators and nursing homes see that they have a large amount of UTIs their goal their quality indicator goal is to lower that. So that’s what’s really going to drive this, because if they can see the positive benefits of a product such as this which is easy to administer and well accepted by the residence, very my feeling is they are going to jump on it and I’m saying this based on the facilities that I consult for myself. They all want to lower their scores in the quality indicators, so I think that’s going to drive them very much to purchase this product.

Gary Giblen - Goldsmith & Harris

So I’m just trying to understand, so the current study is large scale and robust and opportunity drive is purchasing behavior at this point, that’s what I am asked amount this?

Mary Ellen Posthauer

Yes and I think obviously there will be probably further studies done, but I think we are still seeing – those of us who are using the products in facilities are still continuing to see success and for example I attended a presentation made by a man to our consultants in the state of Indiana, very widely received and we had some nurses who were in the audience and they were very receptive to trying this type of product knowing the potential problem and difficulty that they have with urinary tract infections in nursing homes.

Gary Giblen - Goldsmith & Harris

Okay that’s helpful, thank you and just one last one for Frank I guess, have the price reductions resulted in new customer development in other words actually getting new customers of because of lower prices or was it more to protect market share on your normal customer base and develop a normal development of customers?

Francis Newman

I think that those kinds of things are always a combination of both. Clearly it protects market share. More aggressive pricing protects market share but it also helps us with the targeted customers that we had identified as the more price sensitive than other customers. So we used it for both Gary and it continues to support both.

Gary Giblen - Goldsmith & Harris

Okay and then any competitive response within the last couple of months through your price reductions?

Francis Newman

Yes I think we have participated, we have created a general lowering of the price in the market; competitors are not I mean obviously they react but we have achieved our primary objective which was to reduce any apparent or perceived price differences to the extent that price should no longer be a determining factor and we are very confident of the superiority of the product assuming the economics are reasonably close.

Operator

Your next question comes from Jess Thomas – Global Metrics.

Jess Thomas – Global Metrics

I just wondered if you could give an update on plans for the retail launch and I guess is that a regional or a national launch; do you have any specific partners signed on yet?

Frank Newman

We will be going through that process between now and December and that’s why I mention I hope we can give you a more specific update with our Q3 earnings call. We have discussed it on this call before, but the retailers make these decisions over a six or nine month period, the national retailers based on when they reset their Planograms.

At this point our expectation is that we will launch the products nationally with hopefully all of the top retailers in the country that is by no means assured and if as we go through presentations over the next six months we find that not to be the case then; our fall back position would be to launch the products regionally depending on which customers we’re able to secure.

It’s early to predict which way that will fall at this juncture and as I’m sure you are aware some of it has nothing to do with the efficacy of the product, it just has to do with the peculiarities of which retailers are willing to reset their Planograms in order to accommodate additional products.

Jess Thomas – Global Metrics

Okay, and I guess next question is kind of about uses of cash and do you need to bring this $9 million of cash to support the retail launch or could you pursue other uses for that?

Frank Newman

I think on a short term basis we may need to dip into it to support the marketing that accompanies the retail launch. Assuming the launch is successful, that will be simply a loan against future revenues; that will be paid back as the product begins to be replenished into retailers.

There maybe a period at the initial launch when we are in a net investment position prior to (a) getting paid for the initial shipments that we make and (b) beginning to benefit from the replenishment sales that will occur as a result of that marketing; so we are not quite there in identifying the extent of that yet because we are waiting to see which retailers sign up and when they want their shipments, but we are prepared to be in a net investment position probably for the first month or two of the retail launch.

Jess Thomas – Global Metrics

Thanks and I guess my final question then is does your sales force currently call on these dialysis clinics or you have to make any changes or new hires who reach them?

Frank Newman

No we’ve been calling on dialysis clinics for a number of years and dialysis probably represents I would guess it could be up to 10% of our Pro Stat business.

Operator

(Operator Instructions) Your next question comes from [Tommy Poec].

[Tommy Poec]

On the urinary tract business, can you give us some sort of standard of care that happens right now and what percentage gets cured by the standard of cure right now?

Frank Newman

Mary Ellen would you like to answer that?

Mary Ellen Posthauer

Well I don’t know if I can give you actual percentages. I think many patients I guess they are cured by giving antibiotics, however one of the big problems with the antibiotics usage and they are finding this throughout the industry is that the bacteria in the urine is becoming resistant to these antibiotics, so they have to keep trying different ones or stronger ones and then we get into the side effects and the serious side effects for us are the GI distress and people then start to lose weight; well then you start to get into other kinds of problems.

So it’s not always a good thing to have this frequent use of antibiotics which is why this type of treatment is much more beneficial and gerontologist in fact are very receptive to this because they’ve been struggling with this issue for many years as to how to reduce the number of infections without having to go to all these strong antibiotics because they have so many side effects and of course they are very costly compared to a treatment such has using UTI-Stat; does that help to clarify that?

[Tommy Poec]

That does; I guess I have one more question then. I guess with this type of product, can we expect significant sales; I mean is there a reason that when you go out and try to sell this product, that a nursing home or facility would not buy it?

Mary Ellen Posthauer

I don’t think there is a reason they would not buy it because currently for example they are purchasing cranberry juice in large quantities and when you really factor in what they are paying and what is really actually being consumed and who could drink that much cranberry juice and it’s not bad as effective because it’s so diluted, where as a product like this is very fine tuned and has exactly the ingredients necessary to reduce those symptoms. So I think that’s one of the positive effects that we will see.

We see surveyors who survey long term care facilities. I had one survey going on in our building when we were doing this study and the surveyors were extremely pleased with the results that we were receiving; so that’s pretty positive too because that could then fuel them to -- while they don’t give advice when they give surveys, they are not shy about saying nursing home XYZ is using UTI-Stat, may be you ought to look into it.

So I mean it’s a big problem in the industry and I think this is going to be a positive solution to help reduce the incidence of urinary tract infections.

[Tommy Poec]

Do the nursing homes make money on the antibiotics that they dispense?

Mary Ellen Posthauer

No, they would not make money on the antibiotics; that would go against the cost of whatever other medications are being paid for by the patients or whatever their insurance company costs and sometimes if it comes out that they are not covered that could be a concerned for their facility, so they are not making money on the antibiotics, no.

I might just mention is one of the other big issues in nursing homes is to reduce some overall member of medications that people are taking to nine or less. Well, if you’re piling on antibiotics, you’re increasing the number of medications and that’s a goal for all nursing homes, they’re trying to reduce the number of medication primarily because that reduces all of the side effects that long term care residents have from taking so many different kinds of medications for so many different kinds of problems. So this helps to solve that problem also.

[Tommy Poec]

I guess my next question is, is there a reason it shouldn’t be a huge product for our company?

Mary Ellen Posthauer

I can’t think of a reason it shouldn’t be, no.

Operator

There are no questions at this time.

Frank Newman

Okay, well thank you all for your attention. No one talked about the beautiful slides we prepared for the webcast, but I hope that made it more interesting for you. Mary Ellen, thank you so much for joining us; it was a pleasure to have you and to get the benefit of your personal insights with regard to your clinical experience with UTI-Stats, so thank you very much.

Mary Ellen Posthauer

You’re welcome. It was a pleasure to be a part of the program.

Frank Newman

And we will talk to you all next quarter if not the fall; thank you very much.

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