Dec 10, 2014
Executives
Dave Hable - President and CEO Pam Boone - CFO, EVP, Treasurer, Secretary
Analysts
Joe Munda - Sidoti & Co Charles Haff - Craig-Hallum Raymond Meyer - Larry Financials
Operator
Welcome to the Fiscal 2015 First Quarter Earnings Call. My name is Bikib and I'll be your operator for today's call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.
Please note that this conference is being recorded. I will now turn the call over to Dave Hable, CEO.
Dave Hable, you may begin.
Dave Hable
Thank you. And good evening, everyone.
And welcome to our first quarter earnings call. With me on the call this evening is our CFO, Pam Boone.
Today's call will include a review of our first quarter results, and our acquisition of UK based manufacture Sterimedix, order [ph] which we detailed in press release distributed earlier this evening. Following our prepared remarks, we will open the call for your questions.
First quarter sales increased 7.2% year-over-year driven by 2.7% growth in our ophthalmic business and 12.2% growth in our OEM businesses. We posted solid growth in both the US and international market this quarter and we saw growth in the sales of both disposable and capital equipment in the period, really a quarter characterized by balanced contributions to revenue growth overall.
We were also pleased with our cash flow performance in the first quarter generating $5.2 million, driven primarily by improved equipment capital productivity. Turning to review our performance, our two primary business lines in the first quarter starting with ophthalmology.
Sales increased 2.7%, driven by 10.3% increase in sales outside the US and a 3% decline domestically. Sales of our VersaVIT system packs accessories were the primary drivers of the growth in ophthalmic business in the US in the first quarter, offsetting continues softness in our base business in the period.
Our basic ophthalmic business continues to be a source of pressure and a total ophthalmic revenue growth driven primarily by difficult competitive environment in our three largest base business product lines, Laser Probes, Diamond Dusted Membrane Scrapers and Illumination Probes. In total, our base business continues to face low to mid single digit decline.
However, it excludes our three largest product lines which together represent the largest drag on base business results, the rest of the base business posted positive growth in the first quarter. A continuation of the trend we've seen in recent years.
Regarding the strong performance of VersaVIT franchise in the first quarter, building on the solid start to our targeted commercialization effort for the VersaVIT 2.0 system last quarter, the market response continues to be extremely positive and we are winning over our certain customers with differentiated, low cost victretomy offerings. Importantly, we believe our first quarter performance represents strong evidence of the improving trends in both the overall market adoptions and the utilization of our systems across our expanding and installed base.
We have now completed more than 12,185 victretomy procedures including evaluations; we have VersaVIT to date representing growth of 21% sequentially and 21% year-over-year in the first quarter. We had 41 VersaVIT customers place orders for our VersaVIT disposables in the first quarter.
These accounts represent the group of customers that convert into VersaVIT both through any competitive and demo inventory and found themselves in a position to order disposables for their daily usage. We've recognized the number of customers that order disposables in Q1 is down modestly compare to Q4, but we attribute this to the transition of the installed base from 1.0 to 2.0 which relates to the fact that units are out in the field during the upgrade process.
We continue to see our VersaVIT system represent an increasing share of victretomy for our certain customers, specifically at this time last year customers were using the 1.0 version of our system in roughly 20% of their cases in the first quarter of the year. We estimated our system this year was using more than 75% of our customers' cases on average, a clear signal that our victretomy system serves an unmet clinical need within the reign of certain community.
We have now completely more than 3,300 procedures including evaluations with our 2.0 system since approval, a little more than two quarters ago. To be sure our sales force and distributors remain focus on getting the 2.0 in the hand of retinal surgeons around the world and we continue to expect to upgrade roughly 80% of our installed base of 1.0 machine within the first nine months of the launch.
We look forward to continue progress, forge our commercial relation goals for the VersaVIT platform throughout fiscal 2015. Turning to a review our OEM results in the first quarter.
We reported sales growth of 12.2% year-over-year, driven by contributions from sales of both our disposables and our capital equipment products in the period. This was a notable change in trend versus prior quarters, where we reported softer sale of capital equipment primarily generators to our large OEM partners Codman and Stryker.
As we have explained previously, our capital equipment business is subject to periods of volatility, we have benefited from strong orders in the first quarter which drove sales growth at 29% on generators year-over-year. We expect continued volatility in this business in the future.
We continue to focus on the shifting mix of our OEM business overall from capital equipment to disposables over time and believe this business should grow in the mid to high single digits on annualized basis going forward. With that, I'll turn the call over to Pam for detailed review our financial results and our balance sheet position at quarter end.
Pam?
Pam Boone
Thanks, Dave. Total sales increased 7.2% to $16.6 million, compared to $15.5 million in the prior-year period.
U.S. sales increased 6.3% to $12.6 million, while international sales increased 10.1% to $4 million.
International sales represented approximately 24.2% of total company sales this quarter, with the balance of 75.8% coming from domestic sales. Our international sales mix last year was approximately 23.6%.
Total company sales by product category, disposables and capital equipment, reflect a 5.2% increase in sales of disposables year -over- year and a 27.9% increase in sales of capital equipment. Disposable sales accounted for approximately 87% of total sales this year, compared to 89% of sales last year.
Now for a look at total company sales performance by our ophthalmic and OEM business lines. Total ophthalmic sales increased 2.7% to $8.7 million this quarter, compared to sales of $8.5 million last year.
US ophthalmic sales decreased 3%, partially offsetting a 10.3% internationally. U.S.
ophthalmic sales were adversely impacted by decreased sales of capital equipment and disposables in our ophthalmic base business, partially offset by increased sales of procedural kits. Our international ophthalmic sales performance was primarily driven by increased sales of base business disposables, partially offset by foreign currency.
Total OEM sales were up 12.2% from last year. We saw increased sales of disposables and generators to our OEM partner, Stryker, partially offset by lower sales to Codman, compared to last year.
OEM revenue also included deferred revenue of $322,000 recognized in the first quarter of both fiscal year periods. Now for a brief review of the rest of the P&L for the first quarter fiscal year 2014.
Gross profit for the first quarter was $9.3 million or 55.7% of sales, compared with $8.9 million or 57.5% of sales in the year-ago period. Gross margin in the first quarter of fiscal year 2015 was negatively impacted by the mix of products, including both the increase in our international sales and the increase in the percentage of our OEM sales.
Total operating expenses were $8.1 million or 48.7% of sales in the first quarter, compared to $7.5 million or 48.5% of sales last year. Research and development expenses were 7.2% of net sales in the quarter, compared to 7.7% in the prior-year period.
We continue to expect R&D expenses of approximately 6% to 8% of sale point forward as we continue to invest our high priority projects to meet the needs of surgeon community, particularly with respect to our VersaVIT 2.0. And we expect these investments to enhance our revenue growth in future quarters.
Our sales and marketing expenses were $3.7 million or 22.2% of sales, versus $3.6 million or 23.0% of sales for the same period last year. The increase in sales and marketing expenses were primarily related to the addition of our field application specialists to facilitate to launch and adoption of VersaVIT 2.0 during the current quarter.
General and administrative expenses were $3 million or 18.2% of net sales, versus $2.6 million or 17% of net sales for the same period last year. The year-over-year increase in our G&A expenses was primarily related to our acquisition related expenses.
Total operating expenses in the first quarter included $128,000 related to the impacts from the medical device excise tax, compared to $125,000 in the first quarter of 2014. We also incurred approximately $62,000 of incremental expenses related to the company's exit activities at its King of Prussia facility.
We continue to expect to incur an estimated $420,000 of expenses related to the closure of this facility over the next few [indiscernible] 0:10:17.8 months, and anticipate more than $1.1 million in annual cost savings beginning in fiscal 2016. Operating income was $1.2 million in the quarter, compared with operating income of $1.4 million in the first quarter of fiscal 2014.
Net income decreased 17.9% to $768,000 or $0.03 per diluted share, from $935,000 or $0.04 per diluted share for the same period of fiscal 2014. Earnings before interest, taxes, depreciation and amortization, or EBITDA, totaled $1.7 million this year, compared to $1.8 million in the first quarter of fiscal 2014.
Turning to the balance sheet, at quarter-end we had $20.4 million in cash, and no interest-bearing debt. Our DSO ratio is 67 days, down from 82 days at the end of the fiscal year, due to timing of collections throughout the quarter.
Our inventory position was $15.2 million, basically flat from July 31, 2014 which include investments to support new product introductions. As inventory balance represents a 188 days of inventory on hand versus 194 days last year.
Cash provided by operating activities in the first quarter of fiscal 2015 was $5.2 million, compared to cash provided of $1.5 million in the comparable period of 2014. The change in cash flow from operations was largely due to working capital efficiencies including increase in accounts payable and accrued expenses and decreases in inventory and accounts receivable.
Now I'll turn the call back to Dave for a summary of the acquisition of Sterimedix which we announced earlier this afternoon. Dave?
Dave Hable
Thanks, Pam. As we detailed in our press release this afternoon, we acquired a UK manufacture Sterimedix LTD for a net cash consideration of $13.5 million.
Sterimedix is a private medical device company that manufactures and distributes cannulas, needles and other disposable products for ophthalmic and aesthetic markets. The company has generated $6.4 million in sales in their fiscal year ending December 31, 2013, of which roughly 85% of sales came from product serving ophthalmic market and the balance from products sold in the aesthetic market.
Geographically, the majority of sales occur in Europe, which is approximately 70%, 15% of which comes from the UK, the remaining mix of sales of less than 5% coming from North America, with the balance coming from the rest of the world. As reported in the press release today, to the first 11 months of calendar 2014 including the forecasted numbers for the rest of December, the Sterimedix business is projected to grow to approximately 15% on a constant currency basis for full year 2014 period.
Importantly, Sterimedix is solidly profitable on standalone operating basis. With the exception of -- with the expected continuation and solid revenue growth trend and gross margin profile similar to ours, this acquisition will be accretive to both our top and bottom line growth performance of fiscal year 2015.
We are assuming no synergies to drive this accretion and we have planned to let Sterimedix continue operate their business as a largely independent operation going forward. Over time we expect this acquisition will improve the operating and financial results for our entire international business in addition to providing strong diversification of our reported results for international sales.
This acquisition represents a solid example how we are focused on leveraging the strong cash flow generation of our existing businesses and our solid balance sheet to supplement our growth by acquiring solidly profitable growing companies in the ophthalmic space. We look forward to continuing to identify new opportunities to add to our existing footprint in the future.
So wrap before opening the call to your questions. Let me summarize by saying we are off to a strong start to our fiscal year 2015, marked by 7.2% revenue growth and very strong cash flow generation.
Our VersaVIT franchise continues to move towards broad market adoption and our commercialization efforts in the first quarter form impressive contribution to our promised results in the period. We continue to expect the growth in our new products to offset pressure on our base of ophthalmic business in 2015 and for ophthalmic post modest positive growth on an organic basis overall next year.
On the OEM side, we enjoyed 12.2% growth in the period led by an uptick in demand for our capital equipment, although we continue to expect this business to post positive mid to high single digit growth on annualized basis over time driven primarily by strong demand for our disposable products from our two largest OEM partners, Codman and Stryker. We remained focus on improving our margins and driving strong cash flow from operations to fuel our efforts to invest in the commercialization of our VersaVIT franchise into identify and acquire new attractively priced acquisition that will help us expand our ophthalmic business around the world.
So now we'll open up to questions. Operator, back to you.
Operator
[Operator Instructions] Our first question is going to come from Joe Munda from Sidoti & Co. Please go ahead with your question or comment.
Joe Munda
Good afternoon, Dave and Pam. Thanks for taking questions.
Do you hear me, okay? First off, let me touch on Sterimedix, how did this come about and how did you find this and real quick will they be selling your other products in Europe as well?
Dave Hable
Yes. So on the first question how we found them, as I said on occasion we have a full core press on finding opportunities that may not be obvious in the overall scheme of things.
We look at our product portfolio on a worldwide basis. So without limited to any geographies and any one company.
And so as a result of that kind of detail assessment they emerged as a business that was attracted to us. They have their own network of distributors selling their products.
We are currently rationalizing those distributors to see if there is any overlap that makes sense. So right now there is not a plan for them to immediately take on our product line for instance.
We want to keep them focus, keep them focused on the sales and sales growth that they are experienced in.
Joe Munda
Okay. Then as far as growth you guys are seeing in ophthalmic, a lot of that seems to be driven by VersaVIT.
Can you give us a little bit more color on -- you touched on in your prepared remarks but what you are seeing in the competitive landscape as far as from the larger players?
Dave Hable
So from the larger players nothing new basically. So we just came from the American Academy of Ophthalmology in Chicago.
And we have not identified another competitive offering in a small company environment and we see no different product offering change from the large competitors that are -- that would say rightly make them more attractive to an ambulatory surgery cost center, cost efficient environment.
Joe Munda
Okay, that's helpful. I guess my final question, you suggest -- you guys said $13.5 million, what's an optimal cash levels for you guys to operate on?
Pam Boone
So we have been told it's around $5 million, so we paid $13.5 million for Sterimedix, we use $11 million of our cash to fund that, so we have a little over $9.5 million left there. And we did fund about $2.5 million on our attractively priced revolver at two percentage, which you will see all that in a Form 8-K that was just filed.
Operator
Thank you, Joe. And our next is going to come from Charles Haff of Craig-Hallum.
Please go ahead with your question or comment.
Charles Haff
Hi, Dave and Pam. Can you hear me, okay?
Okay, yes, I am calling from a cell phone so I apologize for breakup, so first on Sterimedix, it sounds like they are all distributors or do they have any direct sales people?
Dave Hable
They have no direct sales people there. Some pieces of their business that require kind of an OEM sort of basis.
But they have no -- they have no direct sales people, bottom.
Charles Haff
Okay. And then on the ophthalmology business.
Is this all-- is this back of eye as well, is this retinal surgery call point or is it a different call point?
Dave Hable
So first of all there -- it is just a couple [indiscernible] 0:20:36.2 on their product line, it is 100% disposables, there is no cannibalization to our existing product line in their scheme of things. It is to first supply across a couple of different customer basis so there is a posterior back to the eye piece [ph] also is an anterior eye piece [ph] that these distributors focus on and have access or more complete product line too.
So it is diversification of our pipeline but not that we are directing our current distribution network in any way to it.
Charles Haff
So you don't have any customers that would be called on by legacy Synergetics' distributors and Sterimedix's distributors?
Dave Hable
I can't say it 100%, we wanted to identify to the-- like across over if you will that might represent some duplication.
Charles Haff
Okay, fair enough, I realize it is still early here. And then on the ophthalmology front in terms of what you are expecting for fiscal 2015, appreciate the color that you gave us on the OEM guidance being maintained at a high single digit revenue growth, when you factor in everything to ophthalmology, are you still guiding to modest single digit revenue growth in fiscal 2015 for ophthalmology?
Dave Hable
Yes.
Charles Haff
Okay, great. And then on the operating cash flow side, obviously you had great improvement in working capital.
Are you expecting that to continue, Pam, throughout the remaining quarters of the year or are there going to be some reversals that would maybe mitigate some of those gains that you saw this quarter?
Pam Boone
There is probably going to be little bit the reversals particularly on the accrued expense side but looking at -- excluding the tax benefits from last year, we look to see that cash flow from operations are improved in line with the net income that we're generating plus retaining a majority of those Q1 working capital efficiencies.
Charles Haff
Okay, great, thanks for that. And then my last question is on the VersaVIT 2.0, understandingly you are going to be converting that 80% of your customers that are currently using 1.0, did you say over the next nine months?
Did I hear you right there?
Dave Hable
Yes.
Charles Haff
Okay. And for those customers who don't convert, what would be some of the reasons why they would not want to convert?
Dave Hable
Yes, so it is kind of hotchpotch of reason. Some of who is using the mobile capability maybe working in a very small or relatively environment, lots a take him with the 1.0 fits and find -- there is no ominous or certainly overwhelming reason not to upgrade so I don't want to overstate that dynamic.
Charles Haff
Okay, sure. And then on that VersaVIT 2.0, VersaVIT 1.0, is there a net revenue gain in terms of packs or I mean I understand you're going to have adoption -- better adoption in the market with the higher cutting speed and so forth but are the packs priced the same or are there any other economic benefits to selling the 2.0 other than just the market share and adoption gains?
Dave Hable
Yes. That would be the biggest one.
And the center of procedure that we are doing as a percent of total. No, there is not change in the price even though there maybe some opportunities in the future on that.
Operator
Thank you, Charles. [Operator Instructions] Our next question is going to come from Raymond Meyer at Larry Financials.
Please go ahead.
Raymond Meyer
Hi, Dave, big quarter. Interesting acquisition, my first question actually is for Pam.
Can you remind us what's Synergetics' access to debt capital is currently?
Pam Boone
Oh sure. So right now we have a $9.5 million revolver and $1 million CapEx fine, so we have access to the $10.5 million plus obviously the $20.4 million in cash.
Raymond Meyer
And revolvers are at what percent rate?
Pam Boone
About 2% all under.
Raymond Meyer
And is the amount of debt availability high to EBITDA revenues, how is that determined?
Pam Boone
There are two covenants, one is the leverage ratio and one is the fixed charged covered ratio. And as long as we satisfy those covenantory have full access so it is really not collateral base.
Raymond Meyer
Okay, sounds good. Dave, will Synergetics be selling products from Sterimedix in US or elsewhere?
Dave Hable
Yes. So we see the big opportunity or a real opportunity for growth in the US.
Very small percentage of their current business comes from US sales; most of their business is outside of the US. So the answer is yes.
We got to-- I'd say rationalize our -- their distributors and figure out whether or not they are good US alternative. And that work is in front of us.
Raymond Meyer
Are their products, they have that you didn't have before the strategically sell fit well in your sale people's bag?
Dave Hable
The answer to question number one is for sure. This is an incremental product line.
In some cases, yes, there is a good fit to our current reps that are focused on the bag PI [ph], but it is not 100%, not all their products.
Raymond Meyer
So if we think about the strategic rationale for this acquisition, other than the fact that almost any profitable business you buy at 2% interest rate is probably accretive. What other strategic reason is there for the acquisition?
Dave Hable
Well, the overall -- frankly the overall reason is to be there. Is to generate the sale and do it on a company that's profitable and that we got it without synergies.
There are no synergies in this, we don't have to close plants, we have to do any of the imagination associated with synergies to make this payoff so it is super attractive opportunity for us, it brings growth, brings high margin, it is profitable and it does no require synergies and it is surprisingly well run business for small business. They have been best in technology, they have got a good management team that really understands the business, it invested already in management information systems, so there is not this big infusion of capital that we have to apply to it, or know how horse power if you at integration to make it work.
This is why I said we can leave a large part of the loan. So all that fits my stated street profiles of getting a bigger business and doing with profitable business.
And then the second strategic piece of just to be add more products to as many of our bags as we can to be a broader line player.
Raymond Meyer
Does the acquisition support international sales of VersaVIT or other current products?
Dave Hable
I wouldn't say internationals on -- no, I wouldn't say international sales on VersaVIT. I think in the sense that by having a broader product offering have more reasons to be in front of more customers, it supports our overall sales effort.
But I don't want to draw too tortuous a line between our current product line and Sterimedix product line.
Operator
Thank you, Raymond. [Operator Instructions] Okay, we have no further questions at this time.
Dave Hable
Okay. Well, thank you very much.
Appreciate your attention. We're really excited about the business and we're really excited about Sterimedix opportunities for us and we have to make most of it.
Walk away with -- this is an incremental business, that's growing at an impressive rate. And should help us across our businesses.
So again thank you much, talk to you later. Bye, bye.
Operator
Thank you, ladies and gentlemen. This concludes today's conference.
Thank you for participating. You may now disconnect.