Derma Sciences, Inc. (DSCI)

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Derma Sciences Inc. (DSCI)

Q2 2013 Earnings Call

August 12, 2013 11:00 a.m. ET

Executives

Kim Golodetz - IR, Lippert/Heilshorn & Associates

Edward Quilty - President, Chief Executive Officer

John Yetter - Chief Financial Officer, Executive Vice President, Finance

Barry Wolfenson - Group President of Advanced Wound Care and Pharmaceutical Development

Analysts

David Amsellem - Piper Jaffray

Scott Henry - ROTH Capital

Presentation

Operator

Welcome to the Derma Sciences' Second Quarter 2013 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. (Operator Instructions) As a reminder, this conference is being recorded today Monday, August 12, 2013.

I would now like to turn the conference over to Kim Golodetz. Please go ahead, ma'am.

Kim Golodetz

Thank you. This is Kim Golodetz with LHA. Thank you all for participating in today's call. Joining me from Derma Sciences are Ed Quilty, President and Chief Executive Officer, and John Yetter, Executive Vice President of Finance and Chief Financial Officer. Barry Wolfenson, the company's Group President of Advanced Wound Care and Pharmaceutical Development and Bob Cole, Group President of Traditional Wound Care and Corporate Accounts will join us for the Q&A portion of the call.

Earlier today, Derma Sciences announced financial results for the second quarter of 2013. If you have not received this news release or if you would like to be added to the company's distribution list, please call LHA, New York, at 212-838-3777, and speak with Carolyn Curran.

Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements regarding the operations and future results of Derma Sciences. I encourage you to review the company's filings with the Securities and Exchange Commission, including without limitation, the company's Forms 10-K and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward looking statements. Factors that may affect the company's results include but are not limited to product demand, market acceptance, impact of competitive products and prices, product development, commercialization or technological difficulties, the success or failure of negotiations and trade legal, social and economic risks.

Also, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live call, today, August 12, 2013. The company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

With that said, I would like to turn the call over to Ed Quilty. Ed?

Edward Quilty

Thank you, Kim. And many thanks to each of you for joining us this morning. During the second quarter we continued to execute on our financial goals and our strategic initiatives. Overall I am very pleased with our results and our momentum. Our advanced wound care business or AWC as we refer to it is performing on plan and now has grown to represent 44% of our total overall sales. In addition, we had two new private-label customers for our traditional wound business or TWC as we’ll refer to it today, and finally our DSC127 phase 3 clinical trials are well underway.

Everybody at Derma Sciences has worked very hard to bring us to the point which we are at today and I couldn’t be prouder of the team that we have assembled. Before I get into my remarks, I would like turn it over to John Yetter, our CFO who will brief you on our financial results for the quarter and then as I said I will come back and talk about our strategic progress. John?

John Yetter

Thank you, Ed and good morning to our listeners. Before I begin I would just (inaudible) everybody out there that’s wondering why we haven’t filed our 10-Q yet, we will file that this evening. We had a little internal change of schedule to be filed the press release this morning and 8-K that [we tend] will be coming out later today.

I assume most everyone is familiar with the company and has had a chance to review our press release. So I will limit my comments to the highlights of our operating performance and financial conditions. And let’s take a look at the numbers.

I will first begin with Q2 2013 versus Q2 2012. Net sales increased $0.5 million or 3% to 18.1 million in 2013 versus 17.6 million in 2012. Sales in the U.S. grew 1.9 million or 14% led by advanced wound car. Sales in Canada declined 1.5 million or 44% due to traditional wound care business loss in 2012 and a significant reduction in sales associated with our exclusive distributor rebalancing its inventory during the quarter. We expect to recover a portion of these sales by year end as we anticipate our distributor rebuilding portion of this inventory.

Europe, Middle East and Africa sales grew 100,000 or 22% during the quarter. Advanced wound care segment sales increased 2.1 million or 33% organically in line with expectations while traditional wound care sales decreased 1.6 million or 13% due to the aforementioned Canadian sales shortfall.

Gross profit increased $0.5 million or 8% to 6.7 million. The gross profit margin increased 36.8% from 35.2%, principally reflecting a favourable sales mix towards higher margin advanced wound care products. Advanced wound care gross profit increased 800,000 or 26% consistent with the higher sales partially offset by a lower gross profit margin percentage. Traditional wound care gross profit declined 300,000 or 11% due to the lower sales, partially offset by slightly higher gross margin percentage. Favorable sales mix and lower (inaudible) related product costs were responsible for the traditional wound care margin decrease.

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