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Obagi Medical Products, Inc. (OMPI)

Q3 2008 Earnings Call Transcript

November 6, 2008, 4:30 pm ET

Executives

Ina McGuinness – IR, Integrated Corporate Relations

Steve Carlson – President and CEO

Preston Romm – CFO, EVP of Finance, Operations and Administration, and Treasurer

Analysts

Katherine Lu – Oppenheimer

Angela Larson – SIG

Adam Greene – Stanford Group

Larry Neibor – Robert W. Baird

Presentation

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Obagi Medical Products third quarter earnings conference call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions)

As a reminder this conference is being recorded today, Thursday, November 6, 2008.

I would now like to turn the conference over to Ina McGuinness. Please go ahead ma’am.

Ina McGuinness

Thank you, operator. This is Ina McGuinness with ICR. Earlier this afternoon, Obagi Medical Products released financial results for the third quarter and nine months ended September 30, 2008. If you have not received the press release it is available on the Investor Relations section of the Obagi Medical Products website at www.obagi.com. This call is being web cast and a replay will be available on the Company’s website for 30 days.

Before we begin, we’d like to remind you that today’s remarks contain forward-looking statements within the meaning of Federal Securities Law. These statements do not guarantee future performance and therefore undue reliance should not be placed on them. We refer you to the risk factors contained in Obagi Medical Products’ SEC filings for more detailed discussions of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. All information provided in today’s call is as of the date of the live broadcast, Thursday, November 6, 2008 and Obagi Medical Products assumes no obligation to update any such information.

Participating in today’s call from the company are President and Chief Executive Officer, Steve Carlson, and Chief Financial Officer and EVP of Finance, Operations and Administration, Preston Romm.

And with that, I’d like to turn the call over to Steve Carlson. Steve?

Steve Carlson

Thank you, Ina, and good afternoon everyone. Overall we’re pleased with our financial performance during the third quarter. Despite the extremely challenging macroeconomic conditions which were compounded by the seasonally weakest time in the year for our business our sales declined only slightly and we maintained our track record of profitability.

Total revenues for the quarter were $26 million down about $300,000 and for the nine months ended September 30, 2008, our sales are up 5% to $79.2 million year-over-year. Although our businesses is not recession proof we believe it is fairly resilient and the top line performance appears to be more stable than that of the recently reported aesthetic procedure providers.

We also made good progress on the international front in the third quarter albeit with a modest 3.5% increase in sales. More importantly the implementation and placement of sales managers permanently in each of the key regions has resulted in ELASTOderm and CLENZIderm now being registered for sale in almost all our distributor countries and recently we signed new distribution agreements in China and Australia.

We believe we will begin to see the benefit of these initiatives in China, Russia, Japan and other key countries within the next three to four months and beyond.

During the quarter, our net income totaled $2.9 million of $0.13 per share which was in line with our expectations. Importantly we continued to generate strong cash flow from operations and ended the quarter with a very healthy debt free balance sheet that underscores our strong financial position.

In terms of product lines and segment performance, ELASTOderm, which includes our Decolletage system and our eye cream and gel saw sales rise 46% to $2.4 million. Our account penetration data indicates that more than 4,067 accounts have now purchased ELASTIderm products with approximately 241 new accounts have been ordered in the past quarter. Reorder rates were an impressive 83% for the eye cream and a strong 50% for Decolletage.

Additionally, we have been conducting comprehensive clinical studies and have been presenting these findings in industry events to demonstrate the dramatic improvements our patients experience when using ELASTOderm on total damaged skin on the chest and neck areas as well as skin around the eye. Based on the strong reorder rates we saw during the third quarter we remain enthusiastic about the future upside potential for this technology and product lines.

For CLENZIderm, third quarter sales totaled $1.8 million, which is down about 2% year-over-year. However, account re-order rates remained strong at 83%. Our ongoing clinical studies continue to confirm high efficacy of CLENZIderm in treatment of acne due to our solubilized BPO antibiotic free formulations.

Turning to our core products, sales in Nu-Derm were $14.8 million down 9% from the year ago. Reorder rates for Condition and Enhance was 73% for the core systems. Sales of Obagi C Rx, Professional-C, Tretinoin and others equaled $5.8 million up 13% versus a year ago.

Further we completed our direct to consumer awareness campaign for our Condition and Enhance systems. While feedback from our physicians accounts was positive and we achieve a 200% increase in website hits since the program commenced, and we saw a significant increase in physician locator hits, we have determined that the market conditions does not warrant our further continuing to invest in this program.

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