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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen. And welcome to the Taro Earnings Call. [Operator Instructions] As a reminder, this call is being recorded.
I would now like to turn the call over to Bill Coote. You may begin.
Thank you. Good morning, everyone, and welcome to our Fiscal Year 2018, ‘19 First Half Earnings Call. Joining me today on the call are Mr. Dilip Shanghvi, Chairman of the Board of Directors; Mr. Uday Baldota, Taro's CEO; and Mr. Mariano Balaguer, Vice President and CFO.
We hope you received the copy of the earnings release, which can be found on our website at taro.com.
We anticipate that many of you may have questions concerning not only this quarter's and year-to-date financial performance, but also our markets, operations strategies and other matters. While we will try to respond to most of your queries, we will not be able to share product-specific and commercially sensitive information, including pipeline detail. We ask that you limit yourself to one question. And if you have more questions, please rejoin the queue. As a reminder, this call is being recorded and a replay and a call transcript will be made available on our website.
Before we proceed, I must remind you that today's discussion may include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in such forward-looking statements to be based on reasonable assumptions, it can give no assurances that its expectations will be attained and should be viewed in conjunction with the risk that our business faces as detailed from time to time in the company's filings with the SEC.
With this, I would like to turn the call to Mr. Dilip Shanghvi.
Thank you, Bill. Welcome all of you, and thank you for joining us today for Taro's earnings call after the announcement of the financial results for the 2018, ‘19 second quarter.
While we are encouraged with the positive directions that we realized in the quarter, especially for both gross profit and EBITDA over quarter one of this year, we expect the U.S. generic market to remain competitive in the short term.
Yesterday's announcement of a $500 million special dividend in conjunction with our ongoing share repurchase program is our latest action in creating value for our shareholders. Taro’s strong balance sheet and operating cash flows continues to provide the company with the flexibility to consider a variety of operational and strategic growth opportunities going forward, including inorganic growth opportunities, to further maximize stockholder return over the longer term. We remain committed to maintaining a disciplined capital allocation strategy.
I will now hand over the call to Uday.
Thank you, Mr. Shanghvi. Welcome everyone and thank you for joining us today. As Mr. Shanghvi indicated the generic climate remains very much the same. We are in a very dynamic and competitive industry. Our observations are that the overall pricing trend and environment, especially in the US is not changing dramatically in price deflation depending on the product is a reality.
A few highlights of our business. Our volumes have increased on the year-to-year comparison up 7% over last year. Our - two thirds of our products ranked number one or number two. We have a pipeline 30 ANDAs awaiting approval with the FDA. We have a strong balance sheet with $1.8 billion in cash, $1.3 billion after the special dividend payment and no debt.
We considered – we continue to consider and execute on creating long-term value for all stakeholders. With today’s announcement of the $500 million special dividend or approximately 12.81 per share and in conjunction with our share repurchase program, we have created significant value for our shareholders.
In total counting share repurchases and the special dividend we will have return more than $1.1 billion in value with $1.55 [ph] million as of September 30th remaining under the current share repurchase authorization.
With continuing healthy operating cash flows and cash of $1.3 billion after the $500 million special dividend, we will continue to identify and evaluate opportunities that make strategic and financial sense and will remain disciplined in our evaluation.
Let me talk about Taro’s R&D effort. As you have known, we have always undertaken long - we have always taken a long-term view of our R&D investments. We have a pipeline of products under development for supporting growth and portfolio strategy of our different business segments. Given the challenging external environment we continuously evaluate our pipeline and invest in products which are viable.
With this, I will now hand over the call to Mariano to discuss financials.
Thank you, Uday. Good morning, everyone and welcome. Let me discuss some of the key financial highlights, which are in comparison to the comparable prior year period.
First, second quarter followed by the six months comparison. Net sales were $159 million, a decrease of $11 million, as the result of continuing increased competition and the challenging US pricing environment. Overall, volumes for the quarter increased slightly.
Gross profit of $109 million decreased $17 million and as a percentage of net sales was 68% compared to 74%. Research and development expenses of $15 million decreased $3 million. Selling, marketing, general and administrative expenses or SG&A of $19 million increased slightly.
Operating income of $79 million decreased $10 million and as a percentage of net sales were 50% compared to 52% in the prior year quarter. As a result of the above quarter two EBITDA of $83 million decreased to $10 million with EBITDA margin of 52% compared to 55% in quarter two last year.
Interest and other financial income increased $5 million to $9 million. Foreign exchange expenses of $6 million compared to FX expenses of $33 million, a $27 million favorable impact to earnings, this impact is principally the result of the strengthening of the Canadian dollar versus the U.S. dollar at a lower rate than prior period.
Tax expenses increased $12 million to $19 million, resulting in an effective tax rate of 23.5% compared to 11.5% in Q2 last year. Net income attributable to Taro was $63 million, as compared to $52 million, as the decrease in operating income was more than offset by the thorough [ph] impact from FX, resulting in diluted earnings per share of $1.60 compared to $1.30 for the same period last year.
Let me now discuss the six months performance and comparison to last year. Net sales of $314 million decreased $18 million, the result of continue increasing in competition and the challenging US price environment mentioned before in the quarter, with a 7% increase in overall volumes.
Gross profit of $209 million decreased $33 million and as a percentage of net sales was 67% compared to 73%. R&D expenses of $28 million decreased $5 million principally due to the timing of clinical studies. SG&A expenses remained flat at $43 million.
Operating income of $142 million decreased $25 million and as a percentage of net sales was 45% compared to 50% in prior year. EBITDA was $151 million with a decrease in margin from 53% to 48%.
Interest and other financial income increased $8 million to $17 million in the current period. FX income of $4 million compared to FX expenses of $52 million, a favorable impact on earnings of $56 million, this is principally the result of the Canadian dollar remaining relatively flat versus the U.S. dollar in the current year compared to a strengthening in the prior year period.
Tax expense of $33 million increased $16 million with an effective tax rate increased to 20% from 14%, which reflect some one-time benefit in prior year. The 20% rate is relatively in line with our historical tax rate.
Net income attributable to Taro increased $23 million to $130 million from $107 million, resulting in diluted earnings per share of $3.31 compared to $2.65 in the prior period.
Our cash flow and balance sheet remained strong. Cash including short term and long-term bank deposits and marketable securities increased $110 million to $1.8 billion from March 31, 2018, included the $32 million impact from the Company’s share repurchase in fiscal year 2018,’19.
Cash flow provided by operations for the six months ended September 30, 2018 of $158 million, as compared to $139 million for the six months ended September 30, 2017.
As Uday previously mentioned, we continue to return value to our shareholders through our share repurchase program. During the current fiscal year the company reported 286,000 shares at an average price of $100.88 [ph]
Throughout September 30 in total under the authorization, the Company has repurchased 1,891,000 million shares at an average price of $102 with $0.83. As of September 30, 2018 approximately 55 million remained under this authorization.
Finally, regarding the payment of the special dividend let me explain that dividend payment will be subject to withholding of Israeli taxes. Shareholders who are resident in the U.S. or any country that is party to a tax treaty with Israel may be entitled to a refund of a portion or all of the Israeli tax withheld. Shareholders will be notified of the procedure to obtain refunds of withheld tax, if applicable, shortly after the record date. Such procedures will also be available on our company website at www.taro.com.
I wanted to thank you everybody. And now I will hand it back the floor to Uday.
Thanks, Mariano. Before we open the floor up to your questions, regarding the Department of Justice investigation. We have nothing new to report on this matter and we continue to work with our consent to cooperate with the Department of Justice. We remain committed to strong corporate governance and fostering our culture of compliance at Taro. In conclusion, we are committed to enhancing shareholder value as our recent action indicated, growing our business with the execution of our strategy and the evaluation of business opportunities that meet our criteria.
With this, I will like to open the floor up for your questions. Thank you.
[Operator Instructions] Our first question comes from Ram Selvaraju of H.C. Wainwright. Your line is open.
Hi. Thank you for taking the questions. This is [indiscernible] for Ram. So just the payment of the special dividend means that substantial acquisitions are now off your table?
I think that's what we attempted to indicate in our communication that despite making this payment of $500 million, I think we still continue to have a reasonably strong cash position of $1.3 billion. And the business does continue to generate strong cash flows and we are committed to using this opportunity - using these funds to look for opportunities that meet our criteria.
Okay. Great. And can you tell me more about the drivers underlying discontinued [ph] gross margin pressure being observed and what gross margin level might be used to be a factor?
I think the continued competition in the industry on account of new entrants, on account of accelerated accruals, on account of customer consolidation and expectations of customers for lower prices, I mean, all of that continues to pressure the prices that we get for our product and the gross margins.
I think in terms of expectations of gross margins, very difficult to sort of state anything because it also depends on the specific product mix that we have and how that - how does the competition impact the product that we are presenting.
Okay. Thank you for that. That was very helpful. And lastly, when might the firm [indiscernible] or acquire a branded drug opportunity [indiscernible] Novexatin that have been considered to be [ph].
Again, I think it's very difficult to talk of specific timelines. I think we continue to look for opportunities that - that will sort of aid in the execution of our strategy. But given the uncertainty of these processes, I think its difficult for us to talk of any specific timelines.
Okay, no problem. Thank you so much.
[Operator Instructions] Our next question comes from Anubhav Aggarwal [Credit Suisse]
Thank you. For the shareholder how does the company decide between a special dividend versus share buyback which one to go for. And why are the large share buyback which is on for last two years why its been so slow to complete?
So I’ll ask Mariano to specifically respond here. I think there is a specific structure put together for the share buyback that is currently ongoing and depending on I think the price in the market you know, the purchases can be affected during day work [ph] Mariano you can give some more color to that.
Thank you, Uday. To answer your question. First, our capital allocation we discussed the strategy on our four US [ph] different proposals and options. So the difference between a share buyback or a special dividend it comes [ph] from our strategy and capital allocations that we have, all that considering how is the best way to return value to our shareholders.
In terms of length [ph] of the share buyback, we did not specific [ph] a time purposely because we consider that to be also a way to return value to shareholders. So we do not have an agenda of completing that in a certain time and as we put it together so 10b5 the program is working while we are very pleased with the result that we have seen and I hope that our shareholder have seen that same.
Okay. Thank you.
[Operator Instructions] We have a follow up question from Anubhav Aggarwal of Credit Suisse. Your line is open.
That was great. So just one question on the quarter sales increase that we see sequentially from June quarter to September quarter. What would you say that - how much was a contribution, you know, I'm not looking for the number here, but I'm just trying to see is the majority of the delta which is coming here did that come from new launches or the volume ramp up in the existing products?
I think there is no one single product that sort of has contributed to this change. So it's sort of broad based and sort of mixed. It's not that we just launched one product [indiscernible]
And that is why Uday I was just clubbing all of them as one new launches, which you would have launched in this quarter, the reason I'm asking that because the margins have expanded significantly gross margin. So certainly in terms for – in this quarter we shipped products where the margins were very favorable. And I was thinking, that's why I was asking the new contribution – new launches are large contributor of this delta?
I wouldn’t say so. Its not as if the new launches are the dominant contributor of this margin change...
Thank you.
Our next question comes from Alok Dalal of CLSA. Your line is open.
Yeah. Good morning, Uday. Just one question, so far in the earnings season we have seen most of the generic pharma companies talk about stabilization or an improving trend or rather stability in the U.S.. So what are you seeing differently that makes you believe that this kind of environment may remain for some time?
I think what we are seeing is two, three things. First is the continued approvals for products which are sort of in our segment. We are seeing entry of new competitors. We are seeing continued questions from our customers in terms of pricing.
So when you look at the overall portfolio that we have and probably the larger industry has, we don't see a dramatic change.
But are you seeing all those launches happening. I understand that the approval cycle has been very fast, but we have not seen companies launch at the same pace, maybe because the dynamics are such that maybe the new launch is not as viable or profitable. So are you seeing those launches coming through?
I think incrementally launches do hurt ultimately the encumbrance [ph]. So to that extent if you have let’s say a reasonable share of products, reasonable share of the market and product that we are marketing, any incremental competition certainly hurts. And that's something that we are seeing, even if let’s say the number of launches to the approvals even if it is low, but anything which is incremental hurts.
So from June 2017 to September ’18, if you look at your revenues then you are in this $160 million to $170 million band. Don’t you feel that the kind of damage that should have happened because of new entrants coming through possibly has to some extent played out for the base business?
I think the – partly compensating factor is the volume growth also that you are seeing here.
Sure…
Which is again…
Yeah, please go ahead.
No I am saying which is also on account of the way the industry is positioned there.
And are you happy with the pace of approvals for you?
Yeah, I think the approval that we are getting is in line with our expectations, so that I would say yes.
Okay. Thank you for taking my questions.
Our next question comes from Sameer Baisiwala of Morgan Stanley. Your line is open.
Thanks. Good morning, everyone. Uday, just on your M&A effort, it's been quite a while nothing has been done. So can just help us with what's going on with them. What's stopping you from pulling the trigger?
I think Sameer as we said that it has to make strategic sense and also be reasonable in terms of our financial evaluation. So we've been looking at opportunities, but we haven't been able to find anything which sort of needs that.
So Uday, specifically I mean, is it the evaluation issue or is it the strategic fit. I mean, you say that specific fit. I mean, are you looking at specialty portfolio or more of a generic portfolio?
I would say that ultimately the businesses that Taro has and we have several revenue segments. We are looking at supporting all the revenue segments through organic, as well as inorganic opportunities. So we've been looking at opportunities, but the way we see these opportunities some of these don't fit the way we look at our - future of our business. And if something fits then probably it doesn't fit the financial criteria that we have in mind. So it's sort of - ultimately the result is that we haven't been able to make any specific move on our target.
Okay. And just on the special dividend, anything to suggest why you chose to give back $500 million, why not more, why not less?
I think the amount was determined keeping in mind the fact that we also wanted to retain flexibility within Taro for any strategic move that we would like to make. So I think that's what I think the Boards guidance was too.
Okay, great. Thank you.
[Operator Instructions] There are no further questions. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.