Q2 2006 Martek Biosciences Corporation Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Welcome to the Martek Biosciences second quarter 2006 results conference call. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded Tuesday, June 6, 2006. I would now like to turn the conference over to Mr. Peter Buzy, Chief Financial Officer, Martek Biosciences. Please go ahead, sir.

PETER BUZY, CFO, MARTEK BIOSCIENCES: Thank you and good afternoon, and welcome to Martek's second quarter conference call. First, I'd like to start the call off with our Safe Harbor Statement and then I'll turn the call over to Pete Linsert, Martek's CEO.

Our call today will contain forward-looking statements, concerning, among other things, expectations regarding revenue growth, international expansion by our customers, expense levels, profitability margins, production capacity, utilization, and market inventory. These statements are based upon numerous assumptions which Martek cannot control and involve risks and uncertainties which could cause actual results to differ. These statements should be understood in light of the risk factors set forth in connection with the Company's filings with the Securities and Exchange Commission.

With that, I'll turn it over to Pete Linsert.

PETE LINSERT, CHAIRMAN AND CEO, MARTEK BIOSCIENCES: Thanks, Pete. I'm going to make a few comments and then turn it back over for Pete for going into the financials in more detail and give you guidance for Q3. Then we'll open it up for Q&A. And then I'll sign off and turn it over to Steve Dubin, who is going to take over as CEO on 1 July. That's the format of today's call.

It's my last earnings call and it's a great time to check out. We've got a strong financial position, the future looks bright. It's a great time to talk about the company. We had record revenues of over $70 million, largely driven by sales to the infant formula customers. International growth was driven by Asia. Four of the top five customers had double-digit international growth. And we are getting higher conversion rate in the U.S. also for our supplemented formula with Martek DHA in it.

We expect to continue the international infant formula growth and the indications are that the Asian market could really provide long-term growth potential. And this is largely caused by a growing middle class in as these economies achieve higher incomes and the folks are looking for consumer products that we have in the developed world and that will include what we believe as a much higher infant formula consumption. Our diluted earnings per share were $0.19 adjusted for stock compensation, only $0.02 shy of the highest ever reported. We had strong cash flows year-to-date, positive cash flow for the first time. I've been at this company almost 18 years, and this is really the first time we've started generating cash from internal operations.

We recently signed a worldwide supply agreement with Mead Johnson. Mead does about 50% of our infant formula business, this is a good deal for Mead and good for Martek. It really provides a very strong security on our core business. We're working on a similar type of supply agreements with other of our customers, so we believe that this will provide a very secure base in the future. One event that happened since we've had our last earnings conference was Ross' GRAS notification for a low level fish oil DHA. We believe that this shouldn't be material to Martek. We've stated that in the past and I want to reiterate that we continue to believe it won't be material in the future.

The food interest is high from various food and beverage companies. We're expecting announcements in the future, and these will be good deals for both the food and beverage company as well as Martek. It takes -- as I mentioned before, it takes time to get a good deal, and in our case, we're going for three ingredients, and that is Martek will win the product, marketing commitment by the company, the food and beverage company, significant marketing commitment, and that Martek will be the exclusive supplier. So these are the basic ingredients we believe we will be getting those three ingredients in our announcements -- agreements that will be coming. We see increased interest by companies for DHA for pregnant and nursing applications and the use of supplements increasing.

I think we can just, from today's news where there was a warning on tuna fish consumption for pregnant women, I think Martek's DHA is a great way to get safe DHA. And I think people are beginning to realize this. We've also seen clinical evidence continuing to build on the DHA, the key Omega 3 fatty acids in the brain and eye and especially for brain and eye development. So these studies in papers continue to support its conclusion of DHA and infant formula. And additional studies also continue to show that DHA -- and not EPA, is a critical fatty acid for visual and nerve function.

Production is very strong. Development efforts to improve productivity of DHA for food have been very successful as well as the development of new salable forms of DHA. DHA for food applications will be very cost competitive, as we're making great progress in this area, and in the long-term fermentation will be a cheaper way than fish oil DHA, we believe, because of these development efforts and the success that we've been having. And we also -- as you know, our DHA brings higher quality vegetarian source and no risk of contaminants.

Our research pipeline is very exciting in the anti-inflammatory area. We have a whole new family of potential anti-inflammatory compounds. Patents have been filed. We've seen very encouraging animal and pre-clinical data that has a whole new way of fighting inflammation. So this could be a very …