Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Immucor, Inc. (NASDAQ:BLUD)

F3Q09 Earnings Call

April 7, 2009 8:30 am ET

Executives

Edward L. Gallup – Chairman Emeritus

Dr. Nino De Chirico - President and Chief Executive Officer

Rick Flynt – Vice President and Chief Financial Officer

Analysts

Quintin Lai - Robert W. Baird

Joshua Zable - Natixis Bleichroeder

Stephen Simpson – Northland Securities

James Sidoti – Sidoti & Company

Bill Quirk - Piper Jaffray

Operator

(Operator Instructions) Welcome to the Immucor Conference call. I would now like to introduce your host for today’s call Mr. Edward L. Gallup.

Edward L. Gallup

Thank you, for joining us to discuss our fiscal third quarter 2009 results. Participating with me on this call are Dr. Nino De Chirico, our President and Chief Executive Officer and Rick Flynt, our Vice President and Chief Financial Officer.

Before we begin, I'd like to read the following Safe Harbor statement. Many statements on this conference call constitute forward looking statements that reflect our judgment about future events and circumstances. However, actual results and events could differ materially from these forward looking statements.

The forward looking statements in this call are based upon current estimates and risk assumptions and unanticipated events and circumstances may occur, causing these estimates or assumptions to be wrong. The company does not intend to update or revise these forward looking statements unless required to do so by the Federal Securities law. For a detailed discussion of factors that could cause actual results to vary from these forward looking statements, please refer to yesterday's earnings release and the company's most recent SEC filings. We'll now make some brief comments and then go to Q&A.

We’re pleased with our performance in the third quarter particularly in light of the current economic environment. Approximately 90% of our revenue is generated from sales of our Reagent products which are necessary to ensure the safety of transfusions. Our significant base of recurring revenue is evidenced by the stability of our cash flow and earnings.

Turning to our instruments, we received 88 Echo orders worldwide during the third quarter, consisting of 70 orders in North America and 18 orders in the rest of the world including distributors. Our backlog of Echo orders to be installed was approximately three months, down from three and a half months at the end of November. We continue to work on reducing the number of uninstalled instruments and expect to be at a more normal level by the end of fiscal 2009.

On a year to date basis we have received a total of 264 Echo orders worldwide. We are currently working on several large orders and while the timing of when they close is uncertain, we believe we will be near our 350 Echo target orders for fiscal 2009.

In the third quarter we received a total of 25 Galileo orders, five orders in North America and 20 orders in the rest of the world including distributors. On a year to date basis we have received a total of 53 Galileo orders worldwide with approximately 85% of the orders coming from outside of North America. Galileo is typically a capital expenditure in the US and capital purchases continue to be under pressure due to restricted US hospital capital budgets. We expect to be at the top end of our previous order guidance range of 50 to 60 Galileo worldwide for fiscal 2009.

During the third quarter we signed a five year renewal agreement with Quest Diagnostics as their preferred vendor for reagents and blood bank automation systems. Quest is the world’s leading provider of diagnostic testing and the largest commercial laboratory in the United States. We are very pleased they have chosen to continue working with us for the next five years.

As you know, we closed our acquisition of BioArray Solutions on August 4, 2008. We are currently working on the development of the next generation automated BioArray instrument to enable us to further commercialize the product. We have made key decisions in terms of the development direction of the instrument and hope to be able to share a timetable of its introduction in the near future.

As we mentioned in our press release yesterday, we have begun a quality process improvement project and expect to spend between $1.5 and $2 million on the project in the fourth quarter. I’d like to take a moment to discuss this project. In our highly regulated industry the FDA routinely reviews and monitors our operations and quality systems. In April 2008 we hired a third party consulting group that has extensive experience with quality systems in regulatory environments to provide guidance in improving our quality process and systems.

As we previously reported in May 2008, we received a warning letter from the FDA regarding our quality processes and systems. We take our regulatory responsibility very seriously and implemented a remediation plan to address the FDA findings. We recognize the our progress in improving our quality processes in systems needs to be faster then we can accomplish using our internal resources alone, a fact confirmed by a customary follow up visit by the FDA.

During our third fiscal quarter we expanded the role of consultants and began a more formalized and intensive quality process improvement project. The projects objective is to deliver on our commitment of having a world class quality system. We are committed to producing the highest quality product for our customers and we believe this project will help ensure that we continue to deliver on the commitment in the future.

I’d now like to turn the call over to our Chief Financial Officer, Rick Flynt, who will spend a few minutes discussing our financial results for the third quarter.

Rick Flynt

In our fiscal 2009 third quarter, revenue was $75.3 million up 12% or $8.3 million compared with the third quarter of fiscal 2008. The significant components of the year over year improvement in revenue were US price increases which accounted for $5.9 million of the increase, and US Instrument volume increases which accounted for $1.3 million of the increase. Revenue outside the US also accounted for $2.9 million of the increase. Revenue was negatively impacted in the quarter by $1.7 million due to foreign currency exchange rate fluctuations.

Consolidated gross margin was 71.4% compared with 72.1% in the prior year quarter. Gross margin in the current year quarter was negatively impacted by higher than normal manufacturing variances. During the quarter we disposed of short dated inventory that was produced in Norcross to validate the transfer of production from Houston. Once validation occurred we could not sell the product as it was too close to its expiration date. We also incurred approximately $500,000 of costs related to the quality process improvement project in our fiscal third quarter.

Operating income was $29.6 million or 39.3% of revenue in the current year quarter compared with $29.1 million or 43.4% of revenue in the prior year quarter. Operating expenses are higher in the current year quarter due to our acquisition of BioArray and our initiative to sell directly to end users in the French and UK markets.

Diluted EPS was $0.27 in the quarter compared with $0.27 for the same period last year. Cash flow from operations on a year to date basis is $54 million compared with $54.1 million for the first nine months of last year. I would also like to highlight that in March, during our fiscal fourth quarter, we repurchased approximately 95,000 shares of our common stock for approximately $2 million. We believe the investment in our stock is a good use of our free cash flow.

As we stated in our release last night, we reiterated our financial guidance for fiscal 2009. We expect revenue to be in the range of $292 to $300 million and gross margins to be in the range of 71% to 73%. The expenses related to the quality improvement project will be classified as cost of sales and will negatively impact fourth quarter gross margins. Including these expenses we expect our full year diluted earnings per share to be at or modestly above the top end of our previous guidance range of $0.97 to $1.02. Our guidance is dependant upon the relatively stability of foreign exchange rates.

Now I’d like to turn the call back over to Ed.

Edward L. Gallup

We are pleased with our results for the third quarter. We believe there continues to be good demand for our Reagent products and the need for instrumentation to automate the blood banks in hospitals. At this point I’ll give the call back to the operator to begin our Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Quintin Lai - Robert W. Baird

Quintin Lai - Robert W. Baird

On the overall environment, could you talk a little bit about testing volumes? To us it looks like that its still pretty stable here both in the US and Europe and so would be interested in getting your opinion on that. Could you talk a little bit about the instrument sale cycle, have you seen a shift, especially in the United States to even more operating type leases then you saw in the previous quarter?

Nino De Chirico

The first question, we don’t see any impact on our Reagent sales. We have not seen any material impact on the Reagent sales. That’s because our Reagents of course are used for basic needs in medicine. In terms of instruments, yes we see a shift more in Reagent as a matter of fact for the fiscal year we are 75% of the Echo are sold in Reagent rentals and less business in capital purchase.

Quintin Lai - Robert W. Baird

With respect to Europe the Galileo order number was a lot higher then what we expected. Could you talk a little bit about that, is it customer take aways, is it migration from manual or is it actually maybe replacement cycle of the older Galileo.

Nino De Chirico

I would say that our strategy in Europe started to see some results in fact out of the 20 instruments in Europe 10 instruments were to an export country where we were not present before and we got also an outstanding new order, new customer, in Spain with seven instruments. That basically was performance to new business that we are going to gain in Europe.

Quintin Lai - Robert W. Baird

Could you give us a little update on the development of the second generation Galileo?

Nino De Chirico

We are moving along with that platform and we are still on time for calendar year 2009 and to the product release. The project is moving along as expected.

Operator

Your next question comes from Joshua Zable - Natixis Bleichroeder

Joshua Zable - Natixis Bleichroeder

Can you repeat what was the contribution for price increase, I just got cut off for a second I didn’t hear it.

Rick Flynt

Contribution in the quarter was $5.9 million.

Joshua Zable - Natixis Bleichroeder

On the gross margin I know you guys had some manufacturing variances, obviously been moving that facility. Could we see any more follow through in the fourth quarter just because timing wise or anything like that?

Nino De Chirico

No, at this point we have finalized the move of the Houston facility. The move was finalized in calendar year 2008 with FDA approval of the new facility here in Norcross in the second half of 2008. This was let’s say left over from that process because we had to build some validation inventory batches for inventory and of course at the end of the process the shelf life of this material was not long enough for us to sell it and we decided to destroy it. At this point all that process is over and we moved all the manufacturing from Houston to Norcross.

Joshua Zable - Natixis Bleichroeder

On next generation BioArray I know you’re not going to talk about it. I’m wondering if, I know that’s going to be more of a commercial product, you have sort of a lab product. Is it safe to assume you’re still selling the current product in a limited fashion obviously?

Nino De Chirico

Yes, the BioArray product sales in the third quarter saw some growth as a matter of fact customer sales was over $800,000 for the quarter. We also see some movement, some interest on the product in Europe but like you just said, the platform we are planning to build will make this product more available to much larger number of customers.

Joshua Zable - Natixis Bleichroeder

On the quality control initiative or further initiative you guys talked about, Ed went through you had a consultant, there an FDA letter, the FDA came back, you obviously are doing what you need to do. Can you handicap or give us some sort of comfort here that everything is up to speed right now you’re just kind of making sure this never happens again. Just kind of handicap or give us some sense that there’s no real risk here to manufacturing being halted or anything like that.

Nino De Chirico

Like we said in April 2008 we hired this consultant to help us to improve, in effect, our processes and quality system. At the beginning of the third quarter we realized that what we were doing was not enough. This was soon after confirmed by a routine visit from FDA. Then we decided to expand to a much higher level involvement of this consultant to be sure that we achieve our quality objectives.

Joshua Zable - Natixis Bleichroeder

The FDA obviously knows what you guys are doing and have kind of signed off on it is that a safe…

Nino De Chirico

I cannot comment on that but of course we talk, they know what we are doing.

Operator

Your next question comes from Stephen Simpson – Northland Securities

Stephen Simpson – Northland Securities

I want to dig a little deeper into what’s going on with the Reagents. I was wondering if you could perhaps comment on some of the relative performance with the Traditional and the Capture. It looks like the Capture was a little sluggish relative to the Traditional segment. Secondly, just to go a little further into what you were talking about earlier in terms of testing volume. I’m curious if you’re hearing anything from blood banks looking towards perhaps trying to carry over reagent inventory levels.

Nino De Chirico

In the Capture product is a cycle product meaning that we ship product on standing order and there are some quarters where the cycles are in favor and in some quarters where the number of shipments are not in favor. It’s not business related more manufacturing shipping related. In fact, on Q3 we had 42 shipments of Capture; we have several products in the Capture line. In Q2 we had 44 shipments. That means that Q3 was a very weak cycle shipment for Capture. That impacted of course the total sales.

In terms of gross margin of course the volume had an impact and also the fact that Capture is also very strong in Europe and lower exchange rate impacted that. In fact, in the United States our gross margin grew from quarter to quarter in Europe declined because of the exchange rate impact. In terms of the second part of the question was if see if we are building inventory. We don’t see that. Our standing order and our volume of Reagents are at expected volume.

Stephen Simpson – Northland Securities

Regarding order flows you’re seeing on the machinery side are you seeing any difference in the timing of those orders? Some companies have now been talking about how orders are increasingly coming at the end of the quarter. I’m curious if you’re seeing anything similar?

Nino De Chirico

Not really. Like Ed said at the beginning we are targeting larger chain of customers and it’s more a question of negotiation and it’s not a question of timing of the quarter.

Operator

Your next question comes from James Sidoti – Sidoti & Company

James Sidoti – Sidoti & Company

Earlier you said that when you reviewed the quality issues you thought you weren’t doing enough. Can you just expand on that? How did you know you weren’t doing enough?

Nino De Chirico

Because we assess, we have bi-weekly quality review meetings and we assess what we are doing and we assess, again we had this consultant helping us to do the assessment. I was not pleased with the pace of the speed of the improvement. We were making improvement but not at the speed we were expecting. Again we are talking here about process and quality system related and not related to specific product performance.

James Sidoti – Sidoti & Company

When you measure the quality is it the function of the yield ratio.

Nino De Chirico

The quality system is a very complex matter, you have the Capture system and you have number of deviation, manufacturing deviation, all this I don’t want to go into details. You can measure if you are doing good or fast or not fast, you can measure that basically.

James Sidoti – Sidoti & Company

You were pretty specific on what the impact of the costs of the quality improvement program would be during the next quarter but can you give us a sense when you’re complete with this do you think it will be…

Nino De Chirico

We will complete when we will be pleased with the results of the improvement in our quality system. I cannot comment at this time. I think we give more flavor on this on the coming calls.

James Sidoti – Sidoti & Company

Can we assume that will be positive for gross margin?

Nino De Chirico

What you mean with that? When this will be over yes, of course.

Operator

Your next question comes from Bill Quirk - Piper Jaffray

Bill Quirk - Piper Jaffray

In terms of the inventory obsolescence charge that you took what was the amount of that in the third quarter?

Rick Flynt

Related to the destruction it was approximately $500,000 to $600,000 in excess of what our normal rate would be. As a manufacturer we always have some destruction in every quarter.

Nino De Chirico

There was an excess of $500,000 to $600,000 more.

Bill Quirk - Piper Jaffray

In terms of manufacturing variance, I assume that if you normalized for that we’re probably looking at, gross margins actually been up year over year.

Nino De Chirico

It’s a nice mathematical exercise but you always have something there. Yes, you are right. If you take the inventory distraction plus the $500,000 on quality costs we had you may be right.

Bill Quirk - Piper Jaffray

You have the US Capture number as well as the US Traditional number please.

Nino De Chirico

US Capture for the quarter was $9.5 million and Traditional was $40 million.

Bill Quirk - Piper Jaffray

In terms of the renewal deal with Quest any expectations here for incremental growth at this account or is this simply renewing an existing contract?

Nino De Chirico

We are pleased that we have renewed this account; it is the largest commercial lab in the world, and for a five year term. Of course there are opportunities there that now that we have signed this agreement we can explore it’s too early to say.

Bill Quirk - Piper Jaffray

In terms of the commentary around Echo and the 350 target for the year, it sounded candidly in the release then as well as in Ed’s comments that you guys are being a little more cautious in terms of the overall Echo adoption here this year. Having said that, you just had a great third quarter and obviously year to date candidly performing to your expectations. I’m trying to figure out a little bit where the caution is coming from. Is this generally related to the state of the economy, does this have more to do with perhaps as you guys qualify leads that that’s slowing down a bit? Can you help flesh that out for us a bit please?

Nino De Chirico

At this stage I would say it’s more a question of timing. Instrument business you cannot predict. Mostly you are dealing with combining many units at a time. That’s what our [inaudible] is.

Bill Quirk - Piper Jaffray

It’s not a question of customer interest it has more to do with just timing of closing.

Nino De Chirico

Yes.

Operator

Your next question comes from Quintin Lai - Robert W. Baird

Quintin Lai - Robert W. Baird

Following up on Bill’s question you kind of mentioned about large orders and working on those for Echo. Are those orders for systems of hospitals or hospitals looking at bringing in multiple Echoes?

Nino De Chirico

Both but the first assumption is maybe more important one for us.

Quintin Lai - Robert W. Baird

Can we infer that that’s the timing matter of when not if?

Nino De Chirico

Yes, its not if in my view its when.

Quintin Lai - Robert W. Baird

Sorry to go back again to the consultant and the quality process. You mentioned the fourth quarter; I know it’s difficult to say but how many quarters do you think that you might have to implement this type of improvement process?

Nino De Chirico

It’s too early to say at this stage. I would like in the next call as I said before to give you an update about the process and to be more specific. I cannot speculate at this time. The most important thing for us is to reach our objective.

Quintin Lai - Robert W. Baird

An update on how the penetration or reentry into the French market and kind of an update on how Japan is going.

Nino De Chirico

The French market we are at this point in the plan as a matter of fact our sales is a little high then what were thinking. Instrument, as you know, requires time and we are placing at a very low pace at this point. We are building an organization in France it’s only a few months there operating and we are at this point pleased with the way the implementation of the plan is going.

Japan we had disappointment in Japan because we placed some instruments, we placed I guess three Echo and one Galileo in Japan for the quarter and that was new competing with what was going on before. Its still tough but Japan also thanks to a favorable exchange rate they are also now in the green side, break even and making some little money year to date. We expect to have better results in Japan in the coming years.

Operator

Your next question comes from Joshua Zable - Natixis Bleichroeder

Joshua Zable - Natixis Bleichroeder

On the quality control, the costs, is that coming out of margin or is that kind of a G&A expense?

Nino De Chirico

Like we said in the press release that will come out from the margin. In the third quarter we had already an impact of $500,000 that came out of the margin.

Joshua Zable - Natixis Bleichroeder

I know last year we saw obviously stuff going on the selling and marketing expense steps up in the fourth quarter; should we see that as well this year, think about that?

Nino De Chirico

I don’t remember last year. Selling and marketing is more cycle. Our costs maybe in the fourth quarter maybe we have commission to pay things like that, that’s what can impact the fourth quarter. Most if you have a great year. We are pleased to pay commission.

Operator

At this time there are no further questions.

Edward L. Gallup

Thanks for joining us for this call and we’ll look forward to updating you with our guidance call in late May or early June. Thank you very much.

Operator

Thank you for participating. This concludes today’s conference.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts