Immucor Inc. F1Q10 (Qtr End 08/31/09) Earnings Call Transcript

Immucor Inc. (BLUD)

F1Q10 (Qtr End 08/31/09) Earnings Call

October 2, 2009 8:30 am ET

Executives

Dr. Gioacchino Eatz De Chirico – President & Chief Executive Officer

Richard A. Flynt – Chief Financial Officer

Analysts

William Quirk – Piper Jaffray

Matthew Notarianni – Robert W. Baird

Stephen Simpson – Northland Securities

Anthony Petrone – Maxim Group

Daniel Owczarski – Avondale Partners

Presentation

Operator

Good morning ladies and gentlemen. Thank you for standing by. And welcome to the Immucor Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference, Mr. Rick Flynt, Immucor’s Chief Financial Officer. Mr. Flynt you may begin.

Richard A. Flynt

Good morning and thank you for joining us to discuss our fiscal first quarter 2010 results. Participating with me on this call are Dr. Nino DeChirico, our President and Chief Executive Officer and Michele Howard, our Vice President of Investor Relations.

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 on 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 Federal Securities laws.

For a detailed discussion of factors that could cause actual results to vary from these forward-looking statements, please refer to yesterday's press release and the Company's most recent SEC filings. We will make some brief comments and then go to Q&A.

I would now like to turn the call over to Nino.

Dr. Gioacchino Eatz De Chirico

Good morning. I would like to start the call this morning by giving you a brief update on our situation with the FDA.

In August, we submitted our remediation plan to the FDA, which outlined how we are going to address their noted deficiencies. The basis of our remediation plan is our Quality Process Improvement Project, which began in early calendar 2009.

Our Quality Project is much bigger than simply addressing the FDA-noted deficiencies. Our Quality Project has the goal of establishing a world-class quality system. We are taking this opportunity to re-examine how we look at quality through our organization and are changing our corporate culture accordingly.

Our Quality Project is a two-legged approach. The first part is a focused remediation effort on FDA-noted deficiencies, as well as other potential high-risk compliance areas. We are making good progress on the focused remediation efforts and this is a high priority in assuring compliance in the next FDA inspection.

The second and broader part is a core team approach with teams working on each quality subsystem as defined by the FDA quality system regulation. The core team approach is essential to achieve a compliant, sustainable quality system to make our goal of a world-class quality system a reality.

The process involves assessing the current state, identifying areas of improvement and developing corrective action to improve efficiency and ensure compliance. Our core team approach is also progressing well. We continue to expect our Quality Project to be completed during our third fiscal quarter of 2010, or no later than the end of February 2010.

I remain personally involved in all aspects of our quality initiatives and as I have said before, we are committed to establishing a world-class quality system as part of this process. Like the investment community, our customers have had the questions about the FDA situation and our efforts of improving our quality system.

Many parts of our organization, and specifically our sales force, have spent a lot of time educating our customer and getting them comfortable with our commitment to quality. We believe we have addressed customer concern over supply issues as the FDA action has not placed any restriction on us regarding the sale of our products and no product recalls were involved in the actions.

We believe our Quality Process Improvement Project will have no impact on our ability to produce product. Turning to instrument orders, we had 40 Echo orders worldwide in the first quarter comparing with 224 in the first quarter of the last fiscal year. We had a tough year-over-year comparison due to the record number of orders in the prior year quarter. As you may recall, we had a very successful promotion last year that resulted in a high number of orders in the first quarter of the fiscal 2009.

In the current year quarter, we also had fewer orders from hospital systems with multiple locations known as integrated delivery network or IDNs compared with what we have generated in the past several quarters. While these larger orders are typically lumpy, we have seen a lengthening of sales cycles. We have lowered our current year-end quarter guidance to 280 to 320 orders compared with our previous guidance of 320 to 350 orders, because of the lengthening of the sales cycles.

However, we had a robust pipeline of both IDN and non-IDN orders and believe we are experiencing a delay in orders, not lost orders. Turning to the Galileo, we reiterated our order guidance yesterday and continue to project generating 50 to 70 orders in the fiscal 2010. Our volume remains strong in Europe and in our distribution markets as it was through fiscal 2009.

In the U.S. and Canada, we expect lower order volume until the launch of the Galileo Neo. The launch of the Galileo Neo our next-generation high-volume instrument, continues to be targeted by the calendar first quarter of 2010. We will be showing the Neo at the ABB trade show later this month in New Orleans. We are very excited about bringing our first generation automated instrument to the market.

Turning to our first quarter financial performance, we continue to generate strong financial results due to the needs-based aspects of our business. Approximately 90% of our revenue is generated from sales of our reagent products, which are necessary to ensure the safety of transfusion. Our significant base of recurring revenue is evidenced by the stability of our cash flow and earnings even in the current economic environment.

I would like now to turn the call back to Rick.

Richard A. Flynt

Thanks Nino. Turning to our instruments, for the first quarter, as Nino stated, we received 40 Echo orders worldwide during the quarter consisting of 23 orders in North America and 17 orders in the rest of the world including distributors.

At August 31, 2009, our backlog of Echo orders to be installed in North America was approximately two months compared with four months at the end of our fiscal fourth quarter. In the first quarter, we received a total of 14 Galileo orders with all of the orders coming from the rest of the world markets, including distributors.

Turning to our financials, in our fiscal 2010 first quarter revenue was $83.1 million about 14% or $9.9 million compared with first quarter of fiscal 2009. Year-over-year revenue growth was attributable to price contribution of $6.5 million and volume contribution of $5.1 million. Revenue was negatively impacted in the quarter by $1.7 million due to foreign currency exchange rate fluctuations.

Consolidated gross margin was 71.9% compared with 73% in the prior year quarter. Gross margin in the current year quarter was negatively impacted by costs related to the Company's Quality Process Improvement Project totaling approximately $2.3 million.

Operating income was $33.3 million or 40.1% of revenue in the current year quarter compared with $30.6 million or 41.9% of revenue in the prior year quarter. Operating expenses are higher in the current year quarter due to our acquisition of BioArray, which was completed on August 4, 2008.

Diluted EPS was $0.30 in the quarter compared with $0.28 for the same period last year. The current year quarter included costs of approximately $0.02 per diluted share net of tax related to the Quality Process Improvement Project as well as a full quarter of BioArray expenses versus one month in the prior year quarter.

Cash flow from operations in the current was $24.5 million compared with $21.6 million last year. As we stated in the release last night, we repurchased approximately 350,000 shares of our stock in the first quarter for a total of approximately $6 million. During August, we announced that our Board had authorized an increase of $2 million shares through our stock repurchase program.

As of the end of the first quarter, we had approximately $2.5 million shares remaining on our authorization. We believe repurchasing shares is a good use of our free cash flow. As we also stated in our release last night, we reiterated our financial guidance for fiscal 2010. We expect revenue to be in the range of $322 million to $332 million and gross margins to be in the range of 70% to 71.5%.

The expenses related to the Quality Process Improvement Project are classified as cost of sales. We continue to expect fiscal 2010 project costs to be in the range of $4 million to $4.5 million. Including these expenses, we expect our fiscal year 2010 diluted earnings per share to be in the range of $1.10 to $1.17. Fiscal 2010 guidance also includes a full year of BioArray expenses versus 10 months in the previous year.

At this point, I’ll give the call back to the operator to begin our Q&A.

Question-and-Answer Session

Operator

Thank you (Operator Instructions). Bill Quirk of Piper Jaffray. You may ask your question.

William Quirk – Piper Jaffray

Thanks, good morning.

Richard A. Flynt

Good morning Bill.

Dr. Gioacchino Eatz De Chirico

Good morning Bill.

William Quirk – Piper Jaffray

The first question is on guidance. You guidance implies effectively flat to down EPS for the balance of the year and that is considering the fact that you guys have already absorbed about half of the quality improvement charges and also arguably ForEx is going to benefit now, so could you give us a little additional color here, Rick?

Richard A. Flynt

Sure. Bill, there are actually several reasons why EPS came in above the expectations in the first quarter. The first thing, our pricing contribution is front-end loaded this year. We have about $2 million of price contribution in Q1 that will be higher than our average for the next three quarters. Also, in our international operations, we had about $1 million of orders that were pulled in the Q1 that we had expected in Q2 and finally we had higher margins in our instruments this quarter at 32% compared with 17.4% in the prior year and that was primarily attributable to a larger-than-expected favorable variance related to refurbished instrument parts. And we just don't expect that to be repeated in future quarters.

Dr. Gioacchino Eatz De Chirico

And Bill, we never changed our guidance after one quarter.

William Quirk – Piper Jaffray

Right, certainly very much aware of that Nino. Thank you. A couple of additional questions for me and I will jump back in the queue. The BioArray margin, it looks like it declined fairly significantly here in the quarter, it had been trending slightly positive. Did you guys ship a bunch of instruments related to BioArray in the quarter or is just a function of the fact that it is obviously a very small contribution at this point and any little expense line can move that around quite a bit?

Dr. Gioacchino Eatz De Chirico

Exactly the second point you made the volume is too small and it has to absorb all the costs on the operation.

William Quirk – Piper Jaffray

Okay, very good. And then the last one for me is just a housekeeping question really. Can you provide us with the North American both capture, as well as traditional reagent numbers?

Dr. Gioacchino Eatz De Chirico

Yes, captures is a $11.1 million and traditional is $32.8.

William Quirk – Piper Jaffray

Thank you.

Dr. Gioacchino Eatz De Chirico

Thank you.

Operator

Matt Notarianni of Robert W. Baird. You may ask your question.

Matthew Notarianni – Robert W. Baird

Good morning congratulations on the quarter guys.

Dr. Gioacchino Eatz De Chirico

Thank you Matt.

Richard A. Flynt - Chief Financial Officer

Hi Matt.

Matthew Notarianni – Robert W. Baird

Just starting off, with respect to the Echo placements that were made in the quarter. Can you kind of talk about the percentage of competitive takeaways there and kind of how you saw things during what are usually kind of slower summer months?

Dr. Gioacchino Eatz De Chirico

Well, the fluctuation of – I’ll start with the last point. The fluctuation is, like I said, and introduction is also a factor of getting some IDN or not getting some IDN orders. To give you an idea, if you normalize by the number of IDNs ordered in the last quarter and the first quarter the number is equal. Though in the last quarter we had very large IDN orders like Averno was 24 Echo that we did not get this quarter. In terms of ratio, we are still running over 50% of competitive takeaway.

Matthew Notarianni – Robert W. Baird

Got it. Thank you very much for that. You know, and then just kind of broadly, we are hearing that there could be some obviously consolidation within the space with respect to one of your competitors and just kind of wondering if that has been talked about among customers at this point or if that seems to still be up in the air or how you are looking at the competitive landscape kind of going forward?

Dr. Gioacchino Eatz De Chirico

Well, the competitive landscape is getting more interesting and more complex. I am not going to comment about the rumor you mentioned because it's a rumor and it is not up to us to comment on that.

Matthew Notarianni – Robert W. Baird

Sure. Okay. And then finally, I mean, maybe for Rick, I mean once this Quality Process Improvement Project is kind of out of the way, I mean, have you guys thought about or care to share perhaps what a long-term gross margin might look like for the business?

Richard A. Flynt

Matt, we generally just give our gross margin expectations for the full year and we don't go beyond that until we give guidance for next year.

Matthew Notarianni – Robert W. Baird

Okay. And then just one last housekeeping. It looks like there was just a $3 million kind of sequential build on the inventory side. Is that mostly just kind of getting ready for Neo?

Dr. Gioacchino Eatz De Chirico

Well, it is more instrument overall instrument inventory that is going little up.

Matthew Notarianni – Robert W. Baird

Great. Thanks a lot, guys.

Dr. Gioacchino Eatz De Chirico

You are welcome.

Operator

Joshua Zable of Natixis. You may ask your question.

Joshua Zable – Natixis Bleichroeder

Good morning, guys. Congrats on a great quarter and thanks for taking my question here.

Dr. Gioacchino Eatz De Chirico

Yes.

Joshua Zable – Natixis Bleichroeder

A couple of quick ones, just related to the, you know, you guys made a comment of lengthening of sales cycles for customers obviously, there is a lot of stuff going on whether it's with the FDA competition. Can you just give us a little bit, the economy this summer – I mean can you just give us a little bit more color, I know obviously you can’t get into your customers’ head, but I’m sure you have gotten some feedback as to maybe why the sales cycle is being drawn out a little bit?

Dr. Gioacchino Eatz De Chirico

Yes, like you said, it is a very complex picture, first of all, I said the impact of IDN. But said that though, we are seeing a lengthening of sales cycles for both IDN and non-IDN. And there is many factors that could play. The most important is still in my view the economy factor. I mean, the hospital budget constraints, is delaying decisions basically. There is also possibly another factor that, during the last two or three months, our sales force was very busy to make our customers comfortable with the FDA letter, but if I see the lengthening of the sales cycle was even before that FDA letter, then I would say the FDA played a factor because of our sales force being very busy to deal with it, but the most important factor I still believe is the economy factor.

Joshua Zable – Natixis Bleichroeder

Okay, fair enough. And then just kind of taking that over to the Galileo you guys reiterated your Galileo. Just one I guess point of clarification, is your Galileo guidance both Galileo and Galileo Neo? And two, I guess with all the stuff we both mentioned going on, what gives you the confidence that the Galileo outlook should remain solid?

Dr. Gioacchino Eatz De Chirico

Well, the Galileo first of all includes all the Galileos for this year and I think we said already that we do not forecast a high impact of Galileo Neo in this fiscal year. We will see a high impact of Galileo Neo next fiscal year. The Galileo is performing strongly in Europe and in the export markets, and we believe that our guidance is very well placed and we have no concern about meeting those numbers.

Joshua Zable – Natixis Bleichroeder

Okay, great guys. Well, thanks for taking my questions. Congrats.

Dr. Gioacchino Eatz De Chirico

Thank you.

Richard A. Flynt

Thank you.

Operator

Stephen Simpson of Northland Securities. You may ask your question.

Stephen Simpson – Northland Securities

Well, thanks. Guys, you talked earlier about why the margins for the systems business was so strong this quarter. Could you talk a little bit as to why the revenue was so strong relative to the placements? And my second question I have is if you can give us any update on the progress or progress of developing products through the BioArray acquisition? Thanks.

Dr. Gioacchino Eatz De Chirico

Which revenue are you mentioning, the overall revenue or just the instrument revenue?

Stephen Simpson – Northland Securities

Just the instruments.

Dr. Gioacchino Eatz De Chirico

Well, the instrument revenue is a very complex picture because it includes many does not include just instrument sales. Includes service, includes deferred revenue than we will see some fluctuation there, but not a very large fluctuation. And the gross margin I think Rick explained about it. It's true. The other part of the question was about the BioArray I assume?

Stephen Simpson – Northland Securities

Yes.

Dr. Gioacchino Eatz De Chirico

Yeah. We have two major product that are already in the market. One is called HEA and this is the product that basically make all the rare antigen typing for red cells. And another product we have in the market is HPA that is for platelet genotyping. And with these two products, we have also an HLA for genotyping for HLA. In the pipeline of product, we have some more niche products, less broad in terms of application. One is Rh to define the variance on Rh, RhC and these are the products that are in the pipeline at this point, but again, this will be much more niche application comparing with the largest application that the large volume products mostly will be HEA because that is the product that really screens for all the arrays in antigen outside ABO.

Stephen Simpson – Northland Securities

All right, thanks a lot.

Dr. Gioacchino Eatz De Chirico

You are welcome.

Operator

Anthony Petrone of Maxim Group. You may ask your question.

Anthony Petrone – Maxim Group

Thank you for taking my questions, a couple of here, first on the Galileo orders overseas, still seeing some good follow-up through there. I’m just wondering in which regions you are still seeing strength there and I have a couple of follow-ups on the implementation cycle?

Dr. Gioacchino Eatz De Chirico

This time in Europe in this quarter, we got orders from most of the countries. The largest order was from Italy and Germany. We had I think five in Italy, two or four in Germany, but also our export areas moving along quite well and we receive orders from countries outside our direct distribution. But in this quarter, we got orders from everybody, including Spain, France Germany and Italy.

Anthony Petrone – Maxim Group

So is it safe to assume that the sales cycle overseas, you are not seeing in the same things overseas as you are seeing here in the U.S. or are you seeing a little bit of changing purchasing patterns there as well?

Dr. Gioacchino Eatz De Chirico

No, because the purchasing pattern in Europe is quite different than here. Mostly goes through tenders and a sales cycle there is already very long because a tender can last from the beginning to the end years. Then we are not seeing that kind of lengthening of sales cycle. However, that the selling cycle in Europe, its longer than in North America because its the tender issue.

Anthony Petrone – Maxim Group

And moving on to the implementation cycle here, it seems that you have a healthy number of go-lives this quarter on both Galileo and Echo, so I'm wondering where that cycle is for each system right now and how much more improvement can we see as we move to the end of the year?

Dr. Gioacchino De Chirico

Well, we actually, like you just said, we saw a considerable number of Echo going live in North America, and of course, we are improving in that segment. I think we are going to be at the same level of this quarter going forward assuming though that today, we have 215 Echo worldwide that are either not installed or are not live. Then basically we are going to keep moving this unit to full revenue, running revenue.

Anthony Petrone – Maxim Group

So that changed the outlook for price and volume contributions for the full year. You had given a little bit of guidance relating to those two numbers last quarter now with the increased number of go-lives and lower placements on Echo, should we see changes in price and volume as we move to the end of the year.

Dr. Gioacchino De Chirico

Well, I think that the volume for sure, the more Echo, mostly because this competitive, most of this instruments are competitive takeaway then we will see an impact in volume going forward as we discussed when they go live. The price portion of the question is independent from the go-live number.

Richard A. Flynt

Just to clarify we think that the guidance that we provided is still good for the year. We did have low Echo orders in the current year quarter, but given the time for implementation and then for them to actually get up to full revenue run rate we don’t think the shortfall was significant enough to impact our estimates for the current year.

Anthony Petrone – Maxim Group

Thanks, again. I will hop back in queue.

Richard A. Flynt

Okay.

Operator

Daniel Owczarski of Avondale Partners. You may ask your question,

Daniel Owczarski – Avondale Partners

Yes, thanks good morning.

Richard A. Flynt

Good morning.

Daniel Owczarski – Avondale Partners

Can you talk a little bit more about your Echo order guidance for the rest of the year, and how much of visibility do you have that you can get back to that, roughly 80 Echo orders per quarter after this quarters performance?

Dr. Gioacchino Eatz De Chirico

Well, I can not give you much detail other than saying that, in the first quarter, we had very little orders from IDNs, the Integrated Delivery Network and we expect we have a robust pipeline of orders and we expect orders from IDNs that will increase a number of orders, that assumption we have used on making our numbers.

Daniel Owczarski – Avondale Partners

Are you seeing anything in the September month or in the beginning of this quarter to give you indication that things have changed since the summer?

Dr. Gioacchino Eatz De Chirico

I don’t think the lengthening of the sale cycle is not changed, but we have signals that some of the IDNs we are working with are going to be close to send orders.

Daniel Owczarski – Avondale Partners

Okay, and then just last on the Galileo should we just assume that there will be no more Galileo orders in North America until Neo is onboard.

Dr. Gioacchino De Chirico

Very, very few if we have any.

Daniel Owczarski – Avondale Partners

Okay. Thank you.

Dr. Gioacchino De Chirico

Yep.

Operator

(Operator Instructions). James Sidoti of Sidoti & Company. You may ask you question.

James Sidoti – Sidoti & Company

Good morning, can you hear me?

Dr. Gioacchino De Chirico

Yes, Jim.

Richard A. Flynt

Yes, Jim.

James Sidoti – Sidoti & Company

All right, just a follow-up on the FDA, can you just outline what is the next step there? Now that you have submitted your plans to them, officially or are you waiting for response on that or well you wait till you completed the project before you hear from them again?

Dr. Gioacchino De Chirico

Well, we do not set agenda for FDA. They will decide what the next step will be that very likely will be that they will come in and do an inspection but we don’t know when.

James Sidoti – Sidoti & Co

So that could be now, that could be as you complete the project.

Dr. Gioacchino De Chirico

We don’t know when.

James Sidoti – Sidoti & Co

Okay. All right, thank you.

Dr. Gioacchino De Chirico

Okay.

Operator

There are no further questions at this time.

Richard A. Flynt

All right, thank you for joining us today. We'll look forward to speaking to you again in a few months.

Operator

This concludes today's conference call. Thank you for your participation.

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