Immucor, Inc. F2Q10 (Qtr End 11/30/09) Earnings Call Transcript

Jan. 7.10 | About: Immucor, Inc. (BLUD)

Immucor, Inc. (NASDAQ:BLUD)

F2Q10 Earnings Call

January 7, 2010 8:30 am ET

Executives

Dr. Nino De Chirico - President and Chief Executive Officer

Rick Flynt – Vice President and Chief Financial Officer

Michele Howard - Vice President of Investor Relations

Analysts

Quintin Lai - Robert W. Baird

Bill Quirk - Piper Jaffray

Scott Gleason – Stephens

Joshua Zable – Natixis

Anthony Petrone – Maxim Group

Stephen Simpson – Northland Securities

Dan Owczarski – Avondale Partners

James Sidoti – Sidoti & Company

David Turkaly – SFG

Jim Quentin - Barrett & Co.

Operator

(Operator Instructions) Welcome to the Immucor Conference call. I would now like to introduce your host for today’s call Mr. Rick Flynt, Immucor’s Chief Financial Officer.

Edward L. Gallup

Thank you, for joining us to discuss our second quarter fiscal 2010 results. Participating with me on this call are Dr. Nino De Chirico, 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, including statements or projections about future financial results or economic performance, or statements about plans and objectives for future operations. Actual results could differ materially from these forward looking statements.

The company does not intend to update these forward looking statements unless required to do so by Federal Securities law. For a detailed discussion of factors that could cause actual results to differ from these forward looking statements, please refer to yesterday's press release and the company's most recent SEC filings. Now we’ll make some brief comments and then go to Q&A.

I’ll now turn the call over to Nino.

Dr. Nino De Chirico

Let me start this morning with an update on our Quality System Project. We continue to make good progress on our project. As we have discussed in the past, the project is a two legged approach. One leg of the project is a focused remediation effort on FDA noted deficiency, as well as other potential high risk compliance areas. This part of the project is our main focus right now and accounts for the majority of the rest of the project spend.

The other leg of the project is our core team approach working on each quality sub-system and our efforts to establish a world class quality system. The quality system includes almost every part of our business. This is a very large project that is taking significant man hours. We have dedicated both internal and external resources to the project. We are committed to completing the remediation effort associated with the project by our self-imposed deadline of the end of February and to regain compliance with the FDA.

While we have been focused on our Quality System Project we have also continued to run the business. To ensure the successful completion of the focused remediation activities we made the decision to keep external consultants heavily involved through February 2010. We now expect to spend $6 to $7 million in fiscal 2010 on the project, compared with our previous estimate of $4 or $4.5 million. The increased spend is primarily for external consultants.

We think that additional spend is important to meet customer expectations, to achieve FDA compliance, and to establish our strong foundation for the future. We continue to expect the majority of external costs associated with our quality system effort to stop in February when the FDA remediation efforts are expected to be complete. After the FDA remediation portion of the project is completed we expect to continue to incur some additional costs associated with our world class quality system efforts. After February we will not break these costs out separately as they are not expected to be material impact to the financials.

Work to improve the quality system is never really done. We continue to work to ensure we have a world class quality system for the future. We have had no supply issues as the result of the project and as you can see in our results the business has continued to perform well. This is proof the dedication of our employees and I want to take this opportunity to thank them for the commitment.

I would like now to talk about the upcoming launch of our fourth generation automated instrument, the Galileo Neo. We are very excited about upcoming launch of the Neo; the Neo will be attractive to a larger portion of the high volume market then the Galileo because of the significant improvements in functionality such as the stat capability. The Neo will serve a faster turnaround time and improve the reliability. With this announcement the Neo is more appealing to the large and medium sized hospital market as well as doctor centers and [inaudible].

We expect the launch of Neo in Europe first during the calendar first quarter 2010. We are working on the CMAC and once completed we will begin marketing the Neo in Europe. Europe is a very important market for the Neo. As in America, the Galileo was introduced in Europe in 2002 and in the West in 2004. Since the Galileo launch, more than 60% of Galileo orders have been outside the United States with the overwhelming majority of those orders in the European market.

For the US market we are in the process of completing our 510 K submission to the FDA for the Neo and expect to submit it within the next week. We will launch the instrument in the US once we FDA clearance. Historically based on our experience with the Galileo and Echo it has take roughly 90 days between submission and FDA clearance but this is only an estimation. We are committed to introducing a scalable automation solution to the market and expect to continue increasing our footprint worldwide with our automation strategy.

We continue to see significant opportunities for the Echo and while the launch of the Neo will not have a material impact in our fiscal 2010 results; it’s an important growth driver for the future.

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

Rick Flynt

I’d like to start with our instrument orders for the quarter. We received 77 Echo orders worldwide during the quarter consisting of 55 orders in North America and 22 orders in the rest of the world including distributors. At November 30, 2009, our backlog of Echo orders to be installed in North America was approximately two months which was the same as the backlog at the end of our fiscal first quarter.

In the second quarter we received a total of 27 Galileo orders consisting of three orders in North America and 24 orders in the rest of the world including distributors. Order volume for the Galileo remains strong in Europe and in our distributor markets as it was through fiscal 2009. In the US and Canada we expected lower order volume ahead of the launch of the Neo.

In our release last night we reiterated our full year fiscal 2010 order guidance stating that we expect to be toward the low end of our Echo guidance of 280 to 320 orders and toward the high end of our Galileo guidance of 50 to 70 orders worldwide. Galileo guidance is a combination of our expectations for the Galileo as well as the Neo. We would expect to begin receiving Neo orders in our fiscal fourth quarter which is consistent with our original expectations.

Turning to our financials, in our fiscal 2010 second quarter revenue was $82.6 million up 13% or $9.5 million compared with the second quarter of fiscal 2009. Year over year revenue growth was attributable to price contribution of $5.2 million and volume contribution of $2.4 million. Second quarter revenue in the current year was also favorably impacted by $1.9 million from foreign currency exchange rate fluctuations.

Consolidated gross margin was 70.4% compared with 73.3% 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 $1.8 million. Operating income was $30.7 million or 37.1% of revenue in the current year quarter compared with $27.9 million or 38.2% of revenue in the prior year quarter.

Operating expenses are higher in the current year quarter due to research and development spend for the next generation molecular instrument as well as increased legal expenses. Our legal expenses related to the DOJ investigation and the associated law suits were approximately $1.2 million or $0.01 per share net of tax in the current year quarter. On a year to date basis in fiscal 2010 legal expenses associated with these matters were approximately $2 million or $0.02 per share net of tax. We expect this spend to continue in the back half of fiscal 2010.

Diluted earnings per share was $0.28 in the quarter compared with $0.24 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. Cash flow from operations in the current year was $34.1 million compared with $32.3 million last year.

As we stated in the release last night, we repurchased approximately 300,000 shares of our stock in the second quarter for a total of approximately $5.5 million. As of the end of the second quarter, we had approximately 2.2 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 continue to expect revenue to be in the range of $322 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.

As Nino said, we now expect fiscal 2010 project costs to be in the range of $6 to $7 million or $0.05 to $0.06 per share net of tax. We expect the extra $0.02 per share spend associated with the project to be incurred during our third fiscal quarter. Even with the impact of the quality project and higher than anticipated legal fees, we continue to expect our fiscal 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 as BioArray was acquired on August 4, 2008.

At this point I’ll give it 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

First with respect to the Echo placements, last quarter you talked about the delay in ordering from the IDNs, could you give us an update on what you’re seeing in terms of the selling cycle for Echo right now?

Dr. Nino De Chirico

Even though we see an improvement in Echo we still see that the economy is not rebounded. Basically the level of activity is not at the level that I would have expected for a rebound economy. At the end of the day I think we are doing better then expected in this kind of situation. In terms of the IDN orders the first quarter was really an anomaly in terms of very low number of IDN orders in the second quarter we had the right ratio between IDN orders and non-IDN orders.

Quintin Lai - Robert W. Baird

With respect to Galileo, the Galileo placements were a lot stronger then what we were expecting. Given the fact that you’re getting close to the launch of Neo, what’s driving the uptake of orders of the older Galileo in Europe?

Dr. Nino De Chirico

There are two factors there, one is the German market, and one is the export market. Basically I’ve always said in the past that the German is slow to get there but when they get there they do a good business. In fact, we see the number of orders in the last quarter were mostly from Germany and out from export business. A delay effect of the marketing strategy put in this way.

Quintin Lai - Robert W. Baird

I know it may be difficult for you to comment on this but given the fact that in Germany one of your competitors Biotest is being acquired, was this also an opportunity for you to take market share during this transition?

Dr. Nino De Chirico

Yes and no. Biotest is a small player worldwide, they’re market share is quite small. Not only that but their presence is really not in terms of number of instruments is not significant in Europe. I don’t think the Biotest factor played a role.

Operator

Your next question comes from Bill Quirk - Piper Jaffray

Bill Quirk - Piper Jaffray

I want to talk a little bit about the top line guidance. It does imply somewhat flattish revenue performance over the back half of the fiscal year. I’m trying to figure out what holds this back. We typically see nice sequential improvement as the year goes on.

Rick Flynt

At least one of the things is we don’t expect to see foreign currency year over year benefit on the top side. From an overall perspective I think if you look at our guidance, we kept our guidance the same even though we’re incurring additional expenses as well. I think if you look at our guidance it’s pretty good that we’ve absorbed the additional quality expenses that expect to impact us in the third quarter. We’ve also been incurring legal expenses at a higher rate then we had expected. We expect that to continue in the back half of the year.

I think one other thing is our third quarter will have the fewest ship cycles of any quarter for Capture of any others in the year.

Dr. Nino De Chirico

This is an important point. As you know, most of our products are cycled product that we ship on standing orders and the number of cycles in the third quarter are lower then other quarter. It’s a normal business.

Bill Quirk - Piper Jaffray

I believe we saw a second Capture cycle in the first fiscal quarter, we didn’t see that recur in the second did we?

Dr. Nino De Chirico

Say again

Bill Quirk - Piper Jaffray

Did we see a second Capture cycle in either one of the, either the first quarter or the second quarter?

Dr. Nino De Chirico

We have many Capture cycles, it’s not only one, and there are several shipments because as you know, Capture is a very complex product line. There are though some cycles that are bigger then others. In the third quarter basically we have a smaller cycle comparing with the first quarter.

Bill Quirk - Piper Jaffray

Can you remind us what the North American Capture as well as traditional re-aging contribution was?

Dr. Nino De Chirico

North American Capture was $12,484,000 and traditional reagents $39,319,000.

Bill Quirk - Piper Jaffray

What was the price contribution in the quarter?

Rick Flynt

We had price contribution of $5.2 million.

Operator

Your next question comes from Scott Gleason – Stephens

Scott Gleason – Stephens

Can you guys give us the number of active Galileo and active Echo units in the field? Can you maybe talk a little bit about where you expect the backlog; I know you guys said it was at two months right now, where you expect it to trend over the next couple quarters?

Dr. Nino De Chirico

The Galileo actives it’s basically 634 and Echo 498. What was the other part of the question?

Scott Gleason – Stephens

Can you tell us, you said the backlog right now is at two months, how you expect that to trend over the next couple quarters?

Dr. Nino De Chirico

Two months is really our standard at this point. I don’t think we can go lower then that. Our installing capacity is around, in the United States we are talking 30 Echo per month and I think it’s normal to have a two month backlog. Going forward I think it will remain at this level.

Scott Gleason – Stephens

Can you maybe talk a little bit about what you’re seeing in the overall hospital capital equipment environment? If you’re seeing any improvement in terms of hospitals want to engage in conversations or just give us a little bit of color there.

Dr. Nino De Chirico

Like I said, even though we had a good quarter in terms of a very good quarter considering the situation for the Echo, I don’t see much improvement in terms of activity. The economy is still impacting the business and there is not a real rebound yet.

Scott Gleason – Stephens

Can you guys give us the BioArray revenue in the quarter?

Dr. Nino De Chirico

The revenue in the quarter was close to $1.2 million.

Operator

Your next question comes from Joshua Zable – Natixis

Joshua Zable – Natixis

The Neo has CE mark, it is being launched this calendar quarter, meaning any day now kind of thing in Europe but not in the US?

Dr. Nino De Chirico

The situation is this; we are in the final phase of getting the CE mark of the Neo in Europe. As soon as we get the CE mark we expect to launch in the first quarter, like I said, first quarter of this calendar year. For the US in the next week we are going to submit for a 510 K for FDA and then we will wait for the approval or clearance to launch in the United States.

Joshua Zable – Natixis

A follow up on the additional spend I know that was helpful color you started with about keeping the consultants on. What I’m trying to understand, is it a function of you trying to do it quicker, is it a function there are more things to do, is it a function of being extra precautious? I know you guys are generally pretty conservative so when you’re stepping up spending can you give us a little bit more explanation?

Dr. Nino De Chirico

We self imposed to you and to FDA a February deadline to close all the remediation plan. We realized during the process that we needed more man hours to maintain this timeline. It was not to do quicker it was to keep our timeline like we said since the beginning. Like I said, we decided to keep more consultants in the building to help us to finish the first leg of the project by the end of February.

Joshua Zable – Natixis

On the tradition reagent business can you just remind us seasonality here; this is the second year in a row where it’s been sequentially down from Q1 to Q2. Obviously last year it stepped up. Is there anything going on with sales cycles of traditional reagents, is there anything we should think as far as trends of thinking of traditional versus Capture?

Dr. Nino De Chirico

I think it’s more a kind of cycle issue. There is no other impact on that because as you see comparing with last year yes to can see that from the first quarter the second quarter it kind of declined but its more based on cycles of the shipment because as you know in the traditional reagents there are all the red cells that counts for more then also of the traditional reagents. Red Cell shipments are like Capture there are a lot of products and there are cycles. It’s the way the cycles come through.

Rick Flynt

Also, as we discussed last quarter, we had approximately $1 million of orders outside the US that were pulled up from the second quarter into the first quarter. That accounts for about $2 million of the swing quarter to quarter.

Joshua Zable – Natixis

As far as the upside, it seems like the instrument number by our estimates are coming in stronger then we had expected, more so then the reagents. Is that a fair statement and is that the tailwind if you will from Galileo or did I say that wrong, it’s just coming from across the board?

Dr. Nino De Chirico

It comes across the board because of course the more instruments we sell the more this line will increase including the fact that this line, the reagent trend will include some allocation of revenue on this line.

Operator

Your next question comes from Anthony Petrone – Maxim Group

Anthony Petrone – Maxim Group

As we approach the launch here I’m trying to get an idea of what the strategy is both in Europe and the US when you look at existing customers versus growing the footprint. The new product has increased functionality that will address other customers that you don’t currently have. Is the initial focus here to go for the upgrade business or to grow the footprint?

Dr. Nino De Chirico

Both things, first of all like I said before, because the Neo has new functions that are the stat function called urgent test factor and faster turnaround we make the instrument more appealing to that kind of hospital where they don’t work on batch but they work on a routine kind of samples. These new features will make the instrument more appealing for this market segment then we can gain some new customers that were not interested in the Galileo because the Galileo is basically a batch analyzer.

Also, in Europe there are customers that now, like I said in my introduction, they bought instrument in 2002 they are starting to be seven or eight years old instrument. This is another opportunity to replace the old Galileo with the new instrument. Its both ways, attack a new customer segment, new market segment, mostly in the hospital market. At the same time look at our old existing customer’s base identify customer where we will be worth for them to move to a new instrument.

Anthony Petrone – Maxim Group

That’s interesting on the latter. Can you give us an idea of how many older systems in the install base that are out there just a rough idea? How large is that number?

Dr. Nino De Chirico

I don’t remember exactly but maybe I can tell you by year. I remember in Europe between 2002 and 2004 I think we installed something like 200 instruments. I think its 46 in 2003, 75 in 2004.

Anthony Petrone – Maxim Group

On Echo, I believe last quarter, to what extent is concern regarding the FDA outcome here still impacting Echo to a certain extent. I believe there’s a little bit of an issue that last quarter and then the event that the outcome is completely benign would you expect a jump in Echo activity?

Dr. Nino De Chirico

Like I said in last quarter, the only impact to us that the FDA impact was that our sales force spend basically part of the first quarter talking to the customer instead of to reassure them about FDA instead of focusing in sales. That was the only impact. I think that has been not impacting in the second quarter.

Operator

Your next question comes from Stephen Simpson – Northland Securities

Stephen Simpson – Northland Securities

Regarding the DOJ investigation can you give us an idea where you are in terms of fulfilling the document requests?

Rick Flynt

There’s really not a lot of development there. We are continuing to work on fulfilling the requests and fully cooperating with the DOJ.

Stephen Simpson – Northland Securities

Looking at your full year revenue estimate, can you give us an idea how much of that number is already under contract?

Rick Flynt

When you look at our business about two thirds of our reagent business is under contract.

Stephen Simpson – Northland Securities

For the placements or the orders you had this quarter, can you give us an idea of the percentage you’re seeing that are competitive take aways? I know in the past that’s been about a 50% to 60% number.

Dr. Nino De Chirico

It remains the same. I would say it is a little higher this quarter then other quarters on competitive take away.

Operator

Your next question comes from Dan Owczarski – Avondale Partners

Dan Owczarski – Avondale Partners

To go back to the Neo, you talked about it being faster. Could you give us an idea about what the step up is performance wise, how much faster? Would it use the same amount of reagents or could you get away with less reagents with the system?

Dr. Nino De Chirico

I will try to be quite generic because I’m sure there are a lot of competitors on the line. What I said is the turnaround time is faster, that means that from the time in which the test is started and the time the results is out its faster then the prior instrument in the range of 30% or 40% faster, for a single test. Of course when you will run a big batch the turnaround time is much less important because then you have large volume of tests.

This is very important when you run small batches basically the turnaround time. If you run four samples or eight samples the turnaround time can have an impact on the time from the time you get in the tube to the time you get the results out.

The other important feature is the urgent stat function that is very important in the hospital. If samples get to the blood bank with an urgent request, meaning less then one hour or less then 45 minutes, the old instrument could not make it in time because it did not have the stat function. This new instrument you can basically have the results in timely fashion.

Dan Owczarski – Avondale Partners

Should we assume similar reagent usage?

Dr. Nino De Chirico

The reagent usage is the same.

Dan Owczarski – Avondale Partners

Moving to the AABB this year what were your big take aways from that conference. I know you were showing off the Neo. How was that received? Any surprises from the competition? What were you hearing from customers there?

Dr. Nino De Chirico

We were very excited from the AABB. We saw a lot of excitement from the customer. My take away was that we are running now to the fourth generation of instrument and the competition is still dealing with the first generation.

Operator

Your next question comes from James Sidoti – Sidoti & Company

James Sidoti – Sidoti & Company

I think you said the legal expenses related to the FTC and DOJ investigation in the quarter were around $1 million. Is that about where it was in the first quarter as well?

Rick Flynt

Its about $1.2 million this quarter and $2 million in the six months.

James Sidoti – Sidoti & Company

Until you get to the next phase is that a good number to stick with around $1 million a quarter?

Rick Flynt

Yes, we’re looking for that spend level to continue in the last half of this fiscal year.

James Sidoti – Sidoti & Company

It’s probably pretty hard to predict in fiscal 2011 when that will go, it probably depends on what action you get from either agency.

Rick Flynt

We aren’t making any estimates for 2011 at this point.

Dr. Nino De Chirico

Also this 2010 fiscal year this expenditure we had not predicted at the beginning.

James Sidoti – Sidoti & Company

You’ve been able to maintain the guidance even with these additional legal expenses as well as the additional consulting costs?

Rick Flynt

That’s right.

Operator

Your next question comes from David Turkaly – SFG

David Turkaly – SFG

The incremental spending like your deadline of February was self imposed and didn’t come from any communication or dialog with the FDA is that correct?

Dr. Nino De Chirico

That’s correct.

David Turkaly – SFG

In terms of your expectations and wrap up in February can you give us, in terms of a timeline or what you expect the next step to me with the agency?

Dr. Nino De Chirico

Of course the FDA we have an open dialogue with them and they are well aware that our commitment to address the finding. The next step will be basically FDA will come in to do an inspection. We don’t know when that will happen.

David Turkaly – SFG

Does the J&J system have a stat test feature on it today?

Dr. Nino De Chirico

A kind of yes, there is a kind of stat function.

Operator

Your next question comes from Jim Quentin - Barrett & Co.

Jim Quentin - Barrett & Co.

I was wondering if you could give me, if there is any big price differential between the Neo and the traditional Galileo.

Dr. Nino De Chirico

First of all we are now in the process to define all the pricing but there will not be a big difference.

Operator

I’m currently showing no further questions at this time.

Rick Flynt

Thank you very much and we look forward to speaking with you again in the next few months.

Operator

That concludes today’s conference call. Thank you for your participation. You may disconnect at this time.

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