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

Immucor (NASDAQ:BLUD)

F1Q11 Earnings Call

October 7, 2010 8:30 a.m. ET

Executives

Michele Howard - VP, IR

Nino De Chirico - President and CEO

Rick Flynt - CFO

Analysts

Matt - Robert W. Baird

Dave Turkaly - SIG Capital

James Sidoti - Sidoti & Company, LLC

Daniel Owczarski - Avondale Partners

David Clair - Piper Jaffray

Randy Gwirtzman - Barron Capital

Bill Bonello - RBC Capital Markets

Joshua Zable - WJB Capital

Operator

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Immucor Conference Call. [Operator instructions.] I would now like to introduce your host for today's conference, Michele Howard, Immucor's Vice President of Investor Relations. Ms. Howard, you may begin.

Michele Howard

Good morning and thank you for joining us to discuss our first quarter fiscal 2011 results. Participating with me on this call are Dr. Nino De Chirico, our President and Chief Executive Officer, and Rick Flynt, our Chief Financial Officer.

Before we begin, I'd like to read the following Safe Harbor statement. Many statements on this 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 the federal securities laws. 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.

We'll make some brief comments and then go to Q&A. I would now like to turn the call over to Nino.

Nino De Chirico

Thank you Michele. Good morning. I would like to start this morning by discussing our revised guidance and the circumstances driving it.

Overall, there are two areas that led us to modify our outlook. First is the impact the macro environment is having on our business, primarily in the United States. And second, we have not executed as planned.

Beginning with economic impact, we are currently projecting a 3% to 4% decline in industry volume in fiscal 2011. This outlook is based on market data for blood demand in the United States and contracts with our historical experience and assumption that the industry grows at a rate of low single digits.

While our fiscal 2010 financial performance was in line with expectations, there was a decline in the overall industry volume that was not evident in our numbers. In fiscal 2010 we did not see the economic impact in our financial performance, primarily because of the substantial price contribution we had in 2010, the large number of instruments that went live, and the delay in our customers adjusting their orders.

In retrospect, in analyzing our fiscal year 2010, our market data internal analysis indicates that there was about a 3.5% decline in industry volumes. Our market data indicates that the industry volumes began to decline sharply at the beginning of our fiscal year 2010.

Several factors were driving this decline, including less elective surgery and better blood utilization by hospitals. Blood is one of the largest expenses in a hospital lab's budget, and has been a focus for cost savings. As I said, in fiscal 2011, we are now expecting volume to decline another 3% to 4%. This should put fiscal 2011 volumes 6% to 7% below fiscal 2009 levels.

The consequences of these economic impacts on our business are twofold. First, lower industry volumes lead to lower the reagent revenue from our assisting customers. Second, we believe the economy is having a chilling effect on instrument orders.

We began to see a slowdown in instrument orders that we had primarily attributed to internal executional issues, as well as the fact that we were moving past early adopter [unintelligible], which lengthened the sales cycle. However, we now believe that tighter hospital budgets and uncertainty in the healthcare market are impacting our orders and delaying decision making.

Tighter hospital budgets have meant more involvement from hospital purchasing groups and CFOs than in the past. This change in the buying process has lengthened sales cycles and made the selling process more complicated. Lower instrument orders negatively impact our overall reagent revenue growth going forward.

As I said, our financial performance was slower to reflect the impact of this economic condition than other companies in this industry. In fiscal 2010 we had substantial price contribution, significant revenue ramping up from the success of our instrument orders in the prior year, as well as a very successful year in generating incremental revenue from new high volume instruments, primarily in Europe. Additionally, our customers generally place reagent orders with us in advance, and it takes time for the lab to identify a slowdown and adjust their orders accordingly.

As we noted in our fourth quarter call, we saw some evidence of a decline in industry volumes, but we did not realize the severity of the lower demand in the United States market. In the last few years, we have been focused on rapid growth and have been successful, especially in the United States market, thanks to our automation strategy.

We still have the best instrumentation available in the market, and we are the only company to offer instruments segmented to customers' needs, both in terms of volume and complexity of testing. With the Echo, an instrument targeted to the small to medium sized hospital market, which is the segment most in need for automation, we have a low-cost instrument with superior functionality. With NEO, our new high-volume instrument, we have an instrument with superior through put, making it the natural choice for the high-volume customer. Also, the combination of NEO and Echo continues to be an unmatched solution for integrated delivery networks looking to standardize their testing methodology across their site.

While our business strategy remains the same, our internal execution and customer focus needs to improve. Our value proposition and pricing approach to the market will continue to be focused on automation, and the value [unintelligible] that our market leading instrumentation brings to our customers.

However, we have lost some customers to the competition, mostly over the last 12 to 18 months by not focusing on the needs of customers who buy only traditional reagents from us. We have not been as effective as we could have been in automating with our solutions these customers, or insuring that these traditional reagent customers were getting the level of service and attention they expected from us.

We are taking steps to change our approach to both our customer and the market. In order to improve our ability to support our customers, we have a large project underway that addresses our [unintelligible] interact with and support our customers in terms of our customer service, technical support, and sales effectiveness.

Our goal is to improve our processes and ensure that customers receive the support and service they need to optimize their performance and productivity. We are reassessing our approach to the market to ensure that we compete more effectively in this difficult environment. We recognize that internal execution has been an issue and it's our focus going forward.

As you can see from our revised instrument order guidance, we expect our efforts to have a positive impact on orders in the second half of this year. These orders will benefit revenue in fiscal 2012, but we do not expect to receive a significant benefit in fiscal 2011. We are committed to making the necessary changes to ensure that we get back on track.

In this economic downturn, hospital laboratories can improve their financial performance through automation that increases patient safety, operational efficiency, and allows for more labor flexibility. With the best automation in the industry, it is our job to help hospitals realize this benefit by automating with an Immucor solution.

I will now turn the call over to Rick to review a summary of our first fiscal quarter.

Rick Flynt

Thanks Nino. I'd like to start with our instrument orders for the quarter. For Echo, we had 26 orders worldwide during the quarter, consisting of 15 orders in North America and 11 orders in the rest of the world, including distributors. For NEO, we received 18 orders during the quarter, consisting of 7 in North America and 11 in the rest of the world markets, including distributors. Approximately 30% of NEO orders in the first quarter were competitive wins.

As we stated in our press release last night, we are lowering our instrument order outlook for both Echo and NEO for fiscal 2011. We now expect to generate between 140 and 180 Echo orders and expect between 80 and 120 NEO orders. At the end of the first quarter, we had an instrument order backlog of 142 Echos and a combination of 49 Galileos and NEOs.

Turning to our financials, in our first quarter of fiscal 2011 revenue was $83.6 million, up 1% compared with the first quarter of fiscal 2010. Year-over-year revenue growth was attributable to price contribution of $1 million and volume contribution of $900,000. Currency negatively impacted revenue by $1.3 million.

Turning to gross margin, consolidated gross margin was 71.3% in the first quarter, compared with 71.9% in the prior year quarter. Prior year margins included $2.3 million related to our quality project, for which external spend was completed in the third quarter of fiscal 2010.

Current year margins were negatively impacted by unfavorable manufacturing variances, fluctuations in foreign currency exchange rates, and the capital sales of instruments, which includes a combination of more instruments expensed in the quarter and less deferred revenue recognized in the quarter compared with the prior-year period.

Operating income was $32.2 million, or 38.5% of revenue in the current year quarter, compared with $33.3 million, or 40.1% of revenue in the prior-year quarter. Operating expenses were higher year-over-year, primarily due to higher research and development costs and higher distribution costs.

Our tax rate for the quarter was 34.1% compared with 36.4% in the first quarter of last year. We expect our effective tax rate for fiscal 2011 to be in the range of 34% to 35.5%.

Diluted earnings per share was $0.30 in the current-year quarter, compared with $0.30 for the same period last year. Cash flow from operations in the current year was $28.9 million compared with $24.5 million last year.

In our release last night we revised our fiscal 2011 guidance. We now expect revenue to be in the range of $320 million to $332 million, gross margins to be in the range of 69.5% to 71%, and diluted earnings per share to be in the range of $1.08 to $1.18. Given the uncertainty of the situation, we are not providing price contribution and volume contribution guidance.

A little color on quarterly phasing: We expect the second quarter to be down sequentially, both in terms of revenue and EPS, due to ship cycles.

About half of the reduction in our guidance relates to lower volume due to the industry slowdown, including both the current year impact and the prior year carryover. The rest of the reduction is attributable to the instrument order shortfall, including the timing of those instruments going into the market as well as less price contribution than originally expected.

Our price contribution expectations were impacted by a variety of factors including the instrument order shortfall, even though we have not reduced the prices of our products. As Nino stated, this revised guidance is based on an industry volume decline of between 3% and 4% in fiscal 2011. If this assumption proves incorrect, it would have an impact on our estimates.

I'll now turn the call back over to Nino for some closing remarks before we begin Q&A.

Nino De Chirico

I would like to give you an update on our status with FDA. As we discussed previously, FDA reinspected our facilities in June. In September FDA notified us that for now they are not changing our compliance status and are leaving their administrative intent to revoke [unintelligible] in place. FDA said that we had made substantive corrections to our efforts over the last 15 months. However, they noted that some deviation continued. FDA stated that they would reassess our overall compliance status at their next inspection.

We have made good progress, which FDA has acknowledged, and FDA did not identify any repeat observation in their June inspection. As we have stated in the past, we continue to work on improving our quality system. Our goal is to not only regain compliance with FDA but to create a world-class quality system for the future. I am confident that we are well on our way to achieving this goal.

Before I turn the call over to the operator, I would like to emphasize that our business strategy remains the same. There is a need for automation in the market and we have the best instruments available. We are in the process of determining how we can execute better in this difficult environment. Changes are already underway and we are confident in our ability to get back on track for future growth.

Additionally, we continue to focus on our molecular offering for the future, and remain on track to deliver a research [unintelligible] instrument to the market in the first half of calendar 2011. We also believe that there are good growth opportunities for us outside the United States. Our market share is smaller and our instruments still superior. We are clearly disappointed in our change in our financial outlook but we are taking steps to get back on track and believe our opportunities for future growth remain.

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

Question-and-Answer Session

Operator

[Operator instructions.] Our first question today comes from Quintin Lai. Your line is open, and please state your company name, sir.

Matt - Robert W. Baird

Good morning, it's actually Matt in for Quintin, from Robert W. Baird. Thanks for taking the questions. Just starting with the FDA point, is there any thought process in terms of timing - an update there in terms of when they could provide their next inspection? And also, the quality process improvement project, a lot of the remediation costs, that was ended in fiscal Q3. Are you thinking about incremental costs or anything like that to fix the remaining issues, or is it just part of the process?

Nino De Chirico

Let me start from the last point. It's part of the process. Like we said, the project we embarked on last year was mostly for the remediation claim from the findings they found before, and as I said in my remarks they did not find repeat observations. In terms of timing, I would say that regularly it could be happening in the next 12 months, another inspection.

Matt

Just, Nino, going into your comments about the industry declines. Just trying to get a sense for when volumes start to normalize. Is that something that we need to watch this Cobra roll off kind of work through, or are there other indicators to show the industry starting rebound from that decline?

Nino De Chirico

It's an interesting point. There's a lot of discussion around this. The decline, like I said in my remarks, started at the beginning of our fiscal year 2010 and basically, our outstanding financial results of 2010 in some way covered this volume decline and retrospectively our fiscal year 2010 was more outstanding than we thought.

The blood industry has entered a recession. There is a decrease of blood drives, consolidating of blood donor centers. Many small donor centers are shutting down because of less demand. The reason for this is, like I said, mostly twofold. One is less elective surgery, and number two is there is some advocacy for using less blood.

Less elective surgery is in my view less dramatic because of course as time goes, the Baby Boom will age and we have to know that 51% of the transfusions are for cardiovascular disease and skeletal diseases - joint and hip replacements and things like that. And these are typical diseases that are for old people. As the Baby Boom ages, demand will rebound.

The other part of the equation this advocacy for using less blood is less troublesome, and honestly I don't know where that will go. It's difficult to answer when this will rebound. I just read yesterday, for instance, and I want to share with you an announcement that a small blood center like many others in Piedmont, Spartanburg in South Carolina, they closed down and the press release was a decrease in demand in blood units from local hospitals had forced our blood center to shut down.

It was dramatic the number they communicated, because they said in 2009 they had daily orders for 150 units from hospitals. In 2010, they saw a dramatic decrease down to 50. Now this is not the rule, of course, because this dramatic change can also imply that the hospital buys from someone else, but this is the reality. The reality is there are less blood drives and small centers are suffering about this situation.

Matt

Thank you for all that color. Rick, I'm just going to finish with one quick housekeeping question. With respect to the new order guidance ranges for Echo and NEO, is there any change with respect to the expectations for the percent of reagent rental and the percent of competitive takeaways expected there?

Rick Flynt

We're still expecting around 40% competitive takeaways on the NEO. The rentals on Echos are still running, at least in the U.S., somewhere around the 75% level, and the competitive takeaway percentage is roughly in the 50% range.

Operator

Our next question comes from Dave Turkaly.

Dave Turkaly - SIG Capital

Just to dig into the system placements a little deeper. Obviously you've had this rental model for a long time, and it just seems strange as to the budget impacts. We've heard other companies talk about this for a long time. With a rental model why would that now start to impact you at this stage in the cycle? And if you're kind of giving the thing away to some of these places so they can use the reagents over a period of time, why would their budget really have any impact on you guys looking ahead?

Nino De Chirico

I want to make clear that we are not giving away anything. In our business model when we place an instrument we require a long-term commitment from the hospital. And a long-term commitment also in terms of financial commitment. And it is a decision that a blood banker cannot take by himself. And like I said in my script before, CFOs are more and more involved in any decision, including the commitment for a multi-year contract, a financial commitment with vendors. If I may, it's likely different than what you say. We don't give away things.

Dave Turkaly

No, I get that. I just thought with the - you've had some success even in the face of these budgets declining for a long time and it's just strange that it would kind of hit you now.

Nino De Chirico

We saw this in the last few months of fiscal year '10 too. Retrospectively, if you look at our instrument pattern in terms of placements and orders you see that we had some struggle in 2010 too, even though we had some leftover from the prior year that made us make the number. But we missed the guidance last year too about the Echo placement. And this was the sign that - you know if you look at the number the year before, Immucor orders for Echo was close to 350. And if you look at the last few months of our fiscal year 2010 we saw a slowdown. Now, based on what I read before from these donor centers in South Carolina, 2010 calendar year it's a dramatic year for these centers. That announcement I read before says that in 2009 he had 150 units per day from hospitals. In 2010 it went down to 50. It seems that the situation is getting worse and not better in 2010 calendar year, and calendar 2011 fiscal year for Immucor.

Dave Turkaly

Ok. Then as you look at the stream that you guys have talked about in the past for Echos and Galileos on an annual basis does this guidance reflect that changing at all? Kind of the 40 or 40,000 range for Echo and 110 or 120 - I think it's 140 for Galileo?

Nino De Chirico

It doesn't change on that side.

Dave Turkaly

And then, last, it seems to me that you're pointing more to industry slowdowns but you mentioned something from competition, and I think you said it was on the manual side. Would you say that it's J&J on the traditional side, or did you see anything new from other players that may have caused it to slow a little bit?

Nino De Chirico

First of all, let me apologize for everybody, but I'm sure you all agree that we are in a competitive disadvantage here because we are the only company that has this conference call and as you may for sure understand, we have all the competitors listening to us in this moment. I will be giving not many information on this side of analysis. But to answer your question, there is not a specific common denominator in this lost customer. I mean it's not just against one vendor or another vendor. It's not just some of these customers where Immucor was not the primary vendor, was the secondary vendor and they decide to go to their primary vendor. There is not a pattern, a specific pattern. The only pattern there is they are traditional reagent customers that either decided not to automate with us or decided they could not automate for other reasons.

Operator

Our next question comes from James Sidoti.

James Sidoti - Sidoti & Company, LLC

Quick question on the FDA. You mentioned that they completed the second inspection. They didn't find any findings, but they haven't looked at the letter. How many inspections do you think they'll need to do without finding any additional -

Nino De Chirico

Just to correct, I said they did not find repeat observations.

James Sidoti

Okay, so how many inspections without finding repeat violations do you think they will -

Nino De Chirico

I don't know this. In this environment, with what's going on out there with - I'm sure everybody knows what's going on with other companies having a lot of issues and quality and FDA issues, recall and things like that. I think that my assessment is that FDA is becoming more and more conservative, correctly in my opinion. I don't know. I don't have an answer to that, honestly.

James Sidoti

Okay. And do you plan to bring back the consultants this year?

Nino De Chirico

No.

James Sidoti

So no plans for that. And then finally, you had a share buyback plan open in the last quarter. Obviously the stock's going to be off today. Two questions: One, have you used that share buyback and are there any plans to put in place a new one?

Nino De Chirico

That's still our priority. Of course, like I always said, we will not share with the investor community when we are going to buy back shares, but the plan is in place. We have approval from the board. I think the approval is for -

Rick Flynt

We still have 2.2 million shares.

Nino De Chirico

2.2 million shares to buy back.

Operator

Our next question comes from Daniel Owczarski. Your line is open.

Daniel Owczarski - Avondale Partners

You spoke a little bit about the rental program. I was wondering if customers might be delaying or pushing back if they're looking for other financing options for the equipment. Or do they have plenty of options and are just not moving?

Nino De Chirico

I would say the second part is more true. Like I said at the beginning, the chilling effect of this industry downturn is really having a negative effect. One big assessment for us - the quotes that we make, number of quotes to the customer. And the quotes are still there. We make a lot of quotes to customers and there are customers [unintelligible] that I think the cycle is getting longer.

Daniel Owczarski

What's the common theme that they're telling you why they can't make a decision?

Nino De Chirico

More people are involved in the decision process, and more financial people are really involved, like the CFOs, in this cycle. I think the scenario is changing and we need to compete more effectively in this difficult time. That means we need also to now have more contact with - not only with the users of the equipment but also with the financial people and the decision makers in the financial team.

Daniel Owczarski

And so it's fair to say that these hospitals are becoming more reliant on an economic argument to make their decision?

Nino De Chirico

What I was trying to say before is blood is like low hanging fruit for savings, because it's the highest budget number, number one budget in the hospital lab. And when you are in a situation like the economic situation where we are, the first thing they are going to look is number one, and number one is blood. There is a lot of discussion, I think, inside of this institution, how to decrease the cost of blood and the other side, like I said before, there is some kind of advocate to use less blood. And I'm sure all of you have read about that. And it's a very complex picture.

Daniel Owczarski

And Rick, you might have talked about this with sales cycles, but are your customers trying to delay shipments or put more time in between shipments or even reducing some of their standing orders?

Rick Flynt

Well, I think we spoke about that in some of our prepared remarks, that it took some time, as far as the reagents go, for the labs to recognize that they had lower demand, lower usage of our products, and then adjust their orders out. And that's part of the overall industry decline that's impacting our revised guidance. As far as the orders themselves, for instruments, on the instruments side, once the decision is made to move forward with instrumentation, we haven't really seen a delay in moving forward with that process. It's just a matter of the length of time it takes for the order to come in.

Daniel Owczarski

But as far as - on the consumables side do they typically give you a six-month outlook, or a year outlook, or what's their typical commitment?

Rick Flynt

Typically we have a longer-term view for the majority of our products, and they place standing orders with us.

Nino De Chirico

Sometimes six months, sometimes three months, sometimes even one year. It depends on the customer.

Operator

Our next question comes from David Clair. Your line is open

David Clair - Piper Jaffray

It's Dave Clair here for Bill Quirk from Piper Jaffrey. I have a couple of questions on the competitive side. For the traditional reagent business is the competition that you're seeing, is that primarily people trying to use price to gain market share? Any color you can give there?

Nino De Chirico

Let me give you a perspective before I answer your question. In the last three years Immucor received orders in North America for 648 Echos. That means 210 Echos per year, and 58% of these Echos were competitive takeaway. Then, in business [economics] you win and you lose but when you have 58% competitive takeaway on this big number it's a big boost for the business. The real issue in my mind is the decline of the number of Echo orders. Now having said that, like I said before, there is not a common denominator between these customers. Some go to a price competitor, others go to not a price competitor. But the only common denominator is that we are not losing automation customers, but we are some [unintelligible] traditional reagent customers.

David Clair

Okay, and can you give us the volume growth for both capture and traditional reagents in the quarter?

Nino De Chirico

The capture in the United States was $13.4 million, and traditional reagents for the United States was $37.9 million. Do you want also rest of the world, or just the United States is enough?

David Clair

U.S. is fine. And how about the - question for Rick? What was the impact from the fewer capture ship cycles in the quarter?

Rick Flynt

In the quarter we had four fewer ship cycles than we did in the prior year, the first quarter. And it was about a little less than half of the volume decline for traditional reagents. We also had some negative impact of FX.

Operator

Our next question comes from Randy Gwirtzman. Your line is open.

Randy Gwirtzman - Barron Capital

I missed the pricing volume effects in the quarter?

Rick Flynt

We had price contribution of $1 million and volume contribution of $900,000.

Randy Gwirtzman

On the hospital blood use commentary that you had, what are hospitals doing to try to make the operations more efficient, which would lead to lower blood testing?

Nino De Chirico

Like I said, there are some advocates about many things they are doing. First of all there are some advocates that are predicting or telling to reduce the use of blood. Basically that people are over-transfused. And in some places they are reducing the number of transfusions. The other thing that is happening is also in some hospitals they are using now also the software for better management of blood that one of our competitors, not direct competitor with us, is selling. That's another way also to improve efficiency. The other thing, though, is like I said, there is a reduction of elective surgery. Basically, people don't try to get surgery because their financial system doesn't allow them to do it, or they don't have insurance. Basically they are postponing surgery unless it's strongly needed. And this is mostly people who have - if I look at the statistics here - people who must have a knee replacement, or hip replacement, or things that can be postponed, basically.

Randy Gwirtzman

Okay. On the gross margin side, capture reagents have kind of trended down to the 80% level, whereas they were sort of in the mid-80s for a good period of time. What's attributable to that and is it possible to get back to the mid-80s levels? Or do you think that 80% is sustainable at this point?

Rick Flynt

Over time what's happened is we have instruments that are being placed on reagent rental programs and those programs from an accounting standpoint require us to reclassify a portion of the reagent revenue to instruments, even though we don't reclassify any of the costs associated with that. So that's putting pressure on the capture margins and that's part of what you're seeing as far as the trend line going from the mid-80s to the 80s. So as long as we continue to place a significant number of instruments under rental types of programs, that will - at least the pressure from it - will continue.

Randy Gwirtzman

Do you see a pressuring below 80? Or on capture? And at some point does it reverse as instrument sales slow? Is there a silver lining there that you get a reversal from that effect?

Rick Flynt

You could. That's certainly, I guess, if you want to look at it as a silver lining. We'd rather place a lot more instruments in the market. Over time, what will happen is there will be some mitigation from the fact that you've already got a lot of instruments out in the market and so the new instrumentation coming on will not have the same kind of impact going forward.

Randy Gwirtzman

But all this is reflected in the 69.5% to 71% gross margin expectations for the fiscal year?

Rick Flynt

It is.

Randy Gwirtzman

In terms of instrument placement guidance, you guys - obviously it got taken down pretty dramatically on the Echo side. Do you feel it's conservative at this point? And how did you come to the numbers this year as opposed to past years?

Nino De Chirico

Due to the uncertainty of the situation it's really difficult to give color whether it's conservative or not. We hope it's conservative. The way we come up with the number, basically, it's more a bottom-up process. Basically we analyze all the quotes out there, the sales force quotes, and then the sales management comes up with a number from all the countries and then at management level we assess all the assumptions and we come up with our number. It's a process and it's a model, it's not a number we pick up after from there. I think we need to be careful because it depends about the opportunity of the situation. Can be conservative if the situation improves in the market and could be not conservative if the situation does not improve.

Randy Gwirtzman

Okay. Last thing, on the FDA inspection. Today you said they found no recurring issues. Were there new issues? Or is this just, again -

Nino De Chirico

They found some deviation, yes.

Randy Gwirtzman

Anything significant, or just kind of nits and gnats?

Nino De Chirico

Well, deviation - I don't want to qualify the deviation, Randy. Deviation that we have submitted a plan, and they accepted our plan by the way. In the same letter they said your plan to fix that deviation is fine.

Randy Gwirtzman

Okay, so that's very helpful. I'm sorry, and this is the actual last thing. You guys have [$3.26] per share on the balance sheet and you noted that you still have over 2 million in additional share buyback potential. Is there any - when's the next time that the board could meet or discuss an increase in the share purchase volume?

Nino De Chirico

Like I said, we have a plan already. We have 2.2 million. The board will meet regularly in the next month. They will discuss that. But our priority is to buy back shares. We cannot disclose when or if we can buy back shares.

Operator

Our next question comes from Bill Bonell. Your line is open.

Bill Bonello - RBC Capital Markets

Just wanted to follow up on a couple of the things that were asked about earlier. First of all, on the capture reagent margin decline, you mentioned a significant portion attributable just to this change in [unintelligible] that you have to account because of the reagent rental. Can you give us a little bit more quantification of that? Is that the vast majority of the reason for the margin decline? Or less than half of the reason? Just some sense of how significant that was.

Rick Flynt

What I was trying to give color on was the general trend line, what was happening with the captured gross margins, and the question was really related to the fact that [unintelligible] level.

Bill Bonello

Right, but I'm just trying to figure out how much of that sort of trend line decline is really attributable to what you've seen with the reagent rental accounting versus other factors.

Rick Flynt

It's a major portion of that.

Nino De Chirico

It's the majority, Bill.

Bill Bonello

Okay, great. And then just in terms of the placements and you cited the macroeconomic conditions, can you just tell us what gives you sustained confidence that this isn't simply a market penetration issue, that you sort of hit a point where you've maybe just misestimated the amount of some of these smaller hospitals that want to transition to automated systems versus manual systems and why you feel the longer term growth prospects are still intact?

Nino De Chirico

Like I said before, first of all it's the number of quotes that are out there, meaning that's a measurement for our businesses, meaning there are customers out there that have asked for and seen quotes from us for instruments. This is one term. The other term - based on the numbers and my assumption is that it's still a large portion of U.S. market does not have automation. If you add up all the instruments we place and the instruments the competition has placed, based on our assumptions, you still have more than 50% who does not have full automation. And that's a model that still is valued, and is going to be valued because in our assumption in the future this hospital has to look at automation as a solution to labor saving and to get better results. And I think that's the model that we are looking and in my opinion is still valid.

Bill Bonello

So you're still convinced of that. You don't think that there's a bigger portion of the market maybe than you had anticipated that just simply isn't going to be interested in converting at some point.

Nino De Chirico

We never thought to take 100% of the market. The portion of the market that does not have automation is still very large.

Bill Bonello

Okay. And then just the final question on price, and I know you're not going to get too specific, but just given what's happening in the hospitals needing to control costs and the fact that you did say you're not going to give volume and price guidance. I mean, is it a logical conclusion for us that maybe the pricing environment is not quite as good as even what you - or worse, let's say, than what you thought it was going to be when you initially gave guidance?

Nino De Chirico

I'm not going to elaborate on that, but what I said in my script was we need to compete more effectively in this difficult environment. That's what our assessment is. That also said that we're not going to change our business model.

Rick Flynt

And I just want to make sure I emphasize that the expectation for lower price contribution is not going down because we're making overall reductions in reagent prices. But it's due to a number of other factors including the instrument order shortfall from lost customers and the declining industry [buys]. I said that in my prepared comments.

Operator

Our next question comes from Joshua Zable. Your line is open.

Joshua Zable - WJB Capital

Most of my questions have been answered. I just want to kind of follow up on a couple of things just to get some more clarity here. On the equipment guidance, I'm just trying to kind of correlate your comments with the numbers out there. I know somebody asked about this. But 26 Echos in the quarter, you're looking for 140 to 180. Twenty-six times four is about over a hundred, and then 18 NEOs, 80 to 120, again you're sort of at the low end of the range. Given that you're seeing a weaker environment than you expected, it would seem like you'd need some kind of equipment ramp to get to those numbers, and things would have to improve. So can you just give us more color about those numbers? I know it's a long process and it's not an exact science but simple math would dictate that things would have to get better going forward. What gives you the confidence in that?

Nino De Chirico

First of all, whatever we said, like I said at the end, this all depends on the economy, how the situation will evolve, including our revenue guidance. It's based on the assumptions that we have disclosed today, but if the situation becomes worse, of course we need to reassess our assumptions. Having said that, like I said in my initial remarks is we plan to have a second half of the year where we can have a better result than the first half of the year in terms of instrument orders. And we will not benefit on this fiscal year about revenue from that instrument level, it will be a benefit for next year. But like I said at the beginning, the objective is to have a second half of the year with better instrument than the first half.

Joshua Zable

Okay, great. And then just in terms of volumes, I know you kind of talked about 2010 in retrospect, and now obviously 2011. I guess I'm trying to get to what brought it to your attention today, so to speak. Obviously, times have been tough in general out there. I know you guys have been taking share and so in that sense it does kind of cloud your view of actual procedures, but you aren't there every day. Obviously the environment hasn't been great in general. You obviously speak to a lot of us. I'm just wondering are things getting worse that all of a sudden because it's continuing to get worse you sort of like, jeez, this is awful, or did something happen? I'm just kind of - what kind of triggered this to look back in retrospect and say hey, this is really what's going on?

Nino De Chirico

That's an interesting question because we've been asking ourselves that question. First of all, like we said in the initial - our fiscal year 2010 was an outstanding year. We had $18.2 million in [unintelligible] contribution, adjusted with some number. We had 346 Echos in the year before that went live last year. That means that we generated 58% of those who are competitive takeaway. We generated a lot of revenue, even though on the surface retrospectively we met the number, but we did not exceed by far. And that was the first alarm.

The second alarm came out in the fourth quarter, where we had said in the conference call that we saw some decline in volume. And then when we went to dig, of course the severity of the problem was deeper than expected. The good thing I want to say is it's a very special situation here. If you look at the demand decrease from these blood centers and it's back to basically in the middle of 2009. The memo I read before it says that in 2009 they had 150 units per day per hospital. In 2010 they went dramatically down. It seems like this is a rebound of the financial crisis that was before. Now all the hospitals are hunting for savings and blood is the number-one savings because it's the number-one budget in the lab. That's what my assessment is, along with this advocates to use less blood and along with people not getting surgery, but the dynamic is it's in the last 12 months, in my opinion, that the industry went in deep recession.

Joshua Zable

And so you did see a change in the last few months, there was -

Nino De Chirico

- we had said in the fourth quarter conference call that we saw some decline of unique product volume. Unique products that are we are the only one that makes. And when you see that, of course it means volume decline.

Joshua Zable

Okay, great. And then one last question, and thanks for the commentary here. On the equipment side, obviously you guys had a great 2010, but it was tough out there. So you guys sort of bucked the trend, so to speak, obviously with new product launches, etc. I guess now you're obviously having some issues with the committees or taking longer sales time. We saw that from a lot of other hospital capital equipment companies last year. Again, you guys bucked that trend. Is something changing on the lab side here, specifically? Is it just that last year was low-hanging fruit, so to speak? There were people that have been waiting for this? I'm just trying to get the color on the equipment.

Nino De Chirico

I think you just said not only that, but first of all last year, to put everything in perspective, last year in the second half of fiscal year 2010 we saw a decline. We missed the guidance for that instrument. But before that second half of last year I think you are right. This was all activity of customers that were already lined up to get an instrument and there was maybe the low-hanging fruit, meaning that they had already everything prepared and the wanted it. And we saw this wave coming to us later.

Operator

And that was the completion of the Q&A session for today's call.

Michele Howard

Thank you for joining us this morning. We look forward to seeing you at AABB, which begins on Saturday in Baltimore, or speaking with you in the future. Thanks.

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!

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!

Source: Immucor CEO Discusses F1Q11 Results - Earnings Call Transcript
This Transcript
All Transcripts