ImmuCell Corporation (ICCC) Q2 2016 Earnings Report, Transcript and Summary

Good afternoon and welcome to the ImmuCell Corporation Second Quarter 2016 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Joe Dorame of Lytham Partners. Please go ahead sir.

Thank you, Dan, and thank all of you for joining us today to review the financial results of ImmuCell Corporation for the second quarter of 2016, which ended on June 30, 2016. As the Dan indicated, my name is Joe Dorame. I'm with Lytham Partners and we're the Investor Relations consulting firm for ImmuCell. On the call today representing the Company is Michael Brigham, President and Chief Executive Officer. After conclusion of today's prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today's call does not have a full text copy of today's press release, you can retrieve it through various financial websites or by going directly to the Company’s website at immucell.com. Before we begin with prepared remarks, we submit for the record the following Safe Harbor statement. Statements made by the management of ImmuCell during the course of this conference call that are not historical facts are considered to be forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. Words such as believe, expect, anticipate, estimate, will, and other similar words or statements of expectation identify forward-looking statements. Such statements involve risks and uncertainties, including but not limited to, those risks and uncertainties detailed from time to time in filings the Company submits to the Securities and Exchange Commission. Investors are cautioned that forward-looking statements made during the course of this conference call are based on management's current expectations and involve risks and uncertainties that could cause actual results to differ materially from the statements made. The company disclaims any obligations to update forward-looking statements. A more complete Safe Harbor statement was included in the today’s press release as well as in the Form 10-Q that was filed today. With that, let me turn the call over to Michael Brigham, President and Chief Executive Officer of ImmuCell Corporation. Michael?

Thank you, Joe, and thanks to all of you participating on today’s call. We do greatly appreciate your time and interest in the Company. I have a few prepared remarks and observations before turning to the Q&A. We provide significant disclosures about the Company in our financial results and our SEC filings. Today’s press release and our quarterly report on Form 10-Q which also has been filed today, provides significant details about the company and our financial results. I encourage you to review these reports and the full details, but I will touch on six highlights here. Point one, let’s talk about the second quarter of 2016, all the following numbers compare the three month period ended June 30, 2106 to the three month period ended June 30, 2015. Product sales increased 21%, or $415,000 to $2.4 million, that benefit from our recent production capacity expansion is being realized as we reduce the backlog of orders to $365,000 at June 30, 2016 from $1.7 million at March 31, 2016. Gross margin increased by 10% from $109,000 to $1.2 million equaling 52% in product sales. Selling and administrative expenses increased by 30% or $193,000 to $838,000. Selling expenses amount to 19% of products sales during the second quarter of 2016 compared to 16% during the second quarter of 2015. We do expect expenses, selling expenses to stay with in our budgetary plan of investing 18% or less in products sales for the full year. Product development expenses increased by 40%, or $109,000 to $380,000. While reporting our eighth consecutive quarter of positive net income we did report a small net loss of just $9,000 for less than $0.01 per share. Point two, lets talk about the six month period ended June 30, 2016 all the following numbers compare to six months ended June 30, 2016 to the six months ended June 30, 2015. Product sales increased by 6% or 300,000 to $5.4 million. Gross margin increased by 1% or $16,000 to $3 million equaling 56% of product sales. Selling and administrative expenses increased by 19% or $249,000 to $1.6 million. Selling expenses amounted to 16% of product sales during the first six months of 2106 compared to 14% during the same period in 2015. Selling expenses ended up at 16% of product sales for the full year ended December 31, 2015 again we do expect selling expenses to stay within our budgetary plan of investing 18% or less in product sales for the full year 2016. Product development expenses increased by 13% or $80,000 to $683,000. This increase was in large part related to personal recruiting and relocation expenses incurred during the second quarter of 2016. Net income decreased $530,000 to $0.11 per diluted share. Point three, during the twelve month period ended June 30, 2016 product sales increased by 17% or $1.5 million to $10.5 million. This compares to $10.2 million for the year ended December 31 2015. Point four, we are committed to investing in the growth of our First Defense product line. One key to this growth strategy is to add Rotavirus claim to the First Defense product line by launching the first USDA approved trivalent scours preventative in 2017. Our product development team is on track for this timeline. We are focused on growing the top line and increasing total gross margin earned even if the gross margin as a percentage of product sales declined somewhat. The gross margin is affected by biological yields from our raw material we are contracting with many new firms to buy more milk to increase our production output as we are bringing new cows onto our production program we tend to experience a decrease in yield which increases our cost of goods sold. We do expect this yield to improve over time as we work with these new herds and we've begun to see some indications of this improvement. Point five. I would like to comment on the market dynamics and the drivers to our financial performance. Milk prices measured per hundred pounds of Class 3 milk dropped from the recent high of $22.34 for 2014 to $15.80 for 2015 and further to $13.48 for the first six months of 2016. This level of pricing puts a great deal of financial stress on our varied customers. However future contract prices per liter [ph] in 2016 are trending higher. The milk to feed ratio dropped from a recent high of 2.54 for 2014 to 2.12 for 2015 and has dropped further 2.02 during the first six months of 2016. The value of a bull calf has decreased from the unusually high level during 2015 of about $300 to $400 to approximately $50 to $250 per bull calf. The Rebuilding in the U.S. Beef Herd benefited our sales in 2014 and 2015, saw an increase in the number and the value of beef calves excuse me. The Rebuilding in the U.S. Beef Herd benefited our sales in 2014 and 2015 through an increase in the number and value of beef calves. However cattlemen have lost considerable revenue late in 2015 and into 2016 because of decreased demand. A good sales person enjoys this kind of challenge and I believe our sales and marketing team is doing an excellent job in the field to offset these very challenging industry economics. Point six. Lastly we have cash and investments of $10.8 million, and equity of $16.3 million as of June 30 2016. Our balance sheet has been strengthened principally by our continued profitability, and an equity raise completed during the first quarter of 2016. Our current cash together with our cash flow from operations and the new $4.5 million debt facility that we signed during the first quarter of 2016 will be used to construct and equip the facility to produce Nisin the active ingredient in Mast Out. As a result we now for the first time have a roadmap to complete the development of Mast Out and bring the product to market. Of the five technical sections required for approval of a new animal drug application also known as and a NADA by the FDA three are complete. We expect to complete the fourth technical section known as the Human Food Safety Technical Section by mid-2017. The fifth and last technical section known as the Chemistry, Manufacturing, and Controls Technical Section requires us to build a commercial scale production plant and submit substantial regulatory filings of the process, the facilities, analytics and controls. Our preliminary budget for this project is approximately $17.5 million the Mast Out facility design is well underway. We anticipate breaking ground this fall and we expect to complete building construction and equipment instillation by the end of 2017. Sales of this new product are the subject to FDA approval. We have disclosed a timeline of events that could lead to achieving this approval during 2019. So to summarize from my perspective we continue to execute on the two core components of our business strategy. First we're scaling up production of First Defense which will enable us to expand market penetration. And second we are advancing the development of the Mast Out our novel treatment for subclinical mastitis in lactating dairy cows. We are looking forward with great anticipation. To conclude I would like to again comment that we have provided extensive additional details in our press release and our quarterly report on form 10-Q I encourage interested investors to review these filings with that I would like to move on to the Q&A. Lets open up the calls for your questions. Dan could you help us with that.

Yes sir we will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Eric Miller of Heartland Advisors. Please go ahead.

Yeah hi Michael. Could you maybe just talk about the growth that you're seeing this year in your First Defense, how much of – what is the industry growing at and how is your share, market share shaking out.

Thank Eric. To be honest my best data on that is on an annual basis, so the most recent data I have is for 12/31 2015. What I discussed here was sales at our door, what we have seen through 2015 was a growing market and our share of that growing market increasing up to about 38%. So just to look at a few year-to-year comparisons 2012, 2013, 2014, 2015 we have about 22% market share up to 26% market share up to 32% market share, up to 38% market share for the year ended 12/31 2105. And again that market share and total market data is available to me annually. I can just report what we've seen as far as sales at our door that nice increase in the second quarter and a modest increase for the six months.

Okay, and you referenced that last year your selling expense was about 16% of sales this year. You want to keep it within that budget of about 18% could you may be discuss what the investment that you guys have made in this sales network has been?

Sure, it was a comparable investment in both years as far as sales personnel, so that sales team consists of our V.P. of Sales and Marketing Bobbi Jo Brockmann and five regional managers they are all on board for all of 2015. So their travel, their efforts, their promotions, their advertising, their trade shows all go into those expenses. And in 2015 may be as you may remember they were on backlog. I am not surprised to see those expenses a little bit lower. While they are on backlog there and I'm definitely in favor of go right up to our budgetary limit here in 2016 as we come back into inventory and need to pump up the sales results.

Okay and if we look at say the SG&A expenses basically all the operating expenses ex-the product development say for the first six months of the year. What would – the $1.6 million that you have for the first six months is that sort of a decent run rate going forward you think?

It is, as you know it is obviously higher than 2015. Okay so we've seen an increase in those efforts 2016 over 2015 both on the admin side just running the public company, working with new auditors, we've seen the selling expenses go up, the percentage increase is a little scary. If you just look at that in the vacuum, the dollar increase, not that huge dollar increase on the six month basis.

Okay, great. Thank you.

Thanks Eric.

And our next question comes from Sam Rebotsky of SER Asset Management. Please go ahead.

Yes, good afternoon, Michael. The First Defense, could we have sold more First Defense if we had more colostrum from the cow, I mean cows in essence of the sales. Basically, we had the backlog. We sold 1.335 million of the 2.4 million. So we basically only sold a million in sales. If we had more and more product, could we have sold it? Or what's the story relative to sales?

Sam, thanks for the question. The limit – what created our backlog was the liquid processing not so much the cows. I mean I did point out that we brought on a lot of cows, but if we'd had those cows a year earlier, it really would not have mattered because our limit was really in the liquid process, which we got scaled up fourth quarter of 2015 and then most importantly in the freeze-drying capacity, which we doubled towards the end of the first quarter of 2016. So the cows have been coming on and it's important that they're there and the milk is in the freezer, but the limit was really ultimately – we had one freeze-dryer and we needed two and that second one came on board in the end of the first quarter of 2016. So having more milk in the freezer earlier than we do now, wouldn't have helped us because we couldn't have got it through the single freeze-dryer.

So based on our capabilities, our capacity for the third quarter is there a dollar range that we could put on that we could sell if we could get the sales – sell the product?

Well, I haven’t said to make projections on sales because we just haven't been in that business, but I can say this that it will not be limited by production. So we have completed that scale up, sales out our door are now going to be reflected by purchase orders received and daily shipments made. They will not be capped off by a lack of inventory or by a growing backlog. I mean that small backlog. I don't like any backlog, but that backlog as of June 30 is 365,000. I'm confident we can take care of that in the third quarter and get back to sales reported as shipped to customers quarter-by-quarter.

And as far as international sales were they up or down from this quarter last year and what do we have to do to increase our international sales?

Yes, there is a drop in the international sales. I’m looking for that exact reference, but I did mentioned, I did disclosed in the Q under sales MD&A that that drop was not the result of a drop in demand in our international markets, which are primarily Canada, but also in to Japan and in South Korea. They were a much more result of – when we're on backlog, we did have to allocate product and we do take care of the large domestic market first and that did force a drop in that international sales. So that comes – so again that that problem goes away. We’re not allocating products.

Okay. And now you just speak of 38% share of the market, when we get to Rotavirus, we talk about 2017. I assume is it the first half or the second half or do we have a feeling on that? What percentage of the market can we achieve with the Rotavirus claim?

That's a great question, Sam. It's a tough question. The dating is a little bit easier for me. The timing is a little bit easier for me to answer because it's not realistic to expect the early part of 2017 and we will have not met our expectations. I will be surprised if we’re late in the 2017. We’re in the middle of 2017. The fall is just subject to too much work that hasn't been done yet and too many exchanges with the USDA that are not subject to strict timeline turnarounds. So they're a little bit out of our control. But the reason we’ve spent so much time and so much money and so much effort on Rota is because when we go head to head with the product from what is called Calf-Guard, they may not have an E. coli claim as we do, but they do have a Rotavirus claim that we do not. And our goal is to be much more competitive to take away that competitive disadvantage, have the Rotavirus claim to be more competitive against the Zoetis Calf-Guard. And we know from the market research we've done that that Calf-Guard product sells a very similar dollar value to our product and it sells about half the price. So doing the math there, it’s about twice the volume. So just a huge opportunity there as long as the customers are willing to pay a little bit more for a better quality product, a more effective or a broader claim reach. And I think just better biology for the calf the way our product is delivered in comparison to the way they delivered, they modified live virus vaccine.

It sounds good. Good luck, Michael.

Thanks, Sam. I appreciate it.

[Operator Instructions] Our next question is a follow-up from Eric Miller of Heartland Advisors. Please go ahead.

Yes, last thing, Michael. You talked about this 17.5 million sort of the estimate budget for the Mast Out build out. Can you break out in rough figures what do you think that what’s the capital and what's going to be expensed over the next few years on that?

Sure, we are capitalizing all of the building and all of the equipment. It is roughly half and half as we start to get you know definitive bids in and quotes in and contracts in on the work that building and that equivalently capitalized. We have been expensing our labor as we go. As we move into production, we would capitalize that labor and take it through cost of goods. So, that 17.5 million is capital item.

Okay. And roughly percentage of where you would see that falling out in 2016 and 2017? Is it 50:50 between the two? Or how should we look at that?

Yes, 2016 is going to be light of the – as the calendar winds by when we get into the fall. I mean because the early work is not the real expensive work, just we're in the design and permitting phase days, hoping to get a home ground here in the next couple of months. The excavation then putting up the shell, those are several million dollars worth of expenses. The big money comes from fitting out the equipment inside – fitting out the inside of the building, installing all the equipments, buying all the equipments that hits much more heavily in 2017. And then they’ll be largely get through it because we expect to be manufacturing at least second half or as early as possible in 2018. So, those expenses would be – I mean we can’t manufacture, we haven’t purchased and installed the equipment. It is little vague, but to give you an idea is that a fair answer.

Yes, yes, absolutely. Thank you.

Thanks.

[Operator Instructions] I’m showing no further questions. I would like to turn the conference back over to Joe Dorame of Lytham Partners for any closing remarks.

Thank you, Dan. We want to thank you all for your participation on today’s call. We look forward to speaking with you again in November with our third quarter 2016 financial results. Have a great day.

And ladies and gentlemen, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.