ImmuCell Corp (ICCC) 2019 Q3 法說會逐字稿

Good day, and welcome to the ImmuCell Corporation Third Quarter Fiscal Year 2019 Financial Results Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Joe Diaz.

Please go ahead.

Thank you, Sean, and good afternoon, and welcome to everyone on today's call.

This is Joe Diaz with Lytham Partners.

We are the investor relations consulting firm for ImmuCell.

Thank all of you for joining us today.

I would like to preface this discussion today with a caution regarding forward-looking statements.

Listeners are reminded that statements made by management during the course of this call include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today.

Additional information regarding these risks and uncertainties is available under the cautionary note regarding forward-looking statements of the safe harbor statement in the company's press release that was issued just about 30 minutes ago, as well as in the company's periodic filings with the Securities and Exchange Commission, which can be obtained from the SEC by visiting the investors section of the company's website at immucell.com.

With that said, let me turn the call over to Michael Brigham, President and CEO of ImmuCell Corporation, after which, we'll open the call for your questions.

Michael?

Okay.

Great.

We have a very good roster assembled here, and I thank you all for taking the time to join today's call.

I do appreciate that.

I'm excited to update you on our results for the third quarter.

As always, we have spent a fair amount of time preparing our quarterly report on Form 10-Q, it's worth a read.

It will be filed with the SEC tomorrow morning.

I'm not going to repeat a lot of those important details on this call.

I do want to highlight what I see as the 2 most important financial results and then update on 3 important milestones to watch going forward.

So I'll start with the 2 important financial disclosures.

Let's talk about the sales results.

It's a very strong increase in total sales.

Sales are up 38% in the third quarter compared to third quarter of 2018.

They're up 25% for the first 9 months of the year compared to the same period ended September 30, 2018.

This brings sales for the trailing 12-month period to just over $13 million.

The Tri-Shield is creating most of this growth.

Tri-Shield has created a new market opportunity for us.

It's about quality over quantity in the dairy industry these days, and we are encouraging customers to go beyond vaccination.

We are back with distribution in the mass market selling effort to both the dairy and beef producers.

It's exciting to see what our sales team can do now that they are spending their time selling and accessing new customers rather than allocating scarce product, so great work by the sales team.

This is a strong achievement for us in this difficult dairy economy.

I'd say difficult dairy economy because it is hard.

It has been hard with low milk prices for years.

However, we are seeing some improvement in milk prices presently and some project that this critical measure of a dairy operations revenue may stay strong into the near future.

For the second financial highlight, I point to Page 4 of our press release.

I think it's really important to look at these non-GAAP disclosures in the press release.

I think we should be aware of certain noncash expenses like depreciation, amortization, stock-based compensation and income taxes.

I include income taxes because we have accumulated over $10 million in NOL carryforwards for tax purposes.

At time [of our reporting] our losses could have been income had it not been for these large noncash charges.

So let me turn to the 3 important business milestones to watch going forward.

First, $3 million investment in the First Defense production capacity.

We are investing about $3 million to increase our liquid processing capacity by 100% and our freeze dry capacity by 50%.

We expect this increase -- this investment to increase the annual sales value of our production capacities from what is presently about $18 million to about $27 million.

We signed a lease for about 14,300 square feet to help us make -- complete this investment.

We're in the permitting process, and we're bidding contracts to builders and contractors to do the work.

So we'll keep you updated on that progress.

But we expect to have that project complete around the middle of 2020.

Second, we're tracking on a $4 million investment to create our own aseptic filling capability for Re-Tain.

This is -- this investment is necessary to give us control over the production process from start to finish.

We have agreed to a short-term contract with Norbrook, our current aseptic filling CMO.

This contract will -- this will allow us to complete the development work and produce the initial product for product launch inventory.

We'll do that with Norbrook as we complete the investment in the aseptic filling function to bring it in-house.

Third, the runway of the FDA approval of Re-Tain is becoming more clear and present.

We received the FDA's review comments to our first phase drug substance submission of the CMC technical section during the third quarter.

We're working on our responses now to the queries raised by the FDA, which will be submitted when we make our second phase drug substance and drug product submission of the CMC technical section.

We expect that to be around the third quarter of 2020.

We expect that submission of the drug substance and drug product CMC's technical section to be around the third quarter of 2020.

We're also responding to a preapproval inspection of our drug substance facility.

As anticipated at this early stage, some deficiencies were noted that needed to be resolved prior to commercial production and sales.

We are confident that we can effectively resolve the deficiencies to the FDA's satisfaction by the end of 2019, without significant cost or any delays in the time line to product approval.

So all this could set us up for product approval in 2021.

More details regarding the submission schedule and the runway to FDA approval of Re-Tain will be provided in the 10-Q, which is being filed tomorrow morning.

So in conclusion, I think we've hit the most important topics.

I do, again, encourage you to review our press release and the Form 10-Q for more details.

Also, please take a look at the updated corporate presentation slide deck.

I will be presenting that at the Craig-Hallum Alpha Select Conference in New York City tomorrow, and again on Wednesday to other interested investors.

I believe it provides a very good summary of our business strategy and our objectives as well as our current financial results.

The updated version has been posted to our website.

You could just see the Investors section and click on corporate presentation.

I hope you appreciate the streamlined approach to this call.

This saves more time for your questions, which are important to me.

With that said, let's have the operator -- Sean, would you open up the lines for you for questions?

(Operator Instructions) Our first question will come from Kevin Ellich with Craig-Hallum.

I have a number of questions for you, if that's okay.

Yes.

I guess before we get into the regulatory comments you made on Re-Tain, first thing that jumped out to me with the financial results, gross margin this quarter expanded pretty nicely on a year-over-year basis, even sequentially.

I guess, talk about what drove that improvement?

Yes.

I mean it's -- we're moving to a strategy away from focus on percentage and more focused on total dollars.

So given that gross margin close to 50%, just under 50%, it's not like the old days of the bolus-only business at a higher than 50% margin, but we'll take the cash.

So the goal is total cash, regrow this top line.

We have a lot of fixed costs that just get amortized over more volume.

I think you're right to point to that gross margin.

I look at it closely.

That's money we didn't have, 3 month-period '18 to 9-month period '18, [but] that's really going to help us.

Sure.

No.

That makes sense.

And then going back to your comment that the, I guess, $3 million investment to increase capacity from $18 million to $27 million, you said that should be done by mid-2020.

Are you actually seeing demand in the marketplace for that amount?

Is that why you guys expanded the capacity?

Well, we spent some time with sales being ahead of production, and we've suffered through product allocation during that period and through '18, the beginning of '19, we don't want to go back there.

So seeing demand, hoping to see demand, we look forward to see what people are saying about Tri-Shield and want to be ready for it.

So what that means in the numbers is, our current facility, if we just left things status quo, didn't put the $3 million into growth, we can probably push about $18 million worth of product out of our current facility.

Trailing 12 months or 13, so we've got a little bit of room today.

So we are investing for the future.

That investment will bring that $18 million capacity up to about $27 million.

Got it.

Okay.

And then going to your comments about the -- actually, really good update there on the FDA CMC technical section comment that you got back, hoping to have that second status plan submission in Q3 of 2020, was there anything unusual or anything that you really didn't expect that came back to you in those first set of comments?

No.

I think it's all very manageable.

I think both the responses to the inspection and to the first round submission of the drug tests which I thought, both are normal, both are achievable.

We can get a full response to them without a delay and without spending a lot more money.

And what I look forward to is some kind of roadblock.

A huge new requirement for new investment or something that would delay or adds significant amount of time, I don't see either.

I think no big money spend, no big time, no time delay at all.

So I really think routine we can handle.

Good feedback from the FDA, and we can handle our response to them.

Okay.

That's great.

And then, again, good catching up with you at the World Dairy Expo in early October.

Just wondering if you could comment about how the show went for you and how Bobbi and the team did.

Did you see the type of business pick up that we should see here in Q4?

Do you think that we'll see a sequential increase similar to what we saw last year?

Yes, it was good to see you there, Kevin.

I always think that week in Madison, Wisconsin first week October is just one of the most exciting times of the year for us.

You were able to see that real-time at our booth.

I mean we just had great traffic.

It's always busy.

Sales team is just always on their A game, but it comes in a big public display, World Dairy Expo.

So the customer feedback is great.

And people just come by to chat, new customers learn about the product, old customers want to say thank you.

So it gives me great confidence for the future I mean we're going into the peak season, first quarter is always our best quarter.

Seasonal sales are a bit seasonal that way.

And this first quarter, we're going into it with inventory, which we can't say about the first quarter of 2019.

Two last ones for me.

First, product development costs have ticked very, very modestly higher in the last couple of quarters.

Is about $1 million a good quarterly run rate going forward when you think about product development costs or will that increase with the extended production?

Yes.

The production will not impact PD.

So that production is going to be capitalized as CapEx.

The PD is really driven by depreciation.

So we're in a situation where the facility is in place for its intended purpose, which is to produce Nisin, the active ingredient in Re-Tain, but we're not selling any.

So we've got no revenue, and we've got the expenses.

You'll see in the Q, in the morning, Kevin, I'll detail that very precisely what -- how much of PD expense is depreciation, cash versus noncash PD, it's a big driver to the PD expense.

Got you.

We'll take a look at that.

And then lastly, just updated thoughts on the overall dairy market.

It seems like we've suffered through the last couple of years, but I've been hearing that some pockets and parts of the market, especially Midwest, are seeing some stabilization.

Is that what you would say?

Well, what's encouraging is, and we put a milk curve, as I talk here I'll get the number of the slide, right in our slide deck, because I think one of the most relevant indexes to follow is the price of milk.

Just to get a feel for where the industry is, it's Slide 40 of the slide deck that just got updated and posted this afternoon.

But the swing there is from a very, very high back in 2014 of around $22 to a low of just under $15 in '16, '17, '18, struggling around that $15, $16, $15 level.

And so just recently, we're seeing a much -- well, not -- I shouldn't say much higher, but a reasonably higher milk price.

We've seen some forecasters pushing a projection that that could stick for 6 months out, 12 months out.

So milk prices in the $16, $17 range really helps our customer.

That $14 level did not.

Our next question will come from Sam Rebotsky with SER Asset Management.

And considering that the last fourth quarter -- third quarter had $700,000 profit, I mean this is pretty good.

As far as the -- our sales are $10 million, how much of this would be the Tri-Shield and First Defense?

And what do we expect the ratio eventually between Tri-Shield and First Defense?

And the $18 million to $20 million is your capacity, could you sort of relate all the numbers together on that?

Sure.

Yes, thanks, Sam.

Generally, what we're seeing is the -- what we call the Dual-Force line, that's the bivalent product to the original capsule, the relatively new gel tube bivalent has been pretty flat.

And the majority of our growth is coming off Tri-Shield.

And that's just fine with us.

I think that's strategically our plan.

If we can gain as many new bolus or Dual-Force customers as we lose, as we convert some of them, Tri-Shield keep that business flat and just grow this new opportunity that the trivalent Tri-Shield, that's the plan going forward.

We have a plant that's a growing production facility.

It purifies the antibodies out of milk, and we put them out there in several different formats.

Let the customer choose which way they want to deliver the product, but same antibodies, either bivalent or trivalent, to E. coli, the coronavirus, the rotavirus.

So at this point in time, when we get an order, we could ship it right away?

What kind of -- there's no time lag and we're able to ship overseas also.

In other words, our ability to take advantage of any of the orders domestic or internationally, all we have to do is ship it.

We have the product available?

That's true.

Yes.

No.

That's right, Sam.

The only detail I'll add is, the bolus ships room temp every day, the gel tubes ship mostly on Monday, sometimes on Tuesday, just because of the cold chain requirement on that product.

Okay.

So now the lease of the 14,300 square feet of building, that's what you're going to work on and get approval for, is it 2020?

And you're going to put more equipment in that building to do the manufacturing also or in processing?

Yes.

So we were leasing as an open warehouse, so we've got to equip it to our requirements.

This is USDA, not FDA.

The USDA is going to hold us to a higher standard, but it's a bit easier to get a facility licensed -- site license on the USDA side.

The FDA is just a bigger challenge.

So what we need to do over the next 6, 7 months or so to get this done mid-2020s, we build out these rooms.

Essentially what the project is, is taking all of the final assembly, so whether you put the powder into a capsule or into a gel tube, all that assembly, final assembly and formulation work, take that out of our current facility, put that into the new facility, and that space vacated will allow us to do the expansion of the liquid by 100% and the freeze dry by 50%.

We just need -- there's no room to do that in the current facility today.

So we're basically going to split the operation into all the liquid process, which is a relatively dirty process of farm buckets of milk and cheese and all that, bring that up to powder and take that clean powder over to the new facility for assembly.

And I presume we expect this to save on costs, except to the extent that you structure it with both processes done separately?

Yes.

I mean the long-term goal for me is just to keep right around that 50% range.

I don't want to get too greedy on the top line.

And I don't want to get too sloppy on the costs.

If we can mix all these things, the new investments to new sales and keep that gross margin as we've reported here for the third quarter, I'd call that a success.

Okay.

One more, and I'll come back in the queue, Michael.

The Norbrook, they have [met] another revisional problem with the FDA now.

They resolved all their problems, and they could do whatever we need to do when we're ready to submit to syringe to the FDA.

Right.

So just to be clear, there never was any problem with the FDA.

In fact, that's why we worked so hard to get this short-term agreement with Norbrook because they are an FDA-approved facility.

So what the agreement signed with Norbrook does is just outline the terms of which they'll work with us for the short-term period through December of '21.

(Operator Instructions)

Sean, let me say something one second before the next question.

I don't know if we lost Kevin; that's okay.

Just to update a data point on Kevin's question about milk price.

If you look at Page 36 on the Q in the morning, you're going to see what's publicly available, the milk price posted, but what's important, that trend is averaging at $16 for 9 months, but the July and September averaged $17.82.

So that is a very positive trend for us on the milk price.

But thanks, Sean.

Go right ahead with number three.

Our next question will come from [Ben Andrews] with [Andrews Capital Management].

How much Tri-Shield did you make in Q3?

We achieved our goal, which we stated was being close to $1.5 million worth of product per quarter.

So looking at where we think sales are going and all, it's a $6 million run rate.

Production at $1.2 million to $1.5 million per quarter, that's going to be steady until we see the next levels.

Have you sold any into Canada yet or no?

We have not.

We do have approval up there.

We've just been very cautious.

We do not want to get back on allocation.

So I think that -- I know that's a decision for 2020, but I think we're going to be careful how we get through this first quarter, the peak season in the U.S. and just be careful on that growth step so we don't -- again, so we don't get back into an allocation.

I want to make sure this U.S. market is 100% taken care of through peak season and then Canada becomes the next upside for us.

Okay.

And a question on the PD expense.

I know you had one earlier, but looking at the Re-Tain piece, there's no actual expenses on a quarterly basis for the Re-Tain piece, except the depreciation coming from that facility in that line item.

Right.

Thanks for asking that question, to make sure I clarify it.

I was just pointing out that depreciation is a huge component of that PD expense -- that almost all of our PD expense right now is going to Re-Tain.

So we're not producing commercial inventory.

We're not building inventory, so we're not capitalizing inventory costs.

All the facility plant, operating costs are going through PD expense.

So there's a lot of cash expense in there, too.

I'm just highlighting the large component of which -- of total PD is noncash depreciation.

Does that make sense, Ben?

Yes.

Kind of.

So help me understand that line item then when we're in steady state with Re-Tain and with First Defense?

Is that line item then pretty much depreciation unless you're coming out with a new version of one of the products or how does that work?

Right.

I would never want to see PD go to 0, but it does come down to a more manageable level.

I mean the operating expenses that I'm referring to move from PD expense into cost of goods.

And then PD becomes largely just -- what we continue to do is line extensions, other developments of the same core technologies, whether it be a new formulation for First Defense, a new claim or First Defense or we'll continue to do process improvement work on Re-Tain.

But it -- there's going to be a steady state on noncash depreciation, and then there's going to be a swing from the operating costs going to -- from PD to cost of goods to inventory.

Okay.

So what I heard you say, correct me if I'm wrong, of the $985,000 in the quarter, the majority of that expense is either Re-Tain development or Re-Tain depreciation, correct?

Yes.

That's definitely true.

I mean we continue to do things with a very small PD staff, but we continue to do things to support First Defense, but the majority is towards Re-Tain.

So you're carrying nearly $1.25 million of excess expense you're getting no benefit for, at least as of yet.

Yes.

It's a great concept of matching expenses with revenues.

Now we're taking the expenses and not getting the revenues.

And Ben, by the time I see you tomorrow, we'll have the Q filed, and we can look at the exact number, spell it right out in the Q. I want people to know how much of that PD is depreciation.

(Operator Instructions) At this time, there are no further questions in the question queue.

This will conclude today's Q&A session, and I would like to turn the conference back over to Mr. Joe Diaz for any closing remarks.

Thank you, Sean, and thanks to all of you for participating in today's call.

We look forward to talking with you again to review the results of the full year of 2019 around the beginning of February 2020.

Again, I encourage you to review ImmuCell's SEC filings for the full unaudited third quarter results.

Thanks, again, for your time.

Have a great week.

We'll talk to you soon.

The conference has now concluded.

Thank you for attending today's presentation, and you may now disconnect.