ImmuCell Corporation (NASDAQ: ICCC), a growing player in the animal health industry, has reported a strong sales growth for the second quarter of 2024, although it faced some operational hurdles that affected its gross margin. The company, known for its innovative products in bovine health, has been grappling with product contamination events and equipment breakdowns, which have impacted its sales and gross margins. Despite these setbacks, ImmuCell has made strides in improving its operational efficiency and is in the final stages of bringing a new product, Re-Tain, to market.
Key Takeaways
- ImmuCell saw an increase in sales growth in Q2 2024 compared to Q2 2023.
- The company's gross margin was below target due to contamination events and equipment issues.
- Remediation steps have been successful in preventing contamination since April 2024.
- EBITDA improved from negative $2.2 million in H1 2023 to negative $340,000 in H1 2024.
- CEO Michael Brigham emphasized the company's production growth and quality standard improvements.
- ImmuCell is managing inflationary pressures and is focused on the final regulatory steps for its product Re-Tain.
- Dr. Joe Crabb retired but will continue as a consultant; Dr. John Zinckgraf manages the Re-Tain project.
- The company aims for a 40% gross margin, including depreciation, and has seen a 17% improvement in the liquid process step.
- The next earnings call is scheduled for November 11, 2024.
Company Outlook
- ImmuCell is working on improving operational efficiency and production yields.
- The company is in the final regulatory steps for its new product Re-Tain.
Bearish Highlights
- Gross margin has fallen short of the company's target due to operational issues.
- The company experienced product contamination and equipment breakdowns impacting sales and margins.
Bullish Highlights
- Sales growth has been strong in the second quarter of 2024.
- The company has successfully implemented remediation steps to prevent contamination.
- ImmuCell has improved its EBITDA significantly compared to the first half of the previous year.
Misses
- The company has not yet achieved the targeted 17% improvement in the filtration step.
- Gross margin is still below the company's goal due to earlier contamination events and yield issues.
Q&A Highlights
- CEO Michael Brigham discussed the retirement of Chief Scientist Dr. Joe Crabb and the transition of his responsibilities to the production team.
- Brigham also addressed the company's efforts to improve yield and gross margin, citing a 17% improvement in the liquid process step.
- The goal of a 40% gross margin, including depreciation, remains a focus, with confidence expressed in achieving this target.
ImmuCell Corporation is navigating through a period of growth amidst challenges. The company's dedication to improving its production processes and its focus on the market introduction of its new product Re-Tain are central to its strategy moving forward. Investors and stakeholders are likely to watch closely as the next earnings call in November will provide further insights into the company's performance and its ability to meet its financial targets.
InvestingPro Insights
ImmuCell Corporation (NASDAQ: ICCC) has shown resilience with notable sales growth, as highlighted in the recent article. To provide additional context on the company's financial health and market performance, here are some key insights from InvestingPro:
InvestingPro Data:
- The company's market capitalization stands at $28.12 million, reflecting the current scale of the business in the competitive animal health industry.
- Revenue growth has been robust, with a significant quarterly increase of 110.58% in Q1 2024, demonstrating strong market demand for ImmuCell's products.
- Despite operational challenges, the gross profit margin remains healthy at 30.03% for the last twelve months as of Q1 2024.
InvestingPro Tips:
- ImmuCell's liquid assets have surpassed its short-term obligations, indicating a solid liquidity position that could support ongoing operational improvements and the launch of new products like Re-Tain.
- The stock is trading near its 52-week low, which may present a potential entry point for investors who believe in the company's long-term prospects despite recent operational hurdles.
For those looking to delve deeper into ImmuCell's financials and future outlook, there are additional InvestingPro Tips available at https://www.investing.com/pro/ICCC. These tips can offer further guidance on the company's valuation, performance metrics, and investment potential.
Full transcript - ImmuCell Corporation (ICCC) Q2 2024:
Operator: Good morning, and welcome to the ImmuCell Corporation Reports Second Quarter ended June 30, 2024, Unaudited Financial Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference call over to Joe Diaz of Lytham Partners. Please go ahead.
Joe Diaz: Thank you, Anthony. Good morning, and welcome. As Anthony indicated, my name is Joe Diaz with Lytham Partners. We are the Investor Relations consulting firm for ImmuCell. I thank all of you for joining us today to discuss the unaudited financial results for the quarter ended June 30, 2024. The Listeners are reminded and cautioned that statements made by management during the course of this call include forward-looking statements, which include any statement that refers to future events or expected future results or predictions about steps the company plans to take in the future. These statements are not guarantees of performance and are subject to risks and uncertainties that could cause actual results, outcomes or events to differ materially from those discussed today. Additional information regarding forward-looking statements and the risks and uncertainties that could impact future results, outcomes or events is available under the cautionary note regarding forward-looking statements provided with the press release and the Form 10-Q that the company filed last night along with the company's other periodic filings with the SEC. Information discussed on today's call speaks only as of today, Wednesday, August 14, 2024. The company undertakes no obligation to update any information discussed on today's call. Please note that references to certain non-GAAP financial measures may be made during today's call. The company included definitions of these terms as well as reconciliations of these figures to the most comparable GAAP financial measures in last night's press release in order to better assist you in understanding its financial performance. With that said, let me turn the call over to Michael Brigham, President and CEO of ImmuCell Corporation, after which we will open the call for your questions. Michael?
Michael Brigham: Thanks, Joe, and good morning, everyone. I'm not going to take your time to review all the financial details during this call today. Those numbers and results are available to you at the summary level in last night's press release, and in much more detail in the Form 10-Q that we also filed last night. I would like to point out that we had very strong top line sales growth during the three, six and 12-month periods ended June 30, 2024, in comparison to the same periods ended June 30, 2023. These results demonstrate that we have largely completed the production capacity expansion work that we have been investing in since 2022. During the six-month period ended June 30, '24, finished goods production was approximately $12.7 million. This level of output would annualize to approximately $25.4 million, or approximately 85% of our estimated $30 million annual full capacity target. This top line success has not been matched, with adequate gross margin to the bottom line. Our gross margin as a percentage of product sales, did improve from 19% during the six-month period ended June 30, 2023, to 28% during the six-month period ended June 30, 2024, but this is still well short of our 40% target. As we began to operate at this higher output level, we incurred some significant product contamination events from late '22 to early 2024. We have investigated these events thoroughly. Some of our problems were caused, by an unusually high bioburden in our sourced raw material, which is colostrum, as we rapidly contracted with more source farms, for more cows to meet anticipated demand. We believe that this front-end problem has now been largely fixed, while it will require ongoing monitoring going forward. We also believe that some of the contamination was caused by equipment and processes that, were not adequately optimized to run at the higher level of production output. The remediation of the contamination events required several adjustments, all within our USDA-approved outline of production. We disclosed the cost of scrap inventory in detail in our 10-Q filing, but it's not just the scrap that reduced our gross margin, it is also the lower sales in the prior periods when we slowed production, to remediate the contaminations. This miss sales data is also disclosed in our 10-Q filing, and is the key reason we have not yet cleared the backlog of orders, which was set at $7.9 million as of August 6. New remediation steps implemented during April of 2024, in response to the most recent contamination events, appear to be very successful so far, because we have run without contamination since then, and to the present. For clarity, I'd like to confirm that throughout these contamination events, all product that was sold to market had passed final USDA release testing requirements. Like most other companies in this economy, we are facing challenging inflationary pressures on the cost of labor and components. This impacts just about everything we buy. In addition, the other cause of the gross margin deterioration, is the production yield losses that we have incurred, during this period. We have disclosed some specific targets that we are working on, to improve process yields in the coming quarters. When I look back, I see - something that is now very understandable. After successfully running in the same process for over 30 years, sudden growth is hard. We work with a high bioburden source material, that being farm milk. We needed to better control quality at the source of this growth. We have done that now, similar challenges were incurred in our processing, as we pushed our well-established process and equipment harder. A natural reaction to contamination is to introduce more heat to reduce bioburden, but this heat also kills antibodies. We are optimizing that mix to maintain acceptable bioburden levels, while also maximizing yields. We believe that the operational improvements implemented are allowing us to run more effectively, at the higher output level going forward. To be successful, we must avoid future significant contamination events and equipment breakdowns, and operate with good production yields. With those strong sales, we were able to improve earnings before interest, taxes, depreciation and amortization or EBITDA from negative $2.2 million, during the six-month period ended June 30, 2023, to negative EBITDA of $340,000, during the six-month period ended June 30, 2024. No doubt, cash is tight. In response, we continue to be prudent with our expense controls where possible, and we have frozen nonessential capital expenditure investments for the time being. But we have no draw outstanding on our $1 million line of credit that is available to us until September 2025. So that's the big picture. With regards to the other financial results, the press release provides the unaudited P&L results and some unaudited summary balance sheet data. Further, our Form 10-Q provides all the unaudited financial details and management's discussion and analysis. As I mentioned, I'll now take your time on this call, to review all that in detail. We will remain focused on the commercial opportunity we have with First Defense as we work through what we see as the final steps of the regulatory process and our effort to bring Re-Tain to market. In May, the FDA issued a CMC Technical Section in complete letter, in response to our third submission of the CMC Technical Section for Re-Tain. Pursuant to the incomplete letter, the FDA has provided some minor questions about our submission requiring a force submission, which is typically subject to a six-month review. However, the FDA has indicated that this resubmission potentially could be handled through a shortened review period, because the open items are not complex. Most critical to the time line, however, is that the FDA has also required that we not resubmit the CMC Technical Section, until inspectional observations at the facilities of our drug product contract manufacturer are resolved. Our contract manufacturer submitted its responses to the inspectional observations in early July. Given the unique facts and circumstances, we are working with the FDA and our drug product contract manufacturer to obtain an expedited review. This is part of the process, and we are continuing to move forward. Regardless, we remain poised and excited to revolutionize, the way that subclinical mass site is treated in today's dairy market, with a novel alternative to traditional antibiotics, without an FDA-required milk discard or meat withhold label restrictions. Lastly, I encourage you to review our corporate presentation slide deck. I believe it provides a very good summary of our business strategy, and objectives as well as our current financial results. An August update was just posted to our website last night, see the Investors section of our website and click on Corporate Presentation, or contact us for a copy. With that, I will be happy to take your questions. Let's have the operator open up the lines.
Operator: [Operator Instructions] Our first question will come from [Tom Fox] of Private Investor. You may now go ahead.
Unidentified Analyst: Good morning. Thank you for taking my question. I actually have a couple of questions. My first one is about First Defense. As I understand it, you guys get your main ingredient for the drug from the mother cow's milk after she gives birth. This is the milk that she spits out after given birth. What I'm wondering is, if there's a potential bottleneck here, because you're getting it from an animal, not a machine and you're getting it at a certain point in their life. On top of that, I mean, what is your relationship with these farms? Do you think that you'll be able to contract out more farms if First Defense keeps growing? Thank you. If you could just talk on all that?
Michael Brigham: Yes, Tom, sure. Thanks. It's a good question. So yes, you've got it right. That's the early milk right after she freshens called colostrum, really rich with antibodies. We hyperimmunize those donor cows, so that it's very specific antibodies to our target being E.coli, corona, rotavirus. But we've been very successful at growing the quantity of milk we bring in. There's actually a disclosure. If you don't find it sidebar with me, the page number with me right at the moment. But I did detail a little bit about the growth of that work in process inventory. So, we are really good shape on the quantity of the raw material, the colostrum, the milk that we buy. And I did discuss the challenges in growing those farms, and those cows and those contracts, we did run through this contamination problem, needed to sort of similar our growth and training, quality standards, all that. I think we're in a much better position now on the quality. And so, good shape on the quantity and improved shape on the quality. So, I don't see that as a limit to our production growth.
Unidentified Analyst: Okay. That answers my question. I do have another question, kind of a quick one. Do - I understand that your Chief Scientist retired recently, do you guys have any plans to replace him?
Michael Brigham: Yes. You're referring to Dr. Joe Crabb. I'm very pleased to maintain an open consulting relationship with him, but true. He did retire from full-time work. He's the developer of First Defense going back to the early days of the first USDA approval. He is the initial developer of Re-Tain. He did pass both of those projects on. First Defense is into production team now, and the Re-Tain is being run by Betsy Williams, who's our VP of Manufacturing Operations. So there was good transitions there. And we really do not have a large active new program. So our investment in product development outside of Re-Tain, is very limited and is managed by Dr. John Zinckgraf. He's our Director of Product Development. So no, not to replace at the VP level or at the full-time level. But that team, the production team, Betsy's work and John Zinckgraf's work, really cover our - the science for us quite well.
Unidentified Analyst: Okay. Thank you for taking my questions and good luck to ImmuCell moving forward.
Michael Brigham: Of course. Yes. Thank you, Tom.
Operator: [Operator Instructions] Our next question will come from George Melas with MKH Management. You may now go ahead
George Melas: Thank you. Good morning, Michael.
Michael Brigham: Hi there, George. Good morning.
George Melas: Good morning. Just trying to drill down a little bit more on the gross margin. And thank you for the some of the clarity that you provide in the queues, it's interesting to read. Just trying to understand, it seems like the first quarter was really impacted by some of the previous contamination event of '23. The second quarter was less affected by contamination and maybe more by yield issues in a nutshell, is that right? Or is that just to simplifying?
Michael Brigham: Yes. That has a good - not too simple. That's generally true. I mean, we did that I really think it is hard - the smaller the period, the harder the analysis. So I do prefer six over three, but we do report quarterly, and we do - I want that - you're reading those numbers right, that was a bigger hit in 2Q than 1Q. Yes. So I mean, kind of a combination of both. I don't know exactly how to separate contamination impact from yield impact, but I know for sure, contaminations got to go down and yields got to go up, and that's what we were trying to speak to as far as progress and detail on status on both sides. Is that fair?
George Melas: Okay. Okay. Page - I don't know what page it is, but you talked about in the Q, you talked about some yield improvements that you have already sort of achieved. One of them is by sort of reducing heat and the other one is introducing some new filter equipment with sort of improvement of 17% and 5%, respectively, is that 17 points of margin? Or is that 17% over what you have achieved previously?
Michael Brigham: Yes. No, more the latter. So you are in the Page 35 area. I don't know if Tom is still with us, but the work in process question he asked is right above that where we were talking about the inventory? And then yes, what's interesting about the 17%. I mean what's important about the 17% is - we can identify it. We know what that target is, but that's one that we have not had the technical fix to yet. But it is something that would give us that much more at that filtration step of each week, plus or minus an estimation range, that filtration step can be improved. And then that product still needs to be finished all the way through the rest of the -- it's sort of the early cheesing - post cheesing filtration. That product still needs to be finished through the production cycle, formulated and filled. So it's not - I wasn't trying to suggest dropping 17 points to the bottom line, but 17% improvement on that liquid process step.
George Melas: So it means that if - right now, you have sort of an output there of 100 that output would move to 117. Is that what you mean?
Michael Brigham: Yes, and then go and incur the additional cost, labor and materials to finish it. But yes, then each week, we'd be in that ballpark of like, basically doing the same work and getting those extra 17 doses.
George Melas: Okay. And then maybe looking at - it's very hard to look at the crystal ball, and it's probably a little opaque and murky, but you still have a goal of 40% gross margin, including depreciation. And do you feel like you have the tool, steps, the knowledge, the processes to get there, because you still have that goal, I mean, is there sort of a plan to get there that you can understand?
Michael Brigham: I called out those two specific yield items, because we do understand them well. One, I feel like we just now - we have implemented the 5% or we've implemented and just need to see it be achieved and repeated. The 17% is still in the development stage, with the manufacturer to find that solution. But I mean these people sell equipment that's supposed to work well. We need to adopt it to our process and make it work 17% better. So that one we need to hedge a little bit on, because it hasn't happened yet. But I think both - I pick those two. I mean, there's a laundry list, George. There's a lot of little things, but I picked those two, because they're significant, and because they're identifiable. And yes, I think we can achieve both of those.
George Melas: Okay, great. Okay. Best of luck. Thank you.
Michael Brigham: Cool. Thanks, George.
Operator: It appears to be no further questions, pardon me. [Operator Instructions] It appears to be no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Joe Diaz for any closing remarks.
Joe Diaz: Thank you, Anthony, and thanks all of you for participating in today's call. We look forward to talking with you again to review the results of the third quarter, which will end on September 30, 2024, and we'll do that during the week of November 11, 2024. Have a great day. Thanks again.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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