Bio Rad Laboratories Inc (BIO.B) 2003 Q1 法說會逐字稿

Good day, everyone and welcome to the Bio-Rad Laboratories first quarter conference call. As a reminder, today's conference is being recorded. For opening remarks and introductions, I would now like to turn the call over the Mr. Joe Diaz with RCG Capital Markets Group. Please go ahead, Sir.

Thank you and thank all of you for joining us today to review the financial results of Bio-Rad Laboratories for the first quarter ended March 31, 2003. As the conference call operator indicated, my name is Joe Diaz and I'm with RCG Capital Markets Group. We are the financial relations consulting firm for Bio-Rad. The senior management team of the company will be with us on today's call led by Mr. David Schwartz, Chairman, Mr. Norman Schwartz, President and CEO, Ms. Christine Tsingos, VP and CFO, Mr. John Goetz, VP Clinical Diagnostics, Mr. Brad Crutchfield, VP Life Science, Mr. Ron Hutton, Treasurer and Mr. Jim Stark, Controller. At the conclusion of today's prepared remarks, we will open the call for a question and answer session. If anyone participating on the call does not have a full text copy of the earnings release, please call us at RCG at (480) 675-0400 and we will immediately fulfill your request or you can retrieve the release off the Internet from any number of financial sites.

Before we begin with prepared remarks, we submit for the record the following statement. This conference call has been made available by the way of web cast technology on the Internet and direct dial via a conference call service to all interested parties. Various statements made during this conference call may constitute forward-looking statements for purposes of the Securities and Exchange Commission's Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995 and Rule 3B-6 under the Securities and Exchange Act of 1934. The forward-looking statements contained herein involve risks and uncertainties that could cause results to differ materially from the company's expectations. Having said that, we will begin today's presentation of the overview of the financial results from Ms. Christine Tsingos, VP and CFO of Bio-Rad Laboratories. Christine?

Thank you. Good afternoon and thank you for joining us. Today we are pleased to report record sales for the first quarter of Fiscal 2003 of $246 million, an increase of more than 17% versus the same period last year. This growth was fueled by continued strong sales from our food safety, processed chromatography, blood virus and quality controls groups. The year over year growth rate includes approximately 10% of favorable currency impact. The gross margin for the quarter was 58%, up from 57.7% for the first quarter of 2002 and 56.3% for the fourth quarter. The increase in gross margins is largely a result of a continuing shift in product mix toward higher margin products as well as some improved manufacturing efficiencies. Operating expense for the first quarter was 31.4% of sales, essentially flat with the year ago period and compares favorably with the 33.1% for the fourth quarter of last year.

Research and development expense in Q1 was 8.7% of sales. The net effect of this is an operating margin of 18%, up from 16.8% for the same period of last year and 13.7% in the fourth quarter. We continue to utilize our excess cash to retire our outstanding bonds. During the quarter, we purchased approximately $6.7 million worth of our 11-5/8 bonds in the open market. The bond repurchases caused interest expense to appear higher during the quarter despite a reduction in debt. This was due to our expensing of approximately $1 million in costs and fees associated with the repurchase.

The consolidated tax rate for the quarter has lowered from 35% to 33%, more in line with historical levels, and due primarily to our mix of foreign income. The positive bottom line impact of this change on first quarter earnings is approximately 3 cents. Barring any extraordinary events, we anticipate using 33% for the remainder of the year. Net income for the first quarter was $26.4 million or $1.04 basic earnings per share and $1.01 per share on a diluted basis, an increase of more than 40% versus last year. Higher than expected sales combined with some cautionary spending contributed significantly to that growth. We estimate that approximately 10 cents in quarterly earnings per share is attributable to the favorable currency impact.

Now for certain segment information. Life Science reported sales grew 16.8% for the quarter. On a currency neutral basis, growth was 5.7% versus the same quarter last year. The primary driver of the currency neutral growth was sales of Life Science food safety products, consumables and processed chromatography products. Overall segment profit was $21.6 million this past quarter versus $19.2 million for Q1 of 2002. This approximately 12% increase in profitability is largely a result of higher sales for the segment as well as a decrease in interest expense. Diagnostic sales, coincidentally, also increased by 16.9% for the quarter as all of our divisions posted growth over the same prior year period, On a currency neutral basis, sales grew by about 7.2%. Segment profit was $18.8 million, up from $10.8 million in the first quarter of 2002. This represents an increase of 74% in segment profitability year over year. The increase is driven primarily by higher gross margins due to product mix, manufacturing efficiencies, decreased interest expense and reduced expenses as a percentage of sales. Note that segment profits for both Life Science and Clinical Diagnostics includes an allocation for corporate management expense and interest, although the one-time interest expense associated with the bond purchases has not been allocated to the segment. It is also important to remember that while top line growth is directly affected by currency fluctuations, the profitability is less effected by currency as the company has significant expenses denominated in those same foreign currencies.

Now to review certain balance sheet items as of March 31st - - cash - $25.2 million, receivables - $214 million, inventory - $172.9 million, for total assets - $739.4 million. Total debt as of March 31st was approximately $110 million and equity $414 million. Bio-Rad's balance sheet continues to strengthen as a result of improved profitability and debt reduction efforts. Total debt at March 31st was $110 million, a reduction of over $3 million in the quarter resulting in a debt to equity ratio of under .3 to 1. Cash decreased, despite the record revenues, due to cash payments typically associated with our first quarter as well as the purchase of Verdot. Receivables and inventory are up slightly, primarily due to foreign currency translation. We will continue to utilize our excess cash to repurchase bonds this year if and when we find attractive opportunities. Please remember that the balance sheet numbers are currently estimates and may still be subject to some slight adjustments.

While we are pleased with these better than expected results, our thinking on the full year has changed little. Some components of our business, such as large instrument sales, remain sluggish and it would be imprudent of us to predict further increases due to a weakening dollar. Thus we continue to expect revenues for the full year to grow in the mid to high single digits on a currency neutral basis. Gross margins are expected to be in the 56-57% range. During the first quarter, we elected to spend behind the revenue curve as we gained perspective on the year. However, as we mentioned on the last call, we have several R&D and infrastructure investments planned for 2003 and our thinking regarding contracting operating margins for the full year has not changed. Finally, the revised consolidated tax rate of 33% should provide additional upside to the prior guidance. I'd now like to turn the meeting over to Norman for a few comments.

I think Christine has given you a good flavor of what we really see in our crystal ball at the moment. We certainly are encouraged by the results of the first quarter and although, you know, I think it's fair to say we are operating in a little bit of an uncertain market environment. In the first quarter, we kept a close eye on expenses and really, we will continue to approach the year somewhat cautiously. At the same time, we do keep the long term in focus and we do plan to invest in people, new products, some key operating improvements we want to make, all of those things needed to continue to grow the business. You know, at this point, Bio-Rad has what I consider to be a pretty healthy income statement, a strong balance sheet, and we are seeing an increasing number of opportunities to really move us over the billion dollar mark. So at this point, Melissa, we'd like to open it up for questions.

Thank you. Our question and answer session will be conducted electronically. For those of you that have a question today, please press the star key followed by the digit one on your touchtone telephone at this time. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, if you do have a question, please press star one now. And we'll pause for just a moment. Our first question will be from Sherry Walker.

Good afternoon. Wow, that was a terrific quarter, congratulations. Just first - -could I clear up some housekeeping issues? Do you have the cash flow and cap ex numbers?

We do. Cap ex for the first quarter was approximately $11 million. Do we have the cash flow?

We have not finished all of that.

We have not finished.

Do you have a cash flow from operations number? That just helps us.

No, we have not completed all of that yet.

Okay, and then, R&D came in much lower than expected. What can we expect for the full year, do you think, as a percentage of sales?

Well, I think, you know, our target, 9-10%, has not changed. Part of the reason why it looks, you know, 8%, is because of the strength of the top line, it made the ratio look a little smaller. We also did start the year fairly cautiously, there's a lot going on with the economy and within our industry and we purposely wanted to spend behind the curves. Having said that though, there are projects that were planned from the beginning of the year that we will in fact invest in throughout 2003 which leads to the 9 to 10% of revenue as the more likely scenario.

Okay, and then, maybe Norman you could highlight a little bit - - you mentioned sort of generally what the strengths were, but you know, if you could talk a little bit more specifically about product lines. I know you introduced some MyCycler PCR machines last quarter and it looks like sales were probably robust in that product line and maybe what you're seeing in consumables and the functional genomics area and just some thoughts on the general look of the market.

Okay, well, I think the picture is roughly the same as it has been over the last several quarters. You know, the consumables are showing particular strength. The apparatus and small instruments are doing fairly well and the MyCycler would certainly fit in that. The large instruments and the capital spending side still appears to be slow.

Great. Thank you.

Quentin Lie has our next question.

Fantastic quarter. Congratulations. With respect to Life Sciences and Clinical Diagnostics, what about geographic growth - - U.S., Europe, Asia?

I think that what we've seen, ex the currency, is that the growth has been kind of, I guess, fairly good all across. The Pacific rim may be a little bit slower than the other two areas, but a fairly balanced picture.

Some - - we've heard some of your competitors mention that the U.S. academic sector was weak in the first quarter maybe due to NIH delays. Did you see any of that?

Yes, we did see some of that in the U.S. But, I mean, we have both the Life Science and the Diagnostics business, so when you roll it all up, it looks pretty good. But yes, I think it is fair to say that the Life Science sector in the first quarter was a little bit weak. But on a longer term basis, we're not overly concerned about that. I think that the market is strong and - -

Then, again, with respect to your counts in currency growth, could you give some color on how much of that is coming from your continuing products? Is some of it from the newer introductions or the acquired products like Quantas and the array products?

Most of our growth at this point, comes from the, I would say comes from the current products. Obviously some pick up from the new acquisitions, but I think most of it comes from the organic growth.

Thank you and congratulations again.

We'll take our next question from Steve Riggio.

Yeah, hi guys, great quarter. If you can, could you just refresh my memory - - how much or what percentage of revenues is your academic sort of sales?

At this point it's probably about - - if you take the two markets between - - in Life Science, if you take the two pieces, which is academic versus Pharma, academic is still about 70% versus the bio-pharmaceutical area. And the third part of the business, which is the food science part, is a separate piece and I don't have that breakdown off the top of my head.

That's okay. I apologize if you guys have already covered this, but I joined the call a little late. Did you provide guidance going forward?

Basically, we reiterated the guidance in large part from the last call in terms of mid to high single digit revenue growth on a currency neutral basis, if you will. Gross margins, again in the 56 to 57% range. Expectation of spending on R&D and operating expense in terms of some infrastructure investments and R&D projects that we have this year, so on the last call and again on this call, talked about the operating margin, if you will, contracting for the full year versus last year and that being partially offset by a revised consolidated tax rate of 33% instead of 35%.

Okay, great. Thanks a lot.

As a reminder, if you do have a question, please press star one on your touchtone telephone keypad at this time. Jeffrey Matthews has our next question.

Hi, sorry, can you hear me? I just want to add my congratulations and you seem to have navigated through a pretty difficult economy. I can understand why you want to retain some conservatism because it's not a bad thing to do. And it's nice that you get the leverage of the upside when things don't come in as badly as maybe you thought they might. And I just wonder if Norm could give a little color on what you're seeing out there from customers and from salesmen as far as the environment. Is it loosening up or are there signs of some life out there, recognizing that the environment is always uncertain?

Well, I think there's certainly signs of life in the business, it's certainly not dead. We do see that there are orders that are pending, that kind of thing. So there does seem to be a continual demand, it's just that some of those things haven't come through in the first quarter.

But how would you - - is the environment or the mood any different now than it might have been 3 months ago or 6 months ago?

This is John Goetz. With regard to Clinical Diagnostics, the market has been bumping along in general in the range between 4 and 6% growth and we really haven't seen too much change in that over the course of the last, let's say 12 months.

This is Brad Crutchfield and as far as Life Science goes, the NIH and specifically in the U.S. sector of our business on the academic side, appears and I want to underline appears, that it should be opening up in the next quarter. But right now the situation is, like Norman said, there are a lot of orders pending and in Japan and in Europe on a currency neutral basis, if you think that, you know, the market hasn't really changed in the last three months in growing really sort of mid single digits.

Okay, great. Well, again congratulations on navigating some extremely difficult time with terrific numbers and I'll see you at the annual meeting.

Rob Cristel has our next question.

Yes, I'm sorry - - I missed how much, in terms of dollar numbers, that you bought back of the bonds this quarter.

Approximately $6.7 million.

Great. Thank you, and congrats on a great quarter.

As a final reminder, if you do have a question, please press star one at this time. We will now go to Matthew Spotswood.

Hi, I actually just wanted some clarification. This quarter, I guess, on a currency adjust, the revenues were, I guess, about $224 million. Is that correct?

No, actually less than that. In terms of currency impact, we talked about 17% growth. Organic growth, if you will, net of currency was just under 7%, 6.6%.

Okay, and do you have the operating margin on a kind of current currency neutral basis for the quarter?

No. I don't. And keep in mind that while 60% of our revenues are outside of the United States, the mix of expenses is both within the U.S. dollar and outside the U.S. dollar, so while the top line could be impacted greatly by currency, as we move down it becomes a lesser extent.

Okay, and just with regards to the gross margin, I was just kind of curious, I mean, you guys had a great gross margin this quarter, but you're guiding kind of lower for the year. Is there a mix shift going the other way that you're anticipating?

Well, remember, Matt, on the last call, we did talk about gross margins and the 56 to 56.5% range and now we're talking 56 to 57. The 58% in the first quarter, some of it was currency related, some was product mix related in terms of the higher gross margin products and some is real, permanent operating efficiencies that we've been able to achieve in manufacturing of some of our product lines such as quality control. So I think, you know, I don't know that our guidance has really changed that much from the beginning of the year.

Okay, thank you.

Doug Fisher has our next question.

Let me add my congratulations on the quarter. A couple of small things - - the 10 cents of contribution from currencies - - is that net of the foreign exchange losses that are on the other income line?

No.

Okay. And there was another $600,000, I think, of other income in the quarter. Can you just give me an idea of what that was?

It's primarily interest income related to some notes that we have.

Okay. On the Diagnostics side, were there any particularly large shipments worth noting in the quarter?

None that really stand out. I mean, everything that we've basically shipped has been planned for so in terms of where we stand relative to plan, there's nothing extraordinary.

Okay. And you mentioned the consumable strength. Is it possible to talk a little bit more about what that's coming from outside of the food safety products?

I think just in general, and this seems to be somewhat traditional, especially in the academic market that, you know, people work on maybe different kinds of experiments and focus on different kinds of things. So I think the strength is driven partly by that. It's just a mix of what customers are doing and also from the kind of products that we've introduced in that area and the features of those products.

Okay, and the lower tax rate that you expect to hold through 2003, is there any reason to believe that would change in 2004?

Well, you know, on the one side, we constantly strive to have the greatest efficiencies in our tax provision and we would continue to strive to improve on that tax rate to the extent that we can. At the same time, there are events, whether they are acquisition related events or divestiture related events, that you've seen historically in the company, as well as the mix of foreign income because 50% of our revenues are offshore, that do affect the tax rate from time to time, so it's difficult to predict.

I apologize. I realize - - I meant kind of just the business as it's operating today without any divestitures or acquisitions or external changes in tax regulations.

So barring any of that we would assume using this tax rate going forward for the foreseeable future. How about that?

That's good. Thank you very much.

Okay.

there are no further questions at this time.

Okay. Well, we'd like to thank all of you for participating on today's call and we look forward to talking with you again at the conclusion of the current quarter. Thank you and have a great day.

Thank you.

That does conclude today's conference. We thank you all for your participation.