Bio Rad Laboratories Inc (BIO.B) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2004 Bio-Rad Laboratories, Inc. earnings conference call. My name is Lenny, and I'll be your coordinator for today. At this time, all participants are in a lesson-only mode; however, we will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Ron Hutton, Treasurer of Bio-Rad Laboratories. Please proceed, sir.

Thank you very much. Before we begin the call, I would like to caution everyone that we will be making forward-looking statements about management's goals, plans and expectations. Because our actual results may differ materially from these plans and expectations, I encourage you to review our filings with the SEC where we discuss in detail the risk factors in our business. The Company does not intend to update any forward-looking statements made during the call today. With that, I'd like to turn this call over to Christine Tsingos, Vice President and Chief Financial Officer.

Thanks, Ron. Good afternoon, everyone, and thank you for joining us. Today we're pleased to report sales for the first quarter of fiscal 2004 of $266.6 million, an increase of 8.4 percent versus the same period last year. While this growth was primarily fueled by currency, it is important to look at the fundamental growth areas of the business. In particular, we recorded strong currency-neutral sales during the quarter from our core Life Science division, in particular, imaging, protein function products, which were offset by a year-over-year revenue decline in our food safety and confocal microscopy product lines.

On the diagnostics side of the business, we experienced good growth in our quality control and diabetes monitoring business line, offset by a comparative decline in our blood virus division, the result of order timing and not a fundamental shift in demand. Finally, we have seen some slowness in Japan, especially in the Life Science research market.

The gross margin for the quarter was better than expected at 56.5 percent, up from last quarter, but down from 58 percent last year, reflecting the decline in pricing of our BSE testing product as well as the absence of some one-time royalty revenue recorded last year. On a sequential basis, improvement in gross margin reflects the continued trend towards higher margin product lines, such as quality control. As we have been saying throughout 2003, we experienced consolidation in our BSE customer base that has resulted in volume price discounts as well as increased price competition from some of the other players in the market. But speaking of BSE, today we're very pleased to announce that we have received a purchase order to supply all of the USDA high throughput labs with our BSE automated systems to use in their expanded testing program for mad cow.

In line with our guidance, SG&A expense for the first quarter was up at 33.2 percent of sales and essentially flat with last quarter. As you have been hearing over the past several quarters, the year-over-year increase relates to our ongoing investment in information systems, facilities, manufacturing improvements and personnel. Research and development expense in Q1 was $25.2 million, up 18 percent from last year as we continue to invest in new products, technologies and partnerships. In addition, we recorded a one-time charge of $900,000 of in-process research and development costs associated with our acquisition of Hematronix in March.

Excluding the one-time charge for in-process R&D, the operating margin for the quarter was 13.9 percent, a sequential increase of more than one full percentage point. Again, the decline from last year is consistent with the guidance we have given for quite some regarding our focus on investing in the business for both new product development as well as infrastructure improvements.

Net income for the first quarter was 22 million, due to the one-time breakdown of an investment in a Company which is undergoing a recapitalization. This $2.4 million charge equates to about 9 cents of pre-tax earnings. The tax rate used in the quarter was 28.4 percent and within our guidance of 28 to 30 percent for the full year. Recorded basic earnings per share were $0.86, and $0.83 per share fully diluted.

And now for certain segment information. Life Science reported sales grew 6.9 percent for the quarter to $125.6 million. On a currency-neutral basis, sales declined approximately 2 percent versus the same quarter last year. The quarterly sales include strong year-over-year growth and products for protein function, imaging instrumentation, and protein expression reagents. These were offset by declines in our European and euro-based food safety market. Overall, segment profit was $15 million this past quarter versus 21.6 million for Q1 of 2003 and 19.8 million for the fourth quarter.

We are excited to be selected to provide the systems for BSE testing in the United States. While the USDA program remains relatively small, the impact will help provide a stabilizing influence for both sales and gross margin in our food safety division.

Clinical diagnostic sales were 10.1 percent for the quarter to a record $138.9 million. These records sales were led by continued strong performance in our quality control, autoimmune, and diabetes monitoring line. On a currency-neutral basis, diagnostic sales grew approximately 1 percent. This currency-neutral growth rate was heavily impacted by the timing of a large blood virus order that occurred in the first quarter of 2003, but is anticipated in the second quarter of this year.

In March, we acquired Hematronix, a Texas-based provider of hematology controls, for approximately $17 million in cash. This acquisition will allow us to extend our reach into a new segment of the very important controls market. In the near term, we are working to integrate the business, but over the longer horizon, the hematology product will positively impact our sales trends. Segment profit for the quarter was $16.4 million compared to 18.8 million recorded in the first quarter of 2003.

And now just a few minutes on the balance sheet. Bio-Rad's balance sheet remains strong. As of March 31st, total cash was $141.5 million. The sequential decline in cash balances directly reflects the payment for Hematronix as well as outlays that are typically associated with our first quarter, including profit sharing contributions, employee bonuses and income taxes.

Accounts receivable decreased from year end as collection times improved. Inventory at March 31st was 190 million, flat with the year end numbers, but up from 173 million a year ago, largely due to currency translation effects. In association with the Hematronix acquisition, we recorded approximately $3.2 million of goodwill and 9.3 million of intangible assets.

Net cash generated from operations during the quarter was $27.3 million. Net capital expenditures were 13.4 million. Remember that during 2003, CapEx increased significantly as we invested approximately 25 million in new facilities. Going forward, we will continue to invest in IT system and facilities, although total CapEx should come down from the 2003 levels and more in line with the first-quarter run rate. Finally, depreciation and amortization for the quarter was in line at $10.5 million.

Booking for the remainder of 2004, we continue to be excited about opportunities with new products and markets. While it is difficult to predict the trends within the many markets that we serve, today we reiterate our annual guidance from the last conference call. That is, on a consolidated basis, we believe we can grow 2004 sales in the mid single digits. Our expectations for gross margins are to be in the 55 to 55.5 percent range for the full year. This will also be a year of continued internal investment to improve our systems and distribution processes around the world as well as some tactical R&D projects. This spending will likely put downward pressure on our operating margin during the year, but increase efficiencies over the long term. During 2004, these investments should be partially offset by a lower tax rate as we have implemented new strategies that more properly reflect the global nature of our sales and profits. During the year, we expect the rate to be in the 28 to 30 percent range.

And now, we're happy to take your questions.

(OPERATOR INSTRUCTIONS). Aaron Geist, Robert W. Baird.

Good afternoon. Congratulations on getting selected as the U.S. supplier for BSE testing.

Thank you.

Excluding the one-time write-down and in-process R&D, we came up with about a $0.92 for the quarter EPS estimate. Is that a similar number that you came to?

I'm sorry, Aaron, can you ask again?

Certainly. Excluding the in-process R&D and the one-time write-down, we came up with about a $0.92 EPS for the quarter. Is that a similar number that you came up with?

Well, I think, you know, the $2.4 million write-down was probably 6.5 to 7 cents and the in-process was another 2.5, so I would say that is right there.

Perfect. Sounds great. Can you give us a little bit of an idea of the contribution from foreign currency to the gross margin line in the quarter?

Well, you know, typically we have not broken it out in such detail. It did have some positive effect, but not to the extent you would see on a top line, because a good deal of our manufacturing is based here in the United States and is not affected by currency. So, I think what we're seeing in the gross margin line is real improvement, both in terms of a product mix shift to the higher margin products, but also because we continue to pay close attention to those product lines which are profitable or less profitable and doing the right things with each. In other words, focusing the business more and more on the higher margin, higher demand product line.

You have some of your costs outside of the U.S., a lot of costs in France. Can you talk about the SG&A line in terms of what effect foreign currency had on that?

Well, there is a little more effect on the SG&A line, because we do have a fair amount of operating expenses, especially in France and the other euro-based countries.

Could you give us an idea of the big contribution or the increased costs associated with foreign currency on the SG&A line?

Uh --

Year-over-year?

Yes, you know, it's really not something that we have broken out specifically, publicly before.

Okay. In talking a little bit about Japan, I understand that the supplemental budgets were not there this year in Japan. Can you talk a little bit about what you're seeing now, if you anticipate it to be a one-quarter phenomenon? And that we're moving into a new fiscal year in Japan and spending should rebound?

This is Brad Crutchfield, I will take that question. Aaron, what we see is actually kind of a timing issue this year. The anticipation with the orders and the customers are that some of the money and spending that they would have normally done in March, they held because of the uncertainty of the supplemental budget issue. And our feeling is that we will see those sales in the next three quarters, that will hopefully somehow balance what we did not see in the first quarter.

Is it safe to say that you have already seen the business improve in Japan as we're now well into the next fiscal year?

Yes, I think that is a good assumption.

Okay. Can you talk a little bit more about, without the impact of BSE testing, what the Life Sciences business was like in the U.S.?

In the U.S.?

Yes.

The U.S. in general, the business was quite strong. And certainly we do in the U.S. have some timing issues in our process chromatography business, which had a particular effect in the U.S., and it's just when we receive orders for large-scale customers that are using our products for the purification of biopharmaceuticals. But in general, the demand is pretty good.

Thank you very much. That is all of my questions.

Walter Pisner (ph), Strand, Atkinson, Williams and York.

Well, I saw your annual report. I am a newcomer, as you know. And I was most impressed with your results. The consistency of your achievement is what is so impressive, in my opinion. And I would like to ask you about the royalty payments maybe that Oricher (ph) should be reserving for the use of the HIV II patent? Oricher markets this new OraQuick Rapid HIV test?

I'm not sure exactly, specifically what you're asking --

I'm asking your, specifically, is Oricher reserving royalty payments as they are marketing this?

You know, that is a question you're going to have to ask them, Walter. That wouldn't be something that we would be able to comment on. We are in discussions now for the licensing, and we recognize that they have a new product, but in terms of their accounting, you would need to talk to them.

Well, it just seems to me that if they are going to be using your patents, you should be aware of that too.

I think they are going to need to pay. Whether they are reserving for that payment or not is something you'd have to ask them.

And what is the status on the licensing agreement at this point?

This is John Goetz with the Diagnostics Group. I can answer your question. We are in discussions, and I would expect something forthcoming on this shortly.

Okay. You mean like within the coming months or so?

Yes.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Clint Lei, Robert W. Baird.

Hi, good afternoon. A couple of question -- you said that confocal microscopy was down year-over-year -- how much of a negative impact was the lower sales in confocal microscopy?

It was enough to affect the gross rate, but again, we typically don't break out the revenue by product division.

Is that a timing issue, or do you anticipate those revenues kind of being down going forward?

This is Norman Schwartz. You know, you may have seen in certain trade publications that we are in discussions with Zites (ph) for the sale of this particular business to Zites. And so, you know, we believe that has affected the sales in the first quarter. And the expectation is that those sales would go away in the future if that (multiple speakers) completed --

For us, but not for Zites.

Thank you. When you talked about process chromatography, and Brad mentioned U.S. sales, how is the Verdot integration coming along?

Actually, that is going very well in terms of the manufacturing processes. And the overall integration into our business is working, again, very well, given the fact that it is an ideal linkage between the hardware and the media. The media is where we were quite strong before, and Verdot brought the hardware. So, those sales tend to have a fairly long cycle, but the book of business going forward looks very good from that.

And then, turning to BSE, as these labs start to place the systems, do you need to increase service personnel? Or do you already have that in place now?

Yes, this is Brad again. Actually, we already have it in place. We have a really nice network in place, and we've actually anticipated this as far as even some of the positioning of existing resources. So there is no incremental SG&A associated with this business.

Thank you.

Bob McNorman (ph), Investment Counselors of Maryland.

Does the selection of your BSE test by the USDA -- does that mean you are the exclusive test they are going to use?

Let me clarify this -- Rhonda Aven (ph), the Chief Veterinarian for the USDA, announced that they set up a series of networks of 8 laboratories, one being the actual national veterinary services lab in Ames, and seven additional high throughput labs. And those would do the bulk of the testing. And we can say categorically that we are the exclusive supplier for those laboratories. Those laboratories will use our test on our equipment. And we are in the process of actually setting them up in the next few weeks. There are some additional laboratories, again, the majority of which use our test in a less high throughput mode, but we certainly cannot say that we have an exclusivity in those laboratories.

Okay. And then, it's a little difficult, given the currency impact and the decline in pricing of BSE and it sounds as though Japan was off kilter a little bit from a timing point of view, but if you look at the other parts of the company -- BSE -- as far as taking some other currency up, do you feel like your growth rate of the rest the company is on budget or above budget -- or you're not losing shares in different areas? From a casual observers point of view, it very difficult to try to get a handle on that.

Yes. This is Norman Schwartz. I can understand that. I mean, we've got lots and lots of product and we're in all these geographies. And certainly I think the first quarter was kind of a confluence of a number of factors. We feel pretty good. We are certainly on or ahead of our budget. The outlook for the year is positive, and we've got, certainly, a number of new products and interesting opportunities that are in the hopper. So, we feel pretty good at the moment.

When your salespeople come back from calling on customers, is the rest of the economy a little bit better feeling about things, a little looser purse strings? Budgets going up, that type of feedback from the sales force?

You know, it's kind of a combination of factors. In some markets -- particularly, we talked a little bit about the Japanese market, it seems to be -- it's been a little bit slow in the first quarter. But if you take that as an example, and we pull those salespeople and talk to them, they are very upbeat, very buoyant about the year. I would say, as we look around some of the other geographies and it's unfolding in the first quarter, it seems to be kind of a similar opinion. You know, in any one particular market or any one particular product, there could be a little up, a little down. But overall, people seem to be pretty confident.

Thank you.

Onker Ghandi (ph), Goldman Sachs.

Good evening. This is Lumi Verna (ph) on behalf of Onker -- just a couple of questions. First, on the BSE side, from what I understand, the USDA is planning to conduct tests on about 450,000 animals at most. So on an annual basis, we're looking at, from what I calculate, about 9 million in revenues. I just want to confirm that that's accurate.

No, I think it's fair that the average selling price in the U.S. would actually be closer to $10 a share -- excuse me, $10 a test. So at that point, I would say that -- and the number is going to vary between 250,000 and about 450,000. So there's some variability in that number if you use that going forward. Keeping in mind there is a setup charge that, as far as the equipment, to allow them to begin testing. So, if you put that in there, I would say your estimates are a little bit high.

Okay. So it would be even less than that. And that would slow pretty much through to EBITDA? The SG&A is already accounted for?

Well no, I think what Brad was talking about, or to answer Clinton's earlier question is -- you don't have to do any additional hiring or additional spend beyond his run rate that he has now. But there's definitely costs associated with running this business.

Okay. Perfect. And then the second question that I had has related to acquisitions. First of all, I was wondering if you could give us a little bit of color in terms of how quickly you expect to complete the integration of Hematronix. And second of all, going forward, if these are the types of acquisitions that you would be focused on? Kind of small, you know, in the $20 million range? Or if you are looking for a larger acquisitions?

Okay, this is John Goetz from Diagnostics, and I'll answer the first part of your question on the integration of Hematronix. That acquisition was completed in -- I would say -- the early part of March, mid part of March. And as you now, it's business is headquartered in Plano, Texas. And that is where, primarily, I would say the management of the business is run from as well as the underlying support QC programs that have been developed, which are going to be very, very useful for us and our customers going forward.

But an interesting thing is that the manufacturing plant, which actually produces all of the reagents and controls that are sold as part of that business, is located in Venetia, California, almost within the same business complex in which we operate our selling organization. So it's right in our backyard. And that, I think, helps a lot in what we plan to do as far as integration goes.

Any timeline on when we would be able to see the impact on profits?

We should able to see those beginning in the second quarter.

I think that, you know, what I was talking about is just -- initially, there are costs associated with integrated the businesses. Over time, the profitability will increase, but we'll have immediate revenue contribution.

Okay.

As to the second part of your question -- this is Norman Schwartz -- you know, we certainly have active M&A efforts going on in both the Life Science and the Diagnostics Groups. You know, the kind of thing that we do more of is these smaller tuck-in acquisitions, product line additions, primarily because the larger ones are harder to find and fewer and far between. But, that does not mean that we would not also look at something larger and something more transformational if it was the right opportunity.

Thank you.

Bob Awe (ph), Bennett Lawrence (ph).

Hi, it is Bob Awe. Thanks for taking my call. Some of my questions have already been answered, I just have one more. I assume that -- we're talking about this USDA labs were needed to restore high throughput BSE test instruments. Can you tell us how much those instrument sells per system?

Well, this was part of a total program. So we really don't have it broken out on a per-system basis, because it always depends on what the laboratory needs, and those needs are a little bit different across all the nine laboratories.

In what was the rough range -- can you give that range?

No, in that situation, because it really deals with the specific customer, we're not permitted to discuss that.

Okay. Thanks.

Follow-up from Walter Pisner, Strand, Atkinson Williams and York.

I wanted to ask you, what presentation plans do you have for this year to tell the investment community about your fine company?

We have actually two conferences that are upcoming in the next couple of weeks. We have the Bear Stearns (indiscernible) conference in New York. And at the end of that week, the Bank of America equity conference in Las Vegas. I think we have Deutsche Bank and -- we don't yet? Okay.

They'll be others coming.

There are a few more coming.

Yes, but the B of A healthcare conference in Las Vegas, Walter, is a pretty sizable one. And we will be there on Friday, the --

A couple of weeks from now.

Thanks a lot. I think you have a great story to tell.

And you have no further questions at this time. I would like to hand the presentation back over to Bio-Rad management for closing remarks.

Okay. Thanks Lenny, and thank you everyone for taking the time to join us today. And thank you for your interest in our company and your great questions. As always, we are around for follow-up question should you have any. Thanks. Bye-bye.

Ladies and gentlemen, thank you very much for your participation in today's first quarter 2004 Bio-Rad Laboratories, Inc. earnings conference call. This concludes the presentation. You may now disconnect.