Bio Rad Laboratories Inc (BIO.B) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bio-Rad Laboratories third-quarter financial conference call. My name is Steven, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. If at any time during the call you require assistance, please press star, followed by zero, and the coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Ron Hutton, Treasurer, Bio-Rad Laboratories. Please proceed, sir.

Thank you. Before we begin the call, we 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, we encourage to you 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. I'd now like to turn over the call to Christine Tsingos, Vice President and CFO.

Thanks, Ron. Good afternoon, everyone, and thank you for joining us. Our third quarter results reflect continued growth and achievement in many of our core businesses. In addition, we have recently launched major new products in both Diagnostics and Life Science, and completed the acquisition of MJ Research. All of these events bode well for continued growth in 2005 and beyond. The third quarter results have also been tempered somewhat by the financial impact of the acquisition, and other short-term challenges within our Life Science group. Net sales from continuing operations for the third quarter of fiscal 2004 were $258.8 million, an increase of 7 percent versus the same period last year sales of $241.8 million. The year ago sales number reflects the divestiture of our confocal business, that is now accounted for as a discontinued operation. On a currency neutral basis, reported revenues increased 3.1 percent. During the quarter we recorded growth within our Diagnostics group in line with our industry. Moreover, several of our product lines reported strong growth, in particular diabetes monitoring and quality controls. Our core Life Science division also performed well, with strong sales in our protein expression, amplification, and electrophoresis lines, as well as good contribution from our newly acquired MJ Research products. This revenue growth was offset by a year-over-year decline in our food safety business, and some temporary timing issues related to the implementation of a new enterprise IT system within Life Sciences.

The gross margin for the quarter was 55.2 percent compared to 55.8 percent in the year-ago quarter. This lower than expected margin was impacted by the consolidation of MJ and an inventory value adjustment in our Brazilian operation. As we mentioned on the last call, we are in the process of restructuring our Latin America business model to improve both sales and profitability. This write down resulted in a short-term negative impact to the gross margin during the quarter. And as part of our MJ Research integration plan, we are currently implementing new processes and practices at MJ to improve their gross margin contribution in future periods. In line with our guidance, SG&A expense for the third quarter was $90.2 million. As you have been hearing over the past several quarters, the year-over-year increase relates to our ongoing investments in information systems, facilities, manufacturing improvements, and personnel, as well as increased expenses associated with our Sarbanes-Oxley implementation. Spending also increased by approximately $2 million associated with the MJ acquisition. Research and development expense in Q3 was in line at $26.6 million, up 15 percent from last year as we continued to invest in new products, technologies and partnerships. Our target investment level in R&D remains 10 percent of sales.

During the quarter, we recorded a $13.7 million one-time in-process research and development charge associated with the acquisition. The tax rate used for continuing operations during the quarter increased to 31 percent, slightly above our 28 to 30 percent guidance, primarily the result of incurring the nondeductible losses associated with our Brazilian operation. We expect the full-year tax rate to be at the high end of our guidance, around 30 percent. This still represents a significant improvement to our 2003 tax rate of 33 percent. Net income from continuing operations for the third quarter was $6.3 million. Diluted earnings per share for the quarter were 24 cents. Excluding the one-time in-practice R&D charge, net income was $15.8 million or approximately 60 cents per share. And as you can calculate, we estimate that the one time revenue shortfall, gross margin and tax rate changes negatively impacted earnings per share by approximately another 19 cents.

Now for certain segment information. Life Science reported sales grew 7.6 percent for the quarter to $120.6 million. On a currency neutral basis, sales increased 3.5 percent versus the same quarter last year. We continue to have strong year-over-year growth in our multiplex array technology, nucleic acid amplification, and electrophoresis product lines, which are partially offset by a decline in our BSE business and continued softness in the Japanese market. Overall segment profit from continuing operations was $9 million this past quarter, excluding the one time impact of in-process R&D charge, and compared to 14.6 million for last year. The decrease in segment profit is the direct result of planned spending for new IT systems and facilities, as well as some cost associated with the consolidation of MJ Research. As I mentioned earlier, Life Science reported sales were impacted by approximately $5 million, as we integrated our sales and distribution processes into our new IT system. This integration resulted in a temporary reduction in recognized revenue and a corresponding increase in backlog. We expect to include these sales in our fourth quarter.

Our Clinical Diagnostic sales grew 6.9 percent for the quarter to $136.4 million. These sales were led by continued strong performance in our Quality Controls division, including our new Hematronix line, as well as our diabetes monitoring line which benefited from the launch of a new dual program assay for our D10 system. On a currency neutral basis, diagnostic sales grew approximately 3 percent. Segment profit for the quarter was 12.1 million, down from the year-ago period due to increased spending in R&D, IT systems, and salaried personnel. Now for a few moments on the balance sheet. Our balance sheet remains strong. As of September 30th, total cash was $125 million. During the quarter, we recorded approximately 41 million in goodwill, and $29 million of intangible assets in connection with the acquisition of MJ. In addition, a continued liability of $50 million was booked for the MJ patent infringement litigation. We hope to settle these legal issues before the end of the year. Net cash generated from operations during the quarter was $24.5 million. Net capital expenditures were 12.6 million, and finally depreciation and amortization for the quarter was 13.9 million, the result of increased amortization related to the purchase intangible assets.

Looking to the fourth quarter, we continue to be excited about opportunities with new products and markets. With the inclusion of MJ, our fourth quarter is expected to produce double digit sales growth, and that will likely increase our full year growth rate as well. As I mentioned earlier, we expect full year growth margins to be around 56 percent. As you know, this is a year of continued internal investment to improve our systems and distribution processes around the world, as well as some tactical R&D projects. We're also experiencing and expecting some relatively significant costs associated with our Sarbanes-Oxley compliance efforts. This spending will likely continue to put pressure on our operating margin in the fourth quarter. However, all of these programs should increase both operating efficiencies and sales growth over the long term. Now I will turn the call over to Norman for a few comments.

Thanks, Christine. This is Norman Schwartz. I just want to make a few comments about the numbers. You know, certainly while the third quarter results were somewhat moderated by a number of events, and I think these activities and the expenses we're incurring are really well in hand and I want to emphasize that they are good investments in our future. When we think about some of the investments we're making, I think especially exciting for me are some of the new products that we're introducing. For example, in July we introduced a revolutionary new approach to immunoassay for the clinical diagnostics lab, a product we call the BioPlex 2200. This new system is really the first to offer multiplexing technology incorporated in a fully automated, fully integrated, random access platform. With the excitement we created at the American Association of Clinical Chemists meeting in July, when we rolled out this product, was really very encouraging. You know, we have the product in FDA, and we hope to obtain approval by year end, and certainly anxious to begin placing instruments. At the same time, the big event in Life Science, and the Life Science group for the quarter, was really the joining of forces with MJ Research. A move that really expands our offerings in the DNA amplification market. This is exciting for us. It's a large growing market with lots of areas to participate in. And then more recently, the Life Science group also introduced a revolutionary approach to protein and RNA electrophoresis separations, embodied in the new Experion system. It's really -- we're continuing here to lead the way and it's very widely used research technique of electrophoresis. So over the next several quarters you should see the introduction of a number of new products. Products that will continue to drive our progress in both the Life Science and the Diagnostics markets. So stay tuned. And with that, I guess we'll open it up for questions. Steve?

(OPERATOR INSTRUCTIONS) Quintin Lai, Robert Baird.

First question, on the $5 million backlog, does that mean that it will flow into Q4? Would it have -- does it impact the sales that normally would be recognized in Q4?

I hope so, Quintin. You know, we weren't able to recognize in the third quarter, so we are hoping to recognize the 5 million in the fourth quarter.

Okay. And --

Quintin, could you speak up a little?

No problem. The second question is with respect to Brazil. Was that an inventory write-down in the Q3, and we don't expect it to go on in Q4?

It was, indeed, an inventory write-down in the third quarter. You know, we certainly hope that this is not something that we'll experience again. We are in the process of changing the business model down there, to be more successful than we have been in the past, quite frankly. And this was, you know, kind of a result of some of the moves that we're making.

Is it possible to say that without --- if the $5 million wasn't shifted from Q3 to Q4, and we didn't have the Brazilian write down, the gross margins may have been in the 56 to 56.5, what you were guiding at?

Well, they certainly would have been much better than where we reported them, and probably, you know, closer to that range. We, you know, we do have a little bit of an impact with the consolidation of MJ. They're consolidated margins are not as attractive as our consolidated margins, and Brad and his group are working hard to, you know, change their business model to be more like ours.

With respect to the animal health decline that you saw in Q3, are we getting close to anniversarying some of those year-over-year declines, or should we expect some more into Q4?

This is Brad Crutchfield, Quintin. As far as that goes, it's really hard to see. The amount of testing that's done worldwide is roughly being fixed, and while our market share has gone up, as we renew these contracts usually in sort of periods of 1 to 2 years, we are renewing them at lower prices based on competition and based on what the customer really expects to pay. So the consequence is, I would say that the situation has mitigated somewhat. But these contracts come up on sort of a, you know -- certainly given our market share, well over 70 percent at this stage. There's a number of contracts that are coming up at all times.

Brad, did Spain begin testing in Q3, and are they up and running at 100 percent?

Yes, Spain began testing. We've run up all their main laboratories, and so currently about 50 percent of all animals tested in Spain are tested with a Bio-Rad test.

Then shifting over to Clinical Diagnostics, there was a 5.5 percent revenue drop going from the second quarter to the third quarter. Could you address -- is this a seasonality issue with the summer months, or is there something else there?

John, do you want to talk a little bit about the sequential? I think some of it is seasonality, especially in our -- some of the contractual impacts on our blood virus business.

That's precisely it, Christine. We've had, in the prior periods, shipments to our blood screening laboratories that didn't occur in the third quarter, that we think we'll probably see in the fourth quarter.

And this is not any what related to the IT issue on Life Sciences side?

No.

No, we're not at all connected with that issue.

Tom Munndock, RAM Partners.

Just a few follow-up questions. Has any of the 5 million that was lost, or not recorded during the quarter as a result of the IT implementation. Has any of that been shipped in October or November, or can you give us an idea as to what percentage of that you've been able to ship?

What I will tell you is that we have been working that backlog number down, and have been shipping some of those sales that were affected in the third quarter.

Okay. So you expect that, if it's not all in the fourth quarter, you will get it all back at some point?

Yes.

Is it fair to say? Okay. The other question I had was, what was the impact on the gross margin line to be from that 5 million that was not shipped?

Well, you know, you can probably look at that and calculate it out yourself, based on, you know, kind of the numbers that are up there. I think, you know, you'll probably get to about the same place I did, Tom, which is about 11 cents to the bottom line.

Okay. And in terms of -- what was the issue with the IT that was being implemented during the quarter that caused that glitch? Is there a problem with the software itself, or is the problem resolved? Or can you give us a little color on that?

Sure. I don't think it's a problem in the software and frankly, you know, having been through this before in other companies, this isn't really atypical of a new systems implementation. The fact of the matter is, we went live with this in early September. And, you know, had the few weeks until the end of the quarter of, you know, really making sure all of the distribution, the warehouse management, these various systems that take us from order entry to invoicing are, you know, working seamlessly. And, as is typical with a new implementation, there are bugs to work out. And unfortunately for us, the implementation being so close to the quarter end, some of those, some of those bugs affected the numbers.

Okay. And would you be able to tell us what the margins of MJ were, so we can get an idea as to how that affected the margins line?

You know, I don't think we should go down that path, Tom. As you know, having following this Company for so long, we just avoided giving out specific information about any of our divisions, whether that's revenue or margin information, and I'd like to continue that practice.

Okay. Can you give us some color on what you're seeing in Europe, the strength or weakness there? Any pockets of weakness, or what is your sense of the business climate there, on both sides? Clinical Diagnostics and Life Science?

This is John Goetz. On the Diagnostics side, we see some nice progress in the northern European region, particularly in the U.K. It seems that their health care spend per headcount, which we've known is lower than most of the other European countries, they're making a stab at trying to bring that up to speed a little bit, and we've been a little bit of a beneficiary there. Even though the, let's say the regulatory environment in what we would call central Europe or primarily Germany, has been a dampening factor, that really hasn't held back our sales growth in that particular region. We've been reasonably successful there, where I think others have not. I would say generally that's my comment for Europe.

This is Brad Crutchfield. On Life Sciences, I would sort of echo John's point about northern Europe, specifically the United Kingdom. Strong commitment to publicly funded research, the pharmaceutical companies that are based there, continue to spend strong, and this really even impacts some areas into Scandinavia. Southern Europe as we define it, certainly Spain and Italy, continue to be very strong and they're showing good growth in terms of their spending, tempered a little bit by some slowness in the French market, as their government begins to sort of rationalize some of their investment in research and publicly funded research.

I might add one more thing concerning the eastern countries, as they become part of the European economic union. Their economies are starting to pickup in terms of, in terms of healthcare spend. So I think that bodes well for kind of the long term future for that region.

As a reminder, ladies and gentlemen, if you wish to ask a question, please press star, 1, on your telephone. Quintin Lai, Robert W. Baird.

Christine, you mentioned that the fourth quarter, you would see double-digit sales growth. Was that for Life Sciences expectations, or overall?

I think it's probably overall, compared to fourth quarter of last year.

And could you help me out here? I've got -- I kind of estimate confocal being about 8 million contribution in the fourth quarter of last year. Does that sound about right?

Yes, you're talking about sales contribution?

Right. And so when you talk about double-digit sales growth, you're excluding confocal sales that happened last year?

Yes.

And 8 million is about in the ball park?

Yes.

Now, as we look out to growth drivers, one of the things that we see is MJ Research. Today, you also mentioned the Experion line in your gel electrophoresis. Is that now fully launched and do you anticipate that being a big contributor to that Q4 growth number?

We will begin shipping that product within the next few weeks, but I would not expect it to be a significant number in the fourth quarter. Certainly, the impact, we'll really see that in 2005.

Okay. And then as we look toward the anticipated clearance for the BioPlex 2200, the expectations, should they just -- are you expecting to have a slow launch after that, or are you already, you know, building inventory of machines now?

Well, our expectation will be a controlled rollout, and we're going to be moving that product into the U.S. market to start. So it'll have the beginnings of some impact in the fourth quarter, but we'll start to gain momentum as we go throughout the year. And I think once we have the kind of experience base mod with this new instrument, we'll take a look at where we can start placing this outside the U.S..

Walter Pistor, Strand Atkinson.

It's for Norman Schwartz, and I would like to ask you, why do you think Bio-Rad stock is not more appreciated?

Well, I think Bio-Rad stock is appreciated pretty well. In fact, Christine and I discussed that from a couple of days on the road talking to investors, and they seem to be very appreciative of the progress that we're making. I mean, I think that the kind of investors we have and are interested in Bio-Rad are certainly what we call intermediate or long-term investors. They are investors that, you know, aren't looking just quarter-to-quarter, but looking at our progress over, you know, a year or 2 years' time.

Well, I'd like to ask you, why do you there are not more brokerage firms following the stock?

Well, we've had a number of firms following the stock. And, you know, for one reason or another, with the kind of consolidation going on and the changes going on in the financial industry, you know, we've taken on -- there's been some people followed us, and then they stop following us, and other people have picked us up. Christine, do you want to comment a little more?

Sure. I think like you Walter, we would love to have more sell-side analysts following the Bio-Rad story, because we think it's a great story. You know, the truth is, it's hard to get everyone's attention because they're all so busy. We have had several meetings and a lot of interest is being shown from some of the really big, well-known sell-side houses lately. And, in fact, Norman talked about this launch of BioPlex that we did at the AACC show, and we had a little investor lunch down there, and almost half of our audience were on the sell-side. So we're encouraged. It's just a matter of, you know, them being extremely busy and following many companies, to continue to tell them about the Bio-Rad story, and hopefully they'll pick us up.

Well, isn't there just one brokerage firm following it now, or sponsoring the stock?

Yeah, I mean in terms of official coverage, I think Baird is certainly the biggest and the most well-known of people who are following and printing research on Bio-Rad. You know, there are some smaller sell-side research. Gabelli & Company has a sell-side arm, and she does a little bit of research. But it's certainly not the level that we see from Baird.

I'd like to ask you one more question. What is your interest in the smaller investors? I wrote Mr. Schwartz a letter in September and again in October, and never received a reply, a response, or anything?

Some of the things we're not sure exactly, you know, how to respond to you.

I think it's fair to say that we have quite a bit of interest in the individual investor, and this Company has had many over the years. And, in fact, some of our largest.

Mr. Schwartz, did you receive the 2 letters?

Yes.

But I didn't receive any telephone call or any acknowledgement whatsoever.

Right.

Would that be typical or normal the way you handle investors?

Well, you know, we have a number of things we're working on here. The letter is still here. It's on my desk, and I do mean to respond. But, you know, we have to take these things in some kind of priority order.

Well, you know, I have a lot of clients in the stock, and I own personally 14,000 shares, and I wasn't too impressed. I would like to have a response.

Okay .

I'll look forward to it.

Okay.

Jim Baker, Neuberger Berman.

I just wanted to know if you could comment on the capital spending outlook for the balance of this year, and for 2005?

Sure, Jim. We actually have not talked about 2005 at all, so I'll refrain from speaking to that in detail. You can see from the CapEx that we've been spending this year, it's been fairly in line in terms of the pattern of spending, and I don't imagine that'll change too much in the fourth quarter. Last year CapEx spending was unusually high because of a large investment in some new facilities that we had, and kind of pushed CapEx up into the high 60 million range. I think our goal is to keep it in the 50 to $55 million range, barring any extraordinary type investment.

Okay. And that would be our best place to start for next year?

Probably.

It appears there are no further questions at this time, sir.

Okay. Well, thank you very much for your time today, and joining us. We look forward to speaking with you again in the future. Bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.