Bio Rad Laboratories Inc (BIO.B) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2006 Bio-Rad Laboratories, Inc. earnings conference call. My name is Sarah, and I’ll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question and answer session towards the end of this conference. [Operator Instructions]. I would now like to turn the call over to Mr. Ron Hutton. 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 being said, I’d like to turn things over to Christine Tsingos, Vice President and Chief Financial Officer.

Thanks, Ron. Good afternoon, everyone and thank you for joining us. Today, we are pleased to report a strong start to 2006, with record quarterly net sales of $308.3 million, an increase of 3% versus the same period last year sales of $299.2 million. On a currency-neutral basis, reported revenues increased 8.3%. During the quarter, we had good growth within our diagnostics group, led primarily by blood virus, autoimmune, and diabetes products. Our core life science divisions also performed well, with strong sales of our process chromatography products, as well as amplification products.

The gross margin for the quarter was ahead of expectations, at 56.9%, compared to 52.9% last quarter, and 55.6% in the year ago period. This improvement in gross margin can be attributed to a more favorable product mix; greater efficiencies in our diagnostic group related to new, more automated manufacturing equipment that has given us greater capacity to handle higher volume; and some reduction in warranty reserve.

Life science margins were also up strongly on a sequential basis from last quarter, returning to a more normalized level. Remember that in the fourth quarter, we were negatively impacted by about $4 million of injunction related manufacturing costs.

SG&A expenses for the first quarter were $100 million, or 32.5% of sales. The dollar improvement versus the previous quarter primarily reflects lower spending on legal fees and other one-time costs related to the litigation with ABI, as well as some positive currency impacts. These improvements were partially offset by approximately $800,000 of expense related to FAS 123. On a year-over-year basis, SG&A spending was essentially flat.

Research and development expense in Q1 was 9% of sales, at $28.1 million, about equal to last year. Our target investment level on R&D remains 10% of sales, as we continue to invest in new products, technologies, and partnerships. During the quarter, interest and other income was a net expense of $3.5 million. Going forward, we expect this expense to increase slightly, as the cash is deployed into internal and external growth opportunities, and interest income declines as a result.

The tax rate used for continuing operations during the first quarter was in line at 29%. Remember that both last year and last quarter, the tax rate was benefited by one-time events. We continue to anticipate a full year tax rate of between 28% and 30%.

Income from continuing operation for the first quarter was $31.2 million, an increase of nearly 6% versus last year. Diluted earnings per share were $1.16. As we do not use pro forma reporting, please remember that our operating income includes the impact of FAS 123, total stock compensation expense of $1.1 million.

Life science reported sales were essentially flat with last year at $144.8 million. On a currency-neutral basis, however, sales increased 5.6%. We continue to have strong year-over-year growth in our process chromatography, electrophoresis, and amplification product lines. However, this strong growth was offset by a double-digit decline in our BOC business. Overall, segment profit from continuing operations was $14.1 million in this past quarter, compared to $15.5 million last year. However, on a sequential basis, life science profitability is up significantly, with gross profit increasing more than $8 million, and SG&A spending decreasing by more than $5 million. These results are a combination of ridding ourselves of the ABI litigation hangover, as well as improved product mix and sales effectiveness.

Our clinical diagnostic sales grew 5.5% for the quarter to $160.3 million. On a currency-neutral basis, diagnostic sales increased an impressive 11% versus last year. These sales were led by continued strong performance in our blood virus product group, as well as autoimmune and diabetes systems. Sales were particularly strong in Europe and Asia Pacific this quarter. With gross margin increasing almost three full percentage points, segment profit for the quarter was up significantly to $26 million, compared to $17 million last year, and $15 million in the fourth quarter.

Bio-Rad’s balance sheet also remains strong. As of March 31, total cash and short-term investments were $395 million. The decrease in cash balances versus year end primarily reflects the February payment to settle our outstanding litigation with ABI and Roche. Net cash generated from operations during the quarter was recorded as a negative $42.1 million, reflecting the litigation settlement and cash royalty payments to ABI. Excluding the ABI payments, cash flow from ops was approximately $10 million. This adjusted cash flow being somewhat lower than historical levels was impacted by the building of inventory for some recently won multiyear contracts and tenders and increased receivables. Net capital expenditures for the quarter were $11.3 million. Our full year expectation for CapEx continues to be in the $50 million range. Finally, depreciation and amortization for the quarter was $13 million. The decrease from year end is the direct result of the impairment charge taken in the fourth quarter for the MJ-related purchased intangible assets.

We are pleased with the strong start to 2006. Looking to the remainder of the year, we are more confident in our ability to grow the business in the low single digits on a currency-neutral basis for the full year. Remember that sales flow during the year tends to dip sequentially in the second and third quarters. Given the strong Q1 operating performance, we believe that the gross margin will likely be at the top end of our prior 54 to 55% guidance. Again, our historical performance reflects that our strongest margins are typically in the first quarter, trending down from there, as geographical and product mix changes occur. While the SG&A margin for the first quarter shows good improvement, much of this can be related to timing and favorable currency impact. We remain somewhat cautious about raising our 2006 SG&A margin guidance at this time, and continue to guide full-year margins to be about flat with 2005. As I mentioned before, we will target 10% of sales for R&D and expect the full-year tax rate to be between 28 and 30%.

And now I will turn the call over to Norman for a few comments.

Thanks, Christine. As you can see from the results, we are off to a pretty good start for the year. Christine mentioned that our currency-neutral growth was a little over 8%. And I think it’s also important to note here that this is all organic for us. There is no acquisition in here.

A few other highlights of the first quarter I think worthy of mention -- I think Christine has eluded to this -- the settlement of our thermocycler litigation, really now gives us the licenses we need to operate in the life science research market. And we’re certainly looking forward to that. We had previously mentioned to you that just before year end we received the first order for our BioPlex 2200 multi-analyze system for the diagnostic lab. We are beginning to develop more orders and are very encouraged with the customer response to this new technology. And, also, during the quarter we were also successful in winning a fairly good-sized tender for Microplate products from Russia. And those we’ll be delivering over the next several quarters. And certainly, many, many products have been introduced along the way in the first quarter, including tests for dengue fever, in fact. So those are just a few comments.

And with that, we’ll open it up for questions.

[OPERATOR INSTRUCTIONS]

Quintin Lai, Robert W. Baird.

Good afternoon. Congratulations on a very nice start to the year.

Thank you.

Let’s start, first, in life sciences. Were there any sales of thermocyclers from MJ in the quarter?

Quintin, this is Brad Crutchfield. Yes, there was, really to the credit of our employees that were able to stage manufacturing as a result of the injunction outside the United States. We were able to build the necessary inventory so we could hit the ground running. And we were able to ship orders in the last essential six weeks of the quarter.

Because the 5.6 constant currency growth really surprised us and looks very positive. Are we now to a situation to where with MJ back, with your other products now doing well, that the double-digit declines in mad cow testing are going to start to be lessened for the rest of the year?

That’s a tough one. I mean, this is always a challenge. As you know, we have a very strong product portfolio in what we like to call our classical life science business. And that has certainly been offset for a number of quarters now with the sort of downfall of the BOC market, in terms of average selling price, and the total number of tests. So it’s still going to be a drag, but certainly I think we’re happy with the sort of diverse portfolio we have. And that is certainly cushioning the blow.

Brad, while I have got you on the line then, anything specific -- geography or academic industrial wise in the strength that you saw in the quarter?

We saw a kind of mix bag of results out of Europe. Certainly, Germany and the northern European countries did very, very well. We have, again, strong performance out of Asia, specifically in China. It’s done very well for us, and we’re well positioned there. And we actually saw some pretty good performance out of our U.S. operation, again, who really bore the brunt of the injunction. So, in general, it’s across the board. It may be a little slower in Japan, as some of their spending for research caused an over-conservative approach to the customers, in terms of their typically high March spending that got deferred a bit. So, in general, nothing exceptionally strong. But just, in general, we’re pretty happy and the diversity of the strength geographically.

Now turning to our clinical diagnostics -- really another impressive organic growth quarter. Were there any special large orders? For example, Norman referenced the tender for Russia. Were there any pre-buying in the quarter for the Russian contracts, for example?

Hi, Quintin. This is John Goetz. Actually, with regard to the Russian tender, that’s all kind of downstream. We’re in the process of building inventory for that right now. With respect to your former question, we did have one fairly substantial blood virus shipment that went out at first quarter that really was in, let’s say, second quarter of last year. So that did help contribute to our nice upside in sales growth in diagnostics.

Since I have you on the line, John, is there an Easter effect with clinical diagnostics? For example, in Europe, do they test less during Easter so that since Easter fell in Q2 of this year, you had a favorable comp in Q1?

Well, April, generally, is a little bit of a softer month for us. There are vacations, as you know. And I would say, generally speaking, there is a bit of an effect there.

And then, finally, I guess looking at that SG&A number -- how much litigation was still remaining for finalizing with Applera in that Q1 SG&A number?

Not much, by comparison, Quintin, to what we saw in Q4 and much of 2005. There was a little bit. And we’re always going to have some litigation expense going on, but very small by comparison.

So then the $100 million is kind of a good base rate -- and then your historical growth off of that for the rest of the year?

The only thing I will say is, remember, with currency hurting us now on the top line, it also is making expenses look a little lower. And there was a positive impact, if you will, to SG&A expenses during the quarter. So some of that just depends on where the dollar goes from here. So there was probably, year-over-year, $4 million worth of positive currency impact in SG&A. So should the good base be 100 or 104, you need to predict the pattern of the dollar. I’m not going to do that.

Thank you very much. Congratulations, again.

Thank you.

Michael Nolan, private investor.

Good afternoon. Could you talk a little bit more about this charge that you list for MJ acquisition? And who is responsible for it?

I’m sorry, can you repeat that?

The litigation settlement related to MJ acquisition.

Okay.

Could you discuss it and how it came about, who is responsible for it?

Sure. We acquired a company called MJ Research in August of 2004. And at the time we acquired them, they had earlier in that year lost a patent infringement lawsuit that they had been fighting for numerous years with Applied Biosystems and Roche for their amplification product line. And as part of the acquisition, we paid a small amount of cash, about $31 million; and accrued a $50 million litigation reserve, if you will, to ultimately settle the litigation with ABI. There had already been a jury verdict, etc. So we were well aware of the litigation at the time we acquired MJ. It took longer to settle with ABI, probably, than we originally anticipated. And we weren’t able to complete that until early February of 2006. So at that time, we actually made the payment to ABI. The litigation accrual came off the balance sheet as of year end, because it was a known event. But this is the quarter where it would -- for example, we talked about how it impacted the accounting for cash flow generated from operations, for example, because we made the payment as part of the finalization. Is that enough, or did you have another question?

Let me say one more thing, because if you’re new to our story, you probably heard a lot of discussion today about a lot of one-time costs during ’05, and especially during the fourth quarter. The litigation went on -- or the issue with ABI went on from when we bought MJ. In September of 2005, there was actually an injunction issued for us to stop selling. And it caused a lot of one-time expense for us -- more one-time in nature in terms of legal fees, in terms of manufacturing shutdown costs, etc. And now as we report our first quarter results of 2006, those costs are no longer a burden to us. Does that help, Michael?

Yes, I appreciate it.

[OPERATOR INSTRUCTIONS]

Quintin Lai, Robert W. Baird.

Thanks for taking the follow-up. Norman, we’ve seen, last week, Millipore purchasing Serologicals. And then we’ve seen Siemens come in and buy DPC. Any thoughts from you on are we at the start of another round of industry consolidation on life sciences and clinical diagnostics, especially considering that Bio-Rad plays in both markets?

I think that this has certainly been going on for a while. It’s hard for me to predict this is another round. I mean, I think it certainly is an interesting situation, given the multiples that these folks are willing to pay for these assets.

What are you seeing with respect to your opportunities for M&A? How is the pricing environment?

Especially in some of these deals, it is a pretty competitive environment. There are a number of them that we have bid on and not been successful. But I can say that right at the moment, we have a number of very interesting things that are in our hopper that we’re working on. And hopefully one or more of them will come to pass.

Thank you.

Jeff Matthews, RAM Partners.

Congratulations. I was wondering if you could talk at all about the issue of employee compensation. The job market seems to be getting tighter. It seems to be getting tighter in scientific specialties. And I wonder if you’re seeing any increase in turnover or need to raise salaries.

No, we’re not really seeing anything significant. I think it’s obviously a little more competitive this year. But I don’t see any real dramatic changes year-over-year yet.

You mentioned that northern Europe was strong. Could you give a little more color on what you expect in Europe this year? Has it fully recovered from the malaise over the last couple of years? Does it extend south? How does it look in general?

I guess I would say that the funding outlook is still a little bit on the cautious side. I think there’s still a lot of money going into social and other programs being diverted, I think, on a worldwide basis from life science and, to a certain extent, health care. So I think we’re still a little bit cautious about that.

Thanks very much.

Michael Nolan, private investor.

Thank you. Sorry, one last question. Could you just talk a little bit about the balance sheet? I believe, earlier on you said it was strong. Just your feelings as it regards having $426 million in debt, and offsetting that $394 million in cash. Could you elaborate a little bit, in terms of what you’re actually earning and what it’s costing us? Is it something that we could change as we go forward?

Sure. Good question. As you know, we have about $425 million in debt. There’s two large subordinated offerings -- one at a 7.5% coupon, and the other at a 6 1/8 coupon. Thanks in most parts of the fed, the interest that we’re receiving on our excess cash, right now, has climbed steadily over the last few years. And what originally was a fairly sizable negative spread between the two has narrowed quite a bit. Still, obviously, still somewhat of a negative spread. I think our philosophy is, for long-term, tenure money, the 6 1/8 or the blended 6.75 is a very attractive coupon for us to invest. And we do look at this as long-term money. The best thing that I think we can do now to offset any kind of negative spread in the balance between the two is to deploy that cash into things that have a higher return for the company. And in the past, where we’ve had our greatest success, is our internal R&D products. And we have several new products still to come this year, as well as acquisition. We tend to find acquisitions that we can bring our own value to, and make them stronger, and higher cash-flow generating companies. And, ultimately, that provides a higher return to the company and to our shareholders than the 5% or whatever it is that we’re earning on our cash right now.

Michael Nolan. Okay. Thank you.

Jason Vice, Robert W. Baird.

Good afternoon. Thank you for taking my question. Earlier you said the settlement with Applera was a combination of settlement and royalty fees. I was wondering if you can give us some color or a way to think about the royalty fees going on through 2006, just how significant those are going to be, as far as modeling the rest of the year. Thank you.

I think that a lot of that is baked into our outlook. We’ve been paying royalties to ABI as a licensee or Bio-Rad being a licensee to ABI for a number of years. And while there was some catch-up, if you will, with the litigation settlement, there may be a slight increase in the royalty payments going forward. But much of that is offset by the decrease in the amortization of the purchase intangibles after the impairment of the assets in the fourth quarter. So it’s probably pretty much of a net neutral, as far as our outlook goes.

Tom Budnuck, RAM Partners.

Congratulations on a good quarter. I was just wondering, you mentioned that you had a couple of things in the hopper, in terms of acquisitions that you’re looking at. Is there an area that you’re more focused on? Is it more on the life science side or more on the diagnostic side?

We actually have some interesting prospects on both sides.

Can you give us a little color as to what the size of the acquisition might be?

In terms of sales, they’re in the kind of -- in terms of sales, it would be kind of in the $20 to $50 million range typically. They’re kind of the [base hip] things that are the highest on our radar screen right now.

Okay. Thanks a lot. Again, congratulations.

At this time, there are no questions in queue.

Great. Thank you, Sarah. Again, thank you, everyone, for taking time out of your day to join us. As always, Norman and I are available to answer your questions and looking forward to hopefully seeing many of you next week at the Baird conference. Take care. Bye bye.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.