Bio Rad Laboratories Inc (BIO.B) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter four, 2006 Bio-Rad Laboratories Incorporated conference call.

My name is Michele, and I'll be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to your host for today, Mr. Ron Hutton, Treasurer. Thank you.

Thank you.

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 the call over to Christine Tsingos, Vice-President and Chief Financial Officer.

Thanks, Ron. Good afternoon, everyone, and thank you for joining us.

Today we will review both the fourth quarter and full-year financial results, as well as provide some insight into our thinking for 2007. Let's start with a review of the quarterly results. Net sales for the fourth quarter of fiscal 2006 were $343.1 million, an increase of 11.6% versus the year-ago period sales of $307.3 million.

This strong year-over-year growth was fueled by solid performance in both Life Sciences and Clinical Diagnostics. Currency neutral sales for the quarter grew 7.6%.

During the quarter we posted record sales within our Life Sciences group. This growth was the result of increased sales approaching expressions, amplification and process chromatography products. Diagnostics matched their prior record quarter which is a reflection of strong performance in blood virus, microbiology and quality controls.

Gross margins for the quarter was slightly ahead of expectations at 54.1%, the result of a favorable product mix of consumables and reagents. The significant improvement versus the year-ago quarter is more a reflection of last year's issues when we absorbed cost related to the injunction with ABI. SG&A expense for the fourth quarter was slightly higher than expectations at $122.5 million.

It is important to note that during the quarter we paid $3 million for the settlement of a contract dispute. As a percent of sales, SG&A is flat with fourth quarter of 2005, which coincidently also included approximately $3 million of legal and service expenses that were more one-time in nature.

Research and development expense in Q4 was just about 10% of sales at $33.3 million as we continue to invest in new products, technologies and partnerships. Our target investment level in R&D remains 10% of sales.

During the quarter we incurred a one-time non-cash charge of $4.1 million for the purchased in process R&D relating to the acquiring of the sale of the assets from Ciphergen and the Blackhawk acquisition. These acquisitions also resulted in the addition of $27 million of intangible assets and good will for our balance sheet.

Other income for the quarter was approximately $6 million compared to more than $15 million last year. Remember that in Q4 of last year we reported one-time income for the sale of our investments in Biosource and Instrumentation labs.

Reported net income from continuing operations for the fourth quarter was $16.6 million and diluted earnings per share were $0.61. During the quarter we recorded $1.4 million of stock compensation expense. The one-time non-cash charge for purchased R&D of $4.1 million negatively impacted EPS by approximately $0.10, while the contract dispute settlement of $3 million lowered earnings by $0.07.

And now for certain segment information. Life Science reported sales increased 13% from the year-ago period to a record $159 million. On a currency neutral basis sales grew 8.8% for the quarter.

This increase reflects continued strong sales of amplification products, process chromatography media and protein expression products. Gross margins in Life Science also increased both sequentially and year-over-year, primarily due to a better product mix and a favorable expense comparison. This improvement is also despite another $5 million decline in BSE revenue.

Given the one-time expenses of purchased R&D and the contract settlement affecting our Life Science group, segment profit for the quarter will be about $1 million on a reported basis. Our clinical diagnostic group also reported strong sales for the quarter of $180.1 million, an increase of 10.6% compared to last year, and nearly 10% on a sequential basis. These sales were led by continued strong performance in our quality controls division as well as our blood virus and microbiology product lines.

On a currency neutral basis Diagnostic sales growth was 6.5%. Diagnostic gross margins were in line with those expectations and last year and finally segment profit for the quarter increased 10% to over $16 million.

Looking at the full year results we are pleased to report annual revenues of $1.274 billion, an increase of 8% over 2005. These sales and the growth rate are basically all organic and currency neutral and ahead of the mid-single digit guidance we gave at the beginning of the year.

During the year we recorded one-time revenue of $11.7 million, related to the patent infringement settlement with bioMérieux. Excluding this amount, sales growth was just under 7% for the year. Both of our primary segments contributed to growth in 2006.

For the year Diagnostic sales were $685 million, an annual growth of 10.8% and currency neutral growth of 10.4%. During the year the group launched several new products in autoimmune, diabetes, blood virus, infectious disease and quality controls. On a geographical view, both Asia-Pacific and Eastern Europe continue to be strong double-digit growers.

The Diagnostic group also benefited from the one-time settlement with bioMérieux, and we are pleased to have this long standing litigation behind us. During the year, we placed more new Bioplex 2200's in the U.S. and Europe and have several other systems in evaluation at customer sites. We remain pleased with the pace of our progress.

Our goal is to accelerate the pace of adoption in 2007, both on the strength of the current autoimmune panel, but also hopefully due to new panels for syphilous and Epstein-Barr virus which have recently been submitted to the FDA. And, finally during the year we completed two small but highly strategic acquisitions that will broaden our reach in quality control and diabetes monitoring.

Through an often challenging year our Life Science group also posted good annual sales primarily fueled by growth in our core markets of gene expressions, multi-plex protein analysis and process media. Reported growth in Life Science for 2006 is 4.7%, which is all organic and essentially currency neutral. However, this growth rate also reflects our challenges in the Japanese research market, as well as another significant decline in our BSE business.

Excluding the BSE decline, our core Life Science sales grew more than 10% year-over-year. During the year we introduced more than 50 new assays for our Bioplex system as well as major new platform for the analysis of protein interactions.

The platform is Proteon and it represents a significant step forward for researchers making the study of protein interaction both faster and much more reproducible, and finally, late in the fourth quarter we completed our acquisition of the sale of the assets from Ciphergen. While this business is relatively small we view it as very strategic and key addition to our line up of our protein analysis tools.

Total company gross margins for the full year were approximately 56% compared to 54.7% in 2005. This improvement can be attributed to the bioMérieux settlement, a more favorable product mix, an improved absorption at some of our higher volume manufacturing facilities.

Research and development expense in 2006 was in line at $123 million. During the year, we launched more than 100 new products worldwide and have several more in the pipeline to help keep our return on R&D investment strong.

SG&A expense as a percent of sales was 34.5% for the year, an improvement over the 2005 results, which contained costs related to the litigation with ADI which we settled in February 2006. Net income for the full year was $103.3 million, an increase of 33% versus last year.

Remember 2005 included a sizeable one-time asset impairment charge. The tax rate for the full year was lower than originally expected at 27.3%, due to some one-time benefits recorded in the second quarter. Going forward, we expect the tax rate to be between 30% and 32%. This slight increase over our current run rate is related to a new U.S. ruling which eliminates some of the tax incentives for export.

For 2006, Bio-Rad's balance sheet also remains strong. As of December 31st, total cash, and short-term investments were $488 million, compared to $449 million at the end of last year. Net cash generated from operations during the quarter was $55 million, reflecting the higher quarterly sales.

For the year, cash generated from operations was $118 million. Remember that this amount also reflects more than $45 million paid to settle the litigation in the first quarter. Net capital expenditures for the quarter were $14.9 million and $53 million for the full year.

Going forward we expect CapEx to continue to be in the mid-$50 million range. And, finally, depreciation and amortization for the quarter was $15.1 million and $55.4 million for the full year.

Looking ahead to 2007, we see both opportunities and challenges. Emerging markets of Eastern Europe and Asia-Pacific should continue to grow nicely and we have several new product offerings in the pipeline. On the challenge side, we have a tough comparison, given the one-time revenue and profit from bioMérieux last year.

In addition, we continue to anticipate another double-digit decline in BSE sales and profitability. Thus, our outlook for sales in 2007 is growth in the mid-single digits.

We anticipate gross margins to be in the 54% to 55% range, which reflects the anticipated decline in BSE, but still matches our guidance at the beginning of 2006. However, it is the operating margin where we face our biggest challenge.

We have three major things affecting this. First, is the $11.7 million settlement which was a one-time event. Second, we are planning for another $10 to $15 million decline in BSE profitability. And, third, we are estimating that we will bear around $10 million in expense to consolidate and integrate the three acquisitions made in 2006.

These are big numbers that will keep operating income below the 2006 results, and, as I mentioned earlier, we are estimating an increase in the effective tax rate to be between 30% and 32%.

And now, I'll turn the call over to Norman for a few comments.

Okay. Thank you, Christine.

As I think Christine mentioned, for 2007, we are looking for fairly modest year-over-year sales growth and challenging operating margin comparisons, really largely due to the one-time upside we experienced in 2006, and some of the one-time costs coming in 2007. I think the important part is to understand that underlying this overhang is fundamentally a strong and healthy business in which we'll continue to invest throughout 2007.

As we are setting our plans for this new year, we were really faced with two options. Really what I think of as managing the numbers or managing the business, and our long-term approach and the enthusiasm we have about the future, causes us to really come down strongly on the side of managing the business, and we have budgeted accordingly, really continuing to invest in our future.

With that, I think we would like to open it up for questions.

Thank you.

[OPERATOR INSTRUCTIONS]

Your first question comes from Quintin Lai of Robert W. Baird. Please proceed.

Hi, good afternoon, congratulations on a nice quarter.

Thank you.

Hi, so you kind of mentioned U.S. and Japan in the press release as being slower. Could you talk about some of the other geographies that you're seeing strength? Because as I look at the quarter, it was a pretty good quarter in terms of overall organic growth?

Yes, it was a very good--thank you for bringing that up, it was very good organic growth quarter for us. It is interesting, depending on whether it is the research market or the diagnostic market, we're seeing different effects going on around the world.

Certainly from a geographical standpoint, Eastern Europe and Asia-Pacific, both in excess of 25% growth, continue to be our strongest performers. Now, obviously they're coming off of smaller bases than some other regions, but we're really starting to see good brand recognition for the Bio-Rad name in these markets, as well as an increased appetite for research tools and more sophisticated diagnostics.

In areas like the U.S., is it a function of your customer base, and is it a combination of academic and big pharma, or is there a pricing component as well on this?

I'll take that. Quintin, I think that most of what we see is actually the research spending, and with a lot of money being siphoned off to the war effort, there is a lot of--there is not as much to go around in the research grant funding area.

Okay, all right. And then in Clinical Diagnostics it looks like that--over the last six months or so, on the more clinical side we have seen some new players come in, and acquire companies like Bayer and Abbott. How do you--do you see any of that affecting your specialty in esoteric business?

Certainly on the near-term it's--it seems to be business as usual.

Quintin, this is John Goetz, by the way.

It seems to be business as usual out there for both of those companies, you mentioned Bayer and you mentioned Abbott, but we kind of see this as a developing trend in this industry. It is hard to imagine how much money these companies are going for, but they seem to be commanding extraordinary pricing in the market.

So I would have to believe that the expectations on the part of GE and Siemens have to be pretty high for them. As far as it affecting our business or our strategies, it really has--it really has none at this time.

I appreciate that color, John. One of the things that you highlighted in your press release, were some of your MRSA products. There has been a lot of press about other companies coming in with nucleic acid based tests for MRSA and other hospital acquired infections. Any plans for you to go also along that matter?

Our strategy right now is in the traditional plating area. We had some really great success with our product in Canada, and really at this time we're awaiting FDA clearance in the U.S., and we hope to make a nice entry into the market there. There is definitely room for both techniques, and I think from a pricing standpoint we have an advantage over an NAT approach.

And then--turning our attention to Life Sciences, excluding the BSE, it looks like it was a very strong quarter--strong year. Is--how much of that was your core business, and could you kind of talk a little bit about MJ coming back on the market, and having almost a full year? Is it now up to where you hoped it would have been?

Quintin, this is Brad, clearly we went back on the market fairly aggressively to take care of our customers, and we were successful in doing that. To answer your question directly, we are essentially back where we wanted to be or where we expected to be now, and obviously we--this is an important area for us and we're moving ahead with a fairly aggressive new product development plan in the area of amplification, both on reagents and the instrument side, so we're pretty excited about it and it's really contributed to our ongoing growth.

Thank you very much. And then I guess turning to the income statement. So you've--you're up against some interesting one-time events in 2006. If you were to strip all of those out and look at revenue growth, I mean, what would that be excluding the bioMérieux one-timer?

It depends upon what your definition of mid-single digits is. I think you're still somewhere in that ballpark if you strip out the $11.7 million from the growth, but frankly, if you kind of look at the other things that we have going on, like the future decline or the anticipated decline in BSE, plus the bioMérieux etc., then I think you're looking at growth that is mid to high single digits.

And then with respect to operating margins, again, doing that kind of same math, Christine, if we take out the bioMérieux. which kind of falls to the EBIT line, outside of the slow-down in BSE and then the $2 million for the integration, are there any other special projects, like ERP, or additional distribution-type of projects that are ongoing within the Company?

Oh, sure we always have new projects come on and we're still in the midst of some pretty significant projects here in terms of kind of the reorganization we're doing in Europe to bring them more centralized, and in the investment in our ecommerce and ebusiness projects and those are ongoing and as Norman mentioned, we really thought long and hard and didn't want to mortgage our future because of a couple of one-time events that are either '06 events banking for a tough comparison, or frankly '07 events, whether that's the BSE profitability or the fact that we need to integrate and strengthen three very strategic acquisitions.

What does that net out to? As you well know, we don't do proforma reporting, but that is why I tried to give you a sense of the magnitude of those three things that we have going on.

Okay. Great, and I guess my final question is really for Norman on the M&A side you've been active on some of the smaller acquisitions. Also in the space we've seen a lot of activity, both on the Clinical Diagnostics and the Life Science tools side. What is your feeling of the space? Are there still lots of small deals still available to be had, and is the pricing still at a reasonable level?

Well, I think that as John said we all continue to be surprised with the prices that some of these things are going for, but having said that, I think there do continue to be opportunities. We are regularly looking at things, and encouraged by what we see, and what we might be able to do.

Thank you very much. Again, congratulations.

Your next question comes from the line of [Ellen Semchil] of [Tellis, Walker, and Cochindifer], please proceed.

Hello?

It appears that she's dropped out of the queue, and I'll go to your next question which is from the line of Thomas Bundock of Ram Partners. Please proceed.

Hi, congratulations on a good quarter. Actually, Quintin covered just about everything that I had intended to ask so I don't know what to ask, so I'll just congratulate you again and listen for the rest of the call. Thanks.

Thanks, Tom.

[OPERATOR INSTRUCTIONS]

You appear to have no further questions at this time.

Okay. Well, thank you everyone for taking the time to join us for the call. As always, Norman and I are available for any follow-up questions you may have, and we look forward to seeing you soon. Bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.