Bio Rad Laboratories Inc (BIO.B) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your Q3 2007 Bio-Rad Laboratories Inc. earnings conference call. My name is Mike. I will be your operator today. (OPERATOR INSTRUCTIONS). As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ron Hutton, Treasurer. Sir, please proceed.

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 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 would like to turn the call over to Christine Tsingos, Vice President and Chief Financial Officer.

Good afternoon everyone and thank you for joining us. Today we are pleased to report quarterly net sales of $339.7 million, an increase of 11.5% versus the same period last year's sales of $304.8 million. Currency neutral revenue growth for the quarter was a solid 8%. Our diversification in both product offering and geographic reach continues to help the top line stay strong on a consolidated basis.

During the third quarter we had good growth within our Diagnostics Group, with strong performance across all of our primary product families. Our core Life Science divisions also increased, with strong sales of our protein expression and interaction productline, as well as continued growth in process chromatography.

The gross margin for the quarter was a little stronger than expected at 55.4%, compared to 56% last quarter and 54.7% in the year ago period. The year-over-year improvement can be attributed to a favorable product mix, as well as better manufacturing utilization.

SG&A expenses for the third quarter were $117.7 million, or 34.6% of sales, compared to $106 million and 34.8% of sales last year. Improvement in the SG&A margin for the second quarter of this year is related to seasonally slower spending typically associated with our third quarter results outside the United States.

Research and development expense for Q3 was in line at $33 million or 9.8% of sales. The increase from last year's primarily related to the development of new panels for our Bio-Plex 2200 system.

During the quarter interest and other income was a net expense of $2.4 million. This compares to $2.6 million of income in the year ago period, which benefited from a onetime $4.7 million gain related to our investment in Accent Optical, which was purchased by Nanometrics. Going forward we expect interest and other income to be a sizable net expense, as more than $400 million of our cash was deployed on October 1 for the purchase of DiaMed, and thus in the future we will not earn as much interest income.

The tax rate used for the third quarter was much lower than expected at 20.3%. During the quarter we reported a onetime benefit related to the favorable resolution of tax audits, as well as a required true-up adjustment necessary to reflect our actual federal tax liability. Excluding any future discrete items, we continue to anticipate a rate in the range of 28 to 29% in the fourth quarter.

Net income for the third quarter was $28 million, an increase of nearly 21% versus last year. Diluted earnings per share were $1.03 for the quarter compared to $0.86 last year.

Now for certain segment information. Life Science reported sales for the quarter grew 4% compared to last year to $143 million. On a currency neutral basis, sales increased just over 1%. This revenue growth was affected by a more than 20% in our BSE business. Still our core Life Science sales growth, excluding BSE, was over 8%. We continue to have good momentum in our process chromatography and protein expression productline. Sales of our you ProteOn system continued to grow as customers adopted easy to use and accurate protein interaction technology.

Sales in the U.S. and Asia-Pacific regions more particular strong for Life Science this quarter, while the Japan market continued to be challenging. Overall, Life Science segment profit was $5.2 million this quarter, up significantly from Q2. This increase in profitability is primarily a reflection of improved gross margin due to a more favorable product mix, coupled with focused management of SG&A spending.

Our Clinical Diagnostic Group sales for the quarter were $193.3 million, a growth of more than 17% compared to last year. On a currency neutral basis sales grew 13.5%. These sales were led by continued strong performance across all of our divisions and geographies, especially our quality controls, clinical systems and microbiology productlines in the U.S. and Asia-Pacific.

Clinical systems benefited from strong demand for our key diabetes monitoring system, as well as contributions from our Bio-Plex 2200 autoimmune and EBV panel. During the quarter we placed more than two dozen instruments at Quest laboratories across the country, and expect to begin supplying test panels by early next year. Our Microbiology division posted strong sales of our Aspergillus and Dengue fever test, as well as our market leading MRSA test in Canada. And the recently FDA-cleared MRSA test for the U.S. bodes well for more opportunity in the quarters to come.

With good margins, Clinical Diagnostics segment product profit for the quarter was $24.5 million, compared to $16 million last year and $26.4 million in the second quarter.

And now for a quick review of the balance sheet. As of September 30, total cash and short-term investments were $543 million. Net cash generated from operations during the quarter was approximately $55 million, resulting from the higher profitability as well as higher cash collections.

Net capital expenditures for the quarter were $18.7 million, reflecting a sizable investment in our website and new e-commerce channel, as well as increased placements of the Bio-Plex 2200. Our full year expectation for CapEx is now in the low $60 million range as we continue to invest in our future.

Depreciation and amortization for the quarter was relatively unchanged at $14.5 million. And finally, as I mentioned before, going forward we expect the cash balance and interest income to decline significantly, reflecting our October 1 purchase of DiaMed.

We are pleased with posting another successful quarter for 2007. The strength of our Diagnostics business through the first nine months of the year has helped to offset some of the headwind we anticipated at the beginning of the year. Having said that, the performance of our Life Science segment year to date has been somewhat weaker than we anticipated. Still the combined nine-month performance of our two primary businesses has resulted in revenue growth in the mid single digits, and in line with the expectations we set at the beginning of the year.

Excluding the impact of DiaMed, we continue to anticipate mid single digit topline growth. Given the year-to-date performance, full year gross margin will likely be at the high end of our previously forecasted 54 to 55% range. However, I will remind you that Q4 is generally our lowest margin quarter, as the budget year comes to an end for many of our customers, and the products product mix shifts towards the sale of instruments.

The fourth quarter also generally reflects our highest operating spend as projects that are ramped through the year become fully funded. As a result, the combination of the two has generally produced the year's lowest quarterly operating profit margin in Q4.

As I mentioned, this outlook for Q4 excludes our recent acquisition of DiaMed. We are in the process of recasting and auditing the historical financial results of DiaMed into U.S. GAAP, which we will file in an 8-K in December. During the fourth quarter we will also be assessing the purchase accounting impact and integration needs of the business. As such, it would be imprudent for us to discuss the near-term financial impact of DiaMed on our consolidated results at this time.

As has been our practice in prior years, we will share our thinking and outlook for 2008 in February during the fourth quarter earnings call.

Now we are happy to take your questions.

(OPERATOR INSTRUCTIONS). Jason Weiss, Robert W. Baird.

Congratulations on a great quarter. Clinical Diagnostics has steadily improved in terms of growth rate in the past three quarters. Have we turned a corner here? Do you expect this strength to be ongoing?

The strength to be ongoing? You mean continuing to go until we reach the moon or --?

Continuing in terms of this double-digit growth that we have seen in Q3. Do you expect that strength and the momentum of that to continue on?

We've got pretty good momentum. I think it is probably a little too much to predict that it would continue at exactly the same rate, but we do have pretty good momentum in Diagnostics.

I guess in terms of Life Sciences, are you expecting a stronger growth performance there year in Q4?

I think certainly Q3 was a good quarter for them. We're starting to see the U.S. strengthen. Remember we didn't see that so much in the first half of the year, and I think that bodes well for continuing forward.

What we always combat obviously is the industry growth rate in academic, which is we're primarily focused as opposed to big pharma. Those rates are still relatively modest. We still have a bit of a headwind on the BSE side, although I think as time goes by that will become less strong. So I think that modest improvement is probably doable, but still combating some forces beyond our control.

In terms of FX impact, I don't know if you have shared this in the past, but could you provide a general geographic split of your revenues?

You're talking about as reported sales by geography?

Yes.

You have to give me a minute. I'm not sure that it is much different than the last time we brought it up. I think where we're going to see it change is with the consolidation of DiaMed.

I appreciate that you are still in the process of going through those numbers, but I'm wondering in terms of DiaMed now that the transaction is closed, could you talk about any strategy that you might have to further develop the markets that DiaMed addresses geographically?

I think it is still little bit early to address that. We still are assessing where the opportunities are and what we might do. I would ask you just to stay tuned a little bit until we have a little bit better handle on these various regions.

Okay, great.

Certainly I think there will be opportunities.

(OPERATOR INSTRUCTIONS). Vito Menza, Sandler Capital.

Great quarter. Just a question for you. Could you give us a little color on the geographic mix of business and how different geographies grew for you?

Sure. I think that one of our best growers for both groups was in the U.S., and I think that has to do with, not just the market, but the new products that we had that are gaining traction and acceptance.

I think Europe was a little slow, up very little year-over-year. But I think that is more their seasonality of their summer quarter than it is indicative of anything systemic in the marketplace.

Asia-Pacific, outside of Japan, continues to do pretty well for us. The Eastern European market, especially in Diagnostics, continues to be pretty strong. So back to Jason's earlier question, I think our revenue split year-to-date is pretty similar to what we saw last year -- 43, 44% in Europe, and probably the same in the Americas. And that may be a little higher on the Americas side than it was a year ago because of the strength in the U.S. And then the balance of it, the 14, 15%, is in the Asia-Pacific region.

I think Japan, especially in the Life Science market, continues to be a struggle for not just us but other people in the market. And we will just see how that plays out going forward.

I know you said it earlier and I think I missed it. Just to clarify, organic sales ex currency for both divisions, what were they?

Together or apart?

Apart, for each individual division. And I guess also when you ex out the BSE testing out of Life Science, what would you get also?

For Life Science their currency neutral growth just for the third quarter was just over 1%. That is almost all organic. There's a little bit related to the Ciphergen acquisition. I think this is -- that September quarter will be the last quarter, where there would not have been in that a year ago, but it was pretty small.

On the Diagnostics side, the currency neutral growth was 13.5%. And again that is primarily organic. They did a couple of small acquisitions last year, but really not enough to make a huge difference in the growth rate.

Did you ex the BSE testing from Life Science.

If we ex out the BSE testing the reported growth was 8%, and on a currency neutral basis it was about 4.5.

Last question. Without getting into any specifics at all on DiaMed, I guess it stands to reason there would be a significant portion of noncash amortization that comes along with this, and also I'm guessing some upfront, whether it is IT or just integration costs. How do you plan to break those out to the investment community and deal with them?

I think what we will probably due is what we have done historically, and that is in the purchase accounting to the extent that there is initial onetime write-offs, for example purchased in-process R&D, we will probably give its own line item on the P&L, so that is very clear for everyone to see. And certainly we will discuss it in our disclosures.

Historically we have not done pro forma reporting, and I'm not sure that we would move to pro forma reporting like some other companies do. However, we have tried to give the color surrounding the amortization impact. For example, when we acquired MJ Research in August of 2004, for some time after that we gave some color around that. And I would anticipate with the DiaMed transaction we would do the same and try and help you understand what the noncash impact is.

Okay. I wish you guys would give some pro forma non-GAAP like Chemo and your peers. But that is okay. It makes us do more work. It is okay.

It is good for you.

Thanks a lot guys. Great quarter.

Quintin Lai, Robert W. Baird.

Nice quarter. Following up on Jason's question, so with the guidance of mid single digit organic revenue growth, I guess the question is that, one, is that assuming BSE continues its downward decline, and then that assumes that Clinical Diagnostics continues its strong business to help offset that to get to that number?

There are a lot of assumptions there. Yes, I think that we do expect the BSE business to continue to edge down. And as I think Christine mentioned, Life Science business seems to be picking up a little bit, and maybe will moderate a little bit the diagnostics business. That is probably kind of the mix of things.

When looking at Clinical Diagnostics, a really, really strong quarter, stronger than what you have historically talked about being mid to high single digit. Is there something special that went on this quarter in terms of you easy comp, or was a lot of the strength coming from new product introduction or market share gains? Or help us get a little color on what happened this quarter.

This is John Goetz. Yes, we did have a pretty strong second quarter. And I think largely it came in a couple of areas. But if you really focus on the U.S., that is really where we had some very, very nice performance. We are in the process of beginning and carrying forward a pretty big conversion of some business in the blood virus testing area there. One of our competitors has backed out of that market, and we are picking up some very nice business there.

And then in addition to that our controls business in the U.S. has really picked up nicely. And that was quite unexpected, I have to say. You add that to some additional performance from around the world in some of these emerging markets, I don't know, it is just like a lot of stars aligned for this quarter.

Then at the start of the year, Christine, you talked a little bit about some spending that you were thinking that might occur with -- as you launched or increased the awareness for BioPlex 2200, as well as the integration of Ciphergen. Where are we now, now that we're nine months into the year?

We are still spending. I think that was according to plan, that there were certain costs that were associated throughout throughout year on, for example the Ciphergen side, and then certainly in the second half of the year as we continue to ramp up the Bio-Plex. So I think that spending is still ongoing, but the strength on the top line is mitigating some of that impact.

Again, I understand that the one that you just had with DiaMed and wanting in to kind of postpone talking about the numbers, but I guess does that mean that we are in a level of uncertainty then as we look out to 2008 until you know what DiaMed has -- whether or not you need to have more infrastructure spending, or do you think that we're pass some of that?

That is a really good question. All I can do is talk about what we have talked about already. I think you have a general idea of how big their business is on the top line. Certainly, it is a company that will require integration spending. This is a private Swiss company that is now part of a U.S. public reporting company, so you can imagine what that entails.

Having said that, it has been a good business historically. I think our hesitation is until we get it into GAAP, which is different than the Swiss private accounting methodology, and that is audited, and we really get a handle on where we need to do some integration spending, we hate to put a total stake in the ground.

When I will tell you though is that as we gain clarity on that, we will try and give you more color, not just on the purchase accounting impact, but also on ongoing contribution of the business as opposed to initial contribution, which may be impacted by purchase accounting and the integration.

Then just one question on just top line for DiaMed year-to-date. Can you give us any kind of ballpark figure of what you think the 2007 revenue runrate looks like, and what kind of growth that is off of 2006?

It is actually hard to know that answer. Again, we're trying to get their numbers into U.S. GAAP. I think what we did talk about when we made the acquisition was that in '06 it was about a $200 million a year business. The growth rates are kind of mid single digit diagnostic market growth rates, I think is the best assumption we can use at this point.

Jon Wood, Banc of America Securities.

This is [Brandon Clulard] in for Jon. How many Bio-Plex instruments have you placed net of the arrangement there? And are smaller and mid-sized hospitals interested again?

This is John Goetz on the Diagnostics side. In addition to what has been placed there, we're looking at about another 20 or so. So we are in that low 40s right now in terms of overall placements.

Have you seen any impact from bioMerieux 's exit from the U.S. microplate market? And do you care to quantify that?

I won't quantify it for you, but it certainly was a contributor for us in the third quarter.

When can DiaMed, if you're willing to comment on it, when can they enter the U.S. directly with an instrument solution?

I guess we're looking at -- really the agreement that we got in place, and these are confidential agreements, but to see -- I guess to be a little bit more specific than that, it is a few years from now.

Can you quantify or give any more detail on what your MRSA productline is in terms of sales, and how fast growth was in Canada in the quarter?

I can't give you specifics on that, other than to say we're in a pretty nice market position in Canada. I think, as you probably just saw, we just received FDA clearance on MRSA here in the U.S., so we're hopeful that that will have a nice upward effect for us going into -- actually going into next year.

Do you care to discuss your longer-term operating margin outlook for the Company? Do you think you're capable of retracing the 15 to 20% operating margin range that you historically did over the next few years?

We will give our '08 outlook on the February call. The only thing we can say now is what we have said all along, and that is our long-term goal is to get the operating margin back up to the kind of that low to mid teen level, but that is a longer-term goal.

David Cohen, Noonday Asset Management.

Congrats, a wonderful quarter. Norman, I wonder if you could comment just a bit on balance sheet and how you guys are thinking about it after the DiaMed acquisition obviously put to use some of the cash, but still to stay particularly unlevered? If you could you talk a bit about that. Thank you.

Obviously we have been looking for good opportunities to deploy the cash. And I think as Christine mentioned, certainly this will have a slight negative effect on the interest terms, but we would hope to more than make that up with the operating margin earned on deploying that cash.

I think going forward we have talked about whether it would be advisable to do a little more financing. If the markets are right, we might actually do a little more debt financing. But I probably would not get -- we're going to get tremendously levered, but I think we will have the opportunity, given the income, to do a little more.

Will you still consider other acquisitions? I think in the past you have talked about being prepared to leverage up quite a lot higher than where it is if you found the right acquisition?

For the right acquisition, yes, certainly we would. And obviously we're continuing to evaluate opportunities. As you know, it is not a linear process.

Could you talk a little bit about that process, how it is going, pricing, the range of what you're comfortable paying, or just if you could talk a little bit about what you're seeing on the acquisition side?

A lot of them the prices still seem to be kind of on the high side. There had been a couple of recent ones that we have looked at in kind of these $20 million, $30 million, $40 million companies, that in our minds have still gone for some fairly high prices, especially in Life Science. The hope is that the pricing will settle down a little bit. I haven't seen much sign of that yet, but that is the hope.

Could you also talk a little bit about the way you think about outsourcing and cost bases in Asia relative to cost base in high-cost countries? Have there have been any developments on that for the Company, and how you are thinking about that?

We don't think quite as much about outsourcing, because we like to have control over our destiny and control of the products. We think that gives us the best long-term result. We have, and I'm sure you have seen announcements about this before, we have moved some manufacturing to Singapore recently. That is up and running and seems to be doing pretty well. We are considering a few other opportunities for some other things that we're working on.

Then lastly, if you could just give us an update on the Board and the Board structure? I think we have talked a bit before about that the board has obviously been around for quite a while. The average age is quite high for a public company. If you could just talk about what the Company is thinking about that -- bringing new life to the Board?

As you know, in the last couple of years we have added really two new members, which bring the aged down a little bit. And we are continuing to work that and think about what kinds of other things, what kind of other expertises we want on the Board, and talking to a few people.

Jason Weiss, Robert W. Baird.

On the acquisition of DiaMed, do you plan to conduct a tender offer for the remaining 12.7% within Q4?

Probably not within Q4, but we will conduct a tender next year.

Congratulations on the FDA clearance of your MRSA product. Could you give us a little insight as to perhaps the per test cost or the amount of prep time that would be required to run that test?

I can comment on the time to result. We have a claim on the product that delivers a result within the 24-hour period. That is a reasonably quick turnaround when you consider this is a petri type of approach. What distinguishes it though is its sensitivity on the one hand, and its price position in the market compared to some other alternatives. We think we have a good niche opportunity here to make some headwind.

Is the market strategy for this to -- there has been a lot of talk about hospitals doing general active surveillance. Is your thoughts for a surveillance type environment or is this more of a diagnostic product?

It is both. It will depend on the protocols that the hospitals will be employing, depending on what kind of a product that they will select. So ours can be both.

Up to this point have you gone, I guess, at any given institution head-to-head with some of the molecular tests out there? And can you talk about some of the feedback you might have received as the facilities were considering their options?

We're just under way with this product here, so it is too soon for me to tell you what our experience base has been, particularly against the molecular product right now.

Jon Wood, Banc of America Securities.

Could you give us an overview of your food testing franchise, how big is it? Can you provide an update on a potential launch of a molecular product for food testing. And do you have all the necessary licenses for that? Thanks.

This is Brad Crutchfield. I will take that call. Our food testing, we have received clearance in the U.S. First of all we have all the necessary licenses and we have complete freedom to operate. We have launched all the four major food pathogens, and now adding the quality indicators to go with that. We have launched and have approval now for the confirmatory test that goes with it, again a chromogenic-based products.

So overall we're entering the U.S. market. Have just received some of the clearances on some of the pathogens. We have a few more to do. We certainly expect those by the end of year. And are actively now marketing that product where we can, at least in the certain pathogens that we have approval in the U.S.

We have complete approval in Europe and are already starting to see the switch of that business. It is still a business that is less than $20 million. But it is one that we see an opportunity in the future. But it is a longer-term growth opportunity in the sense that you would had fairly conservative groups of people that are making these calls as companies in testing labs make the decision to switch to a molecular test from maybe more traditional testing.

Currently no other questions.

Thank you everyone for taking the time to -- joining us this afternoon. And as always, we're available for any follow-up questions that you may have. And we look forward to seeing you hopefully soon. Bye.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. Thank you very much, and have a great afternoon.