Bio Rad Laboratories Inc (BIO.B) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Bio-Rad Laboratories First Quarter 2008 Financial Results Conference Call. (OPERATOR INSTRUCTIONS) I will now turn the presentation over to Mr. Ron Hutton, Treasurer. 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.

That having been said, 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 are pleased to report quarterly net sales of $422.2 million, an increase of 31% versus the same period last year sales of $322.5 million. This $100 million increase includes $62.7 million contributed by our newly acquired DiaMed organization as well as approximately $22 million related to foreign currency.

On a currency-neutral basis, year-over-year revenues increased 24%. Peeling the onion back a little further, currency-neutral organic growth for the first quarter was in line with guidance at 4.5%. During the quarter we had good growth across many of our key markets, including Quality Control, Clinical Systems, Process Chromatography and Microbiology.

The reported gross margin for the quarter was 53.7%, compared to 50.8% last quarter and 55.6% in the year-ago period. The first quarter reported gross margin reflects approximately $3.4 million of amortization, plus an additional $1.0 million charge as required under purchase accounting.

Gross margin for the base Bio-Rad business improved year-over-year to 56.2%. This improvement can be found in our Life Science segment where increased sales, coupled with lower factory costs and improved capacity drove margins higher by 2.0 full percentage points.

SG&A expenses for the first quarter were $139.7 million, or 33.1% of sales, about equal to the year-ago 33.4% of sales. The current quarter SG&A expenses include $2.3 million for amortization of intangibles, plus the incremental DiaMed operating expenses.

The sequential improvement versus the fourth quarter is primarily related to lower selling costs associated with the lower sales number. However, this sequential decline in spending is not unlike our historical patterns where projects and hiring generally ramp throughout the year, making Q1 our most favorable margin quarter for the year.

R&D expense in Q1 was about 9.0% of sales, or $37.5 million, compared to $40 million in the fourth quarter and $32.8 million last year. The year-over-year increase primarily reflects the inclusion of DiaMed in our consolidated results.

During the quarter interest and other income was a net expense of $10.4 million, compared to $1.4 million in Q1 of last year. The higher net expense compared to last year reflects nearly $5.0 million, less interest income, due to lower cash balances, as well as $2.5 million of foreign exchange losses mainly related to DiaMed. Going forward, we expect currency swings to be tempered greatly as we incorporate DiaMed into our overall hedging programs.

The effective tax rate used during the first quarter was higher than expected at 27.5%, which compares to 27.9% last year. The current rate is higher than our 24 to 26% expectation, due to discrete items during the quarter, including newly issued guidance in France regarding R&D credits, which necessitated a one-time catch-up. Excluding additional discrete items that may occur during the year, we continue to expect the full year rate to be in the 25 to 26% range.

As you may remember, with the acquisition of DiaMed we now have minority reporting requirements related to the remaining shares of DiaMed Holding, which we will tender for later this year, as well as a few DiaMed subsidiaries where we do not own 100% of the stock.

Net income for the first quarter was $26.5 million, about flat with last year. Diluted EPS were $0.96. As we do not use pro forma reporting, please remember that our operating income includes the impact of FAS 123 stock compensation expense of $1.6 million.

Before I move on to the segment information, let me just take a brief moment to reiterate a couple of data points.

As you can clearly see, our sales increased about $100 million year-over-year and yet, on a reported GAAP basis, net income was essentially flat. The major drivers of that seeming mismatch are $6.7 million of non-cash acquisition-related expenses, $5.0 million less interest income and $2.5 million in one-time currency losses. If we add back just the non-cash acquisition expense and the one-time currency loss, net income would increase by nearly 23% compared to last year.

And now for certain segment information. Life Science reported sales grew 9.2% to $154.6 million. On a currency-neutral basis, sales increased 2.3%. However, currency-neutral sales, excluding our BSE business, increased 4.0% year-over-year.

We continue to have strong year-over-year growth in protein-related product lines, especially Separation Products, as well as Process Chromatography products.

Both Asia-Pacific and the emerging markets produced solid double-digit growth during the quarter. However, this growth was offset somewhat by a slowing in sales of our higher priced capital equipment lines, especially in the U.S., as well as continued softness in Japan.

Overall segment profit for Life Science was $9.7 million this past quarter, compared to $5.5 million last year. The year-over-year increase in profitability is primarily related to the improved gross margin I mentioned earlier.

Our Clinical Diagnostic segment posted another strong quarter, with sales of $263.7 million, including DiaMed's $63 million, which equates to a growth of 48% compared to last year. Excluding DiaMed, Diagnostic sales increased just over 13%, or 6.0% on a currency-neutral basis. These sales were led by strong performance across all our product divisions, most notably Quality Control, Microbiology and Clinical Systems Products.

Sales to the Asia-Pacific region and the U.S. were especially strong during the quarter for both Diabetes Monitoring and Autoimmune. Diagnostic growth in the operating margins were negatively impacted by the $6.7 million of non-cash amortization and purchase accounting costs. Despite this expense, though, segment profit for the group increased more than 20% to $32 million, compared to last year.

Moving to the balance sheet, as of March 31st, total cash and short-term investments were $177 million. The decrease in cash balances versus year-end primarily reflects increased cash payments typically associated with our first quarter. This is even more clearly reflected in cash generated from operations.

Net cash generated from operations during the quarter was a negative $2.2 million, compared to a negative $12.6 million in the year-ago period, as sales and cash receipts increased.

However, the first quarter results represent a significant swing from the fourth quarter and is the direct result of more than $40 million paid for bonuses, commissions, and annual royalties associated with our strong 2007 financial results. For the most part, these are annual and one-time payments and thus are not a prediction of cash flow in future quarters.

Net capital expenditures for the quarter were $19 million. Given these early results, our full year expectation for CapEx to be in the $60 to $70 million range will likely be closer to the high end of that range. And finally, D&A for the quarter was relatively flat, with the fourth quarter at $23.7 million.

Our outlook for 2008 remains unchanged from the guidance we provided in February. That is, for topline, currency-neutral, organic growth to be in the mid-to-high single-digits and closer to the high teens when we include the additional DiaMed sales.

Gross margins are anticipated to be in the 54 to 55% range and SG&A margins are anticipated to be flat-to-down slightly, compared to 2007 on a GAAP basis. In other words, these estimates include more than $20 million for the amortization of intangibles related to the DiaMed transaction, as well as another $5.0 to $10 million in anticipated integration expenses. And finally, as I mentioned earlier, we anticipate the full year tax rate to be between 25 and 26%.

And now we're happy to take your questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Jon Wood with Banc of America Securities.

Hey, can you hear me?

I can hear you.

Hey, Christine. Can you -- is Norman there?

He's here.

Norman's got a cold.

Well, okay, I'll start with Christine. Can you just go over how much of the Life Science, the business mix, is actually capital equipment and not electrophoresis, the apparatus business, but the high end capital equipment?

Yes. It's actually not a huge percent of our mix, Jon. As you know, 70% of the sales are more recurring in nature in your consumables or apparatus and then another chunk are the instruments that are not really these high ticket capital instruments.

However, having said that, we have a couple of new ones that have been doing well in the U.S. recently and we just saw a brief change during Q1. I'll let Brad add some color as to how that may change over the course of the year.

Okay, yes, this is Brad Crutchfield. As far as -- it's about 30% of our business, roughly, which would be in the more capital instrument, and subject to that side of sales cycle and we just saw a fairly soft quarter. We don't really see this as lost opportunities, but more deferred opportunities and are fairly confident that that won't be something we see through the end of the year.

Brad, is that just the Life Science or you mean total Bio-Rad, the 30%?

I'm talking specifically of total Life Science only.

Okay, Life Science only. Okay and then it's split -- in the press release, you kind of talked about academic plus biopharma. Is it any one particular customer group to single out there or is it just both were relatively weak?

I would say it was really across the board. Our biopharma, our for-profit customers, were fairly conservative in terms of when and putting off some purchasing and in general, we've seen a cycle over the last two or three years with the sort of traditionally government sponsored research, of researchers being a little bit conservative in the first quarter and kind of holding back on their budget and purchases. But again, as we saw in the last two years, that generally corrects itself throughout the year.

Okay and then the instruments, I mean, you're talking about the BioPlex for the research use only. I mean, can you name a couple of the instruments, though?

It would be in the area of protein expression, like you said, BioPlex, but certainly impacts our real-time amplification products, which are really capital-related and then as Christine alluded to, our new Protein Interaction Platform, PROTEAN, these are all fairly high ticket instruments and subject to that kind of sales cycle.

Okay and that's MJ Research on the thermal cycler market?

It's actually primarily -- well, we look at them as all one, but yes. Some of the products that came from MJ, but also Bio-Rad has always been a leader in the area of real-time PCR. So, at this point, since we've launched all new products, it really harmonizes our complete line and that's certainly helping us on our gross margin right now.

Okay, great. Can you update us on the BioPlex 2200 placements? I think you had around 50 at the end of last year. Anything to speak of there?

Yes, this is John Goetz. Yes, we've got, at this point, now 60 placements around the world. The majority of those are in the U.S. and they are contributing pretty nicely to a nice uptick in our autoimmune testing area.

Great and then Fujirebio just looked like they bought a controls business. Is that something to worry about? Maybe I'm -- I don't know if I understand the dynamics perfectly. But they don't buy controls from Bio-Rad currently and I mean, do you see them getting into the controls business now as an OEM?

Well, we're aware of that. We think that this is more of a vertical integration move on their part. However, we're keeping our eye on it. A lot of our sales in Japan go through our direct salesforce and through your local representatives there. So we're watching it and we're not wringing our hands over it.

Okay. Has there been any change -- I guess this is for Brad. Has there been any change in the competitive landscape in your Life Science business? I just noticed that Beckman had a massive quarter in their life science business and not so sure why. But have you seen any change in the competitive dynamics in any of the key franchises there?

Not really. Again, we have a fairly diverse product line capital through sort of mid-range instrument apparatus and then reagents. I really haven't seen a lot. I think there is the dynamic of more content reagent business being driven through e-procurement platforms, but certainly not any real change in any of our franchises or even the sort of competitive pressure. I mean, certainly amplification thermal cyclers, that area, is a very competitive area. There are a lot of people in that space and very formidable competitors, but we seem to be able to hold our own.

Okay. Thanks a lot.

Weidong Huang, TimesSquare Capital Management.

Hi, good afternoon. I think I missed the number you gave for the DiaMed sales. Could you also repeat that? Could you repeat that number and also maybe a comment on the organic growth rate of DiaMed in the quarter?

The DiaMed sales are $62.7 million and we didn't make a comment about the organic growth rate during the quarter. Remember, we didn't own them last year at this time, so it would be kind of tough for us to do that.

And how much of that do you see as a benefit is from the foreign currency?

Some of it I'm sure is currency-driven, when you look at how much it's moved. So it's whether you're looking at Euro or Swiss franc, but again, we just can't get to the exact breakout of that.

Okay, thank you.

Richard Glass, Morgan Stanley.

Hey guys, nice quarter.

Thank you.

So just to maybe be very clear on this, in terms of the earnings I was coming out with maybe a little shy of what you guys said, but it looks like $1.18 then or so? Or am I way off, if I was to pull out the kind of one-timers that we're talking about?

Well, I mean, I'll let you do your own math, but I just wanted to highlight those three one-timers and in my math I was only trying to do two of them that are the ones that are more DiaMed-related and then just use the tax rate that we'd reported during the quarter. But, obviously, if you want to use all three, including the interest income decline year-over-year, you're going to get a higher number.

I wasn't including interest income, because that is what you get. You did have pay it.

Exactly, exactly. That's why I didn't include it either.

Okay, but it was still a nice increase. I just have a few questions as well. Can you talk about new assays that are on the come-here in terms of what kind of pace we might expect? Because it just seems to drive a lot of positive things for you guys.

These are assays in which area?

Well, you talked about new assays helping the growth in the --.

Oh, in the BioPlex, in the Life Science area?

Yes. Yes.

Yes, it's -- obviously it's just a continuing pace of new assays being developed in Life Science and being introduced and I would expect that to continue throughout the year.

Yes.

And in Diagnostics, of course, it's a little different picture because it tends to be -- the introduction tends to be a little slower, because they're longer-term developments, FDA approval, that kind of thing.

Okay. Can you maybe help us understand or go into a little more detail on the MRSASelect test that you talked about in your release, in terms of it continuing to gain market acceptance? Is this sort of -- how big could this be? Clearly there are companies out there, which are enjoying massive benefits from this, which what we wonder is whether this could be a boom/bust on the Mad Cow scale or what kind of product this could be.

No. This is John Goetz, speaking about this product. This is a product we've had, let's say on the market, outside the U.S. for, let's say two or three years, and we've recently brought it into the U.S. after having some pretty nice success in Canada. We're watching that market grow and there's lots of interest in, let's say, t he healthcare community as to what is the benefit of screening every single patient that comes into a hospital lab. And you definitely have a couple of camps out there.

Our product is a fairly traditional approach to the test itself, from a technology point of view. It's not a PCR-based. However, it's a pretty rapid chromogenic, media-based test and it's not that expensive for a laboratory to be able to get in and actually do screening. So we're seeing a nice uptick here in the U.S., having just introduced it a little more than a year ago.

So, comparing it to the products that are out there, maybe its a little bit slower but its less expensive as well, or longer to get a result?

Yes, in terms of let's say a traditional approach to testing for MRSA, it's a fairly rapid test, but again, it's using traditional microbiology approach in terms of time to result.

When you compare that to, let's say a PCR type of an assay, a PCR type assay will take less than half the time to produce an answer therein. However, there's a huge price differential between a PCR assay and what we're offering today.

So we think we have some competitive advantages when a hospital really sits down and evaluates what's really, really important in terms of cost or turnaround time.

And Richard, I think it's important you brought up the BSE comparison and while the product's doing quite well, as a percent of Diagnostics' total sales, it's still relatively small.

Right. Okay and at least you guys do the low-cost in this one.

Right.

My last question is in terms of the CapEx. Can you tell us what that's going towards this fiscal year?

In terms of the mix?

Yes, where we're spending the money and you know.

Yes, well, so remember there's three buckets. We have kind of maintainance CapEx. We have new equipment, which could be either on the IT side or on the manufacturing side. We have buildings and then we have our reagent rental on the Diagnostics where the instruments are placed in the lab and we capitalize the cost of those.

The mix really hasn't changed too much. About a third is related to the reagent rental program. Right now, I think that what's going into equipment is probably the biggest portion of CapEx and we've talked over the last several quarters about the significant investment we're making in our website and the e-commerce program, so that's a part of it. And then, of course, what's different from last year is taking on the DiaMed CapEx that we didn't have last year and that's probably another $4.0 million or so.

How much leverage should you get out of the DiaMed CapEx? I mean, is it totally different facilities or, over time, should there be some leverage out of that?

It's kind of early to tell. Over time, I think there will be, but the other thing I'll say is, over time, there's probably some investments we need to make, especially on the IT systems side. But in terms of facilities, they seem to be in pretty good shape and obviously there are some facilities that we'll even rationalize with our own infrastructure.

Okay. All right, thanks, good quarter, guys.

Thank you.

Jeff Matthews, Ram Partners.

Hey there, can you hear me?

Yes.

Hi. I'm in a really noisy spot, so I'm going to ask three questions and put the phone on mute. First, you may have explained this, Christine. What were the foregone profit margins that you mentioned in the release?

The second thing is what's the biggest change in DiaMed, plus or minus, since you actually made the acquisition?

And the third is on the MRSA test. What kind of hospitals are actually buying it and how are they actually employing it? Thank you very much.

Okay.

I didn't get his second question.

The second question was what's the biggest change, either positively or negatively, that we've noticed about DiaMed since we acquired it. I think that's it, anyway.

So, Jeff, as far as -- I know in the press release we said foregone profit and in my script I talked about purchase accounting. But you'll remember back in the fourth quarter we had a charge of $3.0 million or $4.0 million related to finished goods, inventory, and under purchasing accounting we had to write it up and then it goes through COGS.

Now what we're doing is working through what was the work in progress inventory. So it was $1.0 million this quarter and we might see that going forward in future quarters, probably $1.0 million, maybe less. Obviously it'll go down over time, but the next several quarters we'll have that additional cost on top of the amortization.

And then I'll let John talk about DiaMed and MRSA.

Yes. I guess, as I look at this acquisition, I guess I really can't point to anything that's super negative or plus on either side. All I can see is really the opportunity for being able to capitalize on some very positive initiatives.

Christine had touched on this notion of integration. I think we have some great opportunities there, relative to combining salesforces on our infectious disease line, particularly in the blood bank area. I think I've mentioned that, maybe on the last call.

So we're just now starting to get our arms around those kinds of strategies now. But, in the meantime, it's pretty much business as usual. I did have the chance to visit a customer or two while I was in Switzerland on my last trip and we did have a very interesting discussion about the level of service and the quality of customer care coming out of our facilities in Cressier. And if that customer is any indication of our customers that we have in general, I feel pretty confident about the future there.

I suppose, on the negative side, you could say that we have had some management turnover there. Not all of it, let's say, feeling bad about. I thought I'd just mention that. So, going on --.

It's really a process.

Yes, yes, right. I'm sure you may have a couple of follow-up questions on that, but probably can't answer most of those. Okay, on the MRSA side, we're finding general hospitals in the 400-bed to 750- to 1,000-bed are buying this product. It's no one particular market segment or customer segment that's buying this product. So we see it having pretty broad appeal. I hope that answers your question.

Could I follow-up on that? What are they using it for? Is it a screening tool? Are they screening everybody? Are they using it just in the emergency room?

Yes. Yes, they're using it for two purposes. One is diagnostics and one is to actually diagnose a person that actually does have it and to a lesser degree, they're using it as a screening test.

Okay, great. Thanks.

Jon Wood, Banc of America Securities.

Hey, Christine, did you guys buy in any of the outstanding minority interest in DiaMed in the quarter?

Actually, Jon, we did. We -- it was part of the original purchase agreement. There was an existing dispute with a minority shareholder that we we're able to resolve and as part of that resolution, we did purchase some of their minority shares.

Okay and that's the $17 million on the cash flow statement?

Yes it is. It is and I think all out the door there was probably $22 million between all the components of this purchasing the shares and settling the dispute, etc.

Okay and so how much more are you going to spend to bring that 100% in-house over the course of the year?

Well, even though it's gone down, I think it's probably $60 million or $70 million. Even though we've just brought this in, the fact of the matter is that you've seen the value of the Swiss franc and the dollar have changed pretty dramatically. So I'm guessing it'll be $60 to $70 million that we'll spend. I don't -- and we will conduct a tender and have that completed by October 1.

Okay. So, in the future quarters of '08, the minority line, does that go down in the future quarters from $2.1 million?

Probably. Now, it all depends on where the DiaMed profits are and if it lands in areas where subsidiaries, 50% owned subsidiaries have the profits. Obviously we have to share those. So, even as we bring in the tender, yes, one would think that it would go down, but it could be offset somewhat by the 50% owned subsidiaries.

I guess the point I'm trying to make is even when we buy in the minority shareholders, there probably will be a minority interest line remaining on our P&L until we purchase the other half of these few subsidiaries where we don't own 100% of the stock. And we haven't yet made the decision which, if any, of those subsidiaries we would like to do that with.

Okay, great and one last one for Norm, if you're feeling up to it. The acquisition pipeline out there, are you happier about the valuations you're seeing or have expectations been largely unchanged the last, I don't know, six or so months?

I think we probably talked about this earlier and my expectation was that the valuations would become a little more reasonable, but some of the recent fields that we've participated in, the prices are still pretty high.

Okay. Okay, thanks a lot.

(OPERATOR INSTRUCTIONS) And as there are no further questions in the queue, I'll turn the call back to management for closing remarks.

Okay, great. Thanks, Jen. Thank you, everyone, so much for taking the time to be with us today. As always, we appreciate your interest and are available for any follow-up questions you may have. Bye.

Ladies and gentlemen, we do thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day. 10