Bio Rad Laboratories Inc (BIO.B) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Bio-Rad Laboratories second quarter 2009 financial results conference call. I will now turn the presentation over to Mr. Ron Hutton, Bio-Rad Laboratories' Treasurer. Please proceed, sir.

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 would 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 $427.2 million, a decrease of 5.6% on a reported basis versus the same period last year's sales of $452.4 million. However, on our currency neutral basis year-over-year sales grew 3.5%.

During the quarter we had good growth across many of our key diagnostic markets as well as selected markets in Life Science. The reported gross margin for the second quarter was stronger than expected at 56.6% compared to 57.1% last quarter and 54.9% in the year-ago period. This strong margin reflects a continued shift in product mix toward higher-margin consumables as well as improved manufacturing efficiencies.

Additionally, the non-cash purchase accounting expense recorded in cost of goods sold related to the DiaMed acquisition was $3.5 million, a decrease of approximately $1.3 million from last year. SG&A expenses for the quarter were $143.7 million or 33.6% of sales, which is somewhat lower compared to the year-ago dollars but higher in margin, reflecting the currency impacted sales number. The sequential margin improvement versus the first quarter is primarily related to focus cost and headcount management. The current quarter SG&A expenses include $2 million for amortization of intangibles related to DiaMed.

Remember that historical trends consistently reflect lower SG&A spend in the first half of the year. Thus, we anticipate these expenses to ramp throughout the remainder of the year. Research and development expense in Q2 was 9.9% of sales or $42.4 million, compared to $37 million in the first quarter and basically flat with last year. The sequential increase in R&D spend is primarily related to costs associated with the development of our new automated blood typing system. We expect R&D spend to be at the high 9% of sales level for the second half of the year.

During the quarter interest and other income was a net expense of $6.6 million compared to $3.8 million of expense in Q2 of last year. This increase versus last year is largely related to the additional interest expense associated with our recent $300 million subordinated debt borrowing as well as more than $2 million of foreign exchange losses. Going forward, remember that with the additional debt, interest expense on a quarterly basis will be approximately $14 million.

The effective tax rate used during the second quarter was better than expected at 20.2%, which compares to 25.9% last quarter. This lower than usual rate is primarily due to the true-up of prior years as well as an increase in projected R&D tax credits for 2009.

Excluding any discrete items that may occur during the year, we expect the third and fourth quarter rate to be in the 24% to 25% range. Net income attributable to Bio-Rad for the second quarter was $38 million, a decrease of 12% versus last year. Expense for minority noncontrolling interest decreased to $1.3 million, reflecting the purchase of substantially all remaining shares of DiaMed Holdings. Diluted earnings per share were $1.37.

And now for certain segment information -- Life Science reported sales for the second quarter declined 7.4% to $149.7 million. On a currency-neutral basis, sales were flat year-over-year. And if we exclude the decline in our BSE business, currency-neutral sales for Life Science actually grew 1.7% compared to last year. This growth is attributable to strong sales of our gene amplification products as well as protein function products. Both the US and European markets were challenging for Life Science in the second quarter, while Asia-Pacific continued to produce solid double-digit growth.

Overall segment profit for Life Science was $9.5 million, about flat with last year but higher than Q1, primarily reflecting the increase in sales and good operating expense management.

Our Clinical Diagnostics segment posted another solid quarter with sales of $274.3 million, a decline of 4.5% on a reported basis when compared to last year. On a currency-neutral basis, however, year-over-year sales growth was 5.8%. These higher sales were led by strong performance across all of our product divisions, most notably blood virus, quality control and blood typing products. Sales to the emerging markets in the US were especially strong during the quarter. The second quarter also reflects continued growth in BioPlex 2200 placement and test sales. During the quarter we placed five new systems, which brings the installed base up to 120 units.

In addition, we received FDA approval for our ToRC IgG and herpes simplex virus test panels for the BioPlex. Diagnostic gross margins increased compared to last year, primarily due to favorable product mix as well as the decrease in amortization and purchase accounting expense related to DiaMed. Segment profit for the group decreased both sequentially and year-over-year related to higher spending in R&D as well as management allocation of the increased interest expense.

Moving to the balance sheet as of June 30, total cash and short-term investments were bolstered by our opportunistic debt offering and totaled more than $563 million. We also generated good cash flow from internal operations with cash from operations for the quarter of $105 million and EBITDA of more than $85 million.

Net capital expenditures for the quarter were $14.7 million. Our full-year expectation for CapEx remains in the $80 million range. Finally, depreciation and amortization for the quarter increased to $25.4 million, primarily reflecting the US launch of our new website.

We are pleased to post another strong quarter in a rather difficult global environment. Our outlook for 2009 remains relatively unchanged from the guidance we provided in February; that is, for top-line currency-neutral organic growth to be in the low- to mid-single digits. For the first six months of the year, currency-neutral revenue growth is 3.4% and in line with the stated guidance. Keep in mind that strengthening the US dollar could continue to mask the reported growth for the remainder of the year.

While gross margins for the first half of the year were much stronger than anticipated, remember that during the third and fourth quarters our gross margin typically comes under pressure as the sales mix shifts to lower-margin instruments. This year our historical trend could be more magnified by stronger instruments sales, resulting from the Life Science stimulus spending. As such, second half of the year gross margins could be in the 54% to 55% range.

The year-to-date operating margin has also been stronger than expected, due in part to good cost and headcount control. But as we move into the remainder of the year, we anticipate that spending will increase both in terms of dollars and percent of sales as we invest for our future.

As a result of this combined outlook, the consolidated operating margin will likely trend to the low double digits. A significant strengthening of the US dollar from current levels could drive that margin even lower on a reported basis.

And finally, as I mentioned earlier, we are targeting a 24% to 25% tax rate for the second half of the year. And now we are happy to take your questions.

(Operator instructions). Larry Solow, CJS Securities.

Christine, could you maybe talk a little bit about trends you're seeing on the life sciences market? And is it stimulus funds? I imagine not there yet, but are they knocking on the door? How is that playing itself out?

Hi, this is Brad Crutchfield; I'll take that question. We are now beginning to see, like a lot of our competitors, the early stages of the federal stimulus plan roll out. Some of our customers are now getting their grants, and we are starting to see some of those sales. Again, most of that we would see the impact being for the fourth quarter and into the first half of next year. But certainly now, it is becoming a reality, not just something theoretical.

And, is there any way -- I know you guys have spoken in the past that perhaps it was sort of the [anti]-stimulus where customers were actually holding even grant money they had. So now that they're secured in stimulus, is there anyway you could -- I don't know if you can quantify what you would potentially see. But would there potentially be a pent-up demand where actually even your revenue -- you get a nice little pop or bolus over the next couple of quarters?

Yes, there's certainly -- we expect to see some upside, but there's also, it's countered by the downside of potentially state governments' pull back funding for state universities. So there's always the pull of both of those. And again, we are talking about only primarily the US market. And for us, 50% of our -- around 50% of our business in Life Science is outside the United States. So we haven't been able to quantify it specifically, but we are optimistic that it's going to have a positive impact on sales going forward.

And now that you mention it, are there similar programs -- for instance, I know Europe is also -- you mentioned they have been struggling in Life Sciences. Are there similar type of stimulus money or talk on the table, at least of helping out scientists in European countries?

Yes. There is a program in Germany, and that has had some impact in Germany, much smaller in its magnitude to the federal stimulus plan in the US. China has been looking to invest and investing in their life science sector for a number of years, but even sort of accelerated this year, and we are seeing that in terms of double-digit sales growth.

And even Japan now is looking at a stimulus plan for later this year for their biotech, internal biotech market. But then there's large parts of Europe and in Eastern Europe have really been impacted by the financial crisis as well. So it's kind of a mixed bag.

Right. And Brad, while I've got you on the phone, you probably can answer this one. I know that you just kind of launched the e-commerce site. So it's obviously early, but any anecdotal customers' commentary? Is there any feedback you are getting on it?

Well, the feedback has been overwhelmingly positive. We have a really nice website. We're seeing a lot more traffic and even some early trend up in the sales. And it really has only been live now for about two months, but really very, very positive. I'm very happy with the team's performance in terms of really designing a website that speaks directly to our customers.

And then on the BioPlex system, on your Clinical Diagnostics side, Christine, perhaps, can you just remind us how many -- I guess you should have nine tests by year end? That's 33 assays; is that correct?

Panels -- we did talk about that, that we were targeting that. And John Goetz, who runs all of Diagnostics, is with us today as well. So I'll let him comment on the progress that we are making there.

Yes, we have right now seven launched panels on the system today, and largely those are being sold in the US. We have a certain number of our instrument placements outside the US, in Europe, and that's looking to start to pick up as we add more panels.

And then (inaudible) say -- I know it's hard to quantify, but can I assume in two, three years from now, this number could double? Or is it a longer process as you start getting deeper into the panel development?

Yes. We're into probably a time frame in this area that, probably over that time frame, you could see it doubling, yes. I would say more in that three-year time frame.

Great. We look forward to seeing you guys at our conference in a couple weeks, and thanks a lot.

Stephen Simpson, Northland Securities.

I just wanted to confirm or make sure I heard correctly on what you were talking about for margins for the remainder of the year. You said operating margins in the low double digits for the back half of the year. And did you comment on gross margins as well?

54% to 55%.

All right, thank you. And, just going back to the BioPlex, is it possible for you guys to quantify what sort of contribution it made to the Clinical Diagnostics business this quarter?

Well, we don't give out specific numbers, Stephen, but remember, this is actually a significant drag on operating income for the segment and the Company, obviously, as a whole, as we are putting significant dollars in R&D to develop these future panels that John was speaking about earlier.

I know, but I figured it was worth a try. Thanks a lot.

Jon Wood, Banc of America/Merrill Lynch.

So, for Brad, process chromatography -- I know there's been two quarters that have been kind of some fluctuations there. Did that have any impact on the Life Science business this quarter in terms of comparison?

Yes. It still hurt just a little bit. It's really a year-over-year comparison. We had some pickup in the US, but it was -- we -- a lot of our sales are calendarized later in the year in Europe, so it's kind of a mixed bag yet. But overall, we've probably said before, we have to look at this business over even several years as the business ultimately is trending up.

Okay, but it was still a drag in the second quarter, year-over-year?

Yes.

And then what about capital equipment, Brad? Can you give us a sense of -- did the growth, constant currency growth in the capital equipment, did it deteriorate or improve meaningfully from the first quarter of '09 sequentially?

You know, actually, it did probably a little bit better compared to the first quarter. It still tends to be down as we see capital spending down even in our pharmaceutical customers. But what we do see is the prospects, primarily in the US, looking up, as the federal stimulus plans begin to take hold. But overall, I was actually encouraged in terms of the prospects and even some of the placements of our capital instruments in the second quarter compared to the first.

So can you help us quantify the flu situation? I'm sure it's primarily a Clinical Diagnostics phenomenon. But just in a PCR instrument, was that stimulated by the flu situation in the quarter?

For us, it was relatively minor. We certainly participated in providing some instruments and placements in Latin America. But certainly, compared to other companies that enjoyed a very nice upside in primarily the real-time PCR assay instrument platform, it really did not have an impact on our business.

And how about for John, for the Clinical Diagnostics business? Any elevated trends there?

Really (multiple speakers) there's nothing there to report. We have a couple of minor products that cover that aspect of the flu, but nothing for this particular strain today. So it's really pretty much a non-issue for us on, let's say, the reagent side of the business.

And these products are sold outside of the United States.

That's correct.

Okay. Christine, was there an inventory-related step up? You said $3.5 million in deal-related costs in the gross profit. Is there still any inventory-related charges?

Yes, there's a small one. I think it's about $500,000 or $600,000. It's about $600,000.

Okay. And the cash flow is running quite a bit ahead of the first half of 2008 at this point. Can you give us a commitment for a higher cash flow number this year, year-over-year?

I probably am not going to want to try and estimate what that will be because it is sensitive to the results of the business itself, and currency can have an impact on it. Suffice it to say, we have a focus on cash flow this year as a Company and wanting to improve cash flow as a percent of sales. So, hopefully, some of the improvement that we're all seeing is a result of that.

And then the R&D -- you said high 9% in the back half of the year. So you're looking somewhere around $44 million, $45 million on a quarterly basis. Is that a level we should expect to continue in 2010?

I don't want to try and predict 2010 right now. I think a couple of things that are going on with R&D as a percent of sales -- one is, we truly are investing in some really exciting new products like the IH-1000 for blood typing. At the same time, as the top line is impacted by currency, and much of the R&D spend is in the United States, that spend as a percent of those currency-impacted dollars is naturally going to push the margin up a little bit as well.

But our long-term goal, remember, is R&D spend in that 9% to 10%. And I don't have any reason to think that that will change.

Okay. But as far as continuing investments in the IH-1000, less projects that may be rolling off, it's probably reasonable to assume some sort of a constant-dollar rate equal to the second half of the year next year? Anything you know of that would -- ?

Probably.

-- bring it back down, if you will, towards the lower 9's, percent of sales?

Jon, I it always seems like we have new things to invest in, even when something rolls off. So I don't think that's unreasonable.

I'm not sure if Norman is there, but you've raised the money here. Any just updated thoughts on the general M&A environment? Is it better from your perspective or still pretty much of a stalemate out there?

Actually, there are a few things that are starting to show up. I think it's still a little bit on the slow side, but a few things are popping up. So we are encouraged.

And we should assume kind of a typical Bio-Rad target out there, nothing too interesting, but along the same lines as you've done in the past?

Well, we think they are very interesting (multiple speakers). But, yes, I would say nothing transformational, if that's what you mean.

That's what I meant. But I also meant you do like, typically, hair on your acquisitions. So I just wanted to make sure we should expect that.

Yes.

We just don't want to (multiple speakers) for the value we are going to be creating ourselves.

Junaid Husain, Soleil Securities.

John or Brad, relative to the spending environment at hospitals or maybe your academic or industrial customers, when you talk to your sales guys, what is the sense that you're getting? Are institutions slowly starting to loosen up the spending purse strings?

I'll take that first question. Yes, we certainly are starting to see a trend, one, kind of business as usual in terms of our customers getting out of that stimulus paralysis, as I like to call it, which we saw really through probably the first five months of the year as this NIH funding process was rolled out and actually run by our customers or dealt with by our customers. So overall we are starting to see that look up. Our sales reps are starting to see the prospects going forward look positive. And there are certain parts of the world -- China, Germany -- are examples see the same kinds of upside. And then that's countered to other parts of maybe northern Europe, where it's still a little bit slower. And our academic -- or, excuse me -- our pharmaceutical customers, we starting to see again a little bit more of a positive outlook for them, especially in the area of capital spending.

In the hospital testing segment, we see a continual increase in testing in general. It's nothing dramatic, but it's certainly not going backwards, which has been very, very encouraging for us. I suppose, on the hospital and the testing reference testing side, there will be some concern about what the health care legislation will mean for them. We're not exactly sure what it will mean for us, either. But we are trying to keep an eye on that.

Got you, that's helpful. And, John, seeing as I have you, on the Diagnostic side, I do recognize that this is a reagent rental versus a straight-up cash sale. But could you tell me if hospital customers are maybe looking for better terms on the reagent rental business?

They are always looking for better terms on whatever deal we may be offering. With regard to reagent rental, we have some fairly strict internal pricing guidelines that help guide those kinds of discussions, and we tend not to go beyond our internal limits on profitability.

And then another high-level question for both of you guys. Regarding customer ordering patterns, obviously, given the challenging economy, some of your customers might have been looking to get leaner and meaner over the last six to nine months, and maybe bringing down their inventory levels on certain products. So I guess two questions for you. Did you notice this inventory adjustment at your customer sites? And then, as a follow-up to that, do you get the sense that this inventory adjustment is reversing?

For our businesses, we really don't see -- people weren't inventoried up and de-inventorying. It's just not the nature of our customers.

Got you. And then, Christina, I've got a few odds and ends here. Can you tell me what the DSOs were in the quarter and how this compares to the previous quarter and maybe how it compares to the previous [year]?

Sure. The way we [calculated] DSO was around 70 days, and it was a bit of an improvement for us, both sequentially and year-over-year. No?

Sequentially, yes. Year-over-year, we're still a little bit behind it (inaudible).

Okay, we're two days off from last year.

Got you. And what's the geographic variability on DSO's, US versus international?

There are -- huge variability, which is very typical of regions. For any industry, any company, DSOs tend to be longer in certain parts of the world. So in the US our DSOs generally run in the 45-day range. But you can get to places in Europe or in Japan, and you're in 90 to 100 and some-odd days range, 180-day range.

In Italy.

So that's why, for us as a Company average, that 70- to 75-day range, depending on our sales mix in any given quarter, it's not unusual for us because so much of our sales are outside the United States.

Got you, that's helpful. And then last question, either for Norman or even because you mentioned it high level. With regards to health care reform -- sort of lobbing the obligatory health care reform question -- whether or not a bill gets signed later this year or not, from the proposals that you've seen and the chatter that you've heard from your customers and your policy guys, what are your thoughts on how this potential legislation could impact your business moving forward?

It could go either way. It could mean cost containment. Or, if there really are going to be 50 million or 100 million new people in the health care system, it could be a pretty good time.

Dan Leonard, First Analysis.

I only have two questions, first one for Brad. Brad, is there any change in the growth trajectory of your BioPlex products in the research market?

No, not really. If you look over the last year, it's fairly stable in terms of the number of -- the number of placements of instruments have slowed off, and that's more of a capital impact. But overall, the trends have been pretty good.

Okay. And then my second question is for you, Christine. How much of an impact, if any, has the increase in inventory had on your gross margin improvement? Because I've noticed that your inventory turns have declined for the past couple of quarters as your gross margin has gone up.

Inventory, I think, is actually down, flat to down year-over-year. And we've talked about growing inventory as we move into the second half of the year, which is different than where you're going with this. But as an aside, anticipating some of the stimulus spend. But the other thing that can impact our inventory is in the quality control business, where we tend to build significant multi-year lots on behalf of our customers and hold that on their behalf. But I think that the general trends this year is that inventories have been down.

Well, inventory is down, but COGS are also down, so your days on hand have actually gone up by a good bit. So I was just curious if that had any --

Well, yes, but again, that also could be due to the mix of inventory. And one of the places where we've been building inventory is in our quality controls because of some customer sales, and that inventory maybe turns once a year because of holding these multi-year lots.

Okay, so nothing that you would draw attention to or nothing worthwhile, as far as --

I don't think so.

(Operator instructions) Larry Solow, CJS Securities.

Since I was beaten to the punch line on the health care reform question, just another question. You guys have bantered around the idea of implementing a Company-wide ERP system. Any updates to that or any thoughts about that?

We are still in the throes of that, evaluating what we do and how we do it.

Any potential time line when we may hear something about it?

Sure. I think later this year we ought to have something for you.

And just a housekeeping question. Christine, could you just repeat the segment revenue between Life Sciences and Clinical Diagnostics again?

Oh, sure. Life Science reported sales for the quarter were $149.7 million. That's about a 7.5% decline, but flat currency neutral. Diagnostics, $274.3 million.

There are no further questions in queue. I would like to turn the call back over to management for closing remarks.

Thank you, everyone, for taking the time to join us today and your interest in Bio-Rad. As always, Norman and I are available for any follow-up questions you may have. Bye.

Thank you for your participation in today's call. This concludes the presentation, and you may now disconnect. Good day.