Bio Rad Laboratories Inc (BIO.B) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter Bio-Rad Laboratories Incorporated earnings conference call. I will be your coordinator for today's call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the call over to your host for today's conference, 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 managements goals, plans and expectations. Because our actual results may differ materially from these plans and expectations I encourage to you 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 CFO.

Thanks, Ron. Good afternoon everyone and thank you for joining us. Today we are pleased to report record quarterly sales of $461.1 million, an increase of 4.4% versus the same period last year sales of $441.8 million. On a currency neutral basis, sales increased more than 11%. During the quarter we had good growth within our Diagnostics group, especially blood virus, quality control and blood typing products. Our Life Sciences chromatography and gene amplification products also posted good growth. And also noteworthy, during the quarter we fulfilled a large tender for Diagnostic products in Russia sales which we had previously anticipated would occur in the fourth quarter.

The gross margin for the quarter showed continued strength at 56.5% compared to 56.6% last quarter and 54.4% in the year ago period. The third quarter reported gross margin reflects approximately $2.9 million of amortization plus an additional $950,000 charge as required under purchase accounting all related to the DiaMed acquisition. The gross margin improvement compared to last year can be attributed to favorable product mix, a reduction in amortization of royalty expense and better manufacturing capacity utilization. SG&A expenses for the third quarter were $153.6 million or 33.3% of sales, compared to $150.5 million and 34% of sales last year. On a sequential basis the increase in SG&A spend is reflective of our higher sales and in line with our historical pattern. Research and development expense for Q3 was in line with expectations at just under 9% of sales or $39.5 million. During the quarter interest and other income was a net expense of $16.1 million. This compares to $7.7 million of expense in the year ago period. This increase in expense is related to the additional $300 million of subordinated debt we took on in the second quarter of this year. The tax rate used for the third quarter was slightly better than expected at 23%. The improvement versus last years 29% primarily reflects increases in R&D tax benefits in the US and France as well as some true up benefit. Excluding any future discrete items, we anticipate a tax rate in the range of 23% to 25% in the fourth quarter.

Net income for the third quarter was $38.5 million, an increase of more than 38% versus last year. This improvement not only reflects higher sales and gross profit margins, but also a continued focus on controlling headcount and operating spend throughout the Company. Life Sciences reported sales for the quarter declined just over 4% compared to last year to $150 million. On a currency neutral basis sales were essentially flat. Excluding the decline in BSE sales the Life Sciences currency mutual growth for the quarter was 2.4% compared to last year. Geographically the Life Sciences market continues to be challenging in the US and Europe which was partially offset by continued strong growth in the Asia Pacific region. We estimate the impact from US stimulus spending during the quarter was around $1 million. We continue to believe that the bulk of stimulus dollars that may be earmarked for Bio-Rad products will likely occur during 2010. On a product view, during the quarter we posted good growth in both process chromatography and gene expression despite heavy competition. Overall, Life Sciences segment profit was $9.6 million, about flat with last quarter and up slightly versus the year ago period.

Our Clinical Diagnostic group posted a record quarter with sales of $307.5 million, a growth of more than 9% compared to last year. On a currency neutral basis, Diagnostic sales grew an impressive 17.8%. These sales were led by continued strong performance across all of our divisions and geographies, most especially our quality control, blood virus and blood typing product lines. As I mentioned before, during the quarter we fulfilled a sizeable tender in Russia primarily for blood virus products. Sales of BioPlex 2200 tests continued to do well, in fact nearly doubling year over year. During the quarter we placed two more systems bringing the install base to 122. Since the beginning of the year we have placed 36 new units. We currently offer seven panels for the BioPlex in the US and hope to have one or two more panels approved by the FDA early next year. Clinical diagnostic segment profit for the quarter was $44.3 million compared to $34.3 million last year, a 29% increase. This growth was primarily driven by the higher sales as well as the significant improvement in gross margin which is due to lower amortization and royalty expense, the conversion of distributor sales to direct sales and blood typing and favorable product mix.

And now for a quick review of the balance sheet. As of September 30th, total cash and short term investments were $642 million. This higher balance reflects our focus on cash flow generation which resulted in net cash from operations during the quarter of approximately $97 million and free cash flow of more than $80 million. This improvement is due in part to strong receivable collections as well as good inventory management. Net capital expenditures for the quarter were $15.5 million. Our full year expectation for CapEx is now somewhat lower to be in the $70 million range. Depreciation and amortization for the quarter was relatively unchanged at $26 million. We are pleased with our third quarter and the year to date results, which have been ahead of expectations despite continued challenges in some of our markets.

As we look to the final quarter of 2009 we see signs of continued growth and strength in many of our geographic and product areas. Additionally, currency impact seems to be turning from a headwind to a tailwind which should aid year over year growth. However, the fourth quarter also presents some challenges to sales as we remain cautious about the US and European research market. As I mentioned earlier the successful Russian tender impacts our outlook by moving about $20 million of sales from the fourth quarter into the third quarter. Keeping these points in mind and using current exchange rates we are estimating total sales in the fourth quarter of 2009 to be between $460 million and $470 million. As is typical with our historical pattern the fourth quarter usually reflects a lower gross margin as product mix shifts toward a higher percentage of instrument sales. Combining this history along with the sustainable improvement in gross margin related to decreases in amortization and royalty expense we estimate gross margins for the fourth quarter to be in the 55% to 56% range. On the operating side we will continue our focus on controlled spending. Having said that remember that in the fourth quarter we generally have higher expenses which are typical of our year end. In addition, this year we are planning for a sizeable increase in research and development spend as we invest in several new products to be introduced next year and beyond. And remember that while a currency tailwind helps to increase reported sales it also increases our reported expenses. Thus we are estimating operating margin for the fourth quarter to be in the 10% to 11% range. As has been our practice in the prior year's we will share our thinking and outlook in February during the fourth quarter earnings call. And now we are happy to take you questions.

Our first question comes from the line of Larry Solow with CJS Securities. Please proceed.

Good afternoon, Christine. Congratulations on a very good quarter. Even if you take out the $20 million it seems like your Diagnostics still have pretty nice sequential uptick, I guess it's more like 10% organic growth sort of what had been running at 5%. Anyhow, I guess it caught you by a little bit by surprise, any more color on that and is this growth stainable?

Well, John Goetz is with us today so I'll let him comment on the good growth that he's seen.

Larry, we are still trying to figure out why it's so good.

Part good and bad, right.

Yes. No we did have some strong sales to blood banks and emerging markets and we've also made some gains in that area in the US. So those really weren't surprises but some of that did accelerate from fourth quarter. We've had solid instrument sales going into the Middle East, which supported our diabetes line as well as immunohematology. So those have all had upside. And what will be nice, we presume for the future, will be those that will have a follow on reagent string. So we are pretty happy with that.

Okay. Then the BioPlex, can you just repeat that? You said the reagent sales doubled year over year? Was that what you said?

Nearly doubled. Remember that for the most part the instruments are placed on a reagent rental basis. The sales are recognized as the instruments are used and the tests are used.

Right.

It's still very small but the growth is good.

Then on a sequential basis I imagine it was up too, more than double year over year. How about sequentially just to get a feel for it.

It was up a little bit sequentially as well.

Your recent acquisition or your announced pending acquisition of Biotest and I understand it gives you access into the blood typing market and the US market immediately. Would that just be with their products or would you actual will be able to use DiaMed's technology as well?

No, the Biotest acquisition and access to the US market once we close the transaction, which isn't expected next year the first quarter of next year, that will be just for the Biotest products and the DiaMed products will still be under the contract that we have with Ortho J&J currently until place.

I guess that still gets your feet on the ground and do you have any expectations for that? How has that been doing? Are there any financials you care to share with us?

About Biotest?

Exactly.

No, I think we will wait until we actually close the transaction. You understand that technically we are competitors in the European market. We do need to go through a review for the competition commission and other regulatory hurdles between now and the close so we will be able to talk more freely about it after the transaction is closed and certainly on the next earnings call. But I think you're on the right track, that for us it's an opportunity for concentration on the customer base and building the channel and the opportunity in the US once we close the transaction.

Can you just tell me, I know in both the Europe and US markets, have they been in the US market, is that more of a recent entry for them as well? Is most of their business still ex US?

Right, that's correct, they are a recent entry to the US.

Okay. Okay. Thanks a lot.

Our next question comes from the line of Stephen Simpson with Northland Securities. Please proceed.

Thank you. Looking at the revenue both Life Sciences and Clinical Diagnostics, can you give us a sense of the break down between equipment and smaller disposable, or smaller ASP items.

I'm not sure exactly where you are going with this, obviously the product mix for the Company has shifted more than on the consumable side and we are seeing that in continued strength in our gross margin. In instruments have been slower through the year. And then within our consumable array of products we have some higher margin than others. We don't have a lot of disposables in terms of plastics and things like that in our business if that's where you are going with this.

I was thinking more the lower ASP items that might be considered consumables. The real point of my question was whether you are seeing any growth in instrument sales or you saw any this quarter, because one of the things we are seeing so far, especially on the Diagnostics side, is equipment and instruments has been really rough but companies with good consumables or good recurring revenue streams are doing relatively quite a bit better. And your results would seem to corroborate that given how much of your revenue has traditionally come from those lower ASP items.

Sure, sure, and obviously we are seeing that on the Diagnostics side. So, Brad, made you'd like to comment on instrument sales and Life Sciences.

Life Sciences is kind of a mixed bag. We have moved to about 50% of our sails are consumable products of any nature reagent. But for us we did see some very strong instrument sales in our gene amplification, particularly our real time instrument that has a sort of average selling price in the neighborhood of $30,000 to $35,000 and we did very, very well in the third quarter with that. We also did very well with probably our most expensive instrument, ProteOn instrument which has an average selling price of $250,000 to $270,000. I guess given the strange trends with the Europe and US markets it's really hard to really know what's going on. So we are trying kind of all over the map.

Okay. And on the BioPlex, BioPlex 2200, that is, are you getting a sense from customers or perspective customers that there is more interest than might be reflected in two placements and they are just waiting for credit and financing and general economic conditions to improve?

No, I think our placement, let's say history over let's say quarter to quarter is kind of representative I think of the up take and interest in the system. I don't think you can read too much more into it than that.

Okay. And finally this is just a checking up on a number. The CapEx number for the quarter? I'm not sure I got that right.

I think it was about $15.5 million.

Okay. Great. Thank you very much.

Our next question comes from the line of Dan Leonard with First Analysis. Please proceed.

Thank you. I could use some help on the nature of this order to Russia. Is this an annual tender they put out? Does winning it this year increasing your probability of winning it next year?

It is, generally historically it's been an annual process in Russia and we've had some success in winning those in the past. A few years ago it was more instrument based and now they are more testing, the tests themselves based. But every year we do have to compete for that business and this year we were hopeful that we would be fulfilling it in the fourth quarter, obviously we fulfilled it in the third quarter. Next year if they do another tender we will compete for that as well. And one thing you have to remember about Russia, is its very much an oil economy and as the price of oil goes down the government spends less and less and so whether or not a tender occurs and how much it will be is always a question until the last minute.

Okay. So that's really not recurring revenue then necessarily?

Not necessarily.

Okay. And was there -- presumably that helped you on the gross margin line. Was there anything else in the business that helped you maintain gross margins at the high level we saw in Q2?

It may have helped a little on the gross margin. I can't point to any silver bullets. There's a lot of little things that are adding up to bringing our gross margin into a higher level than we've seen historically, whether it's lower amortization of intangibles and purchase accounting impact or a little lower royalty expense or converting some of these DiaMed distributors to direct sales. I don't think any single one of them can you pointed to as a big impact on the gross margin. It's a little bit of all of that and then the fact that our Diagnostics business, which is primarily consumable based, is doing very well this year. All of it is just kind of adds up to help the gross margin.

Okay. And then my final question, what was the impact from the acquisition of the DiaMed distributors on the revenue line in the quarter?

Probably around $5 million or $6 million.

Okay. Thank you.

Our next question is a follow up from the line of Larry Solow with CJS Securities. Please proceed.

Just a quick follow up. So the tender to Russia was mostly test sales? Like you said that was sort of a higher margin than the corporate average, modestly higher?

No, it was a combination of instruments and tests and I don't have the details, Larry, but I also don't have any reason to think that the margins on that would be different than the Company averages.

Okay. And the capital expenditures, sort of a little bit of a less expense this quarter. And I guess in the Q4, does that -- how does that portray for next year? Is it sort of a temporary slow down or do you expect it to rebound independent of other projects, but was it sort of a just a short term [lull] and timing related?

No, I would probably say that it probably is more timing related. It's certainly consistent with how we've been running this year. But as you know, we are in the midst of simulating plans for an ERP implementation and the roll-out of our e-commerce and website to the rest of the world. And what that led to in the short term is for us to take a good hard look on other investments that we are making to make sure that we have the, not just the financial capacity, but the human capacity to do these projects in the future. While I'm not ready to talk about what that level may be for 2010, I think it's save to assume that capital spending will increase.

Right. And sounds like you've given the full green light to go halfway ERP implementation. Could you, kind of on a global basis, talk about what general guidelines of how much that expense may entail and how many years that may take?

We are not ready to talk about that yet because until we really understand the technology and the roll-out and the timing it's very difficult for us to put a dollar estimate on that but certainly I'm hopeful that as we do the fourth quarter earnings call in February we'll have some more specific information on that project.

But it does sound like you now are fully committed to at least beginning the project planning in 2010?

Yes.

Got it. Okay. Thanks.

A question comes from the line of Junaid Husain from Soleil Securities.

My apologies. I've been jumping back between conference calls so I apologize if my questions have already been asked, but relative to hospital spending in general, we heard from our channel checks that spending is potentially started to bounce back in hospitals but it's kind of the case of the haves and have nots. John, if John is on the call, is this your sense at all when you talk to your hospital customers?

When I think about hospital customers I'm thinking about the products and operating and services that we provide. And over the course of the last several quarters we've not really seen much of a difference or a change in buying patterns in that segment. We've been really fortunate. Yes, there's been some drop off in instrument sale placements but generally that's not our model. We tend to be more of a reagent rental type of a company. So I'd have to say, we haven't really seen much in the way of changes over this period of time in buying patterns.

Got it. And then could you tell us perhaps where the real pockets of strength are coming from on the hospital side, anything in particular from a product category perspective that's shining or outshining relative to its peers.

Yes, I think as Christine previously covered, we had experience now with some strong sales in the area of our blood virus product lines both domestically and internationally. We've continued to have strong sales in our quality control business. We are seeing nice uptick in our emerging market area in that product line as some of these countries are starting to take on more and more regulation over the laboratories.

Got it. And then a more high level question perhaps for Norman. You raised a lot of money but only dropped something like $45 million on this latest deal with [DFS] which [perks] the question, do we expect more deals over the horizon?

We do expect to -- we are always out there prospecting, looking at opportunities and I would hope that we can deploy some more of that money in the coming year.

Then in broad strokes I don't know if this question has been asked or not, but can you give us a flavor for the types of deals that make sense? I'm assuming it's more on the Diagnostics side versus the tool side but I could be wrong.

No, I think it's really on both sides. For us it's really just a matter of where the opportunities are. We tend to look for well priced opportunities, something that's, that adds on to what we have and can help us build on the strong base that we have. Candidly I would hope to do a little more on the Life Sciences side in this next year.

Got it. When we talk to the management teams out there it seems that the evaluations have been a sticking point for potential M&A. Is that your sense as well that perhaps charter companies are still hoping for a rich evaluation even in this market?

Yes.

Good. That's all I got.

Okay.

There are no further questions in queue alt this time. I would like to turn the call back over to Mr Hutton for closing remarks.

You want to poll one more time for questions? Sure. (Operator Instructions)

Okay, well, thank you very much.

All right. Well, if there's no more questions thank you for your time today and your interest. As always we are available for any follow up questions you may have. Bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and everyone have a wonderful day.