Bio Rad Laboratories Inc (BIO.B) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 2010 second quarter Bio-Rad Laboratories Incorporated earnings conference call. I will be your operator for today. At this time, all participants are in listen only mode. Later, we will conduct a question-and-answer question session. (Operator Instructions). I would now like to turn the conference over to your host for today, Mr. Ron Hutton, Treasurer. Please proceed.

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. With that, I'll 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 $467.7 million, an increase of 9.5% on a reported basis versus the same period last year sales of $427.2 million. Sales of our newly acquired Biotest product were $14.5 million for the quarter. On a currency neutral organic basis, year over year sales grew 5.5%. During the quarter we had good growth across many of our key diagnostic markets as well as selected markets in life science. This growth was somewhat offset by the continued slowness in Europe.

The reported gross margin for the second quarter was higher than expected at 57.4%. During the quarter, we recorded approximately $4.5 million of one-time gross profit related to the settlement of some outstanding intellectual property disputes. Excluding these unique items, the gross margin for the second quarter was 56.4%, which compares to 56.6% recorded last quarter as well as in the year-ago period. The noncash purchase accounting expense recorded in cost of goods sold related to the Biotest acquisition was $2.2 million in the quarter including the inventory step-up. Additionally, we continue to book approximately $3.7 million of noncash expense related to the DiaMed acquisition.

SG&A expenses for the quarter were in line with expectations at $156.3 million or 33.4% of sales, which is about equal to the margin recorded both last quarter and in the year-ago period. The current quarter SG&A expenses include $2.5 million for the amortization of intangibles related to the Biotest and DiaMed acquisitions. Remember that historical trends consistently reflect lower SG&A spend in the first half of the year, and thus we anticipate these expenses to ramp throughout the remainder of the year.

Research and development expense in Q2 was 9.4% of sales or $43.9 million, compared to $40.3 million in the first quarter. The sequential increase in R&D spend is primarily related to our investment in new technology for the diabetes monitoring, blood virus testing, and gene expression market. Going forward, we expect R&D spend to be in the 9% to 10% of sales range.

During the quarter, interest and other income was a net expense of $12.8 million compared to $6.6 million of spend in Q2 of last year. This increase versus last year is largely related to additional interest expense associated with our 2009 subordinated debt issuance as well as the comparison to $4.6 million of positive tax-related benefit in last year's results.

The effective tax rate during the second quarter was higher than expected at 30%, primarily related to the change in geographic product mix, meaning the business has shifted to higher tax jurisdictions in the wake of a slow European economy. In addition, we continued to be impacted by the expiration of the federal R&D tax credit as of the end of 2009. The current quarter rate compares to 20.2% in Q of last year, which was favorably impacted by the trueup of prior years. Given the expectation for continued sluggishness in Europe and excluding any discrete items that may occur, we now anticipate the third and fourth quarter tax rate to be in the 28% to 30% range.

Net income attributable to Bio-Rad for the second quarter was $38 million, about flat with last year. At this point it's important to remember the significant changes year over year which have resulted in $40 million of additional sales and yet flat net income. These significant items include the addition of the Biotest business which currently operates at a loss, the addition of nearly $4 million of interest expense, the higher effective tax rate, and the comparison to 2009 other income, which includes $4 million for the relief of the foreign tax obligation I mentioned earlier. To overcome these tough compares with flat net income is a testament to the improvement in our base operating model.

Life science reported sales for the second quarter increased 1% to $150.7 million. On a currency neutral basis, sales were basically flat year over year. These results reflect strong sales of our realtime PCR instruments as well as good customer acceptance of our new TC10 cell counter and PROTEAN TGX precast gel products. This growth was partially offset by a tough quarterly compare in processed media. Additionally, the economic challenges of the European research market continue to be a strong headwind for the tools business as well as the post year-end effect in Japan. Overall segment product profit for life science was $7.7 million.

Our clinical diagnostic segment posted another solid quarter with sales of $314 million, an increase of 14.5% on a reported basis when compared to last year. As I mentioned earlier, sales of Biotest products during the quarter were $14.5 million. On a currency neutral organic basis, year-over-year sales growth for the diagnostic group was 8.7%. These higher sales were led by strong performance across all of our product division, most notably quality control and blood typing products. Sales to the emerging markets, Asia-Pacific, and Japan, 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 nine new systems, bringing the install base up to 149 units. In addition, we received FDA approval for our new MMRV IgG test panel for the BioPlex. Diagnostic growth margins increased significantly compared to last year, primarily due to the one-time impact of the intellectual property settlements I mentioned earlier, which were partially offset by the inclusion of Biotest. Segment profit for the group increased sequentially and year over year to $46.8 million, a reflection of sales growth in our higher margin businesses as well as the one-time benefit to gross margin.

Moving to the balance sheet, as of June 30, total cash and short-term investments were nearly $718 million. Cash from operations for the quarter was $36.4 million, reflecting higher cash outlays and taxes, while EBITDA remains strong at more than $98 million. Net capital expenditures for the quarter were $19.4 million. Our full-year expectation for CapEx remains in the $80 million to $90 million range as we ramp up our facilities and ERP-related spending in the second half of the year. Finally, depreciation and amortization for the quarter increased to $26.1 million.

We continue to be pleased with this start to the year, as many parts of our business seem to be outpacing the industry. However, given the challenges in certain geographies and markets around the world, our outlook for 2010 remains relatively unchanged from the guidance we gave in February. That is, for top line currency neutral organic growth to be in the 5% range. In addition to that 5% growth, we estimate that Biotest will contribute $55 million to $60 million for the full year. Also unchanged, we continue to anticipate full-year gross margins to be in the 55% to 55.5% range and full-year operating margins to be around 12% on a currency neutral basis. However, it is important to note that we are cautious about the third quarter, where an already tough seasonality effect could be magnified in the current economic environment, affecting both sales and operating profit trends. And finally, as I mentioned earlier, we are changing our expectation for the effective tax rate to be in the 28% to 30% range.

On a reported basis, the picture for the remainder of 2010 may look very different given the significant swings in foreign exchange rates since the beginning of the year. For example if we apply current exchange rates to the second half of the year outlook, the negative impact could be more than $50 million to $60 million in sales and $10 million to $20 million in operating profits. But since we are not in the business of predicting foreign currency rates, we will continue to track our results on a currency neutral basis.

And now we are happy to take your questions.

(Operator Instructions). Your first question comes from the line of Larry Solow with CJS Securities. Please proceed.

Hi. Good afternoon.

Hi, Larry.

Could you maybe just give a little more color just on the guidance, because I guess just in terms of the gross margin, you're running out about 56.5%. So I guess your guidance would imply that you fall to about 54% in the second half. Is that what you're thinking or are you just not changing it because there are so many moving parts or any more -- ?

That's a good question, Larry. It's probably a little of both. I mean, if you look at our historical trends, having the gross margin go down into that 54% range wouldn't be unusual for us, especially in the fourth quarter where the mix shift to some of the lower margin instruments. Part of it is the uncertainty of the second half of the year in terms of economic trends. Right now, it's affecting our life science business fairly significantly, the diagnostic business is so far hanging in there. So I think it's a combination of knowing historically what we have done with a bit of uncertainty in the second half of the year that we are leaving our guidance as is, despite some pretty good gross margins in the first half of the year.

Because I know just looking at last year, I know it's not a great example, the kind -- in the last couple of years they seem to track down a little bit in Q3, and more maybe in Q4. But it sounds like you're worried about Q3 just because of normal seasonality and I think -- if I'm not mistaken there was a one time tender in Q3 of last year, is that right?

Yes, yes, so that makes for another tough compare.

And was there anything in the first half that make -- let's put it this way, margins running a little bit ahead of schedule if you had to look at the first half by itself?

Yes, yes, and I think that's both gross margin, and when we have talked about some of the impact of that, but also operating margin is running a little ahead of expectations. Some of the projects that we are working on didn't start off as quickly as we originally anticipated at the beginning of the year, but we are still very motivated to make these investments in our future and anticipate spending that.

Okay. So some of it's just timing of expenses, at least on the operating expense line, so that would be -- ?

Yes.

And then is there anything you can add on the FCPA investigation in terms of what to look for next or timelines or where you stand?

No. We are still -- obviously the investigation is ongoing and we really don't have anything to report at this time.

Okay. And then in terms of -- I think you were at the AACC, the American Chemistry Meeting. Any summary? I was not able to attend. Anything you can say in a minute, any summary of that conference, or what you guys presented or what was anything that came out of it, exciting?

I think the AACC meeting was -- it seems to be very well attended. We had good traffic in our booth. Yes, it seemed to be a pretty good show.

Okay. All right. Thank you very much.

Your next question comes from the line of Jon Wood with Jefferies. Please proceed.

Hello.

Hi.

Hello.

Hey, everyone. So it seems like you guys have been cautious on Europe and life sciences for as long as I can remember, and I guess I'd just like some perspective from Brad if he's there on -- did anything change? I mean, we know it's -- Europe's been weak on the life science side. Did anything change from what you guys have been seeing the last couple this quarter? And then I would love to hear some perspective around government academic versus pharma trends in the life science business.

This is Brad, and I am here. The issue with Europe -- it's really been about the same for the last three or four quarters really. There are certain parts of Europe, maybe with the only exception of Germany, that are really weak -- and it's primarily government sponsored research. Although as lot of these pharmaceutical companies shift their research to primarily -- or predominantly out of the UK into China we see again a weakness in that part of the sector in Europe. And then as far as overall, our business is fairly strong in the US. While it's hard to attribute it to specifics in stimulus spending that seemed to have been diluted out, in general our US customers and the academic sectors are doing well and we tend to be doing very well there.

And then the rest of the world as Christine pointed out in Japan, and this is really in effect for us, is the incremental or supplemental budget that occurred in the fourth quarter of 2009 and the first quarter of 2010 ended as their fiscal year ended. And we just saw real slowness in the second quarter, fairly dramatic and even more than we would normally see drop off. And then overall in terms of our Asia-Pacific business, in life sciences, it's -- it was slower than normally expected, but that's just on a momentary basis. We have a lot of tender based business. It tends to be a little bit lumpy for us because we still have a predominant amount of instrumentation in Asia compared to the normal mix we have elsewhere. So -- but overall, to answer your question more specifically, Europe continues to be slow and the outlook is still pretty slow going forward.

That was great, Brad. Thanks. Christine, I didn't hear you mention BSE. Was that not a factor in the quarter?

And you had to bring it up. The first time in I don't know how many years it's not even in this --

I'm sorry.

So you had to bring it up.

I should have left it alone, but old habits.

Thanks, Jon. Hopefully we've hit bottom, I'm talking about the BSE business. But it didn't seem to have much of an impact one way or the other on the quarter.

That's good. So the processed chromatography comp issue -- can you give us a ballpark on what that did to the comp?

It was predominantly two orders and that's in the neighborhood of the $5 million to $6 million so almost maybe closer to $7 million were orders that happened that did not happen -- happened last year, did not happen this year that were really kind of incremental, that business.

That's great. Thanks a lot.

(Operator Instructions). Your next question comes from the line of Junaid Husain of Soleil Securities.

Hello.

A couple of questions with regards to Europe. When you look at the different businesses, and I know you've talked at length on the tool side, which countries and then specific product lines would you say might see some impact from whether it's austerity or a reduction in healthcare budgets and or some form of cost rationalization? Which of your product lines do you think could be most at risk?

Are you asking on the diagnostic side?

Well, diagnostics or -- yes, yes, sure.

On the life science side, we have talked about that and it's -- several parts of the tools business as Brad talked about through much of Europe. And remember a good portion of our total life science sales are based in Europe, and as John mentioned we have been talking about this for two or three quarters already, and maybe we are more of a leading indicator of what goes on over there because we have a fairly sizable business there. But other than what Brad was talking about in the tools business, I don't know that there's more to -- more to add on the diagnostics side of the business. Europe is still doing all right for us and -- but that's a business that's more contract driven and frankly in terms of healthcare, the specialty testing business is one that seems to tick along, even in tough economic times.

And I don't know if John is on the call, but you sold four BioPlex systems in Europe I think it was last quarter. Did you sell any [boxes] this quarter in Europe?

Yes, the mix of placements for Q2 was weighted more towards Europe during the second quarter, so we are starting to see some of our efforts pick up there.

And then Norman, for those of us who are chained to our desk this earning season and unfortunately couldn't make it out to the West Coast for AACC, could you give us a sense for the general mood of your hospital customers? Is there a prevailing sense that hospital budgets are slowly opening up again?

Yes, this is John. I'll take that. The hospital sector has been under a pretty heavy pressure in terms of money allocated. It's largely directed towards spending on capital as well as personnel related. So nothing really has changed much in that. It's pretty much status quo. They are still looking for the good deal.

That's helpful. And then my last question for Norman, AACC is also a good time for business development activities, I imagine, and just broad strokes, as you evaluate the potential deal universe, is there anything out there that you believe fills a glaring gap in your current product portfolio on the M&A front?

Nothing that's glaring, but as you say, there's some interesting opportunities and as usual, we are poking around at a couple of them.

Great. Thanks so much, guys. That's all I've got.

Your final question for today's event comes from the line of Jeff Matthews with Ram Partners. Please proceed.

Hello, everybody.

Hi, Jeff.

Hi.

Just in terms of expenses in the back half of the year, have things normalized to the point where you're expecting to be paying out more in general on employee benefits as a reversal of some austerity stuff that might have come into place during the crisis, or did you not go through that?

We don't expect personnel-related expenses to change significantly front half to back half. We've kept our head counts under control through this whole time and I think would expect to do that certainly through the rest of the year.

Great. Thanks very much.

I would now like to turn it back over to management for closing remarks.

Okay. Well, thank you everyone for taking the time to join us today. As always, we are available for any follow-up questions you may have. Bye.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.