Bio Rad Laboratories Inc (BIO.B) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2010 Bio-Rad Laboratories Incorporated earnings conference call. My name is Noelia and I will be your coordinator for today. At this time all participants are in a listen-only mode. (Operator Instructions) We will be facilitating a question-and-answer session towards the end of this conference. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Ron Hutton, Treasurer. Please proceed.

Thank you. 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'd like to turn it 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 quarterly net sales of $471.5 million, an increase of 2.3% versus the same period last year sales of $461.1 million. On a currency neutral basis, sales increased 5.4%. This increase includes sales of $13.6 million from our newly acquired Biotest product line. On a currency neutral organic basis, sales for the quarter increased 2.2%.

During the quarter, we experienced continued strength in our Real-Time PCR product line and quality controls tempered by weakness outside of the United States, especially in Europe and eastern Europe as well as the challenging compare with the year-ago period. The gross margin for the quarter showed continued strength at 56.5% compared to 57.4% last quarter, and 56.5% in the year-ago period. The third quarter reported gross margin reflects approximately $1.5 million of non-cash purchase accounting expense related to the Biotest acquisition, including $1.3 million of inventory step-up. Additionally, we continued to book approximately $3 million per quarter in cost of goods related to the acquisition of DiaMed.

SG&A expenses for the third quarter were lower than expected at $148.7 million or 31.5% of sales, compared to $153.6 million and 33% of sales last year. The lower spend versus last year is primarily reflective of our continued focus on managing head count, as well as the successful outcome of outstanding legal liability and some timing of expenses. Amortization of intangibles for -- intangibles for the DiaMed and Biotest transactions recorded an SG&A during the third quarter was just over $2.7 million.

Research and development expense for Q3 was in line with expectations at 9.1% of sales, or $42.9 million. During the quarter, interest and other income was a net expense of $16.9 million, this compares to $16.2 million of net expense in the year-ago period. The tax rate used for the third quarter was slightly better than expected at 22%, which compares to 23% last year. The lower than expected tax rate is the result of a more favorable true-up of previous years both in the United States and internationally, as well as increased profit and lower tax jurisdiction. Excluding any future discreet items, we anticipate a tax rate in the range of 27% to 29% for the fourth quarter.

Net income for the third quarter was $44.8 million, an increase of more than 16% versus last year. This improvement not only reflects higher sales, but also a continued focus on controlling head count and operating spend throughout the Company. Life science reported sales for the quarter increased approximately 2%, compared to last year, to $153.2 million. On a currency neutral basis, sales rose 3.5%. Geographically, the life science market continues to be challenging in Europe, which was partially offset by solid growth in the US and Asia-Pacific regions.

On a product view, during the quarter we posted good growth in our gene expression, electrophoresis, and sell analysis lines. Overall, life science segment profit increased more than 18% to $11.4 million, primarily the result of continued strength in the gross margin and focused expense management. Our clinical diagnostic group posted sales of $314.9 million, a growth of 2.4% compared to last year. On a currency neutral basis, diagnostic sales grew 6.3%.

As I mentioned earlier, sales of Biotest products during the quarter were $13.6 million. On a currency neutral organic basis, year-over-year diagnostic group sales grew 1.5%. Organic growth during the quarter was tempered somewhat by a challenging economic environment in Europe, as well as the comparison to last year, when the third quarter included sales from the newly acquired DiaMed distributor business in Japan as well as some tender-related sales. Revenue related to the placement of BioFlex 2200 systems and tests continue to do well growing nearly 30% year-over-year. During the quarter, we placed nine new systems, bringing the install base to 158 units. Clinical diagnostic segment profit for the quarter was $49.6 million, compared to $44.3 million last year, an increase of 12%.

And now for a quick review of the balance sheet, as of September 30, total cash and short-term investments were $738 million. Cash from operations during the quarter was $66.9 million, reflecting higher cash outlays and taxes, while EBITDA remains strong at $98.6 million. Net capital expenditures for the quarter were $20.2 million. Our full-year expectation for CapEx is now somewhat lowered to be in the $80 million range. Depreciation and amortization for the quarter was relatively unchanged at $26.3 million.

Before I turn to the financial outlook for the remainder of the year, I would like to make a comment on the statement in our earnings release concerning our internal control over financial reporting. In connection with our audit committee's ongoing investigation of our compliance with the US Foreign Corrupt Practices Act, an internal control assessment by management and our internal audit group during the quarter, we identified three significant deficiencies in our internal control over financial reporting as of September 30, 2010, that when considered and taken together constitute a material weakness in our internal control over financial reporting as of September 30, 2010.

Our conclusion that we have a material weakness in our internal control over financial reporting is not based on quantified misstatements in our historical financial statements or our financial statements as of and for our third quarter of 2010, but instead, on the risks that we may be unable to prevent or detect on a timely basis potential material errors in our future financial statements. We do not presently anticipate that the material weakness in our internal control over financial reporting will have any material effect on our previously reported financials or our financial results for the third quarter that we are reporting today. Rest assured, we take this very seriously and intend to fix it.

However, due to the timing of our determination that we have a material weakness, we are not in a position to discuss this further today. Our quarterly report on Form 10-Q for the third quarter will contain more information about these three significant deficiencies and the resulting material weakness.

And now for our outlook, we are pleased to report another strong quarter for 2010. At the beginning of the year, we guided currency neutral, organic revenue growth of 5% and contribution from the Biotest acquisition to be $55 to $60 million in revenue for the full year. Given the current economic challenges in the European region, we now believe that the full-year organic sales growth for 2010 may be in the 4% to 5% range. Total Biotest sales are expected to be somewhat lower than originally estimated for the full year due to the weak economic environment in Europe. However, sales of Biotest products in the US have been, and continue to be, very strong. Therefore, based on current exchange rates, we are estimating total sales for the fourth quarter to be between $510 and $520 million.

As is typical with our historical pattern, the fourth quarter usually reflects a lower gross margin as the product mix shifts towards a higher percentage of instrument sales. Thus, we estimate gross margin for the fourth quarter to be in the 55% to 56% range. On the operating side, we will continue our focus on managing head count. Having said that, remember in the fourth quarter we generally have higher expenses which are typical of our year-end. In addition, this year we are planning for an increase in research and development spend as we invest in several new products to be introduced next year and beyond.

Thus, we are estimating operating margins for the fourth quarter to be around 12%. Given the higher than expected operating profit results in the first nine months of this year, we are raising our original expectation for the full year operating margin to now be closer to 14% versus our original estimate of 12%. As you will remember from our prior calls, this higher than expected profitability for 2010 is the result of a more favorable product mix, good expense management, and the one-time benefit related to the settlement of some outstanding legal disputes.

As has been our practice in prior years, we will share our thinking and outlook for 2011 in February during the fourth quarter earnings call. And now, we are happy to take your questions.

(Operator instructions). First question comes from the line of Jon Wood from Jefferies.

Hey, good afternoon. Can you hear me?

I can hear you.

Hey, so I'm not sure if Brad is there, but just kind of put the European life science outlook into perspective. I mean the budgets are out and I think they, you know, by all means are at least stable, potentially a little better. Is there light at the end of the tunnel for life sciences in Europe? And then also commenting on Asia, some of the consumables companies have seen a pretty demonstrable slowdown in the Asian trajectories this quarter and just wondering, you know, if you can qualitate what you saw in Asia in the first half of the year perhaps versus life sciences?

Hi, Jon. This is Brad. Yes, as far as Europe goes, we have seen considerable weakness and even in some of the emerging markets of Europe as well. You know, it's somewhat geographic. We have had particular slowness in northern Europe, but obviously the southern European economies are tough.

The announcement on the austerity measures in the British government is also going to, I guess, sort of give some concern going forward as far as research spending goes. But overall, somewhat tempered by some good growth in some of the pharmaceutical sector in Switzerland and some in the UK and obviously Germany. So, on balance, I don't really see a tremendous amount of change going forward in Europe, certainly in where we saw this year and into next year. As far as Asia-Pacific goes, we did see a slower -- and again Asia-Pacific for us is a very large region, but we did see a slowdown in some of the more consumable and although we don't have a tremendous amount of consumable business in Asia, we did see some of our apparatus, and simple -- sort of, lower cost products were slower in the third quarter than they were in the first half of the year. Maybe more of an impact from India than China as it were.

So, as far as, you know, the general business climate, I don't see a problem in the fourth quarter where it's going to be bigger for us because that's where typically we do a lot of business in the fourth quarter there and then as far as next year, you know, who knows. This part of the world is hard to say.

Okay. Great. Thanks. Christine, what was the impact from the Russian tender comps? Basically I know there's $20 million in the year-ago period. Did you have any tender business in this third quarter or was it just a net negative $20 million impact in terms of the comp?

I think, you know, the comp, when we look at both the rounding the anniversary on the acquisition of the Olympus business in Japan, combined with the changes on the tender side, it's probably about a $10 million impact.

Okay. So, net $10 million. And so in the fourth quarter does that -- some of that tender business come back or should we assume that's gone, you know, that's next year at this point?

Yes, I don't -- I'm not aware of any business coming in the fourth quarter related to that.

Okay. Have you explored debt refinancing at this point?

Certainly it is a topic of discussion here internally.

Okay. Then last one, I know it's early, but just any significant kind of discreet expense items we should be aware of or be preparing for, for next year? I mean, either if it's ERP or maybe a financial control investment. I mean, should we be thinking that there's any kind of step-up in the, you know, significant step-up in the expense base next year?

Well, you know, Jon, we are going through our planning right now, so I'm a little hesitant to talk about, you know, specifics for 2011. We have talked about spending for the ERP and as we have gone through 2010, the project probably hasn't moved along as far as we would have originally anticipated. So, spending is a little lower this year. Next year, obviously, will be a bigger impact because of more people on the project, backfilling those folks, and then of course certainly a higher CapEx spend. But I -- you know, I'm not in a position to give you those details now on that or any other potential unique item.

Okay. I'll stop there. Thanks.

Your next question comes from the line of Larry Solow from CJS Securities.

Hi, good afternoon. Christine, just to follow-up on that question, I know you're not in a position to answer it, the exact number, but I imagine one new expense item maybe won't be too significant, could be some type of remedy for this internal control issue? I imagine you have to implement some type of system or something, right? Is that a fair statement?

I think it is too early to make any kind of comment on that.

Okay. And will there be anything in the queue that says what type of remedies you may have to take or -- ?

Given that the determination of this material weakness is fairly new, we are in the process of analyzing that right now.

Okay. Can you just tell me -- you talked about the successful conclusion of some legal outstanding issues. Do you have a number for that?

It was a little over $1 million and these are some issues that go back to the acquisition of DiaMed.

So, $1 million dollars in SG&A, that's the number?

Yes.

So, I'm just a little confused as to, you know, how in mid-August you say, you know, SG&A is going up so much. What changed from mid-August, you know, middle of your quarter, in the latter half of the last six, seven weeks where you thought, you know, SG&A was going to go up a lot year-over-year when it actually came down? It's a little bit of a -- makes me scratch my head a little bit.

Yes, no and I share some of that with you, Larry because I think all the spending -- we were all surprised that it came in lower than our internal expectation. I think a lot of that is related to timing of expenses.

Okay. Timing being -- I mean I guess one piece of the ERP which is just not -- but I mean I would say -- I would imagine some of those corporate type ERP things you would have a better grasp of them, right? I'm a little confused as to -- I would think SG&A is the one item where most companies unless it's a big sales variance and there's variable commission, that should be the one number where you know where you're going to spend.

And I think commission, I think lower commissions is a part of that.

Right. But -- okay. I mean to some extent but as a percentage of sales, I just find it hard to believe that the number could be, you know, if it was going to increase, it would have -- it's like $15 million lower than it should have probably been based on what you were saying last quarter. And then you talk about a liability, but that's $1 million, so that's basically insignificant compared to what the beat is, right? So, it's just -- I just found it interesting but that's okay. I understand you're conservative but I don't see how in the middle of the quarter you can guide SG&A to go up a lot and actually comes down, doesn't make sense. Thanks.

Your next question comes from the line of Junaid Husain from Soleil Securities.

Hey, good afternoon, everyone.

Hi.

If John is on the phone, John, could you help me understand some of the market dynamics in the blood testing space? Your largest competitor, Immucor, has been talking about a tough macro environment. I think they have talked about a 3% to 4% decline in blood testing volume. What has been your experience with Biotest? Are you seeing these negative trends in the US as well?

Yes, this is John. Yes, actually, you know, the Biotest acquisition for us, you know, took place in January and that's when it became really a part of Bio-Rad and we began reporting sales. Actually, the blood typing business overall is going well for us, especially in the United States. We are finding customers very willing to delay their purchasing decisions to evaluate our product lines, which you may or may not know consists of a full line of manual reagents, you know, as well as the automated platform, the TANGO.

You know, outside the US, it's also going quite well for us. In fact, we were briefly on back order for some of our gel card instruments. And as you know, we have launched the -- that fully automated gel card system, the IH1000 in Europe in July, and we have shown it at a couple of blood banking conventions and feedback has really been excellent. We are in the middle of a controlled roll-out with this system to really highly qualified customers but the feedback has very positive.

Do you think that perhaps you might be winning some market share, then?

Oh, yes, without a doubt.

Okay. And then, John, you know, there's been a lot of talk out there about the Troponin test and the challenges that Beckman Coulter has been having with this test. I think you guys have a Troponin test in your portfolio. Have you noticed any material bump-up in your Troponin business since the beginning of Beckman's problems?

We don't have a Troponin test in our portfolio.

Oh, I'm sorry. I thought you did. Well, then, I guess a bigger picture, maybe a regulatory question for you, especially in light of Beckman's you know, quality issues with Troponin. Would you expect a greater level of scrutiny at the FDA moving forward on tests that you send to the agency for approval?

We don't have any reason to think so. I think FDA is looking specifically at this particular analyte and whether that drives a different -- or a change in how they inspect, I don't know. We don't have any reason to think it will.

Okay. Fair enough. And then Brad, maybe a question for you. Big picture question for you on the US-based research spending. You know, with the midterm elections tonight, I guess if the pundits are correct and we've got a gridlocked congress, what are your thoughts on growth of the NIH budget? Are you basically thinking that NIH funding grows at maybe CPI, maybe more, maybe less. And then, how does that impact your business?

Well, I mean, again, as far as overall, the budgets for NIH are coming off the stimulus and, you know, it's been really hard to quantify the stimulus in terms of the impact on specific business. But overall, it's created a relatively positive climate and we have seen that with very strong growth in North America. You know, going forward we see it kind of growing both the intramural and extramural NIH budgets coming back down into you know, relatively low single digits and, you know, for our approach. And really it's been -- it's fighting for market share and not rising -- or riding a growth or a wave in spending.

Got you.

And then last question for you guys, Norman or Christine. You guys have a lot of cash on the balance sheet and a lot of us have been waiting for you to pull the trigger on maybe another acquisition. I know that you see a lot of deals, you know, that fall on your plate in any given quarter. What would you say is the rate-limiting step on getting a deal done? Is it valuation? Is it finding that diamond in the rough or is it just that you haven't found the right deal?

This is Norman. You know, I think it's a combination of all of those things. As you know, we are -- we have been very careful in our acquisition strategy and we want to get things that really make a difference and add to the total picture. Yes, pricing has been an issue. You know, there haven't been as many available transactions and things that fit. So, you know, it's a combination but we are still working on it, obviously.

Okay. Good enough. Thanks so much, guys.

And your next question comes from the line of Dan Leonard from Leerink Swann.

Thank you. My first question, Christine, on the 200 basis point improved expectation for operating margin, could you tease between how much of that benefit is from product mix versus make better expense management?

You know, I can't give you that level of detail.

Well, do you feel as expense management appears to be a big story, do you feel internally there's any pent-up demands for getting projects approved or do you feel that, you know, you're just operating efficiently and this is something more sustainable?

Well, that's a good question. It's probably a combination. I think some of the efforts that we have made over the last year or two are sustainable. At the same time, we are moving into a period of investment and the ERP is one good example of that, that will require higher spending. So, I think it's a combination.

Okay. And a couple of housekeeping questions. Is the R&D tax credit assumed in your Q4 tax expectation?

No.

And then how much would you expect current foreign currency rates are going to affect your results in the fourth quarter given that they have moved a lot from your prior expectation?

Oh, you know, who knows where they are going to end up, Dan. I mean the best that we can do is kind of see where the rates are now and see how that impacts, you know, our projections for the fourth quarter, but, you know, I don't know where they will really come out. You know, it seems like it will still be a bit of a headwind, you know, versus last year, but who knows.

Is it fair to say that under your expectations for margins and expenses in the fourth quarter incorporate current rates?

To the best that we can.

Okay. Thanks. And then finally I'll ask a business question. John, can you walk me through which pieces of your diagnostics business might be more economically sensitive versus those which are less tied to cycles? Thank you.

Well, I would say most of our business with respect to, let's say, blood typing, what, virus testing is geared towards screening, the amount of donors coming into the system is pretty small. So, that's usually a pretty stable type business for us. Quality control is pretty steady. From that aspect, I don't see a lot of seasonality, you know, growing into this -- into our product mix and how we sell. I don't know if that answers your question.

Well, I mean just the organic growth rate was a little bit weaker than it had been in the past even when you back out the tough comps maybe one or two businesses that there are maybe more sensitive than I had prior -- previously expected them to be.

No, I think it was maybe a little bit more tough to compare situation for us than any kind of general softness due to management conditions of customers, let's say.

Okay. Thank you.

And your final question comes from the line of Mr. Jon Wood from Jefferies.

Hey, one cleanup. Looks like there was like $21 million of acquisition spending in the third quarter. What is that?

It's primarily the acquisition of a DiaMed subsidiary, which at the time of the greater acquisition of DiaMed holding, we owned 51% of, we were able to acquire the other 49%. And so, you can see then the minority interest portion will go down as a result of that.

Is there -- are there any more of those to do, Christine, at this point or are you done?

There's probably a couple more that we'd like to do, both of subsidiaries where we own 51%. We'd like to wholly own them as well as a couple of distributors, but I think as a practical matter, the large ones are behind us.

Okay. Great. Thank you.

You're welcome.

There are no further questions on the line at this moment.

Operator, would you like to poll one more time?

(Operator Instructions)

Okay. Well, assuming there are no more questions, thank you very much for spending time with us today. And we look forward to speaking with you and seeing you again soon.

Thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Have a great day.