Bio Rad Laboratories Inc (BIO.B) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your quarter-2, 2011 Bio-Rad Laboratories earnings conference call. My name is Denise, and I will be your event manager today. Throughout the conference, you will remain on listen only. (Operator Instructions)

We will be accepting audio questions after the presentation. (Operator Instructions)

Now, I would now like to hand the presentation over to your host for today's call, Mr. Ron Hutton, Treasurer. Please proceed, sir.

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 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 $521.7 million, an increase of 11.5% on a reported basis versus the same period last year sales of $467.7 million. On a currency-neutral basis, year-over-year sales grew 4.2%.

During the quarter, we had good growth across many of our key Diagnostic and Life Science markets. This growth was partially offset by the continued slowness in Europe. The reported gross margin for the second quarter was in line with expectations at 56.2%, compared to 57.4% last year. Remember that during the second quarter of last year, we recorded approximately $4.5 million of 1-time gross profit related to the settlement of some outstanding intellectual-property disputes. Excluding these unique items, the gross margin for the second quarter of 2010 was 56.4%. The non-cash purchase accounting expense recorded in cost of goods, related to the DiaMed and Biotest acquisitions, was $3.8 million for the quarter.

SG&A expenses for the quarter were $176.7 million, or 33.9% of sales, which compares to 33.4% of sales in the year-ago period. The current quarter SG&A spend includes approximately $15 million of additional expense due to currency translation, increased reserves to receivables in economically challenged markets, primarily in Europe, as well as costs associated with our ERP project. Also recorded in SG&A is $3.1 million for amortization of intangibles related to the Biotest and DiaMed acquisitions.

Research and development expense in Q2 was 9.2% of sales, or $48.2 million, compared to $43.9 million last year and $42.7 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 blood typing markets. 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 $10.4 million, compared to $12.8 million of expense in Q2 of last year. This decrease versus last year is largely related to additional dividend income.

The effective tax rate used during the second quarter was higher than expected at 30.8%, which is reflective of a change in the geographical sales and profit mix. The quarterly tax rate was also impacted by some additional tax reserves related to certain ongoing tax audits. Given the expectation for continued sluggishness in Europe, and excluding any discrete items that may occur, we now anticipate the full-year tax rate to be in the 29% to 30% range.

Net income attributable to Bio-Rad for the second quarter was $40 million, an increase of 5.5% versus last year. Diluted earnings per share for the quarter were $1.41.

And now for certain segment information. Life Science-reported sales for the second quarter increased 12.8% to $170 million. On a currency-neutral basis, sales grew an impressive 6.7% year over year. These results reflect strong sales of our electrophoresis and imaging product lines, which were buoyed by the launch of new products, as well as growth in process media. Additionally, sales in North America were particularly strong during the quarter, partially offset by the continued challenges in the European research market. Overall segment profit for Life Science was $10 million, an increase of nearly 30%.

Our clinical diagnostic segment posted another solid quarter, with sales of $348 million, an increase of 10.8% on a reported basis when compared to last year. On a currency-neutral organic basis, year-over-year sales for the Diagnostics Group was 2.8%. These higher sales were led by good performance across many product lines, most notably quality control and diabetes monitoring products. Sales to Latin America, Asia-Pacific, and Japan were especially strong during the quarter. Diagnostic gross margins decreased compared to last year, primarily due to the 1-time impact of the 2010 intellectual-property settlement I mentioned earlier. Segment profit for the Group was $46.6 million, about flat with last year.

Moving to the balance sheet, as of June 30, total cash and short-term investments were $886 million. Cash from operations for the quarter was especially strong at $110 million, reflecting higher collections and investment income, and EBITDA remained strong at more than $99 million. Net capital expenditures for the quarter were $24.7 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. And finally, depreciation and amortization for the quarter increased to $29.6 million.

We continue to be pleased with our year-to-date results, which have been in line with expectations. Additionally, the uptick in growth for our Life Science segment seems to be a good sign for the future. However, given the challenges in certain geographies and markets around the world, our outlook for 2011 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. Also unchanged, we continue to anticipate full-year gross margins to be in the 56% to 56.5% range, and full-year operating margins to be around 13%.

As with past years, we are somewhat cautious about the third quarter, where an already tough seasonality effect could be magnified in the current economic environment, affecting both sales and operating profits. And finally, as I mentioned earlier, our expectation for the effective tax rate is to be in the 29% to 30% range.

And now, we are happy to take your questions.

(Operator Instructions)

Paul Knight. Please proceed.

Hi. Good evening. Regarding the expression of challenges in Europe, is this academic, is it clinical? Where do you see it?

It's really kind of across the board, both in academic and in the Diagnostics market.

Norman, do you think that we're in the European -- as Europe stands now, is it reflecting austerity measures passed so are we kind of in a normal state of slow growth? Or is it kind of on rolling out?

Boy, that's kind of hard to tell.

I guess the question would be, did you see deceleration in Europe in Q2 or tone of business to decelerate? Or was it kind of the same is Q1?

I think it's been about the same. There've been no kind of dramatic changes one way or the other.

And then how did Asia look in the quarter?

Not too bad.

Up or down or any change, do you think?

I think it was up. You know, maybe the growth rate wasn't quite as robust as we've seen historically, but it was still good growth given the current situation.

And then relative to an operating margin that I think was a little lighter than we estimated. Is the 13% margin was -- SG&A a little higher? Was it currency affecting that? What was the color on the items affecting the off-margin in the quarter?

Sure. So, I think the biggest component was SG&A was up year-over-year and some of that was currency. In the prepared remarks, I kind of highlighted about $15 million of the increase year-over-year.

And 10 of it is probably related to currency. The other 5 is kind of split between our ERP spend and a decision that we made to increase some of the reserves on receivables for parts of Europe where the economies -- you guys read about them in the newspaper everyday, or some of the economies are really slowing down.

And so that -- the reserves would be in that SG&A line, Christine? Or cost of goods line?

No, it would be in the SG&A line.

Okay. Thank you.

Junaid Husain. Please proceed.

Good afternoon, everyone.

Hi, Junaid.

I don't no if John is on the line?

Yes.

John, I got my quarterly obligatory hospital CapEx question for you. As we've been doing our checks with hospitals, especially in this CapEx environment, my sense is that the for-profit hospitals have the money, and the not-for-profit hospitals are the ones that are struggling to do any capital investments. Is that your sense as well?

Yes, it is. We see more and more of our instrument placements actually being reagent rental than we have in, let's say, prior periods. So I would say that kind of reflects that situation.

Yes. And then can you tell me in any given quarter, in the US, what is your mix of for-profit and not-for-profit customers who are purchasing your high-end Clinical Diagnostic systems?

We don't have that. That break out. Generally for us a customer is a customer and when they buy something from us, they get our full service regardless. So we don't really look at it in that way.

Got you. And then if Brad is on the line?

Yes.

I guess, Brad, in a post debt ceiling world, my sense is that there's going to be less appetite for expanding at the NIH budgets and if anything, we could see a contraction. From years past when we see another flat to lower NIH budgets, what's the triple-down impact to the Life Science's business?

We're trying to get that, too. In the end, we have a broad product line, which helps us. There was a while there where certain sequencing product lines and there were things in demand and maybe mass spec that really drove a lot of the growth and benefited for some increased budget. But we have a very broad appeal of products and even in this quarter we've seen a really good impact from our imaging and electrophoresis lines, which really kind of fly a little bit below the budget ceiling. So I think we kind of balance it a little bit.

Got you. And then Christine or Norman, if you could help me a little bit on pricing for your products more at the aggregate level in terms of its impact on overall corporate margins. How has pricing held in relative to the overall portfolio? Was it up, down, or net neutral?

I think it's probably net neutral when we think about it. Obviously, there'll continue to be pressures on pricing all the way around with the constrained budgets in Life Science and certainly with the pressure on healthcare costs. I think both of those are something that we feel. But I don't think it's any worse this quarter than it has been.

Got it. And then Christina, last question for you. Relative to your European implementation. Could you remind me of the incremental expenses associated with implementation maybe any incremental operating expenses versus the capitalized expenses for the software?

Sure. So I think this year we were expecting ERP spend to kind be in the $15 million plus range on the expense side, and something equal to that if not a little higher on the capital side. We are now starting to ramp up the services of outside professionals more. So that will continue to increase the capital spend.

Overall, for the entire project, we have talked about this being in the $100 million plus to $150 million plus range over many, many years -- 4 years or so. And our best estimate at this point is of the $150 million, maybe 66% of that ends up being more capital and then the other third is expense. In the next couple of years will be the highest spending in both buckets, I think.

Great. And then as a follow-up to that, I've noticed that -- with other companies that have gone through major ERP implementations, you do see some efficiencies as employees plow through integration. As you look at the timeline, where would you expect to see, perhaps, a negative impact from the implementation and how material would you expect it to be to your business?

(laughter) Not even sure how to approach that. It's a good question. I don't disagree with you that many companies when you look at them going through these programs, they're costly. They can be disruptive. I think we're trying to be very diligent and deliberate in how we manage this project, which is partially why we've chosen to do it over a number of years rather than very quickly, you know, big bang, where you increase the opportunity for a disruption. Having said that, I think they're always are blips in the road.

Our goal is to try and not have it be a significant financial blip or impact on our business. In the short term, we're putting some of our best folks on the project, and those positions need to be backfilled. And that always takes a little bit of time. But, while we can't guarantee no blips along the way, were going to be as diligent and proscriptive as possible in running a successful project.

All right. Good enough. Thanks, guys. That's all I've got.

And you're next question comes from the line of Jeff Matthews. Please proceed.

Hi. Can you hear me?

Yes, we can.

Great. Thanks. First of all, the 2.8% same-side organic growth and diagnostics is a pretty big slowdown if I recall. And you highlighted growth in emerging markets and also Japan. So I'm wondering what happened in the US and Europe in Clinical Diagnostics. And also you did not highlight blood typing so I was wondering if there was a change in that side of the business?

This is John. Just a couple of points expiration there. Our blood virus business really has been a little lack luster particularly in the second quarter. I'm saying blood virus. And in this particular case, we've been presented with some tender opportunities where pricing, quite frankly, is not that interesting. So we kind of held the line of some those and in some of those cases we've lost those tenders, which I'm not too broken up about that.

Profitability with that business is still performing well. So I think that's been one contributor to that slower --

Is that in the US, John?

I'm sorry?

That's in the US?

That's actually in the US and European emerging markets.

Okay.

And then in the blood typing part of the business, I think I mentioned earlier that we do see more of our customers at least in this recent period opting for reagent rental deals as opposed to cash sales for instruments. So when you start to get in a little comparison there, there's a little bit of a downward swing there. However, I will say that the units for a placement and reagent sales in those businesses are continuing to grow very nicely.

Okay. And then my second question, Christine called out reserves for receivables in some of the weaker European economies. I don't even remember you guys doing that during the crisis, am I wrong? It sounds like its hit a level that it didn't even hit in the crisis of significance. I'm wondering if a, that's true? And b, is this is a matter of your systems catching up with bad receivables that have been around for a long time? Or is this something materially worse in part of your European customer base, which wouldn't be a surprise given the headlines?

Jeff, I wouldn't read that into it. You're right. It's probably not something that we've called out before, and maybe we didn't even need to call it out this time. We have always done what is appropriate around the world, and I don't know that this would signal something very different specifically within our own business. It's more reflective of what truly is going on in that region and given the debt situation, et cetera. It just seems to be appropriate and a trend among those of us who are GAAP reporting companies. But I wouldn't read anything into it and there is something that specifically changed in our business.

Sure. And then if I could just follow-up on that -- along that line, I wonder if Norman might speak to this maybe or John. In terms of Europe, which is always been very big for Bio-Rad, disproportionately big relative to I think your size, there's a lot of dust in the air, not only from the headlines that we see today, but the UK pressuring the national health service spending. Could you kind of take us around Europe and what the outlook might be over the next 12 months in general?

Well, I think the outlook is probably -- my guess is more of the same. You know, were going to continue to see those pressures. And I think that's about it.

I don't think there's any place -- obviously, places like the UK have announced measures and probably has been a little more affected, although you got other regions that are also -- I guess of all the ones, Germany continues to kind of be the brighter star.

Yes.

In Europe. They seem to be the healthiest of the bunch. But I think that's about the picture.

Jeff, I think one of the things about our market is that we do make products that are needed. At the end of the day when people come to their position and present themselves at hospitals and have operations, the products that we market and sell are needed and will be consumed. I guess the question will be well those governments be able to pay their bills. But at the end of the day, I really do see a fairly insular effect based on product lines that we sell.

Understood. And then I'd like to just follow-up once more, and I'm not a big quarterly EPS guy as you know, but just in terms of the Diagnostics business, if you're up a couple -- 2.8%, or whatever the organic number was and you highlighted growth in developing markets as opposed to the US and Europe, does that mean US and Europe were flat to down? And is that meaningful?

Yes. I would say their flat to slightly up -- not flat to down.

Okay. All right. Thanks very much.

(Operator Instructions)

Jon Wood. Please proceed.

Hey, thanks a lot. This is for Brad. Can you call it -- Brad, I know you had a week comp in the second course 10 on the process chromatography side. I think at that time, we call that at being $7 million year-over-year. Can you just comment on the effect of the process chromatography business in the second quarter of 2011?

You're very correct. And there was -- although we had very good growth on the broad appeal -- across our broad product line, process to help in the second quarter. I can't give you the exact number, but it did have an impact.

I guess what I'm getting at here, Brad, is even if I had just, for that kind of fluctuation in 2010, the second quarter of 2010, it still looks like your Life Science business has stepped up quite a bit from kind of an ongoing core growth perspective. So despite your comments on Europe austerity and the like. So what is driving this kind of better trend, this accelerating trend in the underlying business at this point?

We've launched a lot of new products. And then a lot of cases, we are taking market share. And I think certainly in North America, we have been very well. I mean, the general business climate -- and again as the broad range of products that we offer that has to do with really how the average lab runs. And coming out of the stimulus program were a lot of people were hired, facilities were staffed, that has really helped us well.

And in kind of our core franchise of electrophoresis blooding and imaging, we've worked very hard over the last couple of years to effectively redo that line and kind of changed some the paradigms in the market place and we've been successful. And that has helped us a lot. We have a very strong PCR product line, and we continue to take market share in that area as well. So overall we've done well. We'd certainly like to do better, and would like to keep consistent in this way, but overall the product lines up.

Understood. Okay, great. Norman or Christine, just any comments you can share on kind of the M&A backdrop, the cash level here continues to build to astronomic levels. Any itchy fingers lately on the M&A side? And if you will comment, just parse out the Clinical Diagnostics versus Life Science picture there.

Well, okay. So while we have these astronomical balances on the call, so do some others. The market continued to be pretty competitive and as you know a lot of these assets have gotten did up recently. I would say that there are -- there still continue to be a number of opportunities. It seems like kind of more of these are presenting themselves on both the Life Science and the diagnostics side. We currently have a couple in -- on our radar screen.

Okay, great. Last one for Christine is on the ERP side. So you kind of called that about A $5 million delta between reserves and ERP. So my question is, are we at -- do we still have another step up in the third quarter in terms of the expense side? Or are we at a run rate for ERP that will be pretty consistent in the back half of the year?

No, I think we probably continue to step up through this year as we build the team and go through our global design process. And then it should start to be a little more consistent on the expense side. And of course, over time, the capital side will continue to rise.

Okay. Thanks a lot.

At this time we have no further questions in the queue.

Okay, great. Well, thank you everyone, for joining us today. We appreciate your interest and look forward to speaking with you soon.

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