Bio Rad Laboratories Inc (BIO.B) 2011 Q4 法說會逐字稿

Good days, ladies and gentlemen, and welcome to the fourth quarter 2011 Bio-Rad Laboratories Inc earnings conference call. My name is Deanna and I will be the operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host, Mr. Ron Hutton, Treasurer. Please proceed.

Thank you, Deanna. 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 were review the fourth quarter and full-year financial results for 2011, as well as provide some insight into our thinking for 2012. Let's start with a review of the quarterly results. We are pleased to report net sales for the fourth quarter of fiscal 2011 were a record $550.2 million, an increase of 3.1% versus the year ago period sales of $533.7 million. On a currency neutral basis, quarterly sales grew 2.4%. This year-over-year growth was fueled by continued progress for both our Life Science and Clinical Diagnostics segments, with specific strength in our real-time PCR and imaging product lines, as well as quality control, blood typing, and microbiology products. However, our top line growth continues to be challenged by slowness in Europe.

The consolidated gross margin for the quarter was in line with expectations at 56.5%, versus last year's gross margin of 56.2%. During the quarter, we recorded approximately $3.7 million in cost of goods sold for the amortization and purchase accounting expense related to our DiaMed and Biotest acquisitions. In addition, the fourth quarter gross margin includes $2.5 million of amortization related to the recently acquired QuantaLife.

SG&A expense for the fourth quarter was $174.9 million or 31.8% of sales, compared to $176.7 million or 33.1% of sales last year. The lower-than-expected SG&A spend in margin is primarily related to the one-time reversal of our incentive bonus accruals of approximately $9 million as we anticipate a significantly lower bonus payout for our 2011 operating results. Amortization of intangibles related to our acquisitions recorded in SG&A in the fourth quarter was approximately $3 million.

Research and development expense in Q4 was 9.1% of sales or $50 million. This increase in spending, both sequentially and year-over-year, is reflective of our QuantaLife investment, as well as focus on the development of new products for markets such as diabetes monitoring and blood typing. Interest and Other for the quarter, was a net expense of approximately $12 million, compared to $20.6 million last year. This lower amount versus last year is primarily related to the debt refinancing completed in December 2010 and the subsequent retirement of our 2014 bonds, which resulted in a one-time expense of $5 million last year, as well as the resulting benefit of lower interest costs.

The effective tax rate used in the fourth quarter was better than expected at 20%, primarily related to the finalization of foreign audit, as well as decreases in tax reserves due to statute lapses. Remember that last year, the fourth quarter effective tax rate was actually a tax benefit, related to the one-time repatriation of foreign earnings and the end-of-year reinstatement of the federal R&D tax credit. Reported net income for the fourth quarter was $59.2 million or $2.08 per share on a fully diluted basis, compared to $67.9 million last year or $2.41 per share. As you may remember, last year we estimated that, excluding the unique tax-related impact, diluted earnings per share would have been $1.52 in the fourth quarter of 2010.

Our Life Science group reported record sales for the fourth quarter of $198.9 million, a growth of 3.1% versus last year, which was also a very strong quarter for the group. On a currency neutral basis sales, sales increased 2.3% for the quarter. These quarterly results reflect strong sales of real-time PCR products, as well as our new line of imaging products. On a geographic basis, sales in Asia-Pacific and the Americas were especially robust, partially offset by a decline in Europe.

Gross margins in Life Science remained strong in the fourth quarter despite the impact of QuantaLife operations and amortization. In addition, improved SG&A margins help segment profit for the fourth quarter reach more than $20 million. Excluding QuantaLife, Life Science segment profit was more than $27 million. Our Clinical Diagnostic group recorded sales for the quarter of $347.3 million, compared to $336.5 million last year, an increase of 3.2% on a reported basis or 2.5% currency neutral. These sales were led by continued strong performance in the quality control and blood typing product lines as well as a solid growth for BioPlex 2200 revenue.

On a geographic basis, sales in Asia-Pacific and the emerging markets remained robust but were somewhat offset by a decline in Europe, our largest market. Despite the slower sales growth, reported fourth quarters segment profits for diagnostics was a record $53.7 million, an increase of 44% when compared to last year.

Looking at the full-year results, we are pleased to report annual revenues of $2.047 billion, an increase of 7.6% on a reported basis. On a currency neutral basis, sales for the year grew 3.1%, which is below our original expectation, and primarily reflecting the weaker economy in many of our markets, most especially Europe, which finished the year down in constant currency.

Our Life Science group posted good annual sales of $694.7 million, an increase of 7.2% versus 2010 and 3.4% growth currency neutral. The higher sales were primarily fueled by growth in our core markets of electrophoresis, imaging, and gene expression, as well as good growth in the Americas and Asia-Pacific.

During the year, we introduced a record number of new platforms and consumables, including our of new line of thermal cyclers and real-time PCR instruments that are touch-based and more than 50 new targets for our BioPlex protein expression analyzer. As you know, during the fourth quarter we acquired QuantaLife and their new, innovative digital PCR technology. We have begun shipping these instruments to customers and while it will take time to build the top line scale, we are very excited about the long-term potential for this new generation of PCR in the lab.

For the year, Clinical Diagnostic sales were $1.363 billion, an annual growth of 7.8% on a reported basis and 2.9% on a currency neutral basis. This growth was fueled by continued momentum in blood typing, quality control, and diabetes monitoring products. On a geographical view, Asia-Pacific in including Japan and the Americas showed good growth for the year.

Our Immunohematology division performed especially well in 2011 as evidenced by strong demand for our new IH-1000 system throughout Europe and Asia, and a nearly 20% increase in sales of Biotest blood typing products in North America. Total Company gross margins for the full year were 56.8%, essentially in line with our original guidance and about flat with last year.

Total amortization of intangibles and purchase accounting recorded in cost of goods sold in 2011 was $17.5 million, which includes $2.5 million related to QuantaLife. Research and development expense in 2011 was somewhat higher at $186.4 million, or 9% of sales including $2.5 million of QuantaLife expenses recorded in the fourth quarter. Historically, we have targeted R&D to be in the 9% to 10% of sales range. Looking to 2012, these expenses may be closer to the 10% number, primarily related to our increased investment in digital PCR.

SG&A expense as a percent of sales was 33.6% for the year, and better than we estimated at the beginning of 2011. The two primary drivers of this better-than-expected result are a later in the year launch of the ERP project and the sizable reduction in the incentive bonus accrual. The combination of slightly higher gross margins and lower than expected SG&A spend led to operating margins much higher than originally anticipated. Remember that at the beginning of 2011, we guided the consolidated operating margin to be in the 13% to 13.5% range. As you can see, final results for 2011 produced an operating margin of 14.2%.

Additionally, it is important to note that included in SG&A expense is $11.7 million of acquisition-related amortization. Net income for the full year was $178.2 million, versus last year's net income of $185.5 million, a decrease of 3.9%. As we guided at this time last year, the full-year decline in net profit primarily relates to our investment in new systems, and the unusually low tax rate used last year. The effective tax rate for the full year 2011 was 24%, which compares to an annual rate of 15% in 2010. For 2012, we expect that the effective tax rate will increase to around 31%, primarily reflecting the expiration of some previously implemented tax planning vehicles.

For 2011, Bio-Rad's balance sheet remains strong. As of December 31, total cash and short-term investments were $813 million, compared to $1.25 billion at the end of last year. Net cash generated from operations during the fourth quarter was $78.6 million, and $259.8 million for the full-year 2011. The year-over-year increase in cash flow is the result of lower interest costs and cash taxes as well as improved operations. EBITDA grew to record levels for 2011, finishing the year at nearly $410 million.

Net capital expenditures were $35.6 million for the quarter and $102.7 million for the full year, at the low end of the $100 million to $110 million range estimated at the beginning of 2011. The increase in the fourth quarter is primarily related to our investment in ERP, as well as facilities. Looking to 2012, we estimate that CapEx spending will be in the $130 million to $140 million range, primarily reflecting our increased investment in a new global ERP system. Finally, depreciation and amortization for the quarter was $32.8 million, and $121 million for the full year.

We are pleased with our 2011 operating results, especially in light of some challenging economic headwinds for both tools and diagnostics in many parts of the world. We anticipate that this challenging economic environment will likely continue throughout 2012, offset somewhat by new product opportunities, including the QuantaLife digital PCR system.

For the 2012 full-year operating results, we are estimating currency neutral sales growth to be in the 3.5% to 4.5% range. This estimate includes approximately $20 million of digital PCR sales, which will likely be more back-end loaded in the year. I should point out that foreign-exchange may be a significant headwind during the year when compared to 2011, and could result in little if any top line growth during the year on a reported basis, especially in the first half of 2012.

In addition to currency, it is also noteworthy to mention that the first half of 2012 will be somewhat of a tough compare due to some large one-time diagnostic orders that occurred in the first half of last year. With regards to margins, we are hoping to hold full-year gross margins around 56%, despite adding $10 million of QuantaLife amortization and an expected decrease in HIV royalties.

Looking to the operating margin outlook, we view 2012 as the year of investment and thus are estimating a significant increase in spend during the year. Including an incremental $15 million related to our ERP project and an estimated $25 million operating loss related to QuantaLife, including the amortization expense. I

n addition, please keep in mind that if the dollar stays relatively strong and mitigates top line growth, this could lower operating income by another $15 million to $20 million due to lower translated sales on a reported basis. The net result of these investments and currency headwinds will likely produce an operating margin in the 11% to 12% range for the full year. Finally, as I mentioned earlier, we anticipate a full-year effective tax rate of 31%, and CapEx spend of $130 million to $140 million for 2012. Now I will turn the call over to Norman for a few comments.

Thank you, Christine. I guess I do want to emphasize a little bit that our cautionary outlook for 2012 reflects what I would call it investments in the business rather than business fundamentals. While our markets are a little tougher, with all of the economic uncertainty that is going on around the world today, I think our underlying business is healthy. We certainly continue to have a wealth of opportunities and new products to drive the business in 2012 and beyond.

We are, as you know, making two significant investments in the business. The first, has been mentioned, this global ERP system, which obviously will help us to realize the synergies of our size in the short-term and longer-term, really to give us a scalability as we move forward and grow. Second, is the recent acquisition of QuantaLife. I think this gives us access to digital PCR, a technology which we feel is poised to take DNA amplification to the next generation or next level, I guess, maybe a generation outlook. Next generation Outlook, I guess I would say. So, I think while these will temporarily dampen our margins, we feel both of these investments bode well for Bio-Rad in the longer term, both in terms of top line and certainly bottom line expansion. So I guess, with that, we will open it up for questions.

(Operator Instructions)

The first question will come from the line of Jon Wood, Jefferies

Hello. Good afternoon.

Hello, Jon.

Hello. Did you book any QuantaLife revenue in the fourth quarter?

You know, it was very, very little. Maybe $400,000 or $500,000.

Okay, and, Christine, would you remind us -- you talked about ERP expenses going up $15 million. What were they in 2011? So the step-up in 2011?

Yes. So, I think in 2011 they were probably around $13 million or so on the operating side, and this year there is probably another incremental $15 million.

Okay, how do you see that -- do you have line of sight into beyond '12 at this point, or too early to tell?

Yes, it is probably a little early to tell. I mean, I think part of the reason why spend this year becomes so much more significant, one, the projects now is at full steam and fully staffed. We are going to be working on our first implementation while simultaneously completing a more detailed design for what will be the second phase implementation. As we have said all along, I think 2012, and potentially 2013, will be the heaviest spend years of the project.

Okay, are you willing to disclose the royalty hit in gross margins that you alluded to on the prepared remarks?

Probably not.

Okay. I look at the fourth quarter gross margin, and if you back out QuantaLife, it was the highest number since, I think, '01 in my model so just any commentary you can offer on mix there. It just seems like the gross margins are holding in pretty well, and I guess beyond the QuantaLife and the HIV royalties, why wouldn't that level kind of persist in 2012, if you will?

Well, that is a good question. And you are right, I think the margins, especially for it being a fourth quarter for us, were quite strong, and product mix continues to play a part of that. And we talked for some time now, for example on the Life Science side of the Business that we've been able to manufacture many of our products at a lower cost, and that has helped the margins significantly.

But, as we move into next year, we do have the headwinds of the amortization -- the $10 million in COGS and a not-so-insignificant drop in HIV royalties that will impact it. A lot of it, Jon, depends on what happens on the top line and how much currency may or may not impact that. But our goal is to try and hold the gross margins around 56% despite all the headwinds.

Okay. Got it and what is the FX hit to the top line? I mean you said $15 million to $20 million, I know you said flattish? I mean, you implied 3.5% or so on the top line, is that right?

Well, so who knows, right, I don't have a crystal ball to foreign exchange rates. So basically, the way we do planning, we try and plan on a currency neutral basis and then we'll take the plan and rerun it at December 31 rates. And in December 31 the euro, for example, was for example, was $1.30 and when we rerun the plan at kind of that year-end rate, you can see the decline in sales is $80 million to $100 million, which is $15 million to $20 million on the operating line. But again who knows where rates will really turn out.

Okay. Got it. Thank you.

The next question comes from the line of Reggie Miller, CLSA.

Hello, Christine.

Hello, Reggie.

Hello, guys. Can you just talk about the performance of the Electrophoresis business during the quarter and the trends and where you saw that performance, and where we can think about it for 2012?

This is Brad, I will take the question. Our Electrophoresis and Western Blotting and Imaging Product line, we look at that as a workflow, has been particularly strong this year, as Christine pointed out, relating to imaging. But overall our electrophoresis line has grown significantly higher than the ambient market rate, so we are very confident in 2011 that we took market share and pretty optimistic on the run rate.

Great, thanks so much. That is all for me.

Next question comes from the line of Junaid Husain, Dougherty & Co.

Good afternoon, guys.

Good afternoon.

Hello.

Christine, just kind of a big picture question for you on 2012 pricing environment for both Tools and Diagnostics, and maybe John or Brad can chime in. Which of the segments do you think you have the most leverage to squeeze some pricing gains?

Wow. So, I'll just give some peanut gallery comment and then Brad and John are probably better-suited to answer the question. But, clearly, in a challenging economic environment, pricing pressure is even higher than normal, and certainly we saw that in 2011 and anticipate that pricing will still be an important factor in 2012.

As a rule, we are continually looking to find ways to produce our product at lower cost so that we have some pricing flexibility. But it does impact both sides of the Business. And I'll let John and Brad also comment.

Sure. Yes, this is John, on the diagnostic side, what Christine has said is very accurate. We are seeing buying patterns with customers extending tenders beyond just a normal one, two years to three and four years, and that puts a lot of pressure on the supply side to make sure you don't lose out on those. So, we are seeing that, particularly in our Blood Virus business, as well as our Blood Typing business.

And this is Brad, on the Tools side, one of our largest businesses is QPCR, or generally amplification. And in the last couple of years, we have grown our market share significantly, and our unit volumes have grown substantially. But we see a lot of our competitors, traditional leaders in this market, really have only one solution, and that is to lower the price.

And in tough economic times, our customers are looking sometimes at price as an element and we are having to lower our prices to continue to grow the market. So, yes, I think we do have a fair amount of headwind in pricing, especially in markets like Europe where there is really compression on people's budgets.

Got it, got it. John, could you help us understand some of the dynamics going on in your segment. The Business seems to have slowed down just a little bit in the fourth quarter. Can you walk us through all the different pieces? What part of it was just due to simply a tough comps? What part of that was due to economic uncertainty, et cetera, et cetera?

Yes, well, at the end of the year, particularly, I would say, fourth-quarter, we experienced softness in Europe and in particular in some of our emerging markets, where normally we would have some fairly decent shipments, there. It affected us in areas that in prior periods we really hadn't been affected before, so it is just a general softness that has affected that result.

And, don't forget, Junaid, that Europe and Eastern Europe represent about 45% of our Business.

Got it. Got it. And then, Brad, I guess a big picture question for you on Tools. When you look at the puts and takes with the different customer segments for 2012, be they academic or industrial, where do you see the big opportunities and, perhaps, maybe some of the challenges?

Well, you know, in generally, the compression of the Pharma market maybe the shift Pharma R&D spend to China. Those trends have been going on for a couple of years. I mean, overall, our academic spend is probably more sensitive in Europe, again as governments look to austerity measures and it certainly reflects the government-sponsored spending.

I don't see a dramatic change in terms of 2012 compared to 2011. One specific upside is the digital PCR product, our QX100 product in the pharma markets. Any of the pharma market especially involved in either diagnostics or cancer research. Our cancer pharmaceuticals have really taken to this technology.

Okay, fair enough. And then, Christine, one last question for you just a quick financial one. Could you tell me your DSOs in Europe, and if you could do Europe versus the US, for example?

Well, obviously, we don't disclose our Business to that level of detail. But not surprisingly, we've talked about this in the past, traditionally, Europe has always been a bit slower collection environment than the US. And through the last several quarters, especially in southern Europe, we've kept a pretty cautionary eye on that part of the world, because that is where we have seen the biggest slowdown in collections, if you will.

Right, got it. All right, that is all I've got, guys. Thanks so much.

The next question comes from the line of Dan Leonard, Leerink Swann.

Julian Cochran in for Dan today. Thanks for the questions. I actually only have one. My other ones were answered. But can you talk about what you're seeing in terms of customer behavior in your key end markets so far in 2012?

Has it changed at all? I assume not overall because you said that you're anticipating the challenging environment continuing throughout 2012. But I'm wondering if there were any specific pockets that were experiencing headwinds that may have started to show improvement?

No, I think it is pretty much business as usual. I don't think there's -- there hasn't been since the end of the year any dramatic shift one way or another, and I think to a certain extent it is too early to tell for 2012.

Okay.

(Operator Instructions)

We have a question on the line from Jeffrey Matthews, Ram Partners

Hello, everybody. Can you hear me?

Yes, we can hear you.

Hello, Jeff.

Hello. Norm, I'm curious long, long-term, what this arms race in genetic testing might ultimately mean for the Diagnostics business?

Boy, you know, it just -- there are a lot of people have talked about this. This whole area of personalized medicine and it just seems like there is a lot of opportunity out there. Exactly when and how it will be realized, I think is still open to question, but certainly, I think that is where the potential is and why everybody is so interested in it.

Do you see it as a potential risk to the core business as it is now, long-term?

Well, you know, all of our Businesses has continued to evolve in terms of their technologies. I think, and there is always a challenge for everyone, not only us but everyone in these markets, to remain competitive is kind of to stay kind of close to the technology and where it is going, and certainly I think we are in a good position to do that and continue to have our fair share. But, we do expect the Businesses to evolve technology-wise.

Right. Right. Okay, and then it is probably way too early in the process to make a judgment, but I'm wondering, Christine, how confident you are in the ERP roll out as it stands now? How you think it will evolve and whether the benefits will occur?

Okay, I don't know if you're -- if it's confidence in getting the ultimate benefits, I think the confidence remains high for us, whether it is in the ability to do shared service and reduce some of the redundant expenses in our business or the ability to better manage inventory, or the ability to better manage our taxes, and our tax exposures.

Right.

If that is your question?

Jeff, just to add to that, I think that we're in this whole kind of first phase project where -- of the project where we put a lot of people on the project and have done an incredible amount of work to get through this last year. I think I would say that we're very encouraged, or at least I'm very encouraged by the kind of the level of work that has been done and the attention to kind of all the right things that would help us to get to those paybacks in the future.

So we feel pretty comfortable with it so far. I mean, there are always some hitches in the road on these things, but as, I think, Christine has said before, we have the benefit of hindsight in having been able to learn a little bit from the mistakes others have made and we do have the A-team on this project. And it seems to be well-managed so far.

Right. And the patient is not rejecting the transplant, so speak?

No. No, the patient actually, in this case the patient is embracing the transplant, kind of with open arms. I mean, it is interesting, because the people in the operations do see the advantages of this system. So, I think that is pretty good for us.

Yes and one of the most encouraging signs, Jeff, is, as Norm has said, the folks in the operation, they are not digging in and saying, well I have done it this way forever, I want to do it X, Y, Z way. They are very open to best practices and more efficient ways of running their corners of the world.

Okay, good. And then my final question, on sort of on the state of the world. Is there anything new, different, surprisingly good, surprisingly not as good coming out of Asia? And I'm wondering how healthy is Japan these days and towards the future, how China is looking to you?

Actually, obviously this last year was a little bit of a blow with the tsunami and that affected some of our Life Science business and probably a little bit of the Diagnostic business, as well. But, Japan seems to be pretty stable and in pretty good shape, actually.

The rest of the Asia of course continues to motor along. Lots of opportunities. It is for us to realize those opportunities. So, for Asia, for us, Asia continues to be very encouraging. I think I am also a little bit encouraged by the stability in the US that we are starting to see.

Could you elaborate a little bit on that, Norm? That's pretty interesting.

Oh just that in general, there seems to be a kind of a little better tone. I think if you go back three or more months ago when they were all these big questions about what was going to happen with the NIH budget. That seems to have stabilized now. I think people seem to be a little more relaxed.

Is this the return to the good old days? Probably not yet. And then they talk about employment levels, maybe stabilizing a little bit, and obviously that should have a little better outlook for the Diagnostic side of the business. Those are the -- I guess that is the underlying thought.

Okay, good. Well, thanks very much. I appreciate it.

Okay.

And there are no more questions at this time.

Okay, well thank you everyone for taking the time to join us today. We appreciate your interest and support and hopefully we will see you soon. Bye.

And ladies and gentlemen. Thank you. This concludes today's conference. You may now disconnect and have a great day.