Bio Rad Laboratories Inc (BIO.B) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2012 Bio-Rad Laboratories, Inc. earnings conference call. My name is Cayuse, and I will be your coordinator 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, this call is being recorded for replay purposes.

I would now like to hand the all over to your host for today, Mr. Ron Hutton, TreasurerPlease 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 plans, goals 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 would 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 $486.3 million, up slightly on a reported basis versus the same period last year sales of $485.1 million. On a currency neutral basis sales increased 1.4%.

During the quarter we had growth across many of our key markets and product area, including $1.7 million of sales contributed by our new digital PCR products. These sales were partially offset by continued weakness in Europe, which resulted in a decline in sales versus last year. Excluding currency and the addition of QuantaLife, organic sales growth was 1.1%. However, it is important to remember that sales in the first quarter of last year included a sizeable one-time sale of blood typing products in Japan of nearly $8 million. Excluding this one-time sale in 2011, our currency neutral organic growth for the quarter was 2.7%.

The reported gross margin for the first quarter was ahead of expectations at 57.3%, compared to 56.5% last quarter and about flat with the year ago period. This strong margin primarily reflects a favorable product mix and improved manufacturing efficiencies.

During the quarter we recorded a one-time charge to correct an immaterial error related to foreign indirect taxes in prior years,$4.1 million of which is included in cost of goods sold in the first quarter results. The first quarter cost of goods also reflects an incremental $2.3 million of amortization expense related to the QuantaLife acquisition.

In addition, during the quarter we acquired one of our key raw material suppliers for our Diagnostics group, which resulted in noncash charges of $835,000. Thus, total purchase accounting and amortization expense recorded in cost of goods sold related to acquisitions was $6.9 million, which compares to $3.6 million in the first quarter of last year.

SG&A expenses for the first quarter were $171.3 million, or 35.2% of sales, compared to $167.8 million or 34.6% of sales last year, and down approximately $3.6 million from the fourth quarter. As expected, absolute spending is up year-over-year, primarily related to increased personnel and ERP project related expenses. The current quarter SG&A expense also includes $3.7 million for amortization of intangibles related to prior acquisitions.

With sales essentially flat versus last year, research and development expense in Q1 was higher as a percentage of sales at 10.9% or $52.9 million, which compares to $42.7 million spent in the first quarter of last year. The sequential increase in R&D spend is primarily reflective of the inclusion of QuantaLife, as well as the development of new instruments for the blood typing, diabetes monitoring and blood virus testing market. Our target R&D spending remains in the 9% to 10% of sales range as we continue to invest in new products and technologies.

The operating margin for the first quarter was 11.2% and is essentially in line with the full year outlook we provided on our last call. The one-time correction of the prior period indirect taxes negatively impacted our consolidated gross margin by approximately 80 basis points. Additionally and as expected QuantaLife lowered our operating income by approximately $7.7 million.

During the quarter interest and other income was a net expense of $8.2 million, compared to $18.9 million of expense in Q1 of last year. The decrease in expense versus last year is largely related to lower interest expense and foreign exchange losses, as well as a one-time realized gain on the sale of an in vestment of approximately $4.5 million.

The effective tax rate used during the first quarter was higher than expected at 33%, primarily due to the nondeductibility of the foreign indirect tax related correction as well as the expiration of the federal R&D tax credit. As we stated on our last call, excluding any discrete items that may occur during the year, we expect the full year effective tax rate to be in the 30% to 32% range.

Net income attributable to Bio-Rad for the first quarter was $31 million, slight slightly lower than last year's $33 million and primarily due to the planned ERP project spend and the inclusion of QuantaLife in our consolidated results. Diluted earnings per share for the quarter were $1.09.

Life Science reported sales increased slightly to $154.8 million. On a currency neutral basis, sales grew 0.7% compared to last year. As I mentioned earlier, sales of QuantaLife products were $1.7 million for the quarter and the demand pipeline looks strong for the remainder of the year.

Sales of Life Science products in Japan and Asia Pacific continued to show good growth during the quarter, while sales in the US and Europe struggled somewhat versus the year-ago period. We continue to have good year-over-year growth in our electrophoresis and imaging product lines as well as many of our consumable product lines. Overall segment profit for Life Science decreased versus last year, primarily driven by the inclusion of QuantaLife. Excluding the acquisition, segment profit increased more than 20%.

Sales of Clinical Diagnostic products were essentially flat at $327.2 million compared to last year. On a currency neutral basis, year-over-year sales grew 1.6% for the Diagnostics group. As I mentioned earlier, the first quarter of last year included approximately $8 million of sales of IH 1000 automated blood typing instruments to the Japanese Red Cross. Excluding this sale to the JRC, our Diagnostics group grew 4% on a currency neutral basis when compared to last year.

During the quarter, we experienced strong performance in our microbiology, quality control and diabetes product division. On geographic business, Diagnostic sales in Asia Pacific and the Americas were especially strong in Q1, partially offset by a decline in Europe. And finally, Clinical Diagnostic segment profit remains strong at more than $45 million.

Moving to the balance sheet. As of March 31, total cash and short-term investments were $807 million. The decrease in cash balances versus year end reflects cash use typically associated with our first quarter. Despite this spending, net cash generated from operations during the quarter was $35.3 million, compared to $19.8 million in the year-ago period and primarily reflective of a decrease in interest paid.

Net capital expenditures for the quarter were in line with our expectations at $34.7 million. Our full-year expectation for CapEx remains in the $130 million to $140 million range, as we continue to invest in ERP, E-commerce and facilities. And finally, depreciation and amortization for the quarter was $31.1 million.

Despite this somewhat slow start to the year, our outlook for 2012 remains relatively unchanged from the guidance we provided in February. That is, for top line currency neutral organic growth to be in the 3.5% to 4.5% are range. While we remain cautious about prospects for Europe in the short-term, we believe that our pipeline of new products should contribute to the top line as we move through the year.

Also unchanged from our prior guidance, we continue to anticipate full-year gross margins to be around 56%, and operating margins to be in the 11% to 12% range for the full year. As we have said before, this expected decline from prior years is driven primarily by the building of the digital PCR business and the increased spending for our ERP project.

And now we are happy to take your questions.

(Operator Instructions). Your first question comes from the line of Jon Wood with Jefferies. Please proceed.

Hi, good afternoon. This is actually Brannon Couillard in for Jon. Christine, on the tax reversal, can you just walk me through the mechanics and explain why that manifests in the COGS line instead of below the line?

Sure. This isn't an income tax. This is more of a transaction tax similar to a BATkind of thing, which would normally occur in the cost of goods line, and so that is where we booked it for the quarter. And this is cumulative over a five-year period, but of course, with the discovering of the error we're going to take it all through this quarter.

All right. You said that was $4.1 million in the COGS line?

$4.1 million on the COGS line.

Okay. Could you speak to some of the weakness I guess you saw in the Clinical Diagnostics business in Europe, and how would you characterize the pricing or competitive landscape in that market?

This is John Goetz. I will take that. We see a fairly soft market in Europe across most of our product lines,particularly in the area of blood typing and blood virus. There are some upsides in quality control, which is good for us, as well as diabetes. But those first two product lines have been mainly in impacted.

Thanks. And then I think one of our competitors in the blood typing space actually had what looked like a pretty soft first quarter experience. Could you give us an update on your traction that you are maybe seeing in the US with some of the bio-test products?

We continue to bring products to the US on the bio-test product line, and we are making good inroads with the instrument that we tall the Tango. We feel still pretty optimistic, and that is one of our faster growing product lines within the United States, so I'm he pretty happy with that.

Thanks. And then, Christine, do you still feel comfortable with about $20 million of QuantaLife revenue contribution for the year, understanding it will be skewed more towards the second half? Any update on the full year view?

Sure. So I think we said all along that we expect it to ramp during the year, but Brad is probably in a better position to comment on the pipeline than I am.

Yes, this is Brad. Our pipeline in the initial customer acceptance certainly leads us to believe we can still support that forecast. There is just a natural sales cycle which is six to nine months, and we are working through that.

Thank you.

(Operator Instructions). And your next question comes from the line of Jeffrey Matthews with Ram Partners. Please proceed.

Can you hear me?

Yes, sure.

Yes. Hi, Jeff.

Thanks very much. First, Norm, my condolences.

Thanks.

It was a privilege to meet your father and have the opportunity to speak to him the last decade or so.

I appreciate it.

First, where -- the digital PCR sales, where are they going customer-wise? Is it your existing customer base or are they new?

This is Brad. I'll take that. Pretty much your traditional customer base, maybe skewed a little more towards the pharmaceutical companies, mainly because they probably have a shorter cycle in terms of budgeting. But we are seeing it pretty broadly and almost exclusively in the US and slightly in Europe as we have rolled it out so far.

Okay. And then SG&A seemed a little lower than I might have expected, given the slow patch in sales Norm talked about in the press release, plus the ERP, and I'm wondering if there was anything in there to know about -- to be called out?

Not anything that would lower it. I mean, obviously when currency lowers the top line a little bit, it does lower expenses a little bit, and so there was probably $2 million of FX impact on the expense line. But remember as we talked about the ERP incremental spend this year, we said $25 million of OpEx -- or $15 million of OpEx incremental and $25 million of CapEx incremental, so that spending will roll out through the year.

Okay. All right. You mentioned Europe. Norm,I just kind of wonder if you could take us around the world a little bit on what you are seeing out there, the state of your customer base and how the year looks like it might shape up relative to where you thought it might three, six months ago?

I think we still feel about the same that we have that the US seems to be stabilized,that Europe is still kind of a troubled area. And then the other markets -- Asia Pacific, Latin America -- continue to grow, sometimes it may be a little bit slower pace. As you might imagine, all these economies are connected somewhat. But that is kind of our view. I think it's the same it is a has been.

All right. And then finally, Norm, there was kind of a premature celebration in the market that Bio-Rad would suddenly go on the auction block. And I think the prevailing view expressed in the Bloomberg article was maybe you yourself might not be as committed to Bio-Rad as an independent company as your parents had been. I kind of think the Company has done a fine job building value for shareholders over the last ten years without the help of investment bankers, but I would be interested in your view.

Okay. So I haven't had the time or the energy really to track down the ultimate source of these rumors, but I can only tell you that they are obviously very misguided and, these people are extremely misinformed. We intend to continue.

Good. I appreciate that. Good luck. Thanks.

Thanks, Jeff.

And your next question comes from the lines of Paul Knight with CLSA. Please proceed.

Hi, could you comment on where your academic growth was in North America in the quarter? And are you able to get -- what is your feel on where this year is rolling out on that side of the NIH academic budget?

This is Brad. I will take that. It was slower in a year-over-year comparison. We -- but we still feel that it will be in the low single digits. Like everything in the academic, the way the budgets roll out, typically stronger in the second and third quarter. So overall for the year about the same. But it did start a little slower than we would have expect.

And then, Christine, could you comment, your organic growth ex a year ago comparison was what?

Ex a tough compare and ex the acquisition, it was is 2.7%.

And where do you -- are you getting any new color on where you think organic is going to fall out on FY 2012?

Well, I think we are still thinking in that kind of low single digit as we have talked about. When we laid out our expectation on the year end call, we talked about reported growth of 3.5% to 4.5%, and the addition of QuantaLife is about a point. So organic growth is -- would make that 2.5% to 3.5%. And despite a bit of a slower start, I think we are still feeling those goals are achievable.

And when do you think the margin expansion -- or when is the pressure off of margins, meaning when are we in the post-ERP era?

That is a good question, Paul. I think obviously this year we are anticipating the margins to be down, and it wouldn't surprise me he if they were down next year as well. As we look at the ERP project and where the bulk of the spending is, it is this year and next year where we have our most significant rollout expenses. Next year being a focus on the European market where we have many, many systems that would need to be converted and brought into this single global ERP that we are building.

So I think we are a couple years away on the expense side from seeing margin expansion. Having said that, we are constantly looking at ways to improve our gross margin, redesign our products to manufacture at lower costs, and hopefully we'll have little things here and there that will help offset some of that spending. But ultimately it is an investment year for us.

What do you think a post-ERP operating margin should be?

Well, I think higher than where we were before we started down this path of investment is our goal, and that is mid-teens-plus.

Yes, okay, thank you.

On a GAAP basis.

Meaning, yes, higher than that 14.7% of a couple of years ago?

Yes.

Okay. Thank you.

And at this time there are no further questions in queue.

Okay. Operator why don't you just poll one more time, and if not then we will sign off.

(Operator Instructions). You do have a question from the line of Jeffrey Matthew with Ram Partners. Please proceed.

Sure, why not. On the acquisition side, Norm, with Europe in its -- in the condition that it is in, I wonder if you are seeing any interesting opportunities over there?

The -- I wouldn't say that there is anything different from what we have seen. There are things that are bubbling along, but I don't think there has been a big change in opportunities that we are seeing.

Your sense that -- what is your --

As time goes on -- I think it is a good point. As time goes on and things are -- if they remain slow in Europe, there could be more opportunities.

What would you guess the odds are that sometime in the next five years you make a large acquisition? Not a tuck-in or a product line extension, but a large one? Is there any --

I think there are opportunities to do that. And as you know, those opportunities are few and far between, but I don't think it is unreasonable to expect that we might be able to do one of those.

All right, good. Well, I appreciate it, and again, I appreciate the last ten years and I look forward to the next ten.

Great. Thank you.

And at this time there are no further questions in queue.

Okay, great. Thank you so much, everyone, for joining us, and we look forward hopefully to seeing you soon. Bye-bye.

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