Bio Rad Laboratories Inc (BIO.B) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2013 Bio-Rad Laboratories, Inc. earnings conference call. My name is Allison and I will be your operator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

As a reminder this call is being recorded for replay purposes.

I would now like to turn the call over to Ms. Christine Tsingos, Executive Vice President and Chief Financial Officer. Please proceed, Ma'am.

Thanks, Allison. Good afternoon, everyone and thank you for joining us. Before we begin the call, I would like to caution you 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.

Today, we are pleased to report quarterly net sales of $525.3 million, an increase of just under 3% on a reported basis versus the same period last year sales of $510.4 million. On a currency-neutral basis, year-over-year sales grew 4%. During the quarter we had good growth across many of our key diagnostic and life science markets including $6.2 million of sales contributed by our new antibody business.

Excluding currency and the addition of AbD Serotec, organic sales growth for the quarter was 2.8%.

Overall, the quarterly topline growth was impacted by continued challenges in certain areas of Europe, especially for our diagnostic products, as well as cautionary funding flows in the academic and government research markets.

The reported gross margin for the second quarter was better than expected at 57.1% and is reflective of a favorable product mix as well as increased manufacturing efficiencies, and despite an incremental $2.4 million of amortization expense related to the recent Serotec and cell sorting technology acquisition.

For the quarter, the total non-cash purchase accounting expense recorded in cost of goods sold related to acquisitions was $8.5 million, which compares to $6.7 million in the second quarter of last year. SG&A expenses for the quarter were $195.3 million or 37.2% of sales which compares to 31.8% in the year-ago period. Remember that in the second quarter of last year, SG&A included two significant one-time items that had the effect of lowering the reported expense by more than $13 million. These two unique items were the reduction in the value of the QuantaLife earnout and the reversal of approximately $5 million of bad debt reserves.

In addition to these tough to compare items, SG&A expense related to our global SAP project increased significantly versus last year as we are now expensing the internal and external labor costs related to the project which in the past have been capitalized. Also recorded in SG&A is $2.2 million for the amortization of intangibles related to acquisitions.

Research and development expense in Q2 was 10.1% of sales or $53.2 million compared to $52.3 million last year. The year-over-year increase in R&D spend is primarily related to our investment in several new technologies and instruments for the clinical diagnostic market. Going forward we expect R&D spend to continue to be around 10% of sales.

The operating margin for the second quarter was just shy of 10% which compares to 11.8% in the year-ago period, when excluding the 413 million of one-time benefits associated with the QuantaLife earnout now and the reversal of the bad debt reserves I just mentioned.

During the quarter, interest and other income was a net expense of $3.9 million compared to $7.3 million of expense in Q2 of last year. This decrease in expense versus last year is largely related to lower interest and foreign-exchange costs, as well as additional dividend income typically associated with our second quarter. The effective tax rate used during the second quarter was in line with our expected range at 27.2%.

Excluding any discrete items that may occur, we anticipate the full-year tax rate to be in the 26% to 28% range.

Net income attributable to Bio-Rad for the second quarter was $34.7 million and diluted earnings per share for the quarter were $1.20. This compares to $1.26 per share in Q2 of last year when excluding the one-time benefit to operating expense.

Life Science reported sales for the second quarter were $170.4 million, an increase of 4.9% when compared to $162.4 million last year. On a currency-neutral basis, sales grew 6.2%. As I mentioned earlier, sales of our new antibody products were $6.2 million for the quarter.

Excluding Serotec and currency effects, the Life Science organic topline growth was 2.4%. These quarterly results reflect growth in process media and digital PCR products as well as good initial acceptance for our new cell sorter and next-generation chromatography instrument.

Sales growth during the quarter was partially offset by weakness in some of our more traditional academic research lines. On a geographic basis, European sales have begun to grow while sales in the US market continue to be moderate and Asian markets have slowed somewhat versus prior periods.

Looking to the remainder of the year, we remain somewhat cautious about global funding for our research product, but are also encouraged by the strong pipeline for our new cell sorting and chromatography products as well as continued demand for Droplet Digital PCR products. Segment profit for our Life Science group remains challenged as they continue to absorb new businesses and technology license requirements.

Our Clinical Diagnostics segment posted another solid quarter with sales of $351.5 million compared to $344 million last year, an increase of 2.2%. However, on a currency-neutral basis, year-over-year sales for the Diagnostic group grew 3.2%. This growth was led by good performance across many product lines, most notably our diabetes monitoring and quality control products.

Sales to China and the Asia-Pacific markets were especially strong for Diagnostics during the quarter partially offset by a decline in Europe. Diagnostic margins for the quarter increased both sequentially and versus last year, primarily reflective of the product mix shifting to higher margin reagents and consumables.

Moving to the balance sheet as of June 30, total cash and short-term investments were $834 million. Cash from operations for the quarter was significantly lower than expected at $18.7 million and down from last year as a result of higher cash paid to employees and suppliers, including the recent change in expensing ERP-related personnel costs. A slowdown in collections related to our transition to SAP and a $12 million payment to settle a royalty dispute.

Also keep in mind that the second quarter of 2012 included the unusual one-time payment of receivables from the government of Spain, totaling approximately $20 million which also makes for a tough year-over-year comparison. Despite the reduction in cash flow EBITDA for the quarter was good at $95 million or 18% of sales.

Net capital expenditures for the quarter were $23.4 million, which is a decrease both sequentially and year over year. This decrease relates largely to a shift of ERP-related costs from capital to expense.

As you may know, in early April we went live with the first deployment of the project. We are now in a support mode which requires a different accounting treatment of the personnel cost.

In the fall timeframe, we will begin designing the second SAP deployment at which time these labor costs will start to be capitalized again. Given the timing of the ERP-related spend, our full-year expectation for CapEx is now revised to be in the $120 million to $130 million range. This compares to our previous expectation of $140 million to $150 million.

And finally, depreciation and amortization for the quarter increased to $34.9 million as we began to depreciate our first deployment of the new SAP system.

As we look to the full year for 2013, we remain cautiously optimistic of achieving the currency-neutral sales growth guidance of 3% to 3.5% for the base business we provided last February as well as our expectation of a 3.5% to 4% topline growth when including the Serotec sales. For the first six months of 2013, our currency-neutral sales growth is 3.8%.

However, we will also remind you that a continued strengthening in the US dollar could lead to much lower growth rates on a reported basis. In addition, any further deterioration in Europe or funding in the government and academic market could make our goals difficult to achieve.

On the last earnings call we revised our operating margin expectation for the full year to be around 10%. Given the year-to-date margin of 8.3% combined with the changes in how we currently account for the ERP project and our intentional investments in our higher growth emerging markets, the full-year operating margin could be in the 8% to 10% range. While this lower margin in the short term may be disappointing, our focus remains on the long-term health and profitability of the Company and benefits that new systems and increased focus in high-growth regions will bring in the years to come.

And now we are happy to take your questions.

(Operator Instructions). Brandon Couillard, Jefferies.

Good afternoon. Christine, just back on to your operating margin and commentary there. What aspect of the ERP timing or expenses were not anticipated in your prior outlook? And can you give us an update on the aggregate dollar amount of ERP-related expenses in the P&L both in the second quarter and for the full year now?

Sure. So in terms of pure cash out the door, I don't know that things have changed in terms of our expectations. Basically in the accounting world, while we are in the implementation phases of the project both the designing and the actual implementation, the internal and external labor costs are capitalized.

Right now where we are, we have gone live with our first deployment which you remember was a small segment of the US. Keep it close to home, proof of concept kind of project. And we are in the process of supporting that. And then in the fall, we will begin the designing and implementation of the next deployment which will be a much larger deployment and at that time, then, the internal and external personnel costs will be capitalized for the accounting rules.

So I think when we originally set the budget, while as I said cash out the door probably doesn't change that much, we didn't anticipate that we would have this little break in between the first deployment and the second deployment where we would need to temporarily change our accounting treatment.

Can you give us any numbers around that? I think you had talked about incremental ERP expenses being some $15 million to $20 million in the P&L this year. Any update on that figure?

Yes. So, probably this change in accounting treatment to the P&L over these months where we are in between phases will be somewhere $5 million to $10 million range between what was booked in the second quarter and what will book in a good part of the third quarter. Again, we are looking to restart the next blueprint phase in the fall. And it is flat from CapEx.

Okay. If John or Brad are there, would be curious if they could elaborate on what they are seeing in the government and academic market, particularly the split between the US and Europe.

I'll take that. For Life Sciences we definitely saw in the second quarter with the extramural NIH-funded accounts, basically our academic markets, came back online. They were basically dormant the first quarter. The government accounts continue to be off significantly and basically any of the intramural research or actual government labs, CDC and the like. So we certainly saw that.

In Europe it is pretty much status quo. There's an overall austerity across most of the regions in Europe. And we had a fairly nice second quarter, but a lot of that was timing from shipments that really didn't make it into the first quarter. So it really is sort of status quo.

Thanks. And, Christine, would you care to quantify the impact on the operating line from the QuantaLife and AbD Serotec deals? And if not QuantaLife, maybe just AbD impact on OP?

Both of them obviously are a drag to operating profit, and probably combined between the two of them — gosh, it is probably $5 million or $7 million for that. Let me see if I can get that more. But you remember at the beginning of the year we talked about that Serotec would be a $7 million to $10 million drag on operating expense and we still expected QuantaLife to be $15 million, $20 million plus, depending on our level of investment there. And I don't think anything has changed.

And lastly, any decision on whether or not you will decide to call the 8.5% coupon debt in September?

Good question. Obviously it is something that we are thinking about and they do become callable in September. I don't know that we will be calling them on that exact date, but given that it is 8% money and we took on that debt at a time when we [weren't] investment grade, we will be very seriously taking a look at this and will likely do something after the call date.

Thank you.

Dan Leonard, Leerink Swann.

Can you give us an update on your ERP implementation now that you have got some road under your tires from the first deployment?

Sure. So, as I said, first deployment was that smaller segment of our US sales probably represents 10% to 15% of the total Company revenue. And I think for the most part it has gone pretty well, especially when I hear some of the horror stories from other companies.

We have a lot of people involved with it. A lot of process changed. But at the same time we continued, didn't seem to miss a beat in terms of shipping product to our customers.

Where we are now and part of this support mode that I am talking about is really just adopting to all of the new processes and becoming efficient with those processes. And so as I mentioned, cash -- cash from operations is lower than we have been running because receivables were up a little or folks were focused on working on those new processes. But that is just a matter of timing.

And with each month since we have gone live, we have seen that efficiency get better and better. So I think, on the whole, we are feeling pretty positive about this.

The lesson learned is hard. It is a lot of change and part of our understanding of that is we have made the decision now for the next deployment to really focus on finishing the rest of the United States.

Originally we were thinking, the second deployment, we could take our show on the road to Europe because Europe is where the greatest benefit return resides. But I think we also see benefit in staying in the US. And that is the deployment we will start working on in the fall.

Okay, that's helpful. And to follow up on the cash flow portion of that, how do we think about your cash flow trending through the balance of the year? It was obviously cash flow from operations was lower than we thought in Q2. Does that reverse as you get some of these receivables under control or should that stay at depressed levels through the balance of the year?

Good question. And the receivables is only a small part of it, I mean; and if you look historically, our cash flow is pretty backend-loaded if you look at our historical results. Because there is a lot of cash obligations at the beginning of the year and, of course, last year we had that windfall from Spain. So I think seeing improvement from here would be within our historical pattern and, again, I think the receivables growth is more a transition and timing in nature and not indicative of some sort of change.

And then, obviously, in the second half of the year or starting in the fall timeframe when we are back into the designing and implementing of the second appointment of SAP, all of these internal and external personnel-related costs will be capitalized which will affect the investing cash flow, but not the operational cash flow. And so, that obviously will help as well.

Got it. Thank you. And my final question is a two-part one for Brad.

Brad, can you help me understand how you are looking at the Asian market for Life Science tools in the back half of the year? I think there was some commentary that it had slowed down a bit.

And, secondly, the new digital PCR product, what are the differences versus the initial version? Thank you.

Yes. I think if you look at the Asian market, Japan is off. Most of us have seen that and it has kind of been a shift in the way that they fund their research. We expect that to come back a little bit in the second half of the year.

We also expect our business in China to build in the second half of the year as it always does as a lot of the tenders and government contracts seem to come due in the last quarter.

So overall in general, Asia will continue to build in the last two quarters.

As far as the digital PCR, we have invested very heavily in taking the original product, which is the QX100, and transforming it into a new generation, the QX200. The principal change there is we drastically expand the type of chemistries that can be used in digital PCR and allow customers to adopt a lot of different workflows to it, using some of the intercalating dye instead of some of the other specific TaqMan probes.

So overall that is the biggest change. And again it gives us a lot more flexibility and removes one of the challenges that we had or one of the objections that customers had when we brought this product on market in its original form.

Got it. Thank you.

Brian Turner, Levin Capital Strategies.

Question on the operating margin. Essentially on the last quarter we were talking 10%, 11% and we are a little bit under that now. You said in discussing that operating margin that, going forward, you are going to be able to move to a margin that is back up to midteens if not something better. So the question is have we troughed for sure and when -- if you could provide a map to when we should start to see the improvement in the margin, that would be terrific.

And then, the second question is could you give us a little bit more color on Europe? I know that you sort of opened up the call with it being a little bit challenged, but at the end of the call you -- in your prepared remarks you said that it was getting better.

So if you would just give us a little bit more color what you are seeing, et cetera, that would be very helpful.

Okay. So, on the operating margin you are correct that at the beginning of the year we talked about a 11% to 11.5% target on the margin. And given the margin on a reported basis -- and all of this is good old GAAP reported margins, given where we were in the first quarter, we brought that down to be around 10%. And what changed a little bit since then and now we are saying, well, maybe 8% to 10% for the year is taking this time to do the support phase of ERP brings operating costs to the P&L that originally were assumed to be capitalized. And on top of that, we continue to be cautious in watching the topline.

You know that our margin is impacted pretty significantly by whatever goes on, on the topline. So I think our caution for the remainder of the year, given that we are halfway through the year and we are still in single-digit in terms of a GAAP reported operating margin and we know that we have a few more months of ERP as an operating expense rather than a capital expense. And our caution with watching the topline has led us to have a range of thinking 8% to 10% for this year in terms of a full-year GAAP operating margin.

Now having said that, a lot of this is being driven by the fact that we continue to be in investment mode here at Bio-Rad. And systems is one investment that is clearly a sizable investment. We are also investing in building our presence in some of these higher growth emerging markets where we are putting up pretty solid double-digit topline growth.

But, again, it is an operating expense that we are absorbing today for a benefit in the future.

Our longer term goal when we get ERP behind us of getting our operating margin back to that midteen. We were at about 14.8% before we turned on the investment spigot. That hasn't changed. And our goal to get back to that level we were if not higher, the midteens to the higher teens, it is still there and still achievable. And of course, it is just a matter of timing and a matter of getting through the ERP which continues to be a multiple year project. And a good portion of the return as I said earlier sits in Europe and we -- it will be a few more years before we do the European deployment, which stretches out the timing of getting to that mid- to high teens level. But the proposition and the underlying assumption of what can be achieved has not changed.

And the commentary on Europe.

Yes, Europe. I think it's pretty much the same as it has been in the last few quarters. I think that it is tough sledding in Europe. You have got laboratory consolidations going on in some regions on the Diagnostics side. And on the Life Sciences side, as Brad said, budget constraints. That all applies to Western Europe. Eastern Europe seems to be going better. Still some pretty good growth out of there. Good expansion in those markets.

So that's basically the picture we have in Europe.

Okay and one last question. As it relates to your holding in Sartorius, is there anything -- has the position stayed the same? Is there any update you can tell us about, about your investment there? That would be helpful. Thanks.

It has stayed about the same. I'm sure we maybe acquired a few shares over time, but it remains relatively the same.

Okay. Thank you.

[David Cohen, Seneca].

Regarding Sartorius, I wonder if you could actually give us the amount of shares and preferreds you earn. Mostly if you can tell us what the tax basis are on those shares and then also any plans on those shares and any business relationship between Bio-Rad and Sartorius.

No, we are not prepared to comment at this time on that.

Thank you.

Sam Segal, Senator Investment Group.

In terms of the margin guidance, recognizing that you don't give quarterly guidance, but could you at least give us a feel how to think about the balance of the year? If you are a little bit above 8% year-to-date on a reported basis, seasonally you would expect a stronger fourth-quarter margin number. Does that suggest that just given some of the accounting changes and timing that Q3 margin will be a bit below Q2? Just some insight there and if not numerical at least qualitatively if you can give us some direction.

And in terms of this refinancing, given the size of your cash balance why not just pay down the debt outright? Because you have substantial dry powder and I think we are all supportive of that, but to pay any money from an interest expense to preserve that, given that you are sitting on it even net of paying it down almost $0.5 billion of cash doesn't seem necessary.

So maybe just a little bit of your philosophy on whether it is a refi or if it is paydown. Thanks very much.

Good questions. In terms of the trajectory and the operating margin for the remainder of the year, you are right. We don't really give specific quarterly guidance.

Again, our historical patterns is we to have more attractive margin generally in our fourth quarter. And I fully anticipate by the fourth quarter we will be back into full implementation on the ERP side, which should relieve that cost burden that we are bearing right now of the internal and external labor on the project. So that ought to help the margin.

Q3 is always a little more difficult margin quarter for us because of seasonality in Europe and things like that. But other than that, that's the most clarification I can give you in terms of the 8% to 10% range. Obviously we would like to be the higher end, not the lower end of that range.

Regarding the debt and the refinancing, I think you are right in the things we are looking at now are options. We recognize that we have a fair amount of cash on the balance sheet.

For sure we don't want to carry 8% money especially in this interest rate environment and in our credit quality. And the decision-making process we are going to be going through now is looking at our options of taking the debt out, or refinancing it all or part or, frankly, even more.

And the balance that we are going to strike is looking at the investment opportunity that we see on the horizon especially on the acquisition front and balance that with the ability to lock in some relatively attractive long-term money.

So we -- those are the -- you hit it on the head. I mean I think we can argue it both ways, but we are going to sharpen our pencils and work through this and make some decisions here over the next couple of months.

Got it. Thanks. Just to follow up on that. Your cash, what is usable if not usable? I know a lot of companies have issues with trapped cash and obviously you want to have substantial working capital type cash, but if you can give us a sense of how much of the cash in the short-term investments is actually accessible, how much is trapped internationally and what is a comfortable level just to have from a safety perspective?

Yes, so the majority of our cash is actually here in the US and very usable, as you say. But even our cash that is offshore, again as I mentioned, we are investing in many of these high-growth markets. And so, finding use for the cash there in terms of investing for the future.

So, but 75% plus of our cash is held here in the US and even of the 25% that is outside of the US, a lot of it is used for operating activities or acquisitions. We -- the Serotec acquisition, for example, that we acquired at the beginning of this year, we were able to use our foreign cash.

Thanks very much.

(Operator Instructions). We have no further questions at this time. So I would now like to turn the call back over to Christine Tsingos for closing remarks.

Okay, thanks, Allison. Thank you, everyone, for taking the time to join us today for the earnings call and we look forward to hopefully seeing you soon. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and thank you and good day.