Bio Rad Laboratories Inc (BIO.B) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bio-Rad Laboratories, Inc. Q2 2015 earnings financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference may be recorded.

I would now like to turn the call over to Mr. Ron Hutton, Vice President and Treasurer. The floor is yours.

Thank you, Nicolas. 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, our financial future performance, and other matters. Because our actual results may differ materially from these plans and expectations, you should not place undue reliance on these forward-looking statements.

And 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 floor over to Christine Tsingos, Executive Vice President and Chief Financial Officer.

Thanks, Ron. Good afternoon, everyone, and thank you for joining us. Net sales for the quarter were $506.1 million, a decrease of 5.7% on a reported basis versus the same period last year sales of $536.8 million. On a currency neutral basis, year-over-year sales grew 4.2%. The difference in growth rate represents a currency headwind to reported sales of more than $53 million for the quarter.

During the quarter, we had growth across many of our key life science and diagnostic markets, most notably in our digital and real-time PCR product lines, as well as sales of diagnostic products for autoimmune and diabetes testing, and quality controls. If we look geographically, the quarterly topline growth was led by strong sales in the US, Latin America, and China, offset by continued competitive challenges for our diagnostic products in Europe and Eastern Europe.

The reported gross margin for the second quarter was in line with our guidance at 55.2%, and essentially flat when compared to 55.4% last year. On a sequential basis, the decline in margin is primarily reflective of changes in product mix, as well as additional expense related to an increase in sales of royalty-bearing products. For the quarter, the total non-cash purchase accounting expense recorded in cost of goods sold and related to prior acquisition was $7.3 million, which compares to $8.1 million in the second quarter of last year.

SG&A expense for the quarter was $192.8 million, down slightly from the year-ago period. The decrease in SG&A spending is the combination of a sizable currency benefit, which was partially offset by a $2.6 million increase in bad debt reserves in some of our smaller emerging markets, contingent consideration expense of $1.3 million, and a one-time cost of $1.9 million for the termination of a distributor. Also recorded in SG&A is $1.9 million for the amortization of intangibles related to acquisitions.

Research and development expense in Q2 was 9.2% of sales or $46.5 million compared to $55.7 million last year. The year-over-year decrease in R&D spend is a reflection of timing, as well as the finalization of some major instrument products coming to market, specifically our new D100 for A1c monitoring and the new IH-500 for the midrange blood typing market.

Changes in foreign currency rates also have the effect of lowering R&D spend. Going forward we expect R&D to continue to be 9% to 10% of sales.

During the quarter, interest and other income resulted in a net expense position of $665,000 compared to a net income position of $3.1 million in Q2 of last year. This change versus last year is largely related to higher foreign exchange hedging costs, as well as lower dividend income.

The effective tax rate used during the second quarter was lower than expected at 28%, reflecting a decrease in tax reserves related to statute lapses in the US. Excluding any discrete items that may occur, we anticipate the full-year tax rate to be in the 31% to 33% range.

Net income for the second quarter was $28.4 million and diluted earnings-per-share for the quarter were $0.97. This compares to net income of $31.6 million and $1.09 per share in Q2 of last year. The year-over-year decrease in net income is substantially related to the topline currency headwinds I mentioned earlier.

Now looking to the segments, Life Science reported sales for the second quarter were $170.6 million, essentially flat when compared to last year. However, on a currency neutral basis, sales grew an impressive 8.6%. These quarterly results reflect strong growth in both real-time and digital PCR products, as well as our cell biology products.

In addition, sales of Western blotting instruments and reagents performed well during the quarter, led by good demand for our new imager, the ChemiDoc Touch. On a geographic basis, sales to the US, European and China markets posted sizable increases for Life Science.

Our Clinical Diagnostics segment posted quarterly sales of $332.1 million compared to $362.9 million last year, a decrease of 8.5%. On a currency neutral basis, year-over-year sales for the Diagnostics group grew 2.2%. This growth was led by performance across many product lines, most notably our BioPlex 2200 assays and our quality control products.

On a geographic basis, sales to the Americas were especially strong for Diagnostics during the quarter, as well as good continued momentum in Asia. This growth was partially offset by a continued decline in Europe. With the newly launched instruments for diabetes monitoring and blood typing, we hope to ramp up growth in several non-US markets during the second half the year.

Now moving to the balance sheet, as of June 30, total cash and short-term investments were $727.6 million. Net cash generated from operations during the quarter was $38.5 million compared to $29.5 million last quarter and $77 million in Q2 of last year. This decrease in cash flow versus last year is substantially related to lower customer collections resulting from the decrease in reported sales, and includes approximately $40 million of currency headwinds and receivables.

EBITDA for the quarter was $77 million or just over 15% of sales. Net capital expenditures for the quarter were $32.2 million, which is a slight increase both sequentially and year-over-year. Our full-year expectation for CapEx has been in the $130 million to $140 million range. Given the year-to-date spend of around $60 million, we may likely be at the lower end of that range.

And finally, depreciation and amortization for the quarter was $32.1 million, about flat with the first quarter. For the remainder of the year, we expect depreciation to increase, reflecting the successful implementation of our second deployment of SAP. The decrease in total depreciation and amortization when compared to the year=ago period is largely related to currency.

And now moving to the outlook. At the beginning of the year, we laid out our guidance for 2015. And that is for currency neutral sales growth of around 3%, full-year gross margins in the 55% range, and an operating margin of 9% on a currency neutral basis. We also highlighted that strengthening of the US dollar against our major currencies could actually result in a topline currency headwind of $175 million to $200 million, and consequently, a decline in year-over-year reported sales.

And while we do have some natural hedge with our expense mix, we guided that this sizable revenue headwind could negatively impact our projected currency neutral operating margin by as much as 150 basis points for the full year. As you can see with our first half of the year results, the currency impact is certainly significant, and negatively impacted sales by more than $97 million, and operating profit by around $21 million.

Even so, we are pleased with our year-to-date performance in a somewhat mixed geographic market environment, and today, are maintaining the guidance given at the beginning of the year. Currency neutral sales growth for the first half of the year is 2.8%, just shy of our guidance. And we are cautiously optimistic that newly released products for the diagnostic market will help to accelerate growth in the second half of the year.

And from a profitability standpoint, both gross and operating profits are running slightly ahead of expectations for the first half of the year. But we believe much of this better-than-expected margin is a matter of timing.

Remember, from historical experience, that our margins tend to drift down as we move through the year and ramp up spending for new projects. I would also remind you that the third quarter historically can be choppy for us, primarily related to seasonality outside the US. And given the current business environment challenges in Europe, seasonality this year could have a heightened effect.

And now we are happy to take your questions.

(Operator Instructions). Brandon Couillard, Jefferies.

Christine, last several quarters, you've been pretty good about giving a core EPS number ex-discrete items. If we back out the sort of three one-timers in the period, do you have a cleaner EPS number for us?

I should have known to do that. I don't. And remember the tax rate was also lower-than-expected. So you can probably do the calculation ourselves. And on a kind of a regular basis, we look at 32%, 33% as the base tax rate. I think the lower-than-expected tax rate picked up about $0.07 for us in the quarter. But as far as the math on some of the one-timers or the more discrete items in SG&A, you can probably do that math.

Okay. And then I don't know if John Goetz is there, maybe one for him. This is best for him. But I know you completed the SAP rollout in North America. Could you speak to the benefits enabled by that deployment with the platform? And to what extent did it affect 2Q revenues at all -- if at all?

Yes, okay, I'll take that. This is John. Yes, we rolled out our second deployment at the beginning of July. And we are still in the -- I would say in a stabilization mode with that particular rollout right now. We are still assessing what effect it might have had in terms of topline. But we know this to be a usual situation, having had some experience with D1. And so far in terms of any benefit that we might get from D2, that's still down the road for us.

Brandon Couillard

Okay.

Yes. And I agree with John that it's difficult to know what the revenue impact may have been on the second quarter, Brandon. I mean, we did let many of our customers in the US know that we were going to be going live the first week of July. And so, if some of them may have placed orders in advance of that, that wouldn't surprise me. But it would be hard for us to decipher exactly how much that was.

Sure. And then one for John Hertia. With respect to the IH-500 launch in the US, could you speak to the opportunity there in that sort of low to mid volume market in terms of total hospitals or number of units? And would love to hear your perspective on just the general trend in blood donations, and how you think that affects really the market growth?

So, a couple things in there. The first thing to point out is that the IH-500 was launched outside the US. So that's our international markets. Later this year, we are hoping to introduce the IH-1000 in the US along with our gel product line. We are hoping to get that in the fourth quarter -- which is targeted towards the (technical difficulty) high-volume laboratories. The IH-500 is targeted toward medium-size, smaller to medium-size hospital blood banks or small donation centers. And it's the largest part of the segment that we didn't have (technical difficulty) address before, and we are really (technical difficulty) excited about the opportunity for growth.

Super. Okay. One more for you. You just called out the BioPlex 2200 assays as a growth contributor in the second quarter. Were there specific assays or recent launches that were, I'd say, outsized contributors to that dynamic?

Yes, maybe three -- three things. First, we introduced, over the last six months, hepatitis -- I mean, a HIV antibody antigen test, a fifth-generation test, which was just FDA-approved for use in the US. We approved a Vitamin D test, and both of those are beginning to add to the panel. And we've seen a lot of growth in our MMRV test, which is for measles. And with the measles outbreak in the United States, that stimulated the interest in a lot of new systems.

Super. I'll hop back in the queue. Thanks.

Jeffrey Matthews, Ram Partners.

A couple questions. Number one, the bad debt reserves in emerging markets -- I'm trying to square that with your comments that your weakness sounded like it was more in Europe. Was this just because of currency issues, or what?

So one of the sizable ones, for example, was in Greece. So, technically, that is Europe; maybe I am remiss to call it an emerging market. But that was certainly one of the countries where we increased our reserves, given what's going on.

Got it. Okay, makes sense. And then the Asian growth in Diagnostics that you called out, does that include China?

Yes.

Jeffrey Matthews

Okay.

Yes, so the part of Asia that's still a bit of a challenge for us on both sides of the business is Japan.

Okay. All right. And it sounds like SAP round two went well. Where are you in the whole process? And what are the next steps?

Sure. So, we went live with our second deployment in July, and which is basically bringing in the rest of the US for Diagnostics, and also bringing in our Life Science group. And I think the implementation, the go-live went pretty smooth. We will be going through some of our first close here pretty soon.

So the team right now is focused on what they call hypercare, making sure people who are new to the system -- we've more than doubled the number of users on the system -- know how to use it, they are using it properly, et cetera. If all continues to go well with that, shortly we will be able to roll into beginning to do the design and blueprinting for Europe.

And Europe, as we've talked about in the past, is extremely complex, with 40 entities and more than 10 systems, et cetera. And so they will be spending the better part of all of 2016 really working on that design and implementation. And barring any bumps in the road, we are hoping to start to go through a series of deployments in 2017 in Europe.

Okay. And just, Christine, can you frame it in any way as far as any initial indications you've seen from the deployment and the information that you're getting from it, or the speed at which you're getting information, that ultimately, this is going to make your life a lot easier, relative to your earlier expectations? Is it better than you might have thought it could be? Or is it as you thought it could be? Or are there disappointments in it?

Yes. So, good question, Jeff. I think, overall, it's probably even better. There's always challenges along the way. But you may remember that when we did our first deployment in April 2013, we created a shared service center for all the back office accounting transactions -- ARAPs, things like that.

And now with the second deployment, that team was ready to catch the ball. And that transition went well. And, frankly, having it all in one location helped with the close process, it helped with the analysis process, it helps with the audit process. And so that's great.

But I -- frankly, I think the bigger benefit is to the business itself, and the ability to operate more efficiently, to have that visibility in the supply chain, and -- you know, from planning and ordering right through logistics. And then that, of course, directly helps our customers in terms of our ability to service our customers. So, I think a lot of good news all the way around.

Okay. Great. And then I would normally jump off and come back later, but I'll just ask the question I was going to ask now anyway, I guess for Norman or John. But I don't know how you pronounce it -- Theranos is getting FDA approvals for the herpes test. What does this mean long-term for the industry in general and Bio-Rad in particular, if anything? Thank you.

So, you know, it's obviously, I think, an open question. Obviously, Theranos has a very interesting business model. There's some discussion about whether this opens up really a kind of a new category of patients that want to be diagnosed.

It is more of a near-patient model. I think we've seen a number of things in the past several years kind of leading towards more point of care, and more of what I guess I would call patient-centric model. And I think this is just one piece of it. I think we'll see how this plays out over the coming years.

Okay, thanks.

Dan Leonard, Leerink Partners.

This is actually Kevin in for Dan. Good afternoon. Could you guys comment on the pricing pressure and dynamics in Europe, given the weakness in the diagnostic market?

Sure. Kevin, this is John Hertia. I would say the pricing pressure has stayed pretty constant during the course of the year. And we have some mature markets over there in diabetes and immunohematology, and that's where we are seeing the majority of the price compression. You're also seeing some lab consolidation in France and that's sort of adding to it.

We are hoping, with the introduction of two new systems in those areas where we're seeing price compression -- the D-100 for diabetes and the IH-500 for immunohematology -- we will be able to reverse that trend. And so far, the recent indicators have been pretty good.

Great. And to that point, do you think those launches, and your upcoming launches as well, can that -- can those launches make the diagnostic business go from a low-single-digit growth to a mid-single-digit?

Well, probably not in the near-term timeframe. But it can't hurt. (laughter)

Sure.

We just can't quantify exactly what the percentage rise that we get out of that yet.

Unidentified Participant

Okay. Got it.

Yes. And so we're sticking to our -- kind of our 3% currency neutral growth for the year. And that's across the board. But I think that is where we are targeting for Diagnostics as well.

Okay. And just one last one. Could you provide an outlook on the Chinese and European academic markets, given that growth?

Say that again? We didn't quite get the whole question.

Yes. Could you just provide your outlook on the Chinese and European academic markets?

Chinese, okay. Well, I think that as we see, and especially in China, that they've backed off their budgets a little bit in China, just in general, and still obviously growing at above-average rate. I think the interesting part for us is that it seems that Europe is doing very well. And that's been a very pleasant surprise for us.

I would say, by the way, that also you've got kind of a resurgence of interest in funding the NIH and some of these new initiatives, the precision medicine funding. And they're talking about continuing to ramp up NIH funding. So, I mean I would say that the -- it seems that the outlook in the Life Science Tools space is pretty decent.

Okay. Appreciate the color. Thank you.

(Operator Instructions). Brandon Couillard, Jefferies.

Maybe for Christine. I believe in the first quarter, you mentioned a drag in the Diagnostics business from order deferrals ahead of new product launches. Did that persist in the second quarter? Or was there any catch-up benefit or normalization?

Oh, I would imagine that these early -- in the first part of the quarter, it did continue to persist. The D-100 was launched for a good portion of the quarter, so that probably went away. But the other part of the demand is on the blood typing side. And we just launched the IH-500. So, part of it probably persisted and probably contributed during the quarter.

So is it fair to say it's all probably in that negative dynamic then?

Probably, yes.

Okay. And then one for John, sort of high level. I mean, it's been about a year since you took over the COO role. Would love to get just a progress report on the areas of the business where you've been focused on, and kind of what your priorities are, as you look out the next 6 to 12 months?

Okay. Well, as you probably know, we have made some organizational change here, carving out our supply chain into a separate entity globally. And so one of the things that we are focusing on here is in the area of cost of goods, and all of the things that go into that number -- from sourcing raw materials to looking at our manufacturing plants, how many we have, whether those can be consolidated, where we have products that lend themselves to one particular plant or not.

So there's a lot of analysis going on in that particular area. And I am pretty well-focused on that one. In addition, we have consolidated all of our selling organization into a single global entity. And while that may not give us a lot of, let's say, strategic change, but it will certainly allow us to, I think, get a good handle on setting goals and objectives in a more classically uniform way.

So there's a couple of areas that I have focused on. The groups led by Shannon Hall and John Hertia are focusing on delivering and developing new products into their areas. And we still look at our business as two segments -- Clinical Diagnostics and Life Sciences. And we consolidate all our results there, and so we hold them responsible for that.

So, that's -- well, I guess those are my first comments. And maybe lastly as to really ensure that as we roll out ERP to the rest of the Company, I think Christine touched on it -- Europe is going to be a big hairy project. And we are already planning and gearing up for that, even though we are in hypercare for deployment too. So that's what keeps me busy.

That's very helpful. Just as a follow-up, to what degree do you have any additional cost actions or cost takeout planned for the balance of the year? I mean, at the end of the year last year, I mean, you closed one -- (technical difficulty) profitable product line, closed a couple facilities.

Is anything embedded in your guidance for additional actions like that? And to what extent do you see room for additional opportunities there, say, in the near-term?

No, not in the near-term, Brandon.

Fair enough. Thank you.

Thank you. And with no further questions in the queue, I would like to turn the call over to Christine Tsingos for closing remarks.

Okay, great. Thank you, Nicolas. And thank you, everyone, for taking the time to join us today. Bye bye.

Ladies and gentlemen, thank you for participation in today's conference. This does conclude the program and you may now disconnect. Have a good day, everyone.