Bio Rad Laboratories Inc (BIO.B) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bio-Rad Laboratories, Incorporated Q1 2016 Earnings Conference Call. (Operator instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ron Hutton. You may begin.

Thank you, Chiron. 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 future financial 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 call over to Christine Tsingos, Executive Vice President and Chief Financial Officer.

Thanks, Ron. Good afternoon everyone, and thank you for joining us. With me today are Norman Schwartz, John Goetz, Shannon Hall, President of our Life Science Group, and John Hertia, President of our Diagnostics Group.

Net sales for the first quarter of 2016 were $471.2 million, a slight decrease versus the same period last year's sales of $472.8 million. This decline reflects the continued strong currency headwind which represented a negative impact on sales of nearly $20 million.

On a currency-neutral basis, sales increased 3.9%. During the quarter, we experienced good currency-neutral growth across many of our key market and product areas, most notably in our Life Science segment, as well as certain products and markets in our diagnostics segment. Sales growth in the quarter was somewhat tempered by continued weakness in the European diagnostic market, as well as challenges in the Eastern European region, both of which posted a decline in currency-neutral sales versus last year, offsetting these tepid regions with solid growth in the US, Asia-Pacific, and selected emerging markets.

The reported gross margin for the first quarter was in line with expectations at 56% compared to 57.1% last year. The current quarter margin is the result of good product mix, partially offset by increased costs. The higher margin in the first quarter of last year reflected sizeable favorable manufacturing variances during that period, making the first quarter of this year a bit tough to compare.

Amortization expense related to acquisitions recorded in cost of goods sold was higher at $7.2 million, which compares to $6.8 million in the first quarter of last year. The increase in amortization relates to the newly-acquired flow cytometry technology for the cell biology market.

SG&A expenses for the first quarter were up slightly at $189.7 million, or 40.3% of sales, compared to $188.6 million, or 39.9% of sales last year. When compared to last year, SG&A expense during the quarter benefited from the strong US Dollar. Excluding the currency benefit, SG&A spending increased approximately $7.8 million versus last year. This increase is substantially the result of higher depreciation and spending on professional services.

Total amortization of intangibles recorded in SG&A for the quarter was $1.7 million.

Research and development expense in Q1 was in line with expectations at 10.3% of sales, or $48.6 million, which compares to $47.2 million, or 10% of sales, in the first quarter of last year. The increase in spending relates to our investments in Droplet Digital PCR technology and products for both the research and diagnostic markets.

During the quarter, interest and other income was a net expense of $5.5 million, compared to $7.7 million of expense in Q1 of last year. This decrease in net expense versus last year is largely related to lower foreign exchange hedging costs.

The effective tax rate used during the first quarter was 39%. This higher-than-expected rate includes discrete items related to losses in some of our smaller foreign locations, as well as increased reserves for foreign tax audits. Given the first quarter rate, and excluding any discrete items that may occur during the year, we now expect the full year effective tax rate to be at the top of our previously-stated range of around 32%. Net income for the first quarter was $12.3 million, and diluted earnings per share for the quarter were $0.42.

Looking to our segments, life science sales in the first quarter were an impressive $165.9 million, an increase of 6.4% on a reported basis when compared to last year, and growth of nearly 10% on a currency-neutral basis. This growth was driven by continued strong demand for our Droplet Digital PCR products as well as strong sales of our process chromatography media.

We are especially pleased with the continued growth in our process media business, where our products are now specified in 40 FDA-approved drugs.

During the quarter, we also experienced good growth of our amplification and western blotting products. On a geographic basis, life science currency-neutral sales were particularly strong in Western Europe, China, and the US. This growth was partially offset by slower sales in the Eastern European region.

From a strategic standpoint, during the first quarter we made two significant announcements regarding our life science group. The first is our new exclusive partnership with Illumina to develop the most comprehensive next-gen sequencing workflow for single-cell analysis, and the second is our acquisition of a new high-performance analytical flow cytometer platform. We hope to launch both of these products by the end of the year, which should bode well for continued growth in 2017.

Sales of clinical diagnostic products were $301.7 million, compared to $313.6 million last year, a decrease of 3.8% on a reported basis. On a currency-neutral basis, year-over-year sales were up about 1% for the diagnostic group, highlighting a currency headwind to sales of more than $14 million. Additionally, the overall growth rate reflects a delay in some orders as well as continued competitive and pricing pressure, especially in Europe.

During the quarter, we posted excellent growth in the US as well as Japan and the Asia-Pacific region. From a product standpoint, sales of quality control, diabetes monitoring, and autoimmune testing products continued to grow nicely. Of particular note, demand for our Bio-Plex 2200 instrument and assays continues to gain momentum as many customers around the world adopt the system and additional panel.

And finally, during the first quarter, we announced receiving CE IVD marking for the QX200 Droplet Digital PCR system so that medical practitioners in Europe can use our platform as an aid in clinical decision making.

Looking to the balance sheet, as of March 31, total cash and short-term investments were $752.9 million. Net cash generated from operations during the quarter was a negative $7.4 million, compared to a plus $29 million in the year-ago period. This decrease in cash flow versus last year is the result of lower sales on a reported basis which includes approximately $14 million of currency headwinds and receivables, higher payments to suppliers, and increased employee-related payments associated with various 2015 incentive plans.

Net capital expenditures for the quarter were lower than expected at $25.3 million. Our full-year expectation for CapEx remains in the $140 million to $150 million range, as we continue to invest in our global ERP system and related infrastructure projects. And finally, depreciation and amortization for the quarter was $34.1 million.

Moving to the outlook, on our last earnings call we shared our thinking for 2016. That is, our goals for currency-neutral sales growth of 2.5% to 3%, full-year gross margins in the 55% range, and targeting to hold the operating margin flat at about 8% on a currency-neutral basis. We also highlighted that strengthening of the US dollar against our major currencies could result in a top-line currency headwind of $50 million to $75 million, and that's perhaps flat year-over-year reported sales. And while we do have some natural hedge with our expense mix, we guided that this sizeable headwind could negatively impact our projected currency-neutral operating margins by 50 basis points or more for the full year.

As you can see with our first quarter results, the currency impact is still fairly significant, negatively impacting sales by nearly $20 million and operating profit around $4 million. Despite the relatively low profitability posted in the first quarter, we are maintaining our guidance for the base business given at the beginning of the year. However, I want to reiterate what we have been saying about the numerous challenges to maintaining flat year-over-year operating margins during what will be a year of even greater investment in systems and infrastructure.

As we move through 2016, we will carefully monitor the top-line growth and ongoing investments with a goal of meeting our margin target. And one final note regarding the outlook: with the acquisition of the new flow cytometer, we expect that amortization expense will increase approximately $700,000 per quarter.

And now, we are happy to take your questions.

(Operator instructions) Our first question comes from Brandon Couillard with Jefferies. Your line is open.

Brandon?

Hey thanks, good afternoon. Yes, can you hear me?

Yes.

Christine, is this -- could you break out the effect of the (technical difficulty) you saw in (technical difficulty) [Western]Europe on just the overall segment? If you back out those two regions, which have been weak for some time, sort of what does the base business look like in terms of growth?

So you're -- you're breaking up a little. Backing out, I think I heard Eastern Europe and something else?

Yes, just if we back out those two weak markets, how does the -- how would growth look for the segment, sort of excluding those two regions?

For diagnostics?

Yes.

So, Eastern Europe is smaller than some of the other segments, and obviously on a currency-neutral basis, backing it out would increase their growth rate. But, Western Europe is probably one of the largest regions, if -- no, I guess the US is probably larger now than Europe, with what's been going on in Europe. So, I don't have a specific growth rate, but I think that it'd be safe that it would be a couple of points.

I'm not sure if John Hertia is there, but I mean, if you had to point to one market or product vertical, where you think you're gaining some share, which it certainly seems like you might be at least in the US market, what are the kind of top two or three sort of contributors that you think are accounting for the strength?

Brandon, if I get this right, you're asking for what markets might be strengthening in the US market?

Gaining share, yes.

Yes, that's right. I'm sorry if I'm not coming through. Sorry.

We were pretty strong across almost all segments in the US line. We did introduce, I think we reported in the last conference call, we did get FDA approval for a new diabetes instrument, the D-100, and got approval for a new blood typing instrument, the Infinity, and those are both contributing. And as Christine mentioned, Bio-Plex is doing very well around the world, and that certainly is contributing to the US too, especially in the areas of autoimmune, mumps testing, and then the expansion of HIV and Vitamin D.

So while I have you, any update you can share with us on the status of the new Bio project?

The new Bio project continues, we continue to make progress. And we're anticipating something in the near future.

(laughter) All right, then.

It's obviously, it's still in development.

Okay. Last one Christine, do you have a revised FX outlook in terms of the revenue impact for the year you can share with us?

Well, I mean, that all depends on where currencies go from here, so I think we'll stick with the originally-anticipated, that kind of $50 million to $75 million. We had $20 million of it on the top line in the first quarter. I still think as we get to the second half of the year, then we don't have the same headwinds. But a lot of that, Brandon, is just going to depend on what happens to rates.

Got you. Thanks, I'll hop back. Thanks.

Thank you, and our next question comes from Dan Leonard with Leerink Partners. Your line is open.

Hi, this is actually Kevin Chen in for Dan today. So, my first question is regarding the life sciences. Were there any one-time items or large orders in the quarter, and how should we think about forward rate for that business?

You know, I think the life science growth, it's a combination of really good ongoing strength in some of the base business, and the Droplet Digital PCR technology. We did have a good quarter for process media, which can be a lumpy business as customers will buy in bulk. And so, in any given quarter there could be $3 million to $5 million of an extra order in there. But, even that business is starting to smooth out a little now that we have such a broad reach of customers.

Got it, thanks. And then, my follow-up would be on China, recently expanded their life science sending. Just curious what you're hearing on the ground over there? Do you perhaps see any incremental tailwinds going forward?

China life science spending trends?

Continues to be pretty robust, I guess that's the way I would describe it.

Great, that's good to know. And then, I guess lastly I know you mentioned tax rate was [so far] on the high end of the range, but how would it trend throughout the year? Was it -- just help us understand that?

Well, I think you know, we guided to 30% to 32%, and now we've just kind of [banged] to 39% in terms of the effective tax rate. Obviously, as the year moves on, some of the discrete items get spread on an annualized basis. So, I think for a base rate of being in that 30% to 32%, is where we'll probably trend for the year. But, because of the Q1 39%, I think the math is going to point more to that higher end at 32%, with the caveat of every quarter there's a -- there could be discrete items that move the rate either up or down.

Great, that's very helpful. Thank you.

Thank you. (Operator instructions) Our next question comes from Jeffrey Matthews with Ram Partners. Your line is open.

Hi, everybody.

Hey, Jeff.

Christine, you mentioned an increase in professional fees as part of the SG&A increase on a currency-neutral basis. Does that relate to the ERP spending, and is that going to increase as you go into your next phase?

Some of it relates to ERP, some relates to legal cost. But I think for the ERP, we've talked about spending operating expenses in that low $30 million number, and I think that's probably still the right number to use. Remember, a lot of the professional fees with the project are actually capitalized labor, but then there's a lot of kind of side projects, if you will, other systems that are impacted by this that require some professional services as well.

Okay, thanks. And then, the dollar has been pretty weak lately, and the last time that you came out with your, here's what the dollar is going to do to us this year, I think that was pretty much close to the peak in the dollar. Are you just not -- don't want to change your outlook at this point, you want to see where things go? Or, has there been no movement in the currencies that are really particular to Bio-Rad?

So no, Jeff, it's a good point and we have seen since December 31 some weakening in the dollar, even against some of our major currencies, but we also have exposure to the Russian Ruble and Brazil and some currencies that are still a bit volatile. So, it's kind of a mixed bag for us. You know, obviously if we keep trending this way, then the currency headwinds for the full year should come in lower than what we anticipated at the beginning of the year.

Okay. And then on the Illumina announcement, how did that come about, and when might there be something in the marketplace related to that?

So, I guess it came about, this whole area of single-cell analysis is something that's of more and more interest to customers, and Illumina was looking for a kind of a complete solution for the customers. And I guess they probably approached us. I don't know who made the first move, but got together and looked at what we could do together with that. And so, that's -- I guess that's the way it basically came about. The two groups are working pretty closely together, and anticipate something coming out around the end of the year.

Okay great, and then final one. I'm just curious on the US, it seems like we've had some loosening up in the NIH budget, or increases in it. And you seem more optimistic in the US. Are just things generally better here now, than they had been?

Yes. You know, certainly, I mean the word sequestration has seemed to have dropped out of everybody's vocabulary, and I think that's certainly a big help. In addition to that, I think there's certainly an increased focus. The government has kind of, I would say, gotten back on track with the importance and value of this basic science, and investing in science in the NIH. And so, I think that's a good trend.

Great, thanks very much.

Thank you, and I?m showing no further questions at this time. I would now like to turn the call back to Christine Tsingos for any further remarks.

Can you just poll one more time?

Yes. (Operator instructions) And I'm still showing no further questions.

Okay.

Oh, we do have one more question from Jeffrey Matthews from Ram Partners. Your line is open.

What the heck. (laughter) Haven't asked the acquisition question in a while. Just wondering what the landscape looks like these days? Money got pretty tight in the first quarter, and it seemed to be a good time to be a buyer rather than a seller. I don't know if that filtered into any of the companies you're looking at, but are you optimistic about adding anything to the portfolio this year?

Yes, we are optimistic. You know, as you know these -- it's always hard to say when something might actually happen, or what the competition for it might be. But, we continue to kind of work along that path, and I'm certainly hoping that we can do something this year.

Thanks very much, good luck.

Thank you, and our next question comes from Brandon Couillard from Jeffries, your line is open.

Thanks. Question for Shannon on the process chromatography business, Christine called out 40 FDA approved products in which you're specified. Is that a substantially higher number than where you were let's say 12 months ago?

Not substantially. I mean --

It's certainly higher.

Yes.

But you know, I think the point is that it continues to grow, and I think the other point is being spec'ed in those drugs is a good indicator of a repeatable or continuous business.

Okay, then one question for John Goetz. I would love to get your view sort of as we look out over the next let's call it 18 months, what does the timeline look like for the ERP deployment in Europe? Kind of when do you expect to turn the first, or go live in the first country? And then kind of walk us all the way through the end of next year?

Okay. We're currently in the, I would say the configuration phase of the project right now. Our teams are working on it as we speak in Europe. A lot of that is cleaning up data, of course, but it's the localization of the system that we've put in place here in the US, but having it more applicable to what we're doing in Europe.

We see a go-live timeframe right at the start of second quarter next year, that's kind of our hard target. And, assuming everything goes well, we'll flip the switch at that time. And of course, when you do that, you immediately jump on that system with a lot of hypercare as you pull yourself through the mess of a go-live.

So then, we'll see probably another couple of quarters, maybe even three quarters of stabilization over there. It's a pretty complicated roll-out. And then, I think we're probably going to take subsequent roll-outs in more bite-size pieces as we maybe complete the rest of our European deployment. There's some countries that are excluded in this scope. And then, we'll move on to Asia in the subsequent quarters, and kind of go from there.

But by the time we finish this deployment that we planned for Europe, which is a go-live in that second quarter time frame next year, we will have captured the lion's share of our manufacturing plants and top-line sales, so that's -- we're really encouraged by that.

Super, thank you.

Thank you, and I'm showing no further questions.

Okay great, well, thank you as always for your interest in Bio-Rad and taking the time to join us today. Bye bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.