Bio Rad Laboratories Inc (BIO) 2003 Q2 法說會逐字稿

Good day, everyone, and welcome to the Bio-Rad Laboratory's second-quarter conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Mr. Joe Diaz, with RCG Capital Markets Group. Please go ahead, sir.

Thank you for joining us today to review the financial results of Bio-Rad Laboratories for the second quarter and the six-month period ended June 30, 2003. As the conference call operator indicated, my name is Joe Diaz with RCG Capital Markets Group. We are the financial relations consulting firm for Bio-Rad. With us today representing the Company are Mr. NORMAN SCHWARTZ, President and Chief Executive Officer; Ms. Christine Tsingos, Vice President and Chief Financial Officer and other members of the management team. At the conclusion of today's prepared remarks, there will be a question-and-answer session. If anyone participating on today's call does not have a full-text copy of today's release, it can be accessed on numerous financial sites on the Internet.

Before we begin with today's prepared comments, please note that various statements made during this conference call may constitute forward-looking statements for purposes of the Securities and Exchange Commission's Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995 and Rule 3b-6 under the Securities Exchange Act of 1934. The forward-looking statements contained herein involve risks and uncertainties that could cause results to differ materially from the Company's expectations. With that having been said, we will begin today's presentation with prepared remarks from Ms. Christine Tsingos, Vice President and Chief Financial Officer. Christine.

Thank you, Joe. Good morning everyone and thank you for joining us. Today we are pleased to report sales for the second quarter of fiscal 2003 of $243.5 million, an increase of more than 13 percent versus the same period last year. This growth was fueled by continued strong sales from our process chromatography, microarray, blood virus and quality control products. The year-over-year growth rate includes approximately 9 percent of favorable currency impact.

As expected, the gross margin for the quarter was 56 percent, down from 57 percent for the second quarter of 2002 and 58 percent for the first quarter. The decrease in gross margins is partially a result of an increase in instrument placement. Also as expected, operating expense for the second quarter was 32.5 percent of sales, essentially flat with the year-ago period, and compared to the 31.4 percent for the first quarter of this year. The sequential increase in spending is due in part to the integration of our Verdot acquisition and expenditures necessary to enable us to meet the CE mark requirements in Europe. Research and development expense in Q1 increased to 9.3 percent of sales, within our goal of 9 to 10 percent of revenue. The net effect of this is an operating margin of 14.2 percent, down from 15.4 percent for the same period last year and 18 percent last quarter.

The consolidated tax rate for the quarter remains at 33 percent, and barring any extraordinary events, we anticipate using 33 percent for the remainder of the year. Net income for the second quarter increased 29 percent to $21 million, or 83 cents basic earnings per share and 80 cents per share on a diluted basis. We estimate that approximately 7 cents in quarterly earnings per share is attributable to the favorable currency impact.

Now for certain segment information. Life Science reported sales grew 13.5 percent for the quarter. On a currency neutral basis, growth was approximately 4 percent versus the same quarter last year. The primary driver of the currency neutral growth were sales of Life Science chromatography and microarray products. Overall segment profit was 15.9 million this past quarter versus 15.8 million for Q2 of 2002 and 21.6 million last quarter. The sequential decrease in profitability is largely a result of decreased gross margins due to higher instrument sales, the integration of Verdot and some foreign exchange effects.

Clinical Diagnostics sales increased by 14 percent for the quarter, fueled primarily by blood virus quality controls and and diabetes monitoring. On a currency neutral basis, sales grew just under 5 percent. Segment profit was $15.7 million, up from 9.8 million in the second quarter of 2002 and compared to 18.8 million last quarter. The sequential decrease is the result of gross lower margins and higher spending, in particular to support the CE mark compliance. Please note that the segment profit for both Life Science and Clinical Diagnostics includes an allocation for corporate management expense and interest. It is also important to remember that while topline growth is directly affected by currency fluctuations, profitability in the groups is less affected as the Company had significant expenses denominated in those same foreign currencies.

Today we not able to release any balance sheet information and we apologize for that. As you know, with the new Reg G requirements, we did supply a balance sheet with our press release, and therefore cannot comment on any balance sheet items. We will be filing our 10-Q next week and the balance sheet will be available at that time.

Looking to the future, given the current climate in our industry, we're pleased with these results. Looking to the remainder of the year, we expect revenues for the full year to grow in the mid single digits on a currency neutral basis. While we have experienced significant currency-related growth in the first half of the year, those comparisons are already becoming less favorable. Per our previous guidance, we still expect gross margins to be in the 56 to 57 percent range. As we mentioned on the Q1 call, we have several R&D and infrastructure investments planned for 2003 and our thinking regarding contracting operating margins for the full year has not changed. Finally, with the anticipated tender for extent (ph) notes as well as the issue of new notes that we announced today, we expect that interest expense should increase to around the $30 million mark for the year. I would like to now turn the meeting over to NORMAN SCHWARTZ for a few comments.

I guess from my point of view as the year unfolds, as Christine said, we will continue to invest in a number of areas. Although nothing new to us, we have a number of new products which are nearing the end of the development cycle and which will be introduced in the second half of the year and certainly beyond. We are also investing in infrastructure, particularly in IT, and we have a couple of building projects underway, and those are all focused on improving efficiency and helping us to accelerate the growth. We are currently working on restructuring our debt, as you may have seen. So all of these investments are certainly consistent with our long-term focus and that's where we stand at the moment. So with that, I would like to -- Susan (ph), can you open it up for questions now?

Thank you. The question-and-answer session will be conducted electronically. (CALLER INSTRUCTIONS) Sherry Walker (ph) with Deutsche Bank.

Can you give us -- I was surprised at the gross margin coming at 56 percent, which I guess is the low end of your range. Can you comment on the gross margin in the two divisions? And then a little bit about Life Science, how much Verdot impacted that and how would you think about that going forward? And you had a nice gross margin improvement in Diagnostics in the first quarter. If you could comment what happened there as well.

Remember, Sherry, on the last call, we talked about gross margins and the 56 to 57 percent range and that the 58 percent in Q1 was not sustainable. In Q1, remember that revenues were higher than expected and there was also a small amount of royalty revenue that also helped the gross margin. The 56 to 57 percent range, obviously in this quarter we did come closer to the low end of the range than the high end of the range. And part of that is a pickup of instrument sales which affected the gross margin. In terms of segment gross margins, are you looking at year-over-year or sequential?

Well, we can talk sequentially -- that would be great. You mentioned that one of the -- in the Life Science division, part of that driver would be instruments. And then you mentioned something about Verdot. Did that impact the the gross margin line as well?

Sure, it did. And this is kind of the first quarter that we're bringing them into the fold. There is a little bit of spending ahead of the curve, both in terms of cost of goods sold as well as Opex, as we bring them into the Bio-Rad family.

So if you start thinking about a range for the rest of the year, should we be thinking on the low end or more of the high end of your range -- if you had to guess?

I think it will be within the range for the remainder of year. And then obviously, the 58 percent in Q1 is -- the 58 percent in Q1 is on a blended basis, I wouldn't be surprised that it's at the higher end of the range.

Then if you looked at the Diagnostic division, I know you had made some changes or improvements in manufacturing. Can you comment on what happened there sequentially?

We continue to have the improvements, especially in our Quality Controls group up in terms of manufacturing efficiencies. I think that in terms of gross margin on a sequential basis, specifically related to Diagnostics, remember in Q1, the kind of the onetime royalties were related to the Diagnostic side of the house. So that is probably one of the biggest changes.

Thank you.

Aaron Geiss (ph) with Robert W. Baird.

Good morning, everyone. Can you spend a bit more time talking about product specific growth within the Life Sciences segment? It came down a little bit from the first quarter. Were there some products that growth slowed down somewhat or is it just generally a little bit slower growth on a consolidated basis for the Life Sciences segment?

We've had -- it's been just a little bit slow overall, but I guess it's kind of a mix of things. Certainly, as we've talked about before, I think that while we've maintained our market share in BSE, certainly we have seen some pricing decreases, and that's probably affected those numbers more than anything else.

Can you spend a little bit more time talking about the current trends, whether or not the release of the 2003 NIH budget sort of allowed some Life Science researchers, specifically in the U.S., to spend a little bit -- have they been purchasing more instruments, what sort of instruments have they been purchasing? Do you see those trends continuing the back half of the year?

Brad, do you want to comment on that? We have Brad Crutchfield with us from Life Science.

Certainly throughout the quarter, we begin to see the NIH budget become available. But like we've typically seen over the years, when there's been sort of a slow or delay in the budgets, once the budgets are actually released, customers are fairly conservative. Our sales reps call this spend setting. We have seen some improvements, but its generally in the area of real time, PCR instrumentation is obviously still strong, but were starting to see more in the area of proteomics and some of the bigger kind of systems that we saw several years ago. Those are certainly we're starting to see those kind -- commitments for those systems come back online a little bit more.

Would you say that that strength or that renewed interest is coming from both the pharmaceutical-biotech segment and the academic segment, or that's just principally in the academic segment?

It's a little bit more skewed to the academic segment.

Thank you very much. My next question, you talked a little bit this morning about some new product introductions helping growth in the back half of the year. Can you spend a little bit more time talking about where those new products are, specifically if they're in the Life Sciences area or the Clinical Diagnostics area, sort of where you see those products -- a time frame and timeline coming up?

They are both in Life Science and Diagnostics, and those introductions should happen kind of continually throughout the rest of the year.

Do you see any of these introductions as being substantial new product introductions or most of them are sort of next generation and additions to the existing portfolio -- (indiscernible) portfolio that you have?

I think they are mostly product line extensions, those kinds of things, on the base hit side.

Thank you very much. I appreciate the answers.

(CALLER INSTRUCTIONS) Rob Crystal (ph) with Brant White (ph ) Capital.

I was just clarifying, on the interest expense line, you said it was going to be what for the year?

I think it will be closer to $30 million for the whole year when you look at interest expense so far through the first half, expected interest expense as well as the cost of tendering for the outstanding notes.

And what has it been through the first half, including the tendering?

The tendering is not in the first half of the year.

Okay. I'm sorry. Is that including the buying back of the bonds that you (multiple speakers) previously?

Yes, the 30 million would include the bonds that have been purchased already, as well as the premium for the remainder and then the interest expense on the outstanding debt.

Great, thank you very much.

Tom Vendoc (ph) with Graham (ph) Parker.

I have two questions -- first in Canada, are you hearing anything coming out of that country relative to interest in the Mad Cow test? And then the other question would be, in the diabetes test, the HbA1c test, are you seeing significant growth there?

Let's take -- Brad, you want to take the Canadian Mad Cow first?

Sure, the situation in Canada is certainly fluid at this point. There is definitely interest in looking at and adopting a screening test for BSE. However, at this point, there has been no change in the policy by the Canadian government on the number of cattle they will change. But our experience suggests that those kinds of things can change very, very quickly.

John, do you want to take the diabetes?

On the diabetes side, we have had a new platform being sold in -- outside the United States. And this is our new D-10 product, which is another HPLC platform, a little along the lines that Norman described as a line extension. We are sitting on pins and needles right now waiting for FDA approval, which we should receive, we think, any day now to be able to release that platform in the United States. So our diabetes growth right now is coming largely outside the U.S. and we hope that with the launch of that platform, we'll see kind of a similar result take place here.

Thank you.

(CALLER INSTRUCTIONS) Aaron Geiss with Robert W. Baird.

I understand there's a sensitivity about answering balance sheet questions. Hopefully, Christine, you can answer this question. You announced this morning the tender offer of the $200 million and expanding your credit facility. Can you talk a little bit about that and is that additive or a short-term choice or decision?

I'm not sure what you mean by additive or a short-term choice?

Would you be looking at taking on that -- utilizing all of that short-term credit and the residual that you have would have following the tender offer?

Remember that the notes that we are looking to issue will be 10-year notes and the revolver is a 5-year revolver. So over the life of the two facilities, it's possible that we could use them. But keep in mind that on the Senior Subordinated side, with the 200 million in new (ph) notes, about 100 of that will be used to tender for the extent (ph) notes that are currently outstanding. And less fees, et cetera, there'll be 97, $98 million left over for general corporate purposes.

And the extra $150 million will give you some more wiggle room in terms of the ability to make acquisitions or other sorts of opportunities?

Sure. Remember, we've had a revolver in place for a number of years -- the current revolver is 100 million. We are looking to move that to 150 million. But the business has grown substantially since the first credit facility was put in place, and it just allows us the flexibility if we were to ever use it in the next five years.

Thank you very much.

It appears there are no further questions at this time. Mr. Schwartz, I would like to turn the conference back over to you for any additional or closing remarks.

I would like to thank you all for participating this morning and look forward to seeing you on the call next quarter. Thank you.

That concludes today's conference. Thank you for your participation.

(CONFERENCE CALL CONCLUDED)