Bio Rad Laboratories Inc (BIO) 2003 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter, 2003 Bio-Rad Laboratories earnings conference call. My name is Kelora, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-answer session towards the end of this conference. If you require assistance at any time during the call, please press star followed by 0, and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Ron Hutton, Treasurer of Bio-Rad Laboratories. Please proceed, sir.

Thank you very much.

Welcome to all who are joining us on the call. Before we begin to call, I'd like to caution everyone 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. With that I'd like to turn this call over to Christine Tsingos, our CFO, for her comments.

Thank you.

Thanks, Ron.

Today we are pleased to report record sales for the third quarter of fiscal 2003 of $248 million, an increase of more than 10% versus the same period last year. This growth was fueled by continued strong sales from both our Life Science and Clinical Diagnostics Group. The year-over-year growth rate includes approximately 6% of favorable currency impact. The growth margin for the quarter was 55.5%, down slightly from 56% for the prior quarter.

The decrease in gross margins is largely the result of the integration of our Verdot acquisition, higher sales of Life Science instrumentation products, particularly imaging products for protein discovery and process chromatography instruments for drug productions, and a continued decline in pricing for our BSE products, offset by higher volume. Throughout this year we have experienced consolidation in our BSE customer base that has resulted in volume price discounts, as well as increased price competition from some of the other players in the market. Despite these changes, we remain confident in our ability to defend our worldwide BSE leadership position.

Operating expense for the third quarter was 32.4% of sales, essentially flat with last quarter, as well as the year-ago period. In line with our guidance, research and development expense in Q3 increased to 9.6% of sales as we continue to invest in the business. The net effect of this is an operating margin of 13.4%, down from 15.8% for the same period last year and 14.2% for the second quarter of 2003. This is consistent with the guidance we have given for quite some time now. The higher-than-expected foreign exchange expense for the quarter can be traced to a few items, including the premiums paid to hedge certain of our Brazilian assets and the sharp appreciation in the Euro in the month of September, which led to the revaluation of some of our European assets and liabilities.

During the quarter, we restructured our long-term debt through the tender and repurchase of our 11 5/8 notes and the new issuance of 225 million in 7.5% senior subordinated notes. We also negotiated a new five-year $150 million revolving line of credit with our bank group. The financial impact of these transactions on the third quarter is approximately $13.6 million of one-time financing costs, or 9.1 million after tax.

On a reported basis, including the one-time financing related charges, net income for the third quarter was $9.7 million, or 38 cents basic earnings per share, and 37 per share on a diluted basis. Excluding the one-time financing charges, basic EPS were 74 cents for the quarter and 71 cents on a diluted basis. It is important to know that excluding these one-time charges and despite the pressure on gross margin, net income as a percent of revenue for 2003 is up significantly to over 9%. We estimate that approximately 5 cents of this quarter's earnings per share is attributable to the favorable currency impact.

And now for certain segment information. Life Science reported sales grew 11.2% for the quarter. On a currency neutral basis, growth was 5.4% versus the same quarter last year. The primary driver of the currency neutral growth were sales of Life Science consumables, imaging instrumentation, and process chromatography products. Overall segment profit was 14.1 million this past quarter versus 17.3 million for Q3 of 2003. This approximately 18% decrease in profitability is largely a result of changes in our BSE business and a shift toward lower margin instrument products, as we have been anticipating throughout the year.

Diagnostic sales increased by 9.3% for the quarter as all of our divisions posted growth over the same period last year. On a currency neutral basis, sales grew by about 3%. Segment profit was 15.3 million, up from 12.9 million in the third quarter of 2002. This represents an increase of 18% in profitability year-over-year. The increase was primarily driven by a focus on managing expenses behind the revenue curve and more in line with the currency-neutral top-line growth.

Please note that segment profits for both Life Science and Clinical Diagnostics includes an allocation for corporate management expense and interest, although the one-time interest -- it is also to important to remember that while top line growth is directly affected by currency fluctuations, profitability is less affected by currency as the company had significant expenses denominated in those same foreign currencies.

To review, certain balance sheet items as of September 30th: cash, $140.7 million; receivables, $217.7 million; inventory, 189.2 million, for a total assets of $925.7 million; total debt, 234.8 million; and total equity of 459.3. Bio-Rad's balance sheet remains strong as a result of our focus on the business and our recent debt refinancing. During the month of August we raised 225 million in senior subordinated debt at a much more attractive interest rate than our previous 11 5/8. Approximately $115 million of the proceeds were used to retire the prior debt and pay the related fees. The expensing -- the remaining balance will be used to invest in our business, both internally and externally.

Looking to the remainder of the year, we continue to expect revenues to grow in the mid-single digits on a currency-neutral basis. While we have experienced significant currency-related growth this year, the comparisons are becoming less favorable. Also unchanged in our guidance is the outlook for gross margins, which we continue to expect to be in the 56 to 57% range for the full year.

As has been typical with historical results, the fourth quarter generally reflect some higher sales of instrumentation products, as well as spending on selling, general, and administrative activities, resulting in a a sequential decline in the operating margin. Finally, we anticipate continuing to use 33% as our consolidated tax rate.

And now we are happy to take your questions.

Ladies and gentlemen, if you wish to ask a question, please key star 1 on your touch-tone phone. If your question has been answered, or you wish to withdraw your question, please key star 2. Again, to ask a question, please key star 1. Your first question comes from Ankar Gandhi of Goldman Sachs. Please go ahead.

Good evening, everybody. First if I -- just a number of questions. If you could give us what the cash flow from ops and the capex was in the quarter.

We actually haven't released the statement of cash flows yet, and it will be available in the 10Q.

Any indication of directionally, how the cash flow from ops, the free cash this quarter?

Well, certainly, as we've talked about in the past, we anticipated increasing our capital expenditures for the full year to the 60 to $65 million range as opposed to the 40 to 45 million we've been running, and the year-to-date expenditures reflect that run rate.

Okay. And there is an increase in short-term debt of 9.6. Does that reflect the drawdown in the revolver, or what is that?

No, that is simply largely overseas debt and the like. It's not a drawdown the revolver, no.

Okay. Perfect. So revolver drawdown was zero.

Correct.

And then you mentioned that Life Sciences margin came down to about 14% and that's a continuing shift. Should we be modeling the 14% going forward? Is that --14 to 15% -- is that the range that we should be seeing going forward?

Well, certainly, I think we anticipate that the BSE peaks of the Life Science segment will continue at these levels. We've been maintaining share and doing a good job of managing that business as it goes through the cycle. And the rest of the pieces of Life Science seem to be forming quite well. So --.

So you don't want to go into specifics about the range?

I really don't.

Okay. Fine. Last question, acquisition. Any update on pipeline, what you're seeing out there, timing, anything?

This is Norman Schwartz. I mean, as usual, we have a number of things in the pipeline that we're looking at, both large and small. It's really -- it's really hard to anticipate if anyone of those is going to come to pass at this moment.

Great. Thank you.

Your next question comes from Aaron Geist of Robert W. Baird. Please go ahead.

Good afternoon, everyone. Thank you for providing so much granularity and clarity into the quarter. It's very helpful. And congratulations on positioning the company much better with all of the debt refinancing that you did in the quarter. My questions specifically are: If you could shed a little bit more light on the health of the Life Sciences market, we'd like to know what your expectations are going into next year; and spending a little bit more time just sort of clarifying the gross margins that you gave in terms of the guidance, the 56 to 57%, that's for 2003. What would be your gross margin assumptions going into next?

Okay. This is Norman Schwartz again. I think that, you know, the Life Science market continues to be, from our point of view, a fairly robust one. You know, certainly on the research side of the business, as everybody knows, the biopharmaceutical end of that business, the customer base has been, you know, a little bit slow. There do appear to be some signs of life there. I mean, to predict exactly what's going to happen next year, I think we're a little early in that. We are starting to work on the budgets and might have a better idea of that towards the end of the year. But, you know, the outlook seems fairly positive.

Okay. And on the gross margin side?

Well, I think, again, we're not talking about next year in terms of any of the financial --.

Okay. Would it be safe to assume that the improvement that you've generated by managing expenses in the Diagnostic segment would help to offset the decrease in operating margins in the Life Sciences area, particularly in the BSE business?

Well, the Diagnostics people would not like to -- that to be the -- the way it's stated, [laughter] but I do think that is, you know, candidly, one of the advantages that we have of the broad portfolio products that we have and the, you know, different businesses, is that we do have a chance to balance these things a little bit. If we have, you know, a short-term effect in one division or operation, it is offset by others.

Would you say that any of the higher SG&A costs in the quarter were abnormal or are they recurring expenses that we should continue to look for on a going -forward basis?

Well, I mean, from our point of view, the SG&A expenses have been, you know, in line with sales. They seem to, you know, be fairly reasonable. I think it's probably a reasonable expectation.

I think, you know, some of the spending, Aaron, as we've talked about are on some of the infrastructure projects that we're working on. That could be considered more one-time in nature, although it's not, you know, one quarter at a time. There's more investment that needs to still be completed. So it could be in the short-term run rate, but our long-term goal does remain over the course of the next several years to move SG&A closer to the 30% number.

Last question. You talked about in the press release, securing, locking up, what have you, the U.K. market for BSE testing and becoming the exclusive supplier there. Can you talk a little bit more about that dynamic and talk a little bit maybe, hopefully, about pricing? Do you think that's the beginning of some turnover that you're going to see in Europe, and maybe Japan, and locking those market up again for the foreseeable future?

I think, you know, in the case of the U.K., they have increased their testing, and these are three or four different programs, contracts that our folks there have managed to secure. So, you know, what it holds for the future, not clear.

Okay. Thank you very much.

Your next question comes from Jeff Schreiner of M.S. Capital Management. Please go ahead.

Good afternoon. You had stated in the press release that some new projects had left you feeling fairly confident for the remainder of fiscal year '03. I'm a little new here. Could you explain what some of those new projects may be?

We've got a number of projects going on. These are primarily, you know, in the area of R&D projects. I mean, we've previously announced, for example, that we had relationship with Caliper. We are investing there and kind of looking at broadening the application of the lab on the chip technology. That's one area. We've got some other R&D projects going on. We don't typically talk about those until we get ready to announce. But we've also got some operational improvements that we're working on investing in. You know, in the distribution area, we are kind of reworking some of our facilities, expanding, give us a little more capacity there. So a number of things like that.

Okay. Excuse me. You had stated earlier that the fiscal year '03 projections for capital expenditures would be somewhere around 60 to 65 million, but typically they ran somewhere lower, maybe 45 to 50, if I heard correctly. Going into fiscal year '04, just in a guidance, would we see maybe the capex coming back down to normalized levels?

Again, we haven't given any guidance for 2004. What we have said is that we do, indeed, expect capex to be in the 60 to $65 million range for 2003, and that compares to the 40 to $45 million range that we've been running historically, not 45 to 50. We haven't projected where it goes from there, although I don't think we expect it to stay at the $65 million level.

Okay. And then in terms of the pricing pressure that you commented on within the BSE segment, how long will you expect that to continue? Is it just a cycle, as you've kind of been stating?

Brad, would you like to take that? We have Brad Crutchfield dialed in with us, and he's the Vice President of the Life Science Group.

Well, okay. The situation with BSE is, obviously, extremely dynamic, as governments are working through the lifecycle of their own testing, I think the situation, like any test, or any sort of -- and this is kind of falling almost to more of a diagnostic model. The price is going to drop over time. The other dynamic that's affecting this market is playing out a little bit in Japan right now where the age of the animals that have been found to be positive in the recent months have been younger, and that seems to have brought two dynamics into the market, both the sensitivity issue, which plays out for our test, which has been proven to be the most sensitive test on the market, and the number of animals that need to be tested. So those things we hope, but, you know, obviously, time will tell, may stabilize the price a little bit as governments and private entities that do order the test begin to look at other factors other than just, you know, essentially a strict price competition for the business.

Okay. Well, thank you very much.

Your next question comes from Tom Lunbeck of Ram Partners. Please go ahead.

Hi. I'm just curious as to whether you can give me some color on the D-10 hemoglobin system for HBA 1C testing? How is that product doing, and what is the competitive landscape there?

This is John Goetz. I'm the Vice President for the Diagnostics Group. We launched that product in April, in Europe, and then later in the year here in the U.S., and we found it to be quite well received. In fact, we're trying to produce those units as quickly as we possibly can to kind of fill the pipeline right now. So customer response has been quite good. Pricing in that area is really also right where we thought it would be. So we're seeing a nice little uptick in that area. We continue to compete effectively in the medium to smaller hospital size with this particular platform. That's where it's targeted, and where we can really, I think, exploit our strengths.

Okay. Thank you very much.

You're welcome.

Ladies and gentlemen, once again, if you would like to ask a question, please key star 1 on your touch-tone phone. Your next question comes from Ankar Gandhi. Please go ahead.

Just another follow-up question. Could you perhaps give us the D&A and other line items so that we could calculate EBITDA or just give us the EBITDA number for the quarter, please?

The D&A, again, we haven't released the statement of cash flows yet. And under FC we need to be careful about that until the 10Q comes up, but in terms of where it's been running, it hasn't changed materially

So EBITDA around the 43 millionish range would be accurate, or it would be in the range?

Yeah, for the year.

For the --

For the quarter.

For the quarter. Thank you.

Your next question comes from Aaron Geist of Robert W. Baird. Please go ahead.

Just one quick follow-up. If you could give us the operating margins per segment again for the quarter and for the year, that would be helpful.

I'm sorry. Say that again, Aaron.

Could you, Christine, give us the operating margins per segment for the Life Sciences Clinical Diagnostic segment for the quarter and the guidance that you have for the year.

Well, you know, we obviously haven't given guidance to that level of detail, by segment. We've given it just for the full company. We really didn't give operating margin guidance even for the full company. Jim, do you have those numbers?

Yes, I do. Okay. The third quarter Life Science segment profit will be 17.3 million -- excuse me, that was last year. For 2003, 14.1 for Life Science for the third quarter; for Diagnostics, 15.3. Okay? For Life Science, year-to-date, 51.7; for Diagnostics, 49.8.

Thank you very much.

In millions of dollars.

Once again, ladies and gentlemen, if you wish to ask a question, please key star 1 on your touch-tone phone. There do not appear to be further questions at this time.

Okay. Well, thank you very much for joining us, and we'll look forward to speaking to you at the next conference call, if not before. Bye-bye.

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