Bio Rad Laboratories Inc (BIO) 2003 Q4 法說會逐字稿

Thank you for standing by, and welcome to the Q4 2003 Bio-Rad Laboratories Incorporated earnings conference call. At this time, all participants are in a listen-only mode. My name is Mike, and I'll be your conference coordinator today. If at any time during the call you require assistance, please press star, followed by zero, and a conference coordinator will be happy to assist you. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Mr. Ron Hutton, Treasurer of Bio-Rad. Please proceed sir.

Thank you very much. Before we formally begin the call, we would 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, we 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, Vice President and CFO.

Thanks Ron. Today we are pleased to report record sales, for the fourth quarter of fiscal 2003, of $266.2m, an increase of nearly 10% versus the same period last year. This growth was fueled by strong sales from our core life science division, in particular, imaging, amplification and process chromatography products, which were offset by a revenue decline in our food safety product line.

On the diagnostic side of the business, we achieved record sales and experienced good growth across all our divisions. On a currency neutral basis, diagnostics' quarterly revenue was just over 3% in growth, while life science, as a whole, was down 2%.

The gross margin for the quarter was 55.9%, up slightly from last quarter, but down from 56.3% last year, reflecting the decline in pricing for our BSE testing products. Throughout 2003 we 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.

As expected, operating expense for the fourth quarter was up, at 33.4% of sales, reflecting spending typically associated with our year-end. This compares to 32.4% in the third quarter, and is essentially flat with the year ago period.

Research and development expense in Q4 increased to 9.9% of sales as we continue to invest in new products, technologies, and partnerships. The net effect of this is an operating margin of 12.6%, down from 13.7% last year, and 13.4% in the third quarter of 2003. This is consistent with the guidance we have given for quite some time regarding our focus on investing in the business for both new product development, as well as infrastructure improvements.

Net income for the fourth quarter was up more than 18% year-over-year, to $19.2m. Basic earnings per share were 75 cents, and 73 cents per share fully diluted.

Moving to the full year results, net sales reached an impressive $1,003,382,000. This is quite a milestone for us, and will provide a good foundation from which to build and expand our market presence. Year-over-year sales growth is reported at 12.4%, or 3.7% on a currency neutral basis, and essentially in line with our mid single digit guidance. Also in line with expectations, the gross margin for 2003 was 56.3%, compared to 57.1% last year. Again, it's the result of the downward pricing pressure in our BSE business that was offset by increasing volumes.

It is important to note, that excluding BSE, Bio-Rad's gross margins for the full year actually improved by more than 3/10 of a percent, led primarily by process improvements in our diagnostics growth. Operating margin for the full year finished at 14.5%.

Since the beginning of 2003 we have talked about our planned investment in R&D projects, IT systems, and infrastructure, to support our growth. We will continue to invest in these projects during 2004.

Another important highlight of 2003 was the successful refinancing of our long-term debt through the retirement of our 11 5/8 senior sub notes, and the issuance of new 7.5% notes. During this process, we were pleased to receive double notch credit rating upgrades from both S&P and Moody's. We also successfully refinanced our bank facility to a new five-year, $150m revolver.

The 2003 net income figures include one-time charges of approximately $14.6m, or $9.8m net of taxes, related to the refinancing activities. 2003 net income was $76.2m, an increase of 12%. Excluding the one time financing cost, net income increased by more than 25%.

Full year basic EPS is reported at $3.00 per share, or $2.90 on a diluted basis. Currency positively impacted earnings per share by approximately 30 cents for the full year.

Now for certain segment information. Life science reported sales grew 6.6% for the quarter, to a record $130m. On a currency neutral basis, sales declined 2% versus the same quarter last year. The quarterly sales include strong year-over-year growth in consumables, imaging instrumentation, and process chromatography products. Overall segment profit was $19.8m this past quarter, versus $22.9m in Q4 of last year. For the full year, life science sales grew 11.8%, or approximately 3% on a currency neutral basis, finishing the year at $480m.

Setting aside the continued decline in the BSE business, it is important to note that our core life science product divisions posted strong double-digit growth, particularly in the areas of process chromatography, electrophoresis, and proteomic consumables and imaging products.

Segment profit for the year is $71.5m, compared to $75.2m in 2002. This decline is the result of changes in the product mix and gross margins, as well as significant increased investments in IT systems and facilities.

Clinical diagnostic sales grew 12.3% for the quarter, to a record $133.7m, as all of our divisions posted growth over last year. On a currency neutral basis, sales grew by about 3%. Segment profit for the quarter was $10m, up 18% from the $8.4m recorded in the fourth quarter of 2002. For the full year, diagnostic sales reached nearly $515m, an increase of more than 13%. Even on a currency neutral basis, our diagnostics group posted growth of 4.5%, significantly higher than the industry average.

During 2003 we made great strides in growing our diabetes, newborn screening, quality controls, blood virus, and micrology product line. This was fueled, in part, by several FDA approvals for new hepatitis B, aspergillus, and HIV tests, as well as our new D10 hemoglobin testing system.

During the year we also successfully completed the CE marketing requirements in Europe, which will allow us to continue to grow in that very important region.

Full year segment profit is approximately $59.8m, compared to $41.9m in 2002. This sizeable increase was driven primarily by improved gross margins, and a focus on managing expenses more in line with the currency neutral top line growth.

Looking for a few moments here at the balance sheet, Bio-Rad's balance sheet remains strong. As of December 31, total cash increased to $148.6m. Accounts receivable are up versus last year, due to favorable currency translation, and increased revenue base. However, DSOs are flat year-over-year.

Inventory at year-end was $190m, up from $166m a year ago, due to a pre-planned buildup in anticipation of our recent facility move, as well as sizeable currency translation effects. Total assets reached a record $987m. Cash from operations increased more than 20% during 2003 to nearly $128m.

As we had been predicting, capital expenditures increased significantly during the year, to $69m, up from $42m in 2002, as we invested approximately $25m in new facilities. Going forward, we will continue to invest in IT systems and facilities, although total cap ex should come down from the 2003 level.

Finally, depreciation and amortization for the year was $42m, including $10.9m in the fourth quarter.

Looking to 2004, we are very excited about growing from our billion-dollar milestone. While it is difficult to predict the trends within the many markets that we serve, on a consolidated basis we believe we can grow 2004 sales in the mid single digits, despite anticipating some more decline in the European BSE market.

Our expectations for gross margins are to be down slightly, in the 55% to 55.5% range for the full year, primarily due to these changes in product mix. 2004 will also be a year of continued internal investment, to improve our systems and distribution processes around the world, as well as some tactical R&D projects. This will put downward pressure on our operating margin during the year, but increase efficiencies and higher revenue over the long term. During 2004 this should be partially offset by lower interest expense.

Additionally, we have implemented new tax strategies that more appropriately reflect the global nature of our sales and profits, and result in a lower consolidated tax rate. During 2004 we expect the rate to decrease to the 28% to 30% range. These successful projects tackled during 2003 will provide additional cash flow to help offset the internal investments planned for 2004.

I'd like to now turn the meeting over to Norman Schwartz for a few comments.

Thank you Christine. As I look back, this marks the end of the first year of a new management team in place, a team that's certainly excited about the opportunities ahead of us. As Christine said, we are investing in several areas, operationally, new products, we're certainly honored, as a management team, to have been able to take the company across that billion dollar threshold.

As I look forward, I guess my view is, the business is fundamentally sound, and believe that we've got a number of interesting projects in the pipeline for 2004. Christine.

Thank you. Mike, I think we're ready to take some questions.

Ladies and gentlemen, if you wish to ask a question, please press star-one, on your telephone. If your question has been answered, or you wish to withdraw your question, please press star-two. Once again, please press star-one, to ask a question.

The first question comes from Quentin Light with Robert W. Baird; please proceed.

Good afternoon. Could you give an update on the North American mad cow situation?

This is Brad Crutchfield from the Life Sciences Group. I'll go ahead and field that question. The situation in North America was kind of summarized yesterday by Dr. Rhonda Haven, in the fact that the USDA is formulating their policy concerning BSE surveillance testing. There's no announced change in that policy, other than they will expand testing to 40,000 animals, in the U.S. that is. They have accepted a BSE licensing process for BSE tests. Bio-Rad's test has been submitted through that process. So that's where the U.S. stands. We, at this point, are anxiously awaiting knowledge about where our test stands in that process, but it has been submitted for that process.

As far as North America, Canada that is, we have received an order from Alberta, in Canada, for our test, and they will be using the Bio-Rad test exclusively. It's the region of Canada where the original cow in North America was found, on May 20, and they will be using our tests for both CWD and BSE testing, as part of their increased surveillance program. So that's where we stand today.

I saw an international committee recommended that the USDA look at European approvals and guidelines for the approval process for BSE screening. If they do that, what kind of timeframe do you see the USDA, for its approval process?

Well the body within the USDA that regulates testing is the Center for Veterinary Biologics, and they have a process that follows their own guidelines. We're very familiar with it, because it's exactly this group that regulated and approved our test for CWD. So they, at this point in the regulations that were this international committee announced or at least proposed, really adopted more or less how the tests would be used, not how the tests would be approved.

So, I think the issue at this point is more up to what would happen after a test was approved. At this point, the proposal would be for the USDA to use this test out within their network of laboratories, approximately 26 of those scattered out through the United States. But at this point, they have not made any decision on whether to do that or not.

Right, and then on a follow up question, pricing pressure has affected revenues over the last couple of quarters. When do you see some of this pricing pressure starting to be anniversaried?

I think that's a very good question. Again, we feel that we've put ourselves into a position to be the go-to company around the world. We've held our market share at approximately 55%, based on our ability to provide a very good quality test, a test that's always proven to be the most sensitive in all international comparative studies.

At some point, we hope that that will ring true to consumers and to our customers. This is a very dynamic situation. We're at about two, two-and-a half or three years into this, in fact about three years into this process. It's really kind of hard to tell where things stand. We hope that in 2004 a lot of this will start to stabilize a bit. But again, it's kind of early to tell because a lot of the business in Europe is done by tenders, so it will be interesting to see how this shakes out in 2004.

Looking at the rest of the life sciences market, do you see a return to high single-digit organic growth in 2004, excluding BSE? And, could you talk a little bit about the pricing environment that you see in 2004?

This is XBSE you say?

Yes, this is XBSE.

Yeah, well you know there are a number of things going on. Certainly, the NIH has talked about a lower level of funding, although some of that high level of funding, like for capital improvements, I think, as we look at these kind of things around the world, we look at biotech spending and those kinds of things. As we polled our sales operations around the world, they're all fairly buoyant about 2004, what the potential is in the life science area.

Thank you.

And the next question comes from David Grueber, with Meisenbach Capital. Please proceed.

Thanks for taking my question. When the BSE, I guess, crisis broke in late December, some of the analysts were talking about a market potential of $158m or $200m to $300m. In terms of Canada, my understanding is that the number of surveillance tests has increased from 3,000 to 65,000 tests. So, it sounds like the Alberta opportunity is not really that large on a dollar basis.

And then, in terms of the U.S., they're going from 20,000 to 40,000 animals. And even if you go to 190,000 downers, it's still a relatively small market. So, is it fair to assume that the U.S. market in 2004 would probably be less than $5m to $10m, based on where we are today?

Well I think it's fair to say at this point that the surveillance policies, both in Canada and in the U.S., haven't been firmly established at this point. So, it's very, very hard; everything is strictly speculation at this point. The situation that was announced in Alberta, at this point, is strictly an expanded surveillance program, which is just an initial reaction to the current finding of the positive animal on May 20th.

As far as the case in the U.S., they haven't even really gotten that far, to even go to how they're going to deal with the expanded 40,000 testing. So, on one hand, on that basis, there really isn't that big of a market at all. But the question will be how much further does it go. And then, of course, what happens if they find more animals? So, there's a big question mark relative to all the North American markets.

OK, and then could you comment; you've talked a great deal on Japan. And, when you first came out with the test, there was roughly $15 to $17 a test. Now, it's $10 to $13. Perhaps, you could tell us a little bit on the pricing and how much erosion there is? And, is it primarily Prionics or Enfer Abid that's driving the price down? It sounds like you're holding share in Europe, but at what price?

Well, I mean first of all, the situation is fairly dynamic. There are multiple competitors. The market, our BSE market, is still primarily driven by the original three competitors, Bio-Rad being one of them, that was originally licensed. So, you're right, it's Enfer and Prionics and Bio-Rad are the companies that are primarily doing all the worldwide BSE testing.

It's hard to put an exact pricing number, because it varies from country to country. And so, it's hard to say. The tenders vary, so at this point, it's hard to say where that goes, because they vary over time.

OK, and then Japan, we haven't talked about Japan, but you have a monopoly there, I believe, in [inaudible]. I spoke to the Prionics people. They told me they're going to enter the market, in '04. Could you comment on that and what's happening in Japan? And, in your guidance, you have expectations for an entry, a competitive entry, as well as perhaps price erosion?

There are a couple of players in Japan. We are certainly the dominant player in Japan, with most of the market. But it's a competitive situation like anywhere else.

OK, one last question and then I'll get back into queue, which is growth. Your growth was about 1% net of foreign exchange. How, given the competitive situation in mad cow, how is it going to go back to the mid single digits? And, is it backend loaded? It's going to take time to get there.

Well remember the 1% that you're talking about was Q4 over Q4. It was actually much higher than that for the full year. And, as Norman mentioned, the core life science products are growing quite healthily, in the high-single, low-double digit range, and some even much higher than that. So, as the BSE business continues to come under some pressure during 2004, we believe that the growth that will be achieved by the rest of our life science group will be able to offset that and bring it on a consolidated basis into the mid single digits.

OK, I'll get back in queue.

And the next question comes from Ankhor Ghandi [ph], with Goldman Sachs. Please proceed.

Norm and Christine, I was hoping you could give us some sort of an update on acquisitions, where you stand with that, what's in the pipeline? And, you know, anything in terms of timing as well.

Well, we have a number of things that are in the pipeline. It's always hard to tell when these are going to, if or when these are going to complete. But, I think it's realistic to expect that we will complete something, oh, probably, we hope to complete something in the first half of this year.

Any color in terms of size, or product area? And maybe even comment on your R&D spending next year, you know, where is that going to be focused?

Well, in terms of the acquisitions, most of these are what we refer to as kind of tuck-in acquisitions, kind of product line acquisitions. I would say at the moment there's nothing that's transformational on the horizon.

OK, and in terms of R&D, is there any kind of specific focus for the R&D spend next year?

As you know, we're kind of a company of base hits. We've got a lot of different areas we're investing in, and a number of exciting things, actually, to look forward to.

OK, thank you.

And the next question comes from Vivecq Khanna [ph], with Argus Partners. Please proceed.

Hi, good evening. I just want to go through the guidance again. Did you say 10% top line? And, what are you assuming for foreign exchange in that number? And then where were you seeing on the operating margins as well?

What we said was that, for top line growth, it would be mid single digits. And that's currency neutral, if you will. Obviously, if there is a significant change and depreciation in the dollar, that will make it harder. But it's not 10%; it's mid single digit, on a consolidated basis.

We didn't talk specifically about the operating margins, although we will continue to invest in both administrative type projects, for example IT systems some distribution projects, etc., as well as R&D, which will likely put pressure on the full-year margins as you compare '04 to '03.

I see. So, '04 margin is expected to be down, year-over-year?

Yes.

How much? You're not willing to say?

No.

OK, and what are you saying for earnings? Did you say anything or no?

For earnings? No, but it is important to look below the operating margin line. We have made great improvements in both interest expense, if you will, and more importantly on the tax side. So, if you look at full-year 2003 results, while they did include some one-time charges associated with the financing, if you look at the full-year interest expense, year-to-year, you'll see improvement in 2004. As well as, remember the tax rate in 2003 was 33%, and we're expecting that to be in the 28% to 30% range for '04. The combination of those two will give some protection to the bottom line, to the changes in the operating margin.

OK. And, is the life science business expected to grow next year? Or, is it expected to be down again?

No, it's expected to grow. They have several divisions going on here, and obviously, the food safety division gets a lot of attention because mad cow gets a lot of attention. But we don't want that to distract from the great achievements that are going on in all of our product lines and tools that we sell into the research market for proteomics, etc. And all of those businesses have been growing in the double digits.

Great. Thank you very much.

And the next question comes from Tom Bundoc, with Ram Partners. Please proceed.

Hi, congratulations on hitting the $1b milestone. All of my questions have been answered, though. Thanks a lot.

Thanks, Tom.

And the next question is a follow up from Quentin Light, with Robert W. Baird. Please proceed.

Good afternoon. It's actually Erin Geist this time. Could you talk a little bit about the Eastern European opportunity for BSE tests, in that about seven countries are joining the EU, the beginning of May? Would it be safe to say that the opportunity is there in the business that you are likely to win there would be a significant chunk to offset the pricing deterioration in the rest of Europe, and possibly Japan?

Erin, this is Brad. We already have about 85% of all the Eastern European countries. In fact, I think we just added Uzbekistan, which I'm not even sure where that is. So most of those countries have some ability to export into Europe. So, they have begun testing and surveillance programs, some of them at the 5,000 to 10,000 animals per year level, so it's not big, but most of those Eastern European countries, especially the ones that are going on EU, or are planning to join the EU, are Bio-Rad customers. As an example, we have 100% of the Polish market, which is not insignificant. So, those are already Bio-Rad customers and they've been Bio-Rad customers for several years.

So at that point, we don't look at those as, let's say, offsets, or are businesses for which we have to compete for and continue to service.

Would it be fair to say that the pricing dynamic in the Eastern European countries, including Uzbekistan, is not as fierce as it is in Western European countries?

Let's just say that they're more service-oriented than other areas, and they appreciate the quality and service that we provide them.

Thank you very much.

Once again ladies and gentlemen, if you'd like to ask a question, please press star-one on your telephone.

Please stand by to see if there are any further questions.

And there are no further questions at this time. Mr. Schwarz, please proceed with your closing remarks.

OK. I would just like to thank all of you for joining us today and again, we've had a lot of interesting things, exciting opportunities going forward. And, stay tuned for further developments. Thank you.

This concludes your Q4, 2003 Bio-Rad Laboratories Incorporated earnings conference call. Thank you for your participation today. You may now disconnect.