Bio Rad Laboratories Inc (BIO) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SecondQuarter 2004 Bio-Rad Laboratories Incorporated Earnings Conference Call. My name is Alicia and I will be your operator. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of your conference. If at any time during the call you require assistance, please press "*" followed by "0" and an operator will assist you. As a reminder, this conference call is being recorded for replay purposes. I would now like to introduce your host for today's call, Mr. Ron Hutton, Treasurer for Bio-Rad. Please go ahead, sir.

Thank you. 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. 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 being said, I'd like to turn the matters over to Christine Tsingos, Vice President and Chief Financial Officer.

Thanks, Ron. Good afternoon and thank you for joining us. This has been a very busy quarter for Bio-Rad. First, we entered into a binding letter of intent than to purchase MJ Research, a leading supplier of DNA amplification products. We also entered into several new partnerships in the diagnostics arena. And in line with our goal to focus on higher margin, higher growth business, during the quarter we sold our confocal microscopy product line to Carl Zeiss. As such we must now count for that business as a discontinued operation, both for the current period as well as the prior year comparison.

Today I will talk about our results from continuing operations, which as you know, will exclude all sales and expenses associated with the microscopy business. I will also briefly review the financial impact from the divestiture.

Net sales from continuing operations for the second quarter of fiscal 2004 were $260.5 million, an increase of 9% versus the same period last year. During the quarter, we recorded strong growth in our diagnostics group, in particular autoimmune testing, diabetes monitoring, and quality control products. Our core life science division also performed well with strong sales in our protein expression, amplification and electrophoresis lines. This revenue growth was offset by a year-over-year decline in our food safety business as well as continued slowness in the Japanese life science research market. On a currency-neutral basis, revenue for the quarter increased 4.2%.

The gross margin for the quarter was better than expected at 57.4%, up both sequentially and from last year. On a sequential basis, improvement in gross margin reflects the continued trend towards higher-margin consumable as well as the elimination of some lower margin products. The gross margin was also positively impacted by the increase in BSE-related sales in both the United States and Canada where 100% of the US labs and all three major Canadian provinces are using the Bio-Rad test exclusively in their expanded testing for mad cow disease.

In line with our guidance, SG&A expense for the second quarter was $90 million. As you have been hearing over the past several quarters, the year-over-year increase relates to our ongoing investments in information systems, facilities, manufacturing improvements and personnel. Spending also increased by approximately $1 million resulting from the integration and consolidation of the Hematronix business acquired in March. As a percentage of revenue, SG&A was a little higher than expected, primarily due to the spending on sales and marketing for new products which we will be launching later this year as well as increased expenses associated with our Sarbanes-Oxley implementation.

Research and development expense in Q2 was $25.5 million, up 16% from last year as we continue to invest in new products, technologies, and partnerships. Our target investment level in R&D remains 10% of sales.

The tax rate used for continuing operations during the quarter increased to 30.9%, slightly above our 28 to 30% guidance, the result of incurring non-deductible losses associated with our Brazilian operation. We are in the process of restructuring our Latin America business model to improve both sales and profitability in the future. We expect the tax rate to be within the 29 to 30% guidance for the remainder of the year.

Net income from continuing operations for the second quarter was $20.3 million. Diluted earnings per share for the quarter were 76 cents. These earnings numbers reflect our investment in future products and infrastructure, which are expected to drive and support our top line growth late this year and throughout 2005.

During the quarter, we recorded an additional $2.6 million of net income from discontinued operations, including a net gain after-tax on the sale of $3.4 million. This gain brings total diluted earnings per share to 86 cents, an increase of 7.5% from last year.

Now, for certain segment information. Life Science reported sales grew 3.4% for the quarter to $113.9 million. This excludes approximately $2.4 million in sales from our confocal products in the second quarter of this year and $4.2 million in the year ago period. On a currency-neutral basis, sales declined 1.3% versus the same quarter last year. This decline is primarily the result of a small decrease in our food safety business as well as some weakness in our Japanese market.

We continue to have strong year-over-year growth in our multiplex array technology, nucleic acid amplification, and electrophoresis product lines. Overall, segment profit from continuing operations was $11.9 million this past quarter versus $17.4 million for last year. The decrease in segment profit is the direct result of planned spending for new IT systems and facilities as well as some costs associated with our pending acquisition of MJ Research.

During the quarter, we began providing systems and test kits for BSE testing in the United States in Canada. These sales help drive gross margins higher by more than 1 full percentage point since the first quarter. But the good news in BSE doesn’t stop here. In June, we won a EUR5 million contract in Spain for their BSE testing program scheduled to begin this quarter.

Our Clinical Diagnostic sales grew an impressive 13.4% for the second -- to a record $144.4 million for the second quarter. These record sales were led by continued strong performance in our quality control division including our new Hematronix line, as well as our autoimmune and diabetes monitoring lines. On a currency-neutral basis, diagnostic sales grew approximately 9%, a number we believe to far outpace the industry average.

Our diagnostics group has been very busy. During the quarter we entered into some exciting new partnerships with Enzon Pharmaceuticals and OraSure Technologies. In addition, we won a multi-million dollar tender in Malaysia for our blood virus products. All of these wins will help drive revenues growth next year and beyond.

Segment profit for the quarter was $18 million, an increase of more than 14% from the second quarter of 2003. This increased profitability is the result of a significantly improved gross margin. During the past year we’ve implementation more efficient manufacturing processes as well as exited from lower margin product lines.

Just a quick minute to review the balance sheet. Bio-Rad's balance sheet remains very strong. As of June 30, total cash was $155.3 million. The sequential increase in cash balances reflects the proceeds from our divestiture. Inventory at June 30 was $188.6 million, down slightly from both last quarter and year-end numbers. Inventory turns and collection times remain in line with past performance.

Net cash generated from operations during the quarter was $20.2 million. Net capital expenditures were $15.6 million. And finally, depreciation and amortization for the quarter were $12.4 million, the result of increased amortization related to the purchase of intangible assets from Hematronix.

Looking to the reminder of 2004, we continue to be excited about opportunities with new products and markets. While it is difficult to predict the trends within the many markets that we serve, today we reiterate our annual guidance from the last conference call. That is, on a consolidated basis, we believe we can grow 2004 sales in the mid-single digits. Given the higher than expected BSE sales, our expectations for gross margins have improved and we now expect margins to be in the 56 to 56.5% range for the full year. As you know, this will 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. We are also experiencing and expecting some relatively significant costs associated with our Sarbanes-Oxley compliance efforts. This spending will likely put downward pressure on the operating margin and may neutralize the gross margin gains during the year. However, all of these programs should increase both operating efficiencies and sales growth over the long–term.

And now we are happy to take your questions.

Ladies and gentlemen, if you would like to ask a question, please press "*" followed "1" on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please press "*" followed "2". Again, it is "*" "1" to ask your ask your question. The first question is from Quintin Lai with Robert W. Baird. Please go ahead.

Good afternoon. Had a couple of questions. First, on the acquisition front with MJ Research, what is your timing on when do you think that you might be able to make, I guess, the next announcement on that?

Well, we are in the process right now of negotiating a purchase agreement. We're hopeful to finish that in the near future.

Okay. And with respect to the acquisition of Hematronix, when you talked about SG&A and having a $1 million integration cost, is that a one-time event?

No, that's just a matter of consolidating kind of their run rate. Now, we do obviously hope to as we integrate the business, you know, put the Bio-Rad touch to the entire operation and run that business as efficiently as possible. But right now that's really kind of the impact of consolidating in the numbers.

Okay. In the press release, you talked about timing of shipments in process chromatography and increased competition in certain instrumentation businesses in your Life Science segment. Could you elaborate a little bit on what you are seeing there?

Okay, this is Brad Crutchfield of Life Science. The process chromatography business is a few customers that contribute to that business. The nature of that is a timing or a calendarization of orders. So at this point, we are not concerned. It is just when we get those orders relative to the previous year. So, I don't see an issue there.

And as far as your second question about competitive issues, clearly real-time PCR instrumentation is an area where there is a significant amount of competition and price pressure and that probably is the single biggest contributor to that statement.

Brad, –while I have got you here, could I ask you a couple of questions on BSE, one with respect to the Spain announcement? Did you say that was going to start in the second half or Q3?

That will begin in Q3.

Okay and then I saw a press release that came out of the UK that two cows were found positive with BSE that were born after their feed ban. Does this -- do you think that changed the dynamic then of future testing for BSE in Europe?

It's certainly a dynamic situation. Certainly in the United Kingdom at this point, they are looking to let animals over the age of 30 months enter the food chain. Currently that does not happen. They have a testing program set up to allow that to happen and I think this announcement that you spoke of will just reiterate the necessary –- or the requirement to have this testing program in place, which I will point out is a 100% Bio-Rad.

Okay and then on your clinical diagnostics business, that was very strong and a lot stronger than we anticipated. Was there any one component that you found was a big contributor to the year-over-year gain?

Yes, this is John Goetz. Yes, we experienced very strong sales in our quality control business as well as, let’s say secondarily in the autoimmune and diabetes field. With Hematronix acquisition kicking in, that also adds to that year-over-year growth number, but that base business is doing quite well for us.

And so I know that as we look out to the rest of the year, could we -- do you anticipate seeing those kind of dynamics continue to play out?

Well, I think what Christine has said is that, you know, our guidance is around just mid-single digit. I'm still thinking in those terms. But, you know, this kind of puts it in a little bit of a different light for me. It's difficult to predict exactly how that’s going come out. I'm hopeful that we will be able just to sustain it, but I certainly couldn't guarantee it.

And John, by the way, everyone congratulation on the BioPlex 2200. We had a chance to see to it when we were out at AACC, when do you think the BioPlex 2200 could be commercialized for diagnostic use?

Yes, thanks. Our target to be able to get that, you know, in the hands of customers, let’s say paying customers, will be towards the end of this year. As you know, we are pending FDA review right now and we really are not at liberty to even advertise the platform or talk about it really. Consequently, it was a little bit of, I don’t know, a stilt (ph) introduction, if you will, at AACC. And the interest surrounding the platform was really, really gratifying. We had quite a bit activity in there. Well, I'd just like to say we’ve got several leads for this platform with its launch panel. Of course, as you know, it's all about menu. So that’s what we will be striving to do over the months and years to come.

Thank you.

The next question is from Walter Pistor with Strand, Atkinson, Williams. Please go ahead.

Christine, as you know, the Reuters carried an article yesterday saying that the U.S. Agriculture Department will report a -- repeat a screening test twice before announcing an inconclusive result from rapid test for mad cow disease. Can you comment on that and how that relates to Bio?

I think I'll let Brad Crutchfield comment, but I think the Company views this as good news.

Yes, and Christine, I'll just elaborate with that. The process that began in June 1st was the USDA letting a series of satellite laboratories do to BSE screening. In that period of time up until just this announcement, they have put a higher level of scrutiny until they got comfortable with the test. In other words, any inconclusive result was both announced as well as sent for confirmation testing in Ames, Iowa. The press release or the article that you are referring to basically indicates that they have developed a tremendous amount of confidence over the approximately 30,000 tests. So, at this point they are going to let the laboratories effectively repeat initial reactives and will not announce the result or send off for screening until they get a doubly reactive. And this is consistent with what’s done elsewhere in the world and certainly consistent with our procedures and recommendations.

So, do you see that as favorable for Bio-Rad then?

Absolutely. I think what it does is it establishes that the USDA has absolute confidence in this test that it will run there approximately 250 to 300,000 animals and this just validates that they have chosen in their view the right test and all 12 laboratories are now using it.

Okay, great, great. I wanted to ask you too, have you ever though about listing the stock other than on the American Exchange?

You know, from time to time we do discuss that. We’ve been a long time lister on the American Stock Exchange and we have done just fine there. Frankly, Walter, a lot of times looking at, for example, going to the New York Stock Exchange the fees significantly higher. And frankly, you know, sometimes we wonder what we get for that. But the Board does a management review from time to time listing on other exchanges and so far we’ve come to the conclusion that we’re okay where we are.

I would like to recommend that maybe you consider listing on NASDAQ because I find it extremely difficult to buy the stock and I can just be empathetic with the portfolio manager. I mean, just there is no way for the institutions to buy any quantities of the stock. And I mean, the price jumps 40 cents a share, you know, just on 1000 shares.

Right.

It could be done better than that, I assure you.

Right. And I agree with you, and you are not the first person to mention that and as I said, I don’t disagree at all. We need to work with NASDAQ because we are a dual stock company and that’s not their norm. We would need to work with NASDAQ to see how that would even be possible.

And would you explain the dual stock company?

Well, we have the As and the Bs.

Right. Okay. Also, I think when you look at the figures on Bio-Rad, they look so impressive vis-à-vis other companies and I am just thinking that the full recognition is not given to the merits of the Company and that you need more sponsorship there.

I won’t disagree with that either.

So, I think that should be under study also.

Well, and we are, you know, meeting with and talking with other sell side analysts to pick up coverage. Quintin mentioned that he saw the BioPlex 2200 last week at the big AACC Show, the clinical chemistry show in Los Angeles, which is really the diagnostics industry’s you know, big, big show of the year. And we had an investor meeting where, you know, other sell side analysts, who currently don't follow us but follow companies at the show attended our lunch and heard the Bio-Rad story and the whole story, not just on the diagnostics side and so we are encouraged by that.

Yes. Well, [indiscernible] with that is they are going have to -- if the people like the Company, they are still going to be faced with a problem of buying the stock and so I think that needs to be addressed.

Alright. Well, point well taken.

Yes, and I wanted to ask another question. Are there plans ever to pay a dividend?

You know, again it's another one of those items that we talk about from time to time. I think that for now the management and the Board believes that the best use of our cash in terms of returning value to the shareholder is, you know, first of all investing in the business and R&D; sSecondly, to invest in acquisitions. And then, you know, as you move down the list, then you get to the dividends and the share buybacks and things like that. But right now, we view that we have many, many opportunities, both internally and externally to invest in new products, new technologies, better efficiencies etc.

Okay. What percentage of the business is related to Europe?

This past quarter, it was about 45%.

Okay, and have you had any road shows in Europe?

Not for quite a while.

I would think if you could, you know, present it in a simplistic way -- in other words, Bio-Rad is a complicated company, but if you could get down to the really salient points and present a show that would be --

Okay.

-- well received in Frankfurt and London, Geneva and places like that.

Okay, that's a great idea.

Okay, thank you.

Again, ladies and gentlemen, to ask your question, please press "*" "1". We have a follow-up question from Quintin Lai from Robert W. Baird. Please go ahead

Hey Christine, this is Quintin again. Just wanted to get a little bit more information. I guess, you said that the Sarbanes-Oxley costs that you are going to incur through the back half of the year is going to keep your SG&A as a percent of sales higher. When do you think that Bio-Rad may start seeing the leverage in that SG&A line?

When you mean leverage, you mean a lot of these one-time expenses, when do they go away, not just Sarbanes-Oxley?

Right.

I think as we move into next year, you will start to see some of the costs that are more one-time in nature that we have been spending late last year and all through this year start to tailor off. Our long-term goal has not changed and that is to get SG&A closer to the 30% of sales, you know, mark. We did a great jot of bringing it down from the 35, 34 to the 32 and now we have popped back up a little as we make these investments, but our goal is unchanged in terms of getting to that 30% level.

Alright, thanks.

Again, ladies and gentlemen, to ask your questions, please press "*" "1". Next question is from Jim Baker (phonetic) from Neuberger Berman. Please go ahead.

Yes, I just want to understand in the cash flow statement here, the other investing activities, how much of that $16 million negative there is related to your acquisition and how much has to do with maybe foreign currency hedges and stuff like that or maybe your purchase of the market (multiple securities.

Are you looking at for the full six-month period?

Yes. That’s all I have, yes.

This is Jim Stark. Included in that is, the largest item is the acquisition of Hematronix.

Are you saying how much that is?

In our Q filing, you will be able to see that, but right now that is net of about 4 or 5 numbers. It just turns out that the Hematronix acquisition is the largest piece of all the numbers that are netted in there.

Okay, is foreign currency hedges are continuing to be --?

Foreign currency is a small number in there in this six-month period.

Okay, great. Thank you.

Thanks Jim.

The next question is from Walter Pistor with Strand, Atkinson, Williams. Please go ahead.

Okay, thank you. I have like seven pages of report from your quarter here. I was just thinking if you could boil that down to a one page e-mail and send that out hitting some of the high points, some of the positives, I think that’s an effective way to call peoples' attention to the stock. I know I have a long list of clients that I send that out that to on other stocks and it's, you know, and they may send it out to other people.

Okay. Well, hopefully what’s in the press release and some of the comments made today --

Do you have an e-mail list like that?

No.

I think it'd be a good PR move because I send e-mails to Australia and Canada and Europe and if they can be short, you know, like one page, it would be very helpful in calling people’s attention to the Company.

Okay, well we do e-mail out the press release. We haven’t kind of, you know, rewritten the press release in a different form. We no longer do the quarterly reports etc. but --

Maybe you could be sure if I am on your e-mail list?

Okay.

Because I can do that for you.

Okay.

And get a lot of good exposure for you. I do a lot of business with European banks and funds.

Okay.

And maybe you even get some publicity for you over there. Leo Redberg (ph) writes for the Handlesblatt and he is the foreigner reporter, you know, handling all the foreign stock. He is a good friend of mine.

Okay. Well, thank you.

Okay.

We have no more questions in the queue at this time, ma'am.

Okay, great. Thank you Alicia. Thank you everyone for joining us today. As always, Ron and I are available for any follow-up questions that you may have. Bye.

Ladies and gentlemen, this concludes your conference. You may now disconnect. Good day.