Bio Rad Laboratories Inc (BIO) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the First Quarter 2005 Bio-Rad Laboratories Incorporated Earnings Conference Call. My name is Kristi and I'll be your call coordinator for today.

(Operator instructions)

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. 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 FCC where we discuss in detail the risk factors in our business.

The company does not intend to update any forward-looking statements during the call made today. I'd like now to turn over this call to Christine Tsingos, Vice President and Chief Financial Officer.

Thanks Ron. Good afternoon everyone, and thank you for joining us.

Today we are pleased to report a strong start to 2005 with quarterly net sales from continuing operations of $299.2 million. An increase of nearly 14% versus the same period last year's sales of $262.7 million.

On a currency-neutral basis reported revenues increased 10.2%. During the quarter we had good growth within our diagnostics group, led primarily by quality control, blood virus, and microbiology products.

Our core life science divisions also performed well with strong sales in our protein expressions, consumables and processed media lines as well as contributions from the MJ product.

The growth margin for the quarter was slightly ahead of guidance at 55.6% compared to 54.7% last quarter and 56.8% in the year ago period. The sequential improvement in growth margin is attributable to a more favorable product mix, as well as greater efficiencies and our diagnostic group related to new, more automated manufacturing equipment, which has given us greater capacity to handle the higher volume.

Life science margins were essentially flat compared to last quarter. SG&A expenses for the first quarter were in line with expectations at $99.5 million or 33% of sales. The dollar improvement versus the 4th quarter reflects lower spending on professional fees for audit, IT, advertising and legal.

On a year-over-year basis, SG&A as a percent of revenue is essentially flat.

Research and development expense in Q1 was 9% of sales at $26.8 million, About equal to last year. Spending was down from the 4th quarter percentage as that period reflected sizeable development costs associated with our new Bioflex 2200 system and the Experion(ph) product.

Our target investment level in R-leave(ph) remains 10% of sales as we continue to invest in new products, technologies and partnerships.

During the quarter, other incomes came in better than expected primarily due to a one-time gain of approximately 1.5 million on an investment. Interest income also increased as a result of the higher cash balances and increased interest rate environment.

We expect interest income to continue at these levels until the cash is deployed into internal and external growth opportunities.

During the quarter we reported a $4 million gain in discontinued operations related to the 2004 sales of the confocal microscopy business and the final resolution of our lease commitment in the UK.

This transaction, and revised shut-down provisions, also significantly impacted the tax rate in the quarter. The tax rate used for continuing operations during the 1st quarter was 22.5%.

You may recall that last quarter our rate was higher than expected due to the non-deductible expenses that were connected with this outstanding lease commitment.

The settlement of the lease has had the reverse impact. In addition, we have had a favorable settlement of a tax audit in Europe and other foreign benefits.

While these events are more one-time in nature the 1st quarter tax rate will impact the full-year rate. Thus we are improving our previous forecast of 30% to be a 28% rate for 2005.

I should also point out that this improved rate is primarily the result of better tax planning and strategies we implemented during 2003 and 2004. These changes should provide ongoing benefit over the next several years.

Income from continuing operations for the 1st quarter was 29.5 million an increase of more than 30% versus last year. Total net income for the 1st quarter was 33.5 million and diluted earnings per share were $1.26.

Now, for certain segment information. Life science report sales grew 18.5% for the quarter to $144.1 million.

On a currency-neutral basis, sales increased an impressive 14.9 % versus the same quarter last year. We continue to have strong year-over-year growth in our multiplex array product lines and consumables as well as the incremental sales from the inclusion of MJ.

This strong revenue growth was partially offset by a decline in our BSE business.

Overall segment profits from continuing operations was $15.5 million this past quarter, compared to 15.8 million last year. The flat segment profit reflects the year-over-year changes in growth margin, resulting from lower average selling prices and increased amortization of acquired intangibles.

Our clinical diagnostic sales grew 9.4% for the quarter to $151.9 million. These sales were led by continued strong performance in our quality controls division, as well as our microbiology and blood virus product line.

Sales were particularly strong in the United States and Asia Pacific this quarter. On a currency-neutral basis diagnostic sales were approximately 5.5%. Segment profit for the quarter was $17 million compared to 16.4 million last year.

Bio-Rad's balance sheet also remains strong. As of March 31st, total cash and short-term investments were $384 million.

Remember, that in December we took advantage of increased liquidity in a traffic coupons in the high yield bond market and issued 200 million of 10-year notes.

Like the offering in 2003, we view this as long-term money to invest in the business such as new product development and these operational projects as well as investment in strategic acquisitions.

As I mentioned earlier, the higher cash balances result in higher interest income in excess of $2 million per quarter.

Net cash generated from operations during the quarter was $25 million. Net capitol expenditures were lower at 9.8 million as we assessed the capitol investments for 2005.

Our 4-year expectations for cap-ex continues to be in the mid-$50 million range.

Finally, depreciation in amortization for the quarter was $15 million, the result of new facilities and increased amortization related to the purchased intangible assets.

Total long-term data as of March 31 was approximately 426 million.

Our expectations for 2005 remain relatively unchanged. We continue to guide sales to grow in the mid to high single digits on a currency-neutral basis.

While the U.S. and Asia Pacific were strong growers in the first quarter, we are seeing continuing signs of weakness in Europe, especially Germany and France.

The growth rates in the first half of the year will likely be higher than the expected overall annual rate, primarily because of the addition of MJ which was not in the first half of last year.

As you recall, this year we are also anticipating some further pressure on the growth margin due to lower pricing in BSE and the impact of acquisition related amortization.

Thus, for the remainder of the year we continue to expect growth margins to be in the 54 to 55% range. This year we will be investing in the business in development projects across the organization as well as the implementation of improved IT systems and distribution consolidation.

And finally, as I mentioned earlier we are revising our estimated tax rates for 2005 to be closer to 28%. And now I'd like to turn the call over Norman Schwartz for a few comments.

There are 3 or 4 points that I'd like to cover.

First, I think as Christine mentioned in her outlook, we are still somewhat cautious about 2005. We were very pleased with the 1st quarter, which is a good healthy start for the year, but, again, as Christine mentioned we need to watch certain regions in Europe, which have started to show some signs of weakness.

Second, as most of you are aware, we made a generous overture to Bio-Source, to acquire them, which they have rejected. At this time we are evaluating our options given the current situation.

Third, we are in active discussions with Aplara to settle the outstanding litigation we acquired with MJ research and would hope really to bring this to closure in the near future.

And last, and certainly not least, the MJ acquisition. I think the integration is proceeding as planned. Many of the operational aspects are completed or well under way and we expect to see the results of these efforts later this year.

So, that's about all I have.

Alright, Kristi, now we're happy to take questions.

Ladies and gentlemen.

(Operator instructions)

And your first question comes from Quentin Lay of Robert Duffy Baird. Please proceed.

Hi, good afternoon. Congratulations on the nice quarter.

Can you speak up a bit Quentin?

Hi, can you hear me?

Yes.

Okay. Congratulations on a nice quarter. When looking at the life sciences growth on a -- do you have the growth rate on an non-acquisition organic cost and currency rate?

We do, Quentin. But, as you know, we generally don't disclose individual product lines or divisions. Certainly on a currency-neutral, acquisition-neutral if you will growth rate its not as high as what we've just talked about.

Okay. Could you talk a little bit about what you're seeing with respect to demand, especially? We've heard other life science toolmakers talk about various demand differences in the U.S. with respect to pharma and academic, and in Europe.

Sure. Quentin, this is Brad Crutchfield, I'll take that. I mean, clearly, what helped us this quarter was Japan. Obviously in 2003, and really felt in 2004, the academic funding of research was really turned upside down as the changed the formula. Customers were really conservative. That really came back strong in the first quarter for us.

U.S.continues to be -- sort of mixed messages. The academic funding through NIH and NSF grants seems to be a little bit soft, but we see the pharma sector look pretty strong, particularly in our processed chromatography business.

And in Europe it's kind of a mixed message, as I think Christine pointed out. France and Germany seem to be very very slow, particularly on the academic side of the funding or government sponsored research where the see the pharma side of it again be fairly strong.

Brad, with respect to France and Germany, other companies have mentioned the fact that Easter fell in Q1, could that be a partial reason for some of the difficult comparisons for Europe with respect to this quarter versus last year?

You know, I will say for companies that rely very very heavily on consumables that I could see where that would be the case. But, we're a fairly diversified.

But its not consumables.

Yes. We have a very diversified area.

And on the diagnostic side, you've launched Bio-Plus 2200, could you tell us a little bit about how that has been going out with the roll out?

Quentin, this is John Goetz; I can take your question. The product is not actually launched yet. We've introduced it, as you know.

We're completing our reliability studies at the moment and we'll soon be making a placement, what we would call a field trial. That'll be coming up in the next month or so and then following that we intend to launch.

Okay. Thank you. And, I just want to make sure Christine that I understood when you said tax rate of 28%, that's for the full year, which includes the 22.5 in Q1.

Well, I think 28% is probably a good rate to use for the remaining quarters of the year. Obviously, the extraordinary low rate in Q1 will make the average for the year something lower than that but I think 28% for the foreseeable future on a quarterly basis is not unreasonable.

And I guess, the final question before I get back into the queue. Norman, with respect to the Bio-Source and your offer, are there any other things that we should be looking for news-wise here over the next coming months?

Boy, I would imagine there would be something, but I can't tell you exactly what it would be.

Alright, have you had direct discussions with Bio-Source and are you in open negotiations now, or is it still just kind of trading the press releases?

I think its trading press releases. It's kind of in the early days.

Quentin Lay. Thank you. I'll get back in queue.

And you next question comes from Ewong Hung of Times Square Capital Management. Please proceed.

Hi, congratulations on a great quarter. I have just two questions. The first is, Norman, you talk about the MJ acquisition integration going very well, you expect to realize some synergy before the end of the year, could you quantify how much cost-synergy you expect from the integration process?

No, I don't have a specific number for you.

Okay. And the material?

I would expect that we could see the effect, yes.

Okay. You also mentioned in the press release, also, I guess you comment on that too that the real time PCR sales resume in Japan.

Could you tell us how much sales were before it was stopped?

I don't have that specific number, I'm sorry.

Okay, you said material revenue number?

It's a significant number, yes.

More than million, I guess?

I'm sorry?

It's more than a million a year, a million a quarter?

You know, we really don't talk about specific products in specific regions.

Okay, all right, thank you.

And your next question comes from Vivic Kahada (ph) of Argus Partners, please proceed.

Thank you, hi, I just had a question, do you have the organic growth rate for the whole company, maybe you don't want to give it by segment but just for the whole company?

By organic you mean...?

That's acquisitions and XFX(ph).

I think X acquisitions...FX said, FX is in line with our guidance of that mid to high single digit.

Okay, thank you very much.

And once again, ladies and gentlemen, that's star followed by one for any audio questions. And your next question is a follow up question from Quentin Lee of Robert W. Baird, please proceed.

Hi, with respect to SG&A pacing for the rest of the year, Christine, should we just look at kind of a ramp from where we were in Q1 or did Q1 have any charges either positive or negative that will flow through to Q2?

Well, you know, Quentin, if you look at our historical pattern, generally, Q1 is a pretty favorable quarter for things like SG&A spending and, historically, we've seen some ramp from those levels. And I wouldn't expect this year to much different from that.

I don't think there's any extraordinary things in the number, but part of what we're looking at this year is how it tracks with sales and we're trying to improve upon where we ended last year, as you know in the 3, 4.5% range for the full year, we certainly would like to further improve upon that.

Okay, thank you.

And your next question comes from Doug Fisher of Matador Capital, please proceed sir.

I just wondered if you could provide a little more color around the DSE business.

You mentioned some erosion in the ASP in the first quarter and if you can give us some sense as to the rate of change and whether you expect that to remain relatively stable from here through the balance of the year, or whether we could see further price compression as the year plays out.

This is Brad Crutchfield, I'll take that question. The situation with DSE really hasn't changed dramatically in the last few quarters. We continue to see a lot more competition. There are eight new tests on the market in Europe.

You see certain countries are beginning to pull back with the number of animals they test in terms of mandatory testing.

The U.S. has been a strong push for us in the sense that we do all testing and currently you're testing about 8 to 10,000 animals a week, although that program looks like it will sunset at some point this summer, although USDA hasn't made a specific announcement.

So, overall, we're going to continue to see downward pressure in the price that we can get. We've been able to maintain a large part of our market share at higher prices than our competitors because our test has worked so well.

And, we've actually done very well in Japan where now we have a domestic competitor and even in the face of that we've been able to maintain a vast majority of the market.

So, overall, I don't see the trend changing much in terms of the downward pressure that we're experiencing.

Can you talk about the rate of change in the pricing of those tests, even ballpark, have they gone down kind of high single digits, low double digits?

And can you also talk about volume trends given the different dynamics that you touched on? Where should we expect volumes to fall out kind of up, flat or down in 2005?

Well, in volumes, specifically, in the number of animals tested it's still being, it's in the 9 to 10 million animals tested per year.

The overall price compression is really hard to calculate because most of the business comes on contract basis and those contracts come up sort of periodically.

But overall, we're seeing sort of in that neighborhood of about a 10% to as high as a 15% reduction in average selling price. It's been the trend, and that really has been a trend for really almost the past eight quarters.

And just a last question, given the pricing compression that that business has experienced, are we at the point now where the margin contribution from that business is less than the life science business or similar?

No. Doug, the margin contribution is still higher than the company consolidated margin.

Yeah, the other thing I just want to point out over the past several years, we've invested very heavily in the manufacturing process and it continues to get efficiencies in that as well to help us somewhat offset the average selling price drop.

Great, that's helpful, thank you.

And your next question comes from Tom Bendac of Brand Partners, please proceed.

Hi, congratulations, nice quarter.

Thanks Tom.

You mentioned signs of weakness in France and Germany, is that something that has been kind of a constant over the course of the quarter or has it gotten worse or better or is it, what are you saying in terms of that dynamic?

I think it's something that has been building over, really over the last several quarters. And I don't think it's anything that's all of a sudden happened in the middle of the quarter.

Is it, well, I guess my question is, does it continue to get worse or has it sort of reached a point where it's crested, or its stabilized?

I don't know, it's always hard to tell but it just seems slow. I think is the best way to characterize it, and I think our caution is that we think in some of these regions it's going to continue to be slow for the year.

And given some of the economic measure that you see in those countries, there really isn't anything in them that will lead you to believe it's going to get better anytime soon.

Okay, and just one other question, on the negotiations with Aclera, do you have any -- can you give us any more idea as to when you might expect to have that issue resolved?

No, I think this is a two-sided equation and it's hard for us to predict exactly when this might be resolved.

Okay, thank you very much.

And, once again, that's star followed by one for any audio questions.

You have no questions at this time.

Great, thank you. Thank you everyone for joining us today and we appreciate your continued interest in the company as always.

Ron and Norman and I are available for any follow up questions you may have. Bye.

Thanks for your participation in today's conference. This concludes the presentation, you may now disconnect. Good day.