Bio Rad Laboratories Inc (BIO) 2005 Q2 法說會逐字稿

Welcome to the second quarter 2005 Bio-Rad Laboratories, Incorporated earnings conference call. [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 go ahead, sir.

Thank you very much. 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. I'd now like to turn the conference over 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 second quarter net sales from continuing operations of $291.3 million, an increase of nearly 12% versus the same period last year sales of 260.5 million. On a currency-neutral basis reported revenues increased 8.5% led primarily by strong sales in the U.S. at our Asia Pacific region. During the quarter we had good growth within our diagnostics group in the areas of quality control, blood virus, and diabetes systems. Our core life science divisions also performed well with strong sales in our protein expression, amplification, consumables, and process media line. This growth was tempered somewhat by a fairly sizable sequential decline in our food safety division.

The growth margin for the quarter was in line with expectation at 55.1% compared to 55.6% last quarter and 57.4% in the year-ago period. The year-over-year decline in gross margin is attributable to changes in our BSE business as well as an additional $2 million in the amortization of purchased intangibles in our life science group. Gross margin for our diagnostics group is essentially flat with last quarter and last year. SG&A expenses for the second quarter were higher than expected at $104.2 million, the result of higher legal fees as well as increased advertising costs associated with several new products launched during the quarter. With lower revenue and these additional expenditures SG&A as a percent of sales was much higher than our target. Our goal remains to reduce the full-year SG&A margin below our 2004 result. Research and development expense in Q2 was 9.8% of sales at $28.5 million, about equal to last year. Our target investment level remains 10% of sales as we continue to invest in new products, technologies, and partnerships.

During the quarter interest and other income increased versus the year-ago period primarily as a result of the higher cash balances and an increased interest rate environment. We expect interest income to continue at these levels until the cash is deployed into internal and external growth opportunities. As expected the tax rate used for continuing operations during the second quarter was 28%. The improvement over the 31% rate used last year is the reflection of better tax planning and strategies implemented during 2003 and 2004. These changes should provide ongoing benefit over the next several years. Net income for the second quarter was $18.4 million and diluted earnings per share were $0.69.

And now for some certain segment information, life science reported sales grew 17% for the quarter to $133.1 million. On a currency neutral basis sales increased an impressive 13.7% versus the same quarter last year. We continued to have strong year-over-year growth in our MultiPlex array products, Process Media, and the incremental sales from the acquired MJ products. We are also seeing increasing demand for Experion, our new automated electrophoresis system. This strong revenue growth was partially offset by a decline in prices in our BSE business. It is important to note that on a worldwide basis our leading market share in BSE testing remains unchanged.

Segment profit for the quarter was down to $2.6 million, the result of a confluence of events from lower sales and gross margins to a significant increase in spending for legal fees, advertising, and other operational spend. While some of these expenses are more one-time in nature this level of profitability is well below our target, and we have already begun to implement programs that should better manage the spending going forward. Our clinical diagnostic sales grew 7.5% for the quarter to $155.2 million. These sales were led by continued strong performance of our diabetes products around the world, especially the D-10, as well as quality controls and blood virus product. On a currency-neutral basis, diagnostic sales grew approximately 4%. Segment profit for the quarter was $17.3 million, essentially flat with Q1.

Bio-Rad's balance sheet also remains strong. As of June 30, total cash and short-term investments were $379 million. Net cash generated from operations during the quarter was approximately 3 million. In addition to the lower sales number, the decrease is primarily related to the building of inventory for several new products, an increase in cash tax payments of approximately $7 million and the higher spending levels during the quarter. Collection days and inventory days remain in line with historical performance. Net capital expenditures were lower at $8 million for the quarter and about 18 million for the first six months. Our full-year expectation for CapEx to be mid 50 million has changed and will now likely be in the 45 to $50 million range. Depreciation and amortization for the quarter was $15 million as expected and will likely continue at these levels. Finally, total long-term debt as of June 30, was $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 half of the year we are seeing continuing signs of weakness in Europe, especially Germany and France. This weakness will likely become more evident during the seasonally slow third quarter. Remember that the growth rates in the first half of the year will be higher than the expected overall annual rate, primarily because of the addition of the acquired MJ sales which were not in the first half of last year.

As you may recall this year we are also anticipating some further pressure on the gross margin due to lower pricing in BSE and the impact of the acquisition related amortization, thus, for the full year we continue to expect gross margins to be in the 54 to 55% range. We will also be investing in the business and development projects across the organization as well as the implementation of improved IT systems and distribution consolidation. However, as I already mentioned, our goal remains to reduce SG&A as a percent of sales below the 2004 levels. And finally we continue to target 10% of sales to be invested in research development and will use 28% as our estimated tax rate for the remaining two quarters of 2005. And now I will turn the call over to Norman for a few comments.

Thank you. Well, looking back on the quarter, I think sales were pleasing, especially in light of the continued weakness in some of the European markets. As Christine has alluded to several times in her -- in her talk, the area we do need to focus on for the rest of the year is improvements in our expense ratios. Again, as Christine mentioned, we have a number of targeted areas to work on, and I do feel we'll make the progress by year end.

In terms of other things going on, I'm sure some of you are wondering what we have to say about BioSource. We were certainly quite surprised by the value that Invitrogen ascribed to the Company in its competing bid and we're currently evaluate where we go next with this. When we have something, we'll let you know.

On MJ Research, I think the integration of MJ Research, which we acquired last fall, continues to proceed on plan and, in fact, the first new jointly developed product from the marriage of Bio-Rad and MJ was introduced during this last quarter. One of the things that you may remember we acquired with MJ was some outstanding litigation. We are inching closer to resolving this outstanding litigation that we have with Applera related to amplification and so stay tuned on that. And I guess last -- lastly, in this past week I had the opportunity to travel with one of our sales reps visiting with customers, and I think these visits really reinforced with me that we have a wealth of opportunities not only with our current products, but also with the investments that we're now making in the products and the technologies to fuel the future. So those are my comments, and the outlook as I see it.

We'll now open the floor for questions, please.

Yes, sir. [OPERATOR INSTRUCTIONS] And your first question comes from the line of Aaron Geist. Just one moment.

Good afternoon. If you could provide a little more color on the declines in the BSE business that would be really helpful. Can you give us a sense of when we're going to get to the point where we're not going to see these significant declines anymore and the BSE business looks more like other areas of your business?

This is Brad Crutchfield, I'll take that question. Clearly probably the most single biggest event in the second quarter had to do with a series of tenders in our Japanese business. We came out of that very well, and we conserved a majority of the market, a vast majority of the market. The challenge of course is they came in a much lower price. As for as the valley or the floor of the valley of this business, it's really hard to tell. Obviously it's a fairly dynamic market. Europe is on a different product lifecycle than potentially North America, and at this point, we are stabilizing a lot of this business with long-term contracts, but given the level of competition I do see that there will be continued declines in the average selling price.

Thank you very much. Can you talk a little bit more about the efficiencies in terms of manufacturing so that you're able to maybe maintain margin on those products?

That's a good point. One of the things that we have put a lot of -- invested quite heavily in, in going back several years, is the manufacturing process. We are confident at this point that we are the low-cost producer of this test. But the reality is, is that when you're a company that's entering into a market where you have no market share, like a lot of our competitors, they basically have nothing to lose, and that creates that dynamic for a company with Bio-Rad that has upwards to 70% of the market. While we are getting that efficiency, at some point that -- marginally it's hard to improve much more than the levels we're at now.

Thank you Brad, that was very helpful. Can you spend a little bit more time talking about the European market? You mentioned France and Germany as being weak from my expectation. That was on the clinical diagnostic side. Is it also on the research side? When would you think we'd start to see a little bit of an improvement in Europe?

Okay. In general, in the life science side the academic or government funded sector, which is quite large in most of the European markets, despite obviously the pharmaceutical sector that exists there that has been very slow and it had to do with a lot of uncertainty in some of the budgeting processes. We see some signs that that's improving, but in general, given the sort of the economy and some of the issues with the EU, I would see a general softness in the coming three or four quarters from the academic funded research. The private sector funding, or pharmaceutical and biopharmaceutical, is actually fairly strong, and we're pretty confident about that going forward as well.

And I think Germany has probably felt the decline in BSE just about more than any other country.

Christine, could you provide a little bit more color on the organic growth of the life science business? If you could give us a range so that we have a better sense of the organic growth that you saw on a year-to-date basis or a quarterly basis?

Yes, I think looking at the year-over-year for the quarter, if you take out -- you're talking about taking out the acquired MJ sales?

Yes. And then the favorable currency.

And the favorable currency. Then you're probably down into the low single-digit type of growth, primarily because of what's going on in the food safety. If you take that out, which, obviously is part of our business, but if you wanted to look at at more traditional core life sciences that would be comparable to our competition, then we're seeing quite good growth across a number of product lines and markets. So it's kind of a give and take.

And would it be safe to assume that there aren't any very large contracts through the remainder of 2005 like the Japanese tender that would upset sort of the balance for the life sciences segment?

Nothing of that magnitude, Aaron.

Thanks, Brett.

[OPERATOR INSTRUCTIONS] And your next question comes from the line of Quintin Lai. Please go ahead.

Hi, Christine and Norman. I had a question with respect to the SG&A guidance that you kind of gave. And said that your target for 2005 would be to try to be below the 2004 levels.

Yes, on a full year basis.

On a full year basis. Does that take into account some of the foreign currency effects that you might see kind of negative effects in Q4 with the strengthening of the U.S. dollar?

Well, keep in mind that what currency effect has on the revenue line is kind of the opposite effect, if you will, on the expense line. And our business is pretty global on the OpEx side, as is our sales, so I think in terms of impacting the margin it's not as influential. If I recall last year SG&A as a percent of sales was 3, 4.7, or something pretty darn high. When we have the opportunity to look back on 2005 we would certainly want that margin to be better than that.

Kind of following up on that Christine, the 104 million of SG&A in this quarter on an absolute basis, for, like, Q3, the quarter that we're in now, would you anticipate seeing a number that high again?

It depends, obviously, on the sales and where we are. But, I would hope not on an absolute basis. Again, depending on currency, that can affect the absolute number, as you pointed out.

With respect to your clinical diagnostics, the organic growth being at 4% was a little less than what you saw in Q1. Was there anything special with respect to the second quarter? Were you up against a more difficult comp with last year?

Say that again.

With respect to clinical diagnostics, the organic growth in Q2 was a little bit less than in Q1. I was wondering, was there anything special going on in Q2, like a tough comp or something? --

That's a good question. John Hertia, our Group Operations Manager from Diagnostics, is actually with us today so I'm going to let John answer that.

Just a little bit. We do have some seasonalized sales to Japan for our blood virus products, and in some of our manufacturing partnerships for QC products in second quarter last year was just a little bit stronger than second quarter this year for those two segments, but by the end of the year those will balance out. So that just comes from -- these are three or four large shipments that happened for each of those segments during the course of the year and that was a little bit different quarter over quarter. But the end of the year you won't see any effect.

Super. So then if we looked at Q1, Q2 combined that would give us a more of a true feel for how that organic growth looks then?

Yes. I think that's a good point.

[OPERATOR INSTRUCTIONS] And your next question comes from the line of Steven Geist.

Hi. Good afternoon, Christine.

Hi.

Let's see. Just looking at the income statement for -- in the SG&A expense, you had -- you did mention you had higher legal fees in the quarter, I guess due to the Applera patent issues. Just how high were the legal fees in the quarter?

Well, we actually have never disclosed anything that specific in terms of legal fees or anything quite so detailed. I guess what I could say, Steven, is between -- if I look at some of these things that I'll call a little more one-time in nature, meaning, at some point we'll be settled and those fees should go down or go away, there's probably 1 million to 1.5 million in the quarter that would at least, be more one-time in nature.

Okay. And was -- did some of these expenses continue into the third quarter?

Sure.

Okay. But after that, then it should be over?

That would be great. We're very hopeful, as Norman mentioned. We're at least moving forward and making progress in our discussions with Applera. Some of the things that I'm calling more one-time in nature were related to the fact that life science has put out several, several new products in the second quarter, and they have more coming this year, that either they're already advertising for, like the mini Opticon that Norman mentioned coming out of the joint relationship with MJ, and also more products to come that are in kind of the prelaunch phase. Some of those expenses are more launch-related than ongoing.

Okay. And in the gross profit you indicated that there was about $2 million of, I guess intangible amortization?

That's correct.

So that's a recurring?

That's correct.

All right. Thank you.

You're welcome.

Your next question comes from the line of Ben Robertson.

Hello. Yes, I just had a question on the SG&A expense as well to follow up. Besides the one-time items, is there anything structurally that you expect will help to reduce that in the second half or going into next year?

Well, there's certainly lots of things that we're doing to make sure that all of the operating expenses are well managed. I don't know that there's any big bang program, silver bullet type of thing that we need to do, because, again, a lot of this is part of the ebb and flow of the business as well as some more situational type events.

Well, if you were going to -- could you break out a little bit some of the larger pieces of the multiple pieces that you're attacking or approaching?

If we look on a longer term basis -- this is Norman Schwartz -- if we're looking on a little longer term basis we do have some, I guess what I would call sales effectiveness programs that are being rolled out to basically increase the kind of sales per head that we're able to achieve. Those aren't as Christine refers to, some kind of short-term magic bullet, but I think over the next six or eight quarters we're going to see the results of those investments. That's one example.

Is that -- would that be software or systems that you're putting in place?

It's software, it's systems, it's training. There are a number of different pieces to that program.

Looking at how we can be most effectively organized to gain efficiency.

On a sales -- from a sales standpoint?

Right.

Would it be fair to say that you expect, in '06 that you could further reduce your SG&A expense as a percent of revenue?

That's certainly our goal.

And would that reduction be greater than what you're able to do in '05? Do you see it as something that's accelerating or is it--?

Now that you're getting into an area that's really hard to predict, because there's -- we're -- our goal is to get back to at least a 32% of sales. How long it takes is dependent on a number of factors, not just some of the programs that we're putting in place, but obviously top-line growth, currency, all kinds of things. So it's hard, Ben, to say how much of it comes this year and how much of it comes next.

Okay. And I may have missed in the release, but what's going on with the BioPlex?

The BioPlex 2200?

Yes. Sorry?

This is -- Ben this is John Hertia from Diagnostics. We just came back from our big trade show, the American Association of Clinical Chemistry. We featured the BioPlex there. We featured it also last year. Last year we had a good response, this year we had a great response. A lot of demonstrations in the booth. We did theater presentations, we had packed standing room only theater presentations so a very good responses, we'll begin commercial shipments of the unit in October of this year. We've got some field placements already. We're looking forward to it being successful.

What kind of customers did you have looking at it mostly?

Laboratories. I would say the larger hospital laboratories, reference laboratories,commercial labs.

How many do you have out in the field right now?

Again, we aren't going to begin commercial delivery of this system until October this year, it's finishing up the transfer validation and documentation phase right now within the Company and then we'll begin shipments in October.

Is it -- how many would you have out beta testing?

We don't really disclose the number of field trial units that we have for customer placement but we have a number in the U.S.

That's it. Thank you.

[OPERATOR INSTRUCTIONS] You have no further questions at this time.

Okay. Well, on behalf of John and Norman and Ron and Brad and myself, thank you very much for taking the time to join us today and your continued interest in Bio-Rad, and we look forward hopefully to speaking with you and seeing you soon.

Ladies and gentlemen, this concludes your conference call for today. We thank you for your participation. You may now disconnect. Have a good day.