Bio Rad Laboratories Inc (BIO) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2005 Bio-Rad Laboratories, Inc. earnings call. My name is Tamiko and I will be your coordinator for today. At this time all participants should be in listen-only mode.

We will be conducting a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn call over to your host, Mr. Ron Hutton. Please begin, 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 expectation. 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 would now like to turn the call over to Christine Tsingos, our Vice President and Chief Financial Officer.

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

Today we are pleased to report third-quarter net sales of $283.2 million, an increase of 9.4% versus the same period last year sales of $258.8 million. On a currency neutral business, reported revenues increased 8.4%, led primarily by strong sales in the United States and our Asia -- Pacific region.

During the quarter we had good growth within our diagnostic groups in the area of quality control, blood virus test kits, and Diabetes systems. Our core Life Science divisions also performed well, with strong sales of protein expression, instruments, and reagents and our new Experion electrophoresis system. This growth was tempered somewhat by the August 30 injunction against selling certain MJ Research thermal cycling products in the United States.

The gross margin for the quarter was in line with expectations at 55.4% compared to 55.1% last quarter and 55.2% in the year-ago period. The increase from last quarter is the result of higher consumable sales in Life Science. This improvement was partially offset by an increase in warranty reserves to accommodate customers impacted by the injunction.

SG&A expenses for the third quarter were $102.7 million. This includes a substantial increase in legal fees during the quarter. As a result, SG&A as a percent of sales was higher than our target. Our goal remains to reduce the full-year SG&A margin to a level below our 2004 result of 34.7%.

Research and development expense in Q3 was on target at 10% of sales or $28.7 million. Remember that the year-ago period included 13.7 million of in-process R&D charges. Excluding that noncash charge, the increased spending from last year reflects our investment in new products and technologies for both groups, that we expect will positively impact top-line growth going forward.

During the quarter, interest and other income improved versus the year-ago period, primarily the 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.

The tax rate used for continuing operations during the third quarter was lower than expected at 22%. This change from last quarter reflects adjustments required in conjunction with the filing of our U.S. Federal return, as well as certain foreign jurisdictions. The significant improvement over the 31% rate used last year is also the reflection of better tax planning and strategies implemented during 2003 and 2004.

Net income for the third quarter was $16.2 million. Excluding the one-time R&D charge last year, net income increased 3%. Diluted earnings per share were $0.61. The better-than-expected quarterly tax rate benefited earnings per share by approximately $0.05.

And now for certain segment information. Life Science reported sales grew 9.5% for the quarter to $132.1 million. Less than 1% of that growth is attributable to currency.

We continue to have strong year-over-year growth in our multiplex array and process Chromatography product lines, as well as strong demand for Experion, the new automated electrophoresis system. Also during the quarter, we began shipping the BioOdyssey Calligrapher, a miniarrayer that brings microarray chip writing performance to the bench top for individual researchers.

This strong revenue growth was partially offset by a 3 to $4 million negative sales impact from the injunction against our MJ product line, as well as a year-over-year decline of BSE pricing.

Segment profit for the quarter was $3.4 million. This segment profit continues to be impacted by changes in BSE margins, amortization of the MJ-related intangibles, substantial litigation expenses, and the increased warranty reserve.

Our clinical diagnostic sales grew 8.7% for the quarter to $148.3 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 products in the U.S. and Asia-Pacific region.

On a currency neutral basis, diagnostic sales grew approximately 7.5%. Segment profit for the quarter was $15 million, an increase of more than 20% versus the same period last year. This increase resulted from the improved gross margin due to better manufacturing through-put as well as increased operating efficiency.

Bio-Rad's balance sheet also remains strong. As of September 30, total cash and short-term investments were $358 million. This excludes $36 million of restricted cash associated with the Applera dispute.

Net cash generated from operations during the quarter was approximately $31 million and $59 million year to date. This compares very favorably with the second quarter, which contain higher cash passes, as well as a sizable annual royalty payment.

Net capital expenditures were $8.7 million for the quarter. This net amount includes approximately $3 million in proceeds from the sale of a building.

Depreciation and amortization for the quarter was [$50] million as expected and will likely continue at these levels.

And finally, total long-term debt as of September 30 was $426 million.

Looking to the fourth quarter, our base 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 have been strong growers during the year, we still see some signs of weakness in Europe, especially Germany and France.

For the full year we continue to expect gross margins to be in the 54% to 55% range. Our goal to reduce full-year SG&A as a percent of revenue compared to 2004 also remain unchanged.

Having said all that, the uncertainty surrounding the timing and resolution of the Applera litigation leads us to make some caveats regarding financial performance in the fourth quarter. While we continue to aggressively pursue a resolution of this matter, we are fully complying with the August 30 injunction order. If the injunction remains in place through the remainder of the fourth quarter, our Life Science business could be negatively impacted with sales being reduced as much as $10 million to $15 million and pretax operating profit reduced as much as $8 million to $10 million versus our prior expectations. Because the legal fees associated with this litigation are substantial, our SG&A goal may be difficult to achieve.

On the upside, however, during the fourth quarter, we will also be recording other income of approximately $10 million to $11 million, reflecting the gain on our sale of shares of BioSource and Instrumentation Laboratory.

And now we are happy to take your questions.

[OPERATOR INSTRUCTIONS] Your first question comes of the line of Mr. Quintin Lai. Please proceed, sir.

Good afternoon. Congratulations on a nice quarter despite the injunction.

Thanks.

With respect to that injunction, how long could this last? Do you hope to get it done by the end of this year? Or do you think that there is a chance that it might slide into 2006 as well?

Quintin, this is Norman Schwartz. It is always hard to predict exactly how the courts are going to proceed on these kinds of things. You know, we certainly are looking for this to be resolved before the end of this year, but again, it's something we are not in complete control of.

And then, Christine, with respect to the impact of that injunction in Q4, 10 to $15 million of revs but 8 to 10 of pretax profit. Does that include legal fees as well?

Yes, it does.

Okay. Because I was looking at that and I said, it can't be just the profit of the --

It would be nice. [ LAUGHTER ]

All right. Then kind of taking a look -- you mentioned warranty reserve for your customers. Could you elaborate a little bit more about what that entails?

Sure. Just from the accounting standpoint, we -- I'll let Brad talk about what we are doing for the customers, but from an accounting standpoint, we did increase the reserve for the warranty on servicing these products by about $600,000.

Quintin, this is Brad Crutchfield. Obviously, our focus is on our customers and their research and this is certainly impacting them. We have a line of thermal cycle products that were not enjoined by this. In other words, products that were manufactured by Bio-Rad all along and we were actively using that to support the customers going forward so they can get their research done.

Okay. Well, and that kind of leads to my next follow-up, Brad, is that -- is it so different, the MJ thermal cycler versus the Bio-Rad line, that you couldn't just substitute or make it, you know, an offer to make up for those sales with your own internal line?

Well, we are certainly doing that. Again, there is -- there is a fairly good brand preference. One of the reasons that we were attracted to MJ was because they had a very strong brand presence in that market and there's a certain inertia associated with that that we are trying to overcome.

Obviously, it is a fairly fluid situation at this point. Again, our primary focus right now is to keep our customers up and running. As far as the sales going forward, that is taking a little bit more time to ultimately convert them, you know, and obviously mitigate some of these issues.

Christine, with respect to your tax rate, 22% in the quarter. Is that something that is just quarter specific with respect to your filing? Or should we expect it to go to a 28% level or so for the remainder of the year and beyond?

Well, the 22% in the quarter was the result of specific events in the quarter in terms of some true-up associated with the Federal return and some resolution of issues outside the United States. I think as we look to the fourth quarter, we still view 28% as our ongoing rate.

Having said that, there are events that will affect it or could affect it one way or another. For example, the gain that we will record from a book standpoint on sale of our shares of Instrumentation Laboratory, for tax purposes we'll probably go that other way and that could benefit the rate. But with that uncertainty, Quintin, 28 is where we start and then the events take us from there.

Norman, now that the BioSource acquisition did not go through -- toward -- to you, can you tell us a little bit about what your thoughts are with respect to future M&A activity for Bio-Rad?

Well, as I think is always the case, you know, we have a number of opportunities in the hopper. Things that we are looking at, evaluating. And one or two of which actually look very interesting at the moment. But we've got to really continue that evaluation process, and if that looks favorable at the end of the day, we might move forward.

Okay. Thank you. I will jump back into the queue.

Your next question comes from the line of Jeff Matthews with Ram Partners. Please proceed, sir.

Hi there.

Hi, Jeff.

How are you?

Not bad.

Two things, and the first question, it's going to sound like a would have, could have, should have, but it is not. I am wondering -- I really just want to get a sense of where the surprises came on the MJ litigation issues. Was there due diligence that you could you have done that would have protected you, in hindsight? Or was this an issue with the other negotiating party that is the key to the way this has gone.

I think -- you know, we did a fair amount of due diligence with the -- in the MJ acquisition. You can always look back and say, gee, what could we had done differently. I think, as Brad said, we were still very interested in this product line, good brand equity, good addition of people. A good contingent of people that we got with this acquisition and kind of weighing up kind of all the factors. I think, still a pretty good -- going forward I think still will be a pretty good acquisition for us.

Sure.

I think our surprise and certainly our dismay has been more on the side of reaching an agreement with Applera.

Sure.

Given that Bio-Rad is a licensed vendor under thermal cycling products, this has been a little bit of a struggle.

Sure, understood.

And then the second area I was looking to get some more detail on, there's -- a lot of the major drug companies are having real problems now. They've lost big sources of their income streams and they seem to be really tightening up and talking about it, and in Pfizer's case, bragging about how much cost they can take out of their system. I know you are mostly on the disposable side. You don't sell a lot of big equipment, but what do you see out there, both in your customer base and also in your geographic regions, as you look towards 2006, that might be different than the last year or two, if any differences, plus or minus.

This is Brad Crutchfield. I will take that question.

You know, really, I -- we sort of see the same thing. But a lot of our products, especially in the gene expression side, really have a way of adding efficiency to the drug discovery process. And basically that is really the focus of the manufacturing -- of the pharmaceutical companies today, is to increase the hit rate of products that begin in the research stage and what they ultimately get to the market as a product. And so a lot of the growth that we are reporting is really in those products that help achieve that.

On the other side of it, we do have a -- let's say on the sort of the drug production side, our process chromatography business continues to grow strongly, because there is still a demand for these kinds of medicines. As sort of the genome becomes a reality in terms of new medicines, our products are impacted positively there.

So those are more upside than the normal downside that would be just the general product line that these companies look to sort of cut back.

Okay. Fair enough. Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Quintin Lai with Robert Baird. Please proceed, sir.

Thanks for taking my follow-up. Clinical Diagnostics had a nice bounce-back from Q2 levels, and so, I guess kind of reaffirmed what you said before that when you take the average of two quarters, it looks like more normal of that high single-digit constant currency growth. Can you tell us a little bit about the third quarter? Did you have any impacts with respect to like the hurricane season, in terms of your revenues?

Hello, Quintin. This is John Goetz with the Diagnostics group.

Yes, we had some impact with that. In fact, I think the numbers that we saw were somewhere in the half a million to $750,000 range in lost revenue; however, we saw offsetting revenue increases in our surrounding regions, so we are not totally clear that that was completely lost, where we could measure a particular region. So we were affected. Some of our customers in that area were -- had interrupted services, as you well know.

And then kind of circling back to M&A and then taking a look at the fact that you're seeing traction in your newborn screening as well as some genetic testing. Norman or John, do you see maybe expanding out into that area as maybe a potential growth for -- future area for Bio-Rad?

Quintin, I would say in the diagnostic area we have focuses on certain product areas. One is in the area of autoimmune, another is diabetes, another is HIV blood virus testing, let's say and quality control. The other product lines are important to us, but let's say they are not strategic. So in the area of acquisitions, while we will keep our eyes open and look for anything that could be synergistic with what we do, it's probably not going to be something that we're going to initiate and go look for.

All right, thank you.

Your next question comes from the line of Mr. Leonard Rubinger with Bio-Rad. Please proceed, sir.

I am a retired pathologist known to very few people there in the audience except perhaps Norman and his father, David. But I have a curious question about whether you are stretching any tentacles in the direction of avian flu and testing in that area, since you have had connections with Chiron and [Synope] in the past. What about it, Norman?

Well -- this is John Goetz. This is -- the short answer to your question is no. We have not explored anything in that area of avian flu.

Okay. You don't plan to?

No.

All right, thank you.

Your next question comes from the line of Mr. Dov Gertzulin with Neuberger Berman. Please proceed, sir.

Congratulations on a good quarter. A question regarding the 8 to $10 million that you've talked about for the possible impact in Q4 of the litigation. How much of that is Legal?

You know, I think we've been seeing legal fees running in the -- kind of 2 to $3 million a quarter.

Okay. And we're in -- we're beginning November, so the first month of Q4 is already completed. When you say -- with respect to that 8 to 10 million, is that in addition -- is that kind of incremental to what you've lost from this point on? How should we think about --

No, I think that is what we are looking at for the full quarter effect. I mean, obviously, your point is a good one, we've started into the quarter and we are already feeling some of the effect.

Okay. And do you have any estimate of what that effect was in terms of top line for this past quarter ?

For the third quarter?

Yes.

It was about 3 to 4 million.

Okay. So when you -- Norman you may want to -- I don't know what your view is on this, but when you look at the Company, there's something like -- between the spread on the interest and between all the legal expenses, even forgetting about just the actual loss of revenue from the injunction, it's something like 50-plus or maybe $.75 per share that I guess is being masked or is being overcome by these issues.

I mean, how do we -- how do you unlock that?

Well, a couple of ways. I think it is a good point that we've made a tremendous amount of progress in our business and it is getting masked by some of these other events. Certainly a resolution with the Applera litigation will help with making those legal fees go away, and that not only goes directly to improve margin but frees up those dollars for investing.

In terms of the interest expense and the overhang of that right now, we are continuing to invest heavily, as you can see, in R&D for several new technologies and products in both Life Science and Diagnostics. Tests for the BioPlex 2200, for example, that we believe will be strong beneficial return to the shareholders, and of course we've talked a lot today already about always keeping our eye out for good acquisitions.

So once that money is deployed into higher return and the litigation is behind us, I agree with you. We should see a change in the business model.

Okay. Thank you.

Your next question is a follow-up question from the line of Mr. Jeff Matthews with Ram Partners. Please proceed, sir.

Thank you. I think you should have more former employees ask questions. I think that's great. [ LAUGHTER ]

I wanted to follow up on that one and then follow up on my own. Is there a reason why you are not looking into the avian flu issue for science purposes or business purposes or -- it doesn't make any sense?

I would say mainly for business purposes. You know, you have X amount of money to spend on development, and you spend a heck of a lot more if we wished. And at this point, we pick the projects that we think are strategic for us and we are kind of sticking with those.

Understood. Sure. And then I want to follow up on my prior question. You talked about customer-related issues. I wondered if you could look ahead and maybe into 2006 by geography, where you see maybe improvement or not.

Looking ahead to 2006, in terms of the market?

Yes.

I think the one that we've talked about a fair amount has been Europe, particularly Germany and France, where it has been weak this year, and I think Christine probably alluded to that. I think that we are seeing some -- what I would call signs of life there in certain segments. I think that recovery is going to be slow, but --

Sure.

-- but I think there is certainly some hope in those areas. I think the U.S. is ticking over fairly nicely, and, of course, there are lots of opportunities in the Asia-Pacific region.

So that's kind of how we see the world shaping up.

Sure. Okay, great. Thanks very much.

Again, ladies and gentlemen, if you would like to ask a question, please press Star 1 on your touch-tone telephone. If there are no more questions at this time, I would like to now turn the call back over to your host, Mr. Ron Hutton.

Well, thank you very much for joining us today. And we look forward to revisiting with you in about three or four months' time. Thank you very much.