Bio Rad Laboratories Inc (BIO) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your Q4 2005 Bio-Rad Laboratories earnings conference call. My name is Rob. I will be your operator today. Throughout this conference all lines will be on listen-only mode. [OPERATOR INSTRUCTIONS] At this time I would like to turn the conference over to your host for today's call, Mr. Ron Hutton, Treasurer.

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, plan and expectations. Because our actual results may differ materially from these plans and expectations, I encourage to you 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 would like to turn things over to Christine Tsingos, Vice President and CFO.

Thanks, Ron. Good afternoon everyone, and thank you for joining us. Today, we will review both the fourth quarter and full year financial results, as well as provide some insight into our thinking for 2006. Let's start with a review of the quarterly results. Net sales for the fourth quarter of fiscal 2005 were $307.3 million, about flat with the year ago period despite the decline in sales of BSE products, as well as the negative impact related to the injunction that was placed on our MJ Thermal Cycler product line in September.

And for the first time in more than three years we are experiencing a negative currency impact on sales growth. Currency neutral sales for the quarter grew just shy of 3%. During the quarter, we posted record sales within our Diagnostics Group. This growth was the result of increased sales of blood virus, diabetes monitoring, and quality control products. In our core Life Science Division, we reported strong sales in our protein expression, consumables, and electrophoresis lines. Gross margin for the quarter was lower at 52.9%, partially the result of higher instrument sales typically associated with our fourth quarter, but primarily the result of approximately $4 million of one-time costs in our Life Science Group.

These costs were related to the injunction and subsequent changes in manufacturing and are more one-time in nature. We are very pleased to have resolved our litigation with ABI and Roche and put behind us the challenges and expenses of the past 18 months. We expect the core Life Science gross margin contribution to improve in future periods. SG&A expense for the fourth quarter was slightly better than expectations at $109.6 million. As a percent of sales, this compares favorably to both last quarter and last year. During the quarter we incurred approximately $3 million of MJ related legal and severance expenses that are not expected to carry into future periods.

Research and development expense in Q4 was just over 10% of sales at $31.1 million, as we continued to invest in new products, technologies and partnerships. Our target level of R&D remains 10% of sales. During the quarter, we incurred a one-time, non-cash charge of $19.8 million for the impairment of purchased intangibles, primarily related to the acquisition of MJ Research. Many of the assets acquired with MJ were significantly impaired by the injunction as we were forced to stop manufacturing, selling and servicing products in the U.S. requiring us to relocate manufacturing and redeploy a good portion of the work force.

You may recall that on the last conference call we anticipated reporting in Q4 just over $11 million of one-time other income associated with gains on the sale of our BioSource and Instrumentation Laboratory investments. While the sale of our IL holdings was a gain for book purposes it was a significant loss for tax reporting purposes. Thus the tax rate used for continuing operations during the quarter was actually a benefit of $4.5 million. This extraordinary quarterly result brings the full year tax rate to about 17%. Other income and expense also includes a $1.2 million expense associated with the final ABI settlement.

This relatively small adjustment was necessary in order to match our prior litigation and royalty accruals with the ultimate value of the settlement. Reported net income from continuing operations for the fourth quarter was $13.5 million, and diluted earnings per share were $0.50. Excluding the one-time, non-cash charge for impairment of purchase intangible assets net income was approximately $27.6 million, and diluted EPS was $1.03.

Now for certain segment information for the quarter. Life Science reported sales decreased from the year ago period to $140.7 million. This decrease reflects a significant negative sales impact related to the injunction, as well as the year over year decline in BSE revenue. However, despite these negative forces, the group posted more than a 6% growth on a sequential basis, a testament to the impressive strength of our core Life Science products. We continue to have strong year-over-year growth in our multi-flex array systems and consumables, as well as automated electrophoresis and process chromatography products.

As mentioned earlier, our Life Science Group was negatively impacted by nearly $7 million of additional cost of goods sold, and SG&A expenses associated with the injunction. These expenses, coupled with the non-cash impairment charge, resulted in a segment loss for the quarter. Our Clinical Diagnostic Group reported record sales for the quarter of $163 million, an increase of more than 4% compared to last year, and nearly 10% on a sequential basis. These sales were led by continued strong performance in our Quality Controls Division, as well as our diabetes monitoring and blood virus product lines. On a currency neutral basis diagnostic sales growth was higher at 6.7%. Segment profit for the quarter was just over $15 million, an increase of 12% versus the year ago period.

Looking at the full year results, we are pleased to report annual revenues of $1.181 billion, an increase of more than 8% and despite our recent challenges. Contributing to this growth are several new products introduced during the year, as well as some currency benefits. However, even on a currency neutral basis sales grew 7%, ahead of the mid-single digit guidance we gave at the beginning of the year. Both of our primary segments contributed to growth in 2005. For the year, Diagnostic sales were $618 million, an annual growth of 7.3% and currency neutral growth of 6%.

During the year, the Group launched several new products in autoimmune, diabetes, newborn screening, toxicology, blood virus, infectious disease and quality controls. Our D-10 diabetes monitoring system achieved record sales with more than 650 new placements during the year. We renewed our partnership with Institut Pasteur in France and Fuji Radio in Japan. But perhaps the most exciting news for clinical diagnostics is the first placement of our new fully automated random access multiplexing platform, the BioPlex 2200 with a large regional reference lab.

They selected our product based upon both increased automation and accuracy. Our first menu consists of 12 different tests for diagnosing autoimmune disease. Future panels of tests, currently in development, include serology disease panels, cardiac, and infectious disease testing. All of these new diagnostics products and partnerships bode well for their continued success in the coming years. Despite the many challenges, our Life Science Group also posted good annual sales growth, primarily fueled by incremental MJ sales in the first half of the year, and strong growth in gene expression reagents, process chromatography, and our Life Science Bioplex system, which is used for protein analysis.

In addition, our new Experion automated electrophoresis system was well-received by customers around the world. For the year, Life Science sales were $550 million, a growth of 9% over last year and despite more than a 20% decrease in BSE sales. On a currency neutral basis Life Science sales increased just over 8%. With the AVI litigation behind us we are looking forward to turning our full focus to growth opportunities and new product launches in 2006. Gross margins for the full year were 54.7%, down from 56% in 2004. This decline was primarily driven by two things, changes in our BSE business as customer contracts with the testing labs came up for renewal and were renewed at a lower price per test, and, secondly, several million dollars of injunction related expenses such as inventory warranty charges, manufacturing shutdown and severance costs.

Research and development expense in 2005 was in line at $115 million. During the year, we lost more than 60 new products worldwide and have several more in the pipeline to help keep our return on R&D investment strong. SG&A expense as a percent of sales was higher compared to the 2004 results, primarily due to increased legal, severance and customer maintenance costs related to the litigation with AVI.

And finally, as I mentioned before the tax rate also ended the year much lower than originally expected as our sale of IL shares resulted in a sizeable loss for tax reporting. Going forward we expect the effective tax rate to normalize back to the 28% to 30% range. Income from continuing operations for the full year, including the negative impact from the impairment expenses, grew 17% to $77.5 million. For 2005, Bio-Rad's balance sheet also remains strong. As of December 31, total cash and short-term investments were $449 million. Remember that at the end of 2004 we took advantage of the increased liquidity and attractive coupons in the high yield bond market and issued $200 million of 10-year senior subordinated notes.

Like our previous offering, we view this as longterm money to invest in the business, such as new product development and operational projects, as well as investment in strategic acquisitions. Collection days and inventory turns also improved year-over-year. The change in purchased intangibles reflects the impairment charge taken in the fourth quarter. The full balance sheet impact of the ABI settlement will be reflected in the first quarter 2006 results with the payment of approximately $51 million cash and the subsequent elimination of the litigation accrual.

Net cash generated from operations during the quarter was $49 million, reflecting the strong collections and improved DSOs during the period. For the year, cash generated from operations was $108 million. Net capital expenditures for the quarter were $9.8 million, and $36 million for the full year. This number is significantly below our historical levels and prior expectations. Finally, depreciation and amortization for the quarter was $16.4 million, and $61 million for the full year, the result of new facilities and increased amortization related to the purchased intangible assets.

Total longterm debt is as of December 31 remained unchanged at $426 million. Looking ahead to 2006 we anticipate another year of progress. We have some exciting new products coming in both Diagnostics and Life Science that will continue to contribute to top line growth. And we will continue to implement new programs and processes to help improve both growth and operating margins over the longterm.

However, it is also important to note that we are facing some rather significant top line challenges in the current environment. As I mentioned before, with more than 65% of our sales outside of the U.S. and the dollar strengthening, we expect currency to have a negative impact for the foreseeable future. In fact, just comparing today's rates with the average rates of 2005, already produces a negative impact to our sales forecast of more than $20 million. On top of that we are anticipating another sizeable decline in our BSA business as contracts come up for renewal and are expected to renew at both lower prices per test and numbers per test. Finally, while we are pleased to be back on the market and amplification and real time PCR, our experience in Europe and Japan has taught us that it just takes time to ramp back up after being shut out of the market.

With all this in mind, we expect consolidated 2006 sales to grow in the low single digits. While we have made progress in manufacturing efficiency over the past year or so, the anticipated decline in our BSE business will likely offset this improvement and keep gross margins in the 54% to 55% range. We will also continue to invest in the business, including the implementation of improved IT systems and distribution consolidation. Our goal is to keep SG&A growth in line with sales growth. However, with the slowing top line this will likely result in an SG&A margin similar to 2005 and still above our longer term target of 32%. We will begin expensing employee stock compensation in 2006 per FAS 123, which is currently estimated to be between $5 million and $6 million for the full year.

As I mentioned earlier, our target level of R&D spending remains 10% of sales and we are targeting a full year tax rate of 28% to 30%. And now I will turn the call over to Norman for a few comments.

Thank you, Christine. I think actually Christine covered this pretty well. I think for the most part the challenges that we face in 2005 are behind us and I think we can now really focus on 2006. Certainly the resolution of the Thermal Cycler litigation allows us really to return our focus to the customer in this key business area. In the BSE market while we've experienced declines we continue to enjoy good margins and good market share. And finally, on the acquisition front, while we came up dry in 2005 we have a number of interesting opportunities that we are currently evaluating and hope for the best in 2006. I think in general we are mindful of the fact that government funding for research has moderated. In the short term as spending has been redirected to other efforts and that rising cost of healthcare is still a focus for all of us. We do see these as opportunities. Opportunities to provide enhanced tools and to aid, really to aid in the discovery process and in lowering healthcare costs. So we do see -- we have a pretty positive outlook for the future. With that I guess we would like to open it up for questions.

[OPERATOR INSTRUCTIONS]. Sir, I have your first question today coming to you from Quintin Lai.

Good afternoon. Congratulations on resolving the litigation with ABI and Roche. With respect to the growth that you saw in your Life Sciences business, could you make a stab at what the growth constant currency would have been excluding the MJ injunction?

That's a good question, Quentin, and I think we have some ideas. It's hard to know exactly but just judging by the impact of the injunction, which was a fourth quarter event, I think sales in Life Science were negatively impacted probably as much as $10 million to $15 million.

And then as we look forward, you said that the ramp, your expectations for getting back into the market in the U.S. could take sometime. Will you also have some residual legal expenses that we need to be looking for in SG&A for the first quarter?

If we do it would be probably smaller than what we had in the fourth quarter. We didn't reach final final resolution until early February. So there is some, Quintin, for sure, but not to the extent we've been seeing.

Going back to your Life Sciences sector can you give us a rundown of what you are seeing, either geography or sector academic, industrial, pharma-biotech that may have been either better or worse than expected during the quarter?

Hey, Quintin, this is Brad Crutchfield, I will take that. As Norman pointed out, the U.S. market, specifically in the area of academic or government-sponsored research has slowed down somewhat. We've tended to do fairly well there and we've been able to hold our own in that environment. As far as Europe goes, again Germany and France, specifically, seem to be very slow in the area of government-sponsored research.

We have seen a nice rebound in the Japanese market as their customers have learned to survive in this new sort of value-added way of allocating funding for research. On the bio-pharma side, again, the challenge there seemed to be a fairly slow fourth quarter that seemed to hit us, as well as our competitors, fairly hard as a lot of those companies begin to slow down some of their investment.

We don't see that as a longterm impact because there is a tremendous number of tools and there is a tremendous number of targets that are in the process of moving towards becoming medicine, so we see that as a real opportunity for us going forward.

So then on a constant currency basis as we look out into 2006, Brad, do you kind of see that mid to high single-digit Bio-Rad growth rate still achievable, excluding the BSE year-over-year impacts?

I think that's a reasonable conclusion, absolutely. We see our overall Life Science market rate growing in that sort of 4 to 5, or mid single-digit range and we always have a focus to outgrow that so I think your assessment is correct.

And then with respect to Clinical Diagnostics, this is a very solid quarter. If we take a look a little bit deeper in Clinical Diagnostics, is that growth coming from just opening up new markets, or is it taking market share from existing players with some of your tests?

Quintin, this is John Goetz. With respect to that growth, we are seeing the growth across, I would say, all of our product lines, I think as Christine mentioned. We had some very good success in the U.S. in the area of blood virus testing in the Diagnostic arena where we are placing some automated platforms for the first time. The reagent drag on that is pretty nice. We continue to penetrate our controls market around the world. We are also seeing increased regulation of laboratories requiring more and more QC. So that's also an upward driver, so, I would say, generally, it's no one in particular product line and pretty much across it all.

With respect to, kind of, the BioPlex 2200, John, now that you have your first placement out there and you have one panel of tests, is this going to be a case where as you get more tests menu through the FDA process you could see more increased placements, or do you think that the first autoimmune panel will be strong enough to get more placements throughout the year?

We will continue to get more placements just based on autoimmune alone. Certainly the key to longterm success with this platform will be additional panels. No doubt about it, and that's really where we are spending the lion's share of our segment's R&D money.

Okay, thank you. I'll jump back into the queue.

Okay, thank you, sir. Your next question comes from Ray Garson.

Thanks. First, with respect to the FY '06 guidance on the top line, how does the new product portfolio roll-out through the course of the year? Is it fairly evenly disbursed or is there some, some grouping of new product roll-out that may need to be accounted for when we model the year on a quarterly basis?

You know, I think a lot of the products are scheduled more mid-year and then allowing time for launch and ramp up, it's probably later in the year that the real sales impact.

So if we are thinking about that low single-digit top line growth it's more back end loaded in the first couple of quarters, won't have that same type of contribution, is that the right way to think about it?

If you look at kind of how our year typically rolls out you can see patterns to the quarters and generally the fourth quarter is our strongest revenue quarter in each year. So that should stay true.

Okay, and then with respect to BSE, can you just, at this point what percent of your revenue is generated from BSE testing and when does that next book of contracts come up for repricing, is it one particular period in the year where that happens?

Right. Well, you've seen that historically in our 10-K it's just over 10% of sales because we are required to report a product that is of that significance. Obviously, I think with the '05 results it's dropped below that and we won't be needing to make that comment any more in the 10-K. And traditionally we haven't disclosed specific product lines or even the division sales and we prefer to not do that at this time, as well. But, clearly, it's under 10% of the revenue of the Company.

As far as the contracts that come up for renewal, they are all over the board in different labs and different countries. Some were multi-year contracts. Some were annual contracts. And so they kind of happen throughout the year. But, clearly, where the market has gone to over the last few years it's not unreasonable at all to expect that these contracts will be renewed at pretty significantly lower price per test and we are seeing volumes of testing decrease around the world as governments change their requirements for testing.

Sure. Okay. And then CapEx, you mentioned that this year's spend was below expectations. Do you have guidance for next year for capital spending?

You know, right now, the best guidance I can give you is to anticipate CapEx moving back kind of to the mid-$40 million range. We've been running in the $50 million to $55 million we've made, you've heard over the years a lot of pretty significant investment both in facilities and IT systems. And I think the low number in '05 was a reflection of a lot of the investments that we've made in previous years and we are working on finalizing those. There are, however, new projects that are starting back up, so I think moving back to the mid-$40 million in CapEx in '05 is not unreasonable. I think for us to get all the way back into the 50s probably is not realistic.

Okay. And then, Christine, in your prepared comments you referenced a couple of one-time items embedded in both COGS and SG&A. I wanted to just reiterate those -- I thought you said $4 million in COGS, and then $7 million in total. But I just wanted to make ---

Yes, it is $7 million in total is the best estimate that we have and the way that I think that breaks out is about $4 million in COGS, and about $3 million in SG&A.

And then the final question is just with respect to some of the systems investments that you've all been making and some of the conversions that are ongoing, can you just give us some perspective for how that is proceeding, are you realizing, I guess, the enhancements in either management reporting and controls that you hoped to?

Norman wants to answer this. I'm not going to let him just yet. We are making progress. It is a huge project and process and ongoing. When you think about a $1 billion Company all over the world with numerous manufacturing sites around the world it is not a small task. But we are making progress. At this point, I would say it's probably more of, still an expense, or a cost, than a true benefit but we've made huge strides.

And I actually thought of one more if I could then I will jump off. It's just that the DSO trends, obviously, very strong cash collections this quarter, is there anything unusual or is this a sustainable level from your perspective? And, then I'm done, thanks.

No -- I would say -- first of all, again, the quarterly trend is Q4 is usually a pretty good quarter for us in terms of DSOs and seeing improvement. I think there is a lot of goodness that will continue on and follow us. But part of it is just the trend that is the fourth quarter. I don't think there was anything unusual that would put a blip in the radar to suddenly make DSOs look artificially different or something.

Thanks.

Thank you, sir, I have a follow-up question from Quintin Lai.

Thanks for taking my follow-up. So with respect to, again, the previous question with, in SG&A, 65% of your sales are international, but I know that you have quite a bit of international operations, but still the majority, or maybe vast majority is still in Hercules, isn't it?

It is true when you look at our cost model that it's not a perfect match between revenue outside the U.S. or non-dollar denominated revenue and non-dollar denominated expense. But we do have a fair amount outside the U.S., so we do get some natural hedge, if you will, to whatever happens on the top line, positive or negative to help us protect a little bit the bottom line.

So then when you sit there and say that SG&A is not going to come down from 2005 levels, that includes negative FX expectations for a lot of the, especially the early part of 2006?

Yes, yes. And what I'm talking about is not absolute dollars but the margin.

Okay. And then with respect to taking the FAS 123 charges, is that going to be mainly loaded in the fourth quarter or should we be looking at kind of a more even pacing throughout the year?

I think, I'm anticipating a more even pacing throughout the year of the, what we are thinking is, $5 million to $6 million of expense. It will be spread where the, obviously, where the employees are in terms of the expense categories, although I wouldn't be surprised to see it weighted to SG&A.

And then I guess last question, with respect to the acquisition environment, Norman, what are you seeing right now, do you feel like the prices have gotten to be more reasonable or do you still see them as being a little bit higher than what you would be willing to go out and do right now?

Well, it depends on the particular area. Some of these areas are very hot and have commanded some real premiums. I think that we are seeing some opportunities now that I would say are potentially much better priced.

And then I sit here and look at the business, Life Science and Clinical Diagnostics, would you be looking mainly toward Life Science or kind of at both sides?

Really on both sides, we have active things going on in both areas.

Thank you very much.

Okay. Thank you. We will go to Bob McDorman.

I'll tell you, being a shareholder in this Company has been rewarding, but it takes a lot of work.

[LAUGHTER] That's what we think, too.

You can come work here.

Can you just sort of tell me, has MJ been a disappointment, as expected, or, it's just so [EXPLETIVE] complicated? Excuse me.

It is complicated and we apologize for that. I think certainly when we acquired MJ we were certainly aware of the legal problems that they had and took that into account when we purchased MJ. I think the, candidly the disappointment is that it's taken a little longer than expected to resolve. But, overall, I still think it's a good acquisition. It did help to broaden our product line, and give us some geographic reach and, you know, there is some very good people there that I think have been a real addition to the team.

Okay. Are we going to generate new products out of this acquisition, or are we going to be able to generate revenues going forward because we have a license in line with what you originally thought or how is this? Can you give a little more color on that?

This is Brad Crutchfield, I will take that question. Overall, we have a very strong product pipeline associated with this acquisition, both in the regions and the instrument part of the product line, and in general I just underscore what Norman said. We, the most important part of any acquisition is the people, and we got some fabulous people that have worked very diligently through some very tough situations. As far as the marketplace goes forward, we have a very broad product line. We have a very strong market position and I think a winning strategy. It's nice now at this point that we can get away from the legal side of things and focus specifically on serving our customers, and something that we've done for 50 years and that kind of reputation I think really gives us a lot of confidence in this business going forward.

Thanks.

[OPERATOR INSTRUCTIONS] Sir, I have a question from [Wedong Hong].

Hi, good afternoon. Can you maybe give a little more color on the, your SG&A spending? I think you said it would be more than 32% of revenues in 2005. Does it take into account some of the, I guess, cost cutting measures that you alluded to earlier on?

It does. It takes, I think we've tried to take into account all of the various events of '05 that carry forward or not into '06. I think that a lot of progress has been made on SG&A and, frankly, when one talks about top line growth in the low single digits then just keeping that in line, keeping the growth in SG&A along the same types of rates masks a lot of the progress that we, indeed, have made. So what we were trying to say is that as a margin, SG&A as a percent of revenue probably will be similar in '06 as it was in '05 and we ended up '05 around 35.5%. And so, frankly, we will continue to focus on that and as the top line growth accelerates then I think will you see that margin improve, as well.

I think I must be missing something here. I think that the number in '05 has a lot of legal expenses included in '05, which is going to be removed in '06, so with your top line growing, I would think that you would also get some SG&A leverage, so why would the ratio still be constant here? I must be missing something.

Well, I mean, we are talking about total SG&A for the year in excess of $400 million versus, hopefully, a benefit meaning reduced legal expenses of $4 million or $5 million.

So the SG&A run rate for 2005, the true run rate is about $400 million in '05?

We reported $416 million, so I would say that's, and we outlined about $3 million of SG&A expense related to MJ.

For the whole year or just the fourth quarter?

Well, for the fourth quarter, but a lot of it was spent in the fourth quarter with the injunction. Perhaps for the full year the expenses were 5.

I see. So we should take that 5 out of the $416 million and maybe that's the run rate you have in 2006?

It could be. I mean there's also a lot of other things in '06, investments that we are making, natural growth that comes with the business in terms of healthcare costs and employee compensation, et cetera.

I see. All right. Thank you.

Okay, thank you. [OPERATOR INSTRUCTIONS] I have no further questions queueing up for you at this time.

Okay, thanks, Rob. Thank you everyone for taking the time to join us today and for your patience as we rescheduled our earnings release for today. As always, Ron and I and Norman are available if you have any follow-up questions. Thanks.

Okay, thank you, ma'am. Thank you again, ladies and gentlemen. This brings your conference call to a close. Please feel free to disconnect your lines now at any time.