Bio Rad Laboratories Inc (BIO) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Bio-Rad Laboratory earnings conference call. My name is Angela, I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the ends of this conference (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. Now I would like to turn the call over to your host for today's call, Mr. Ron Hutton, Treasurer. Please proceed, 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 managements goals, plans 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. That having been said I would like to turn the call over to Christine Tsingos, VP and Chief Financial Officer.

Thanks, Ron. Good afternoon, everyone, and thank you for joining us. Today we are pleased to report quarterly net (technical difficulties) sales of $308.3 million, on a currency neutral basis year over year revenues were essentially flat. During the quarter we had good growth across all of our key markets within the diagnostics group. However, this growth was offset by some challenges in Life Science such as continued weakness in the U.S. and Asian academic research markets as well as expected decline in BSE sales. Gross margin for the quarter was slightly ahead of expectations at 55.6%, compared to 54.1% last quarter, and 56.9% in the year ago period. The sequential improvement in gross margin is the result of a more favorable product mix as well as lower cost resulting from the planned consolidation of some Life Science manufacturing facilities.

The decrease in margin versus Q1 of last year can be attributed to the BSE impact. SG&A expenses for the first quarter were $107.8 million, or 33.4% of sales. The dollar improvement versus the fourth quarter is primarily related to lower selling costs associated with the lower sales number. However, this sequential decline in expense is not unlike our historical patterns where project spending and hiring generally ramped through the year making Q1 our most favorable margin quarter for the year. And finally you may remember that the fourth quarter included $3 million to settle a contract dispute. SG&A spending is up versus the year ago quarter primarily due to the inclusion of three acquisitions completed late last year as well as currency related increases. Research and Development expense in Q1 was just over 10% of sales at $32.8 million, compared to $33 million in the fourth quarter and $28 million last year. The year over year increase is evenly shared by both Life Science and Clinical Diagnostics as we continue to invest in new products and technologies scheduled to launch later this year.

During the quarter interest and other income was a net expense of $1.4 million. The lower net expense compared to last year reflects the increased interest rate environment. Going forward we expect this expense to increase slightly as the cash is deployed into internal and external growth opportunities and interest income declines as a result. The effective tax rate used during the first quarter was better than expected at 28%, which compares to 29% last year and 30% last quarter. The sequential improvement can be attributed to increased benefit from the new R&D tax credit provision as well as a reflection of higher interest rates and the weaker dollar. While we won't try to predict where currency rates will be in the future, it seems clear that the R&D benefit will be continuing. That's where revising our guidance for 2007 tax rate to be in the 28% to 29% range excluding any one time items.

Net income for the first quarter was $27 million, a decrease of 13.5% versus last year. Diluted Earnings Per Share were $0.99. As we do not use pro forma reporting please remember that our operating income includes the impact of FAS 123 stock compensation expense of $1.3 million. Now for certain segment information. Life Science reported sales were down both sequentially and versus last year to $141.6 million, a decrease of 2.2%. On a currency neutral basis, sales decreased 5.7%. We continued to be strong year over year growth in our protein related product line especially separation products. However this strong revenue growth was offset by the double-digit decline in our BSE business, which we anticipated in our guidance. Not anticipated however was increased weakness in the academic sector especially in the United States. Overall segment profit for Life Science was $5.5 million this past quarter, compared to $14.1 million last year.

The year over year decrease in profitability is primarily related to a lower gross margin which was impacted by the decline in BSE pricing. In addition, during the quarter we provided $1.8 million in Cost of Goods for the anticipated resolution of a dispute. Also contributing to the lower profits was the increase in R&D spending related to the inclusion of the business acquired from Ciphergen as well as several new products scheduled to launch later this year. On a sequential basis Life Science profitability is up significantly, remembering that the fourth quarter included $7 million of one time expenses related to the in process R&D charge for the Ciphergen business and the one time charge in SG&A to settle a contract dispute.

Our Clinical Diagnostic segment posted another strong quarter with sales of $177.6 million, a growth of 10.8% compared to last year. On a currency neutral basis Diagnostic sales increased approximately 6%. These sales were led by strong performance across all of our product divisions, most notably quality controls and blood virus products. Sales were particularly strong in the United States and Asia Pacific this quarter. As an example, in the U.S. we are seeing upside from buyer (inaudible) use decision to exit the U.S. HIV screening market. With gross margins much higher than expected, segment profit for the quarter was up significantly on a sequential basis to $25.7 million and about equal to last year's profit. The higher than expected gross margin for diagnostics primarily reflects a more favorable product mix. Year over year segment profit is flat due to the planned increase in R&D spending primarily for new Bio Flex 2200 Panels. Our balance sheet also remains strong. As of March 31, total cash and short term investments were $472 million. The decrease in cash balances versus year end primarily reflect increased cash payments typically associated with our first quarter and this is even more clearly reflected in cash generated from operations.

Net cash generated from operations during the quarter was a negative $12.6 million. This significant swing from the fourth quarter is the direct result of approximately $25 million increase due to bonuses, commissions and taxes paid for our strong 2006 financial results as well as approximately $20 million of operational expenses that were incurred in the fourth quarter and paid in the first quarter. For the most part these are annual payments and thus are not a prediction of cash flow in future quarters. Net capital expenditures for the quarter were $10.6 million. Our full year expectation for CapEx continues to be in the mid $50 million range. Finally depreciation and amortization for the quarter was relatively unchanged from the fourth quarter at $14.4 million. Looking ahead to the remainder of 2007, our expectations remain relatively unchanged. While we will closely monitor trends in our markets, especially the Life Science Academic Research market our expectation for top line growth continues to be mid single digits. We continue to anticipate full year gross margins to be in the 54% to 55% range, keeping in mind that historically Q1 has been our strongest margin quarter trending down throughout the year. On the year end call we outlined several financial comparison hurdles and additional expenses that would likely make 2007 operating income significantly lower than 2006. Our plans to continue to invest in the business, integrate our acquisitions and drive R&D spending have not changed. Finally as I mentioned earlier we are revising our tax guidance from the previous 30% to 32% to the current outlook of 28 to 29%. And now we are happy to take your questions. Angela?

(OPERATOR INSTRUCTIONS) We'll pause one moment to compile a list of questions. Your first question will come from the line of Quintin Lai of Robert W. Baird. Please proceed.

Hi, good afternoon. With respect to your BSE sales, again down double-digit as expected; is it possible to tease that out and try come out with what would the growth have been excluding BSE?

Oh, I have that Quintin, bear with me. One second. Without BSE the Life Science reported growth is about 2% and if we look at that currency neutral it's about flat.

So should we expect that that type of, is the pricing structure and the volume that we see here in Q1, should we expect more sequential declines throughout the year or when do we get to more of a, I guess a steady state?

You're talking specifically about BSE?

Right, for BSE.

First, let me clarify that double-digit is percentage decline year over year. As opposed to absolute dollars. But I think, we talked about it when we, on the last call you remember when we looked at the kind of the outlook for the year, we were thinking that the decline in BSE for '07 could be another $20 or $25 million I think we still believe that and Q1 is indicative of just about that range. Your question is to when do the comparisons get easier or better, I think the dollar amount for this quarter probably wasn't as significant as we've seen historically but the lack of growth in the research market specifically in the U.S. and some of the Asian markets made it more visible.

Thank you for that. Turning to attention to that, so with the -- as we are now later into the earnings season many of the other Life Science companies have kind of said that the Life Science -- government academic spending environment hasn't really changed that much, it's funding really hasn't grown much at the NIH for the last few years. What aspects caused the downturn for you? Was it a competitive environment? Was it a -- was it a pricing or was it just demand for your certain products?

Hey, Quintin, this is Brad, I will take that. I think there's a couple of things. I think there's some very acute things with certain product lines in our gene expression area that we look to be probably a little more transitory than long-term, obviously our, we are rectifying that in terms of our overall product mix and product development cycle. The other side of it is, in general a lot of the product lines whenever are more susceptible for people guarding their budget or putting off spending. So we see that again as something more transitory in nature.

I guess, Brad, the outlook then for the rest of the year, is it that as people get a little more comfortable through their fiscal year that they might start to free up some of their budget then?

Absolutely. I really do believe that the first quarter, and we knew kind of going into it is our most difficult quarter on a year over year comparison basis and I think we will see that change and you will see that as a result later on this year.

Then with respect to the weakness that you cited in Asia, is that primarily still Japan.

Yes, it's Japan and I think you probably heard a lot of that in other calls. But the other thing is we had changed our sales model in other Asia Pacific markets to reflect sort of a longer term ability to grow and to be profitable. And that's created a kind of a short term issue as we've kind of built up a different channel that's more direct for us. So that's created a weakness that really goes beyond specifically Japan.

I guess now turning a little bit toward Clinical Diagnostics, this quarter just another very strong quarter performance, as you look at increasing some of the marketing initiatives such as for Bio Flex 2200, are there any significant things that we should be looking for for new menu introduction that is might help stimulate adoption rate for that?

Quintin, this is John Goetz, yes, as we bring more panels on and we introduced I think two panels since fourth quarter, we are starting to see some traction in our placements. I think I had mentioned we had a couple of high profile placements, one at Cleveland Clinic and another at Mayo which we are pretty proud of right now. And at the moment we've got, we have a hand, a very substantial confirmed order as well for a large number of platforms. So we are starting to see some traction on this particularly still in the autoimmune area but we are starting to get our first sales now in what we kind of call the (inaudible) area. So we are feeling pretty good about it.

Then I guess, just in longer -- more strategy based question on the Diagnostic side, we are seeing more and more players coming into using agnostics on real time PCR. platforms. Any update on any plans for by Bio-Rad to do something similar?

No, I haven't got anything really to report there for you.

Thank you. I will just back into the queue, then.

(OPERATOR INSTRUCTIONS) Your next question will come from the line of [Ray Garrison] with RBS. Please proceed.

Thanks. Just want to do follow back up on the working capital issue, Christine. You noted there was some normal seasonality, would we expect that your payables and accruals would build through the course of the year like they did last time with the typical pattern?

That follows the spending in the business that we talked about. But some of the cash payments that typically are, the annual bonus payment, taxes, things like that are associated with the beginning of the year obviously are more one time in nature.

Okay, and then I think you also stated that you planned to again continue to invest cash, internal and external. Could you give us an update in terms of maybe, the pipeline of investment opportunities you're looking for and any sort of directional guidance around how much of that cash may get deployed this year?

Well, we really haven't given too much of the directional guidance on the cash being deployed other than looking kind of the outlook for CapEx and things like that. But one of the things you will see is that, that, for example, on the R&D side, we are spending at least a 10% of sales in R&D and investing in several new products and platforms as well as John Goetz was talking about new channels and assays for existing platforms that we have in the market. In addition to that we are making investments in some IT systems, in some infrastructure projects, in all of it is focused on returns in the future, whether that's in terms of lower cost, lower headcount or just greater productivity and greater efficiency.

Okay. Then I guess the final question, with respect to your quality control business, is that, is there any seasonality specifically in that or, I know sometimes those orders can be pretty lumpy or was this quarter kind of a typical performance as relates specifically to that business line?

I wouldn't say there is seasonality in that business, really. Sometimes the product mix was favorable on that, in that business this year. Remember, this is a business where customers tend to come in and they are significant orders, they like to buy large lots and we tend to hold those lots as inventory for them and they by it over the course of time. Which you will see some of the inventory increase in the Q1, for example, and that relates to the quality controls group and some new customers that they have coming on there. There's a small positive benefit so far on an acquisition we made last year, Black Hawk Systems which has a line of Infectious Disease Controls which fit very nicely within our product line and we anticipate future growth out of that.

Okay and then final one just with BSE, can you just tell us what is the current run rate of sales related to BSE just as a way of helping to fully capture the guidance as relates to the deterioration going forward?

Gosh Ray, we never really talked about a run rate, although people who have followed us for some time and the declines that we've seen over the last two or three years probably can fairly easily get to the conclusion that we are now down to a $50 or $60 million business. For the year.

Thank you.

Next question, Jeff Matthews with RAM Partners.

Hi there.

Hi Jeff.

I'm wondering on the BSE why you actually lost that business.

I will let Brad answer.

I want to make it clear, we have not lost the business. We still have in the neighborhood of two-thirds or three fourths of the market. The difference is that as the testing has gone on in Europe and Japan what happened is in some cases the number of animals being tested has dropped as well as there's been more competitors and at some point the premium prices that we were able to enjoy back in the beginning have eroded as we've had to stay competitive. Overall it was very profitable for us but we in the end in order to maintain our business we have had to renew it at the lower prices. Again, these businesses tend to get renewed in blocks of a year or two years. So we've been as we bid for these tenders. We have not lost it. We still the go to company for BSE and I don't see that changing at all.

Okay. Because then I was under a misimpression, I was talking to [idex] and they said that there was a switch to a new generation, a second generation product which they had and they claimed that that was taking business from you.

Again, I can't comment on what they claim. I can tell you that we've been in the market for a long, long time.

Oh, I know.

We know every inch of the market and we have confidence that we still maintain the market share again we have around 50% to 70% of the market so, now maybe they did other competitors, as far as generational testing, we are on our third generation test and continue to put up a good (inaudible)

Okay, great. That's very helpful. Appreciate that. and then, I just wondered if you could take us a little bit more around the world. Generally speaking it seems like Germany and France economically anyway are doing better. What are you seeing in Europe particularly as well as Asia outside of Japan?

We are all trying to decide who wants to go first on this one. I think you're right about the general economies of France and Germany. The one thing I will caution from the buyer adds specific in those regions is those are pretty sizeable BSE markets or were sizeable BSE markets. And both countries have changed the regulations in terms of the age of the cow being tested and therefore that affects the volumes, et cetera. We still see that, especially in Germany we feel that impact. I think Japan, we've known for some time in the research market as they are still trying to sort out how they are going to fund those dollars there tends to be some continued weakness there, but we believe that's very situational and not indicative of something particularly the buyer route or really of a long-term trends. The highest growth markets for us are still in Asia Pacific and Eastern Europe and Latin America where each quarter we continue to make very good progress, especially on the Diagnostics side.

Okay.

Any other markets? No.

The final thing is I assume you, in terms of acquisition activity, I assume you weren't in the bidding for Biosite given the multiple --

It's not over yet, Jeff. We are very focused on looking at potential acquisitions and feel that would be a very good return for the investment but that one slipped by us.

Is it just getting impossible with marquee deals like that as well as private equity or do you still think you have some things in the hopper that might come to fruition?

This is Norman. There is still some things in the hopper and we are encouraged by a couple of things that are going on. Obviously Biosite things are -- kind of make your head spin but underneath all that there are some interesting opportunities.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) At this time, I show no further questions within the queue.

Thank you, Angela. Thank you everyone for joining us. We look forward to seeing those of you who will be at the Baird Conference next week. And as always, Norman and I are here and available for any follow up questions you may have. Bye-bye

Ladies and gentlemen, we thank you for your participation in today's conference, and this does conclude your presentation. You may now disconnect. Have a good day.