Bio Rad Laboratories Inc (BIO) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the second quarter 2007 Bio-Rad Laboratories, Inc. earnings conference call. My name is Eric and I'll be your audio coordinator for today.

At this time, all participants are in listen-only mode. We'll facilitate the question-and-answer session towards the end of the conference.

(OPERATOR INSTRUCTIONS)

I would now like to turn your presentation over to your host for today's call, Ms. Christine Tsingos, CFO of the Bio-Rad.

Thank you. Good afternoon. Thank you for joining us.

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.

Today, we are pleased to report quarterly net sales of $339.1 million, an increase of 6.7% versus the same period last year's sales of $317.7 million. On a currency-neutral basis, reported revenues increased 3%. Remember that the 2006 quarterly sales results included the settlement with bioMerieux of $11.7 million. Excluding this event, sales grew nearly 11% when compared to last year and 7% on a currency-neutral basis.

During the quarter, we had good growth within our diagnostics group, led primarily by blood virus, autoimmune, and quality control products. Our core life science divisions also performed well, with strong sales of process chromatography products, as well as our multiplex product lines.

The gross margin for the quarter was ahead of expectations at 56%, compared to 55.6% last quarter and 58.1% in the year-ago period. Excluding the one-time royalty payment from bioMerieux, the gross margin for the second quarter of 2006 was approximately 56.5%.

Strength in the current period gross margins can be attributed to a more favorable product mix and greater efficiencies in absorption and diagnostic manufacturing. Life science margins were down from the year-ago period, reflecting in part the reduced sales of BSE, as well as higher royalties.

SG&A expenses for the second quarter were $119.6 million, or 35.3% of sales, compared to $110 million and 34.8% of sales last year. The year-over-year expense increase is primarily attributed to acquisition-related additions in sales and marketing, personnel, and other related costs totaling $3.1 million. In addition, the currency translation of a weakening U.S. dollar added $3.4 million in expense during the quarter.

Research and development expense for Q2 increased to 10.2% of sales, or $34.8 million. Both life science and clinical diagnostics have increased the rate of R&D spending for new products and technologies expected to be released over the next 12 to 18 months.

During the quarter, interest and other was a net positive of $26,000 compared to a net expense of $1.4 million in the year-ago period. This improvement is primarily driven by higher investment and dividend income. Going forward, we expect net interest and other income to become a sizable expense as the cash is deployed for the purchase of DiaMed and other growth opportunities, and interest income declines as a result.

As expected, the tax rate used during the second quarter was 28%. This compares to 23% used in the second quarter of 2006, which was benefited by a favorable audit resolution of our U.S. return, as well as the closing of a manufacturing operation in Canada. We continue to anticipate a tax rate in the 28% to 29% range for the current year.

Net income for the second quarter was $25.7 million, compared to $32.3 million last year. We estimate that the settlement with bioMerieux contributed approximately $6.5 million to net income in the year-ago period.

Diluted earnings per share for the quarter were $0.95. As we do not use pro forma reporting, please remember that our operating income also includes the impact of FAS123 stock-compensation expense of $1.1 million before tax. We have recently completed our annual stock awards and thus expect the FAS123 expense to be slightly higher in the second half of the year.

Now for certain segment information. For the second quarter, life science reported sales grew 8.6% year over year, to $146 million. On a currency-neutral basis, sales increased by more than 5%. We continue to have strong year-over-year growth in our process chromatography and protein interaction and analysis product lines.

During the quarter, we experienced good growth in the U.S. research market, which is counter to the trends we experienced just last quarter. The Japan research market continues to be somewhat flat. And sales of BSE products continue to decline year over year. Still, our core life science sales growth, excluding BSE, was 10.6% on a reported basis and 7.6% currency neutral.

Overall, life science segment profit was down sequentially and year over year, to $1.5 million for the quarter, reflecting higher spending for research and development, as well as costs associated with the absorption of the SELDI business and increased personnel. The life science gross margin was up slightly from the first quarter.

Our clinical diagnostic sales grew 5.4% for the quarter, to $189.8 million. On a currency-neutral basis, this growth was 1.4%. Excluding the bioMerieux benefit last year, diagnostic sales grew nearly 13%. These sales were led by continued strong performance in our blood virus product group, as well as autoimmune and quality control products. Sales were particularly strong in the U.S. and Asia Pacific this quarter.

With continued strong gross margins, clinical diagnostic segment profit for the quarter was up sequentially to $26.4 million. Segment profit was down year over year, primarily reflecting last year's bioMerieux benefit.

During the quarter, we entered into several exciting agreements in the diagnostic space. First, we extended our long-time agreement with Beckman to develop and manufacture blood virus and infectious disease tests for their UniCel and Access systems. Next, we signed two multiyear agreements with Quest Diagnostics to place the BioPlex 2200 system and autoimmune test reagents in their network of reference labs nationwide.

And finally, we signed a definitive stock-purchase agreement to acquire DiaMed, the Swiss-based leader in immunohematology products used for blood typing and screening. The initial purchase cost will be approximately $400 million for 77.7% of the shares. We are very excited about including DiaMed in the Bio-Rad family and look forward to the transaction closing later this year. Once we close the transaction, we will tender for the remaining 12.7% of the shares outstanding.

Bio-Rad's balance sheet also remains strong. As of June 30th, total cash and short-term investments exceeded $500 million. However, as I just mentioned, much of this cash will be deployed later this year for the DiaMed transaction. As such, we will likely explore different financing options to help offset some of the purchase price and provide resources for us to continue to invest in and grow our business.

Net cash generated from operations during the quarter was just over $46 million, reflecting an increase in accounts receivable associated with the higher sales, as well as the significant reduction in accounts payable when compared to the first quarter. Remember that the first quarter typically includes cash used for annual bonuses, commissions, and tax payments.

Net capital expenditures for the quarter were $16.7 million. This increase over the prior run rate reflects investment in new equipment and buildings, as well as an increase in BioFlex 2200 systems. Our full-year expectation for CapEx continues to be in the high $50-million to low $60-million range. Finally, depreciation and amortization for the quarter was $14.5 million, in line with prior amounts.

Looking ahead to the remainder of 2007, our expectations remain relatively unchanged. Thus, we continue to expect top line growth to be in the mid single digits, and gross margins to be in the 54% to 55% range.

As with our historical patterns, we expect spending to ramp up throughout the remainder of the year, and operating margins to decline sequentially. Barring any one-time items, the tax rate should remain in the 28% to 29% range.

These outlook comments, of course, exclude any potential impact from the upcoming DiaMed transaction. Once we close the acquisition, we will be able to share more insight regarding profitability and EBITDA contributions, as well as transaction and integration cost estimates.

And now, we are happy to take your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Quintin Lai with Robert Baird. Please proceed.

Hi. Good afternoon. Congratulations on a nice quarter.

Thanks, Quintin.

Just looking at the numbers in life sciences, looks like that a very strong quarter, especially when you exclude the BSE. Was there anything special in terms of order flow? I noticed that you, in the press release, you mentioned the ProteOn business. That's from the Ciphergen acquisition. How much of that contributed to the year-on-year growth?

Hi, Quintin. This is Brad. I'll take that. Actually, the ProteOn release did not come from Ciphergen. That would be the SELDI business.

Thanks.

And then what's on the impact -- ProteOn is a product line we've been developing for a number of years and is really doing quite well. It's got a sales cycle of 12 to 18 months. And we're starting to get really into that window and placing a lot of instruments.

The other thing that we saw during the quarter that was very nice is a tremendous amount of business from our process chromatography product line. And a lot of that was related to the big success of the Gardasil product. As more and more teenage girls are vaccinated for that, the demand for that product has exceeded the forecast. And so we've been producing large amounts to help our customers meet that demand.

And on top of that, some of the, as you probably are well aware of -- in general, the overall research funding market was just a little bit better in the second half, preparing sort of it to go into the quarter-end market for the third quarter.

So then as you -- as we look forward to the back half of the year, sounds like that those products should continue. Is this level of organic growth, even with BSE as part of the overall mix, the second quarter number, is that kind of a good benchmark to look at?

Well, I think if we take that out, we're still kind of in that mid single digit growth, which is what we've been talking about for the year.

Right. Excellent. And then on clinical diagnostics, excluding bioMerieux, double digit organic revenue, would that be double digit organic revenue growth? Or is that 13% including--

No, that -- reported without bioMerieux was at almost 13%.

Yes.

On -- it's 8.4% currency neutral.

All right. And so there -- that, again is, as we look out toward the back half of the year, another good run rate to look at for this business?

Well, I think that the mid single digits is kind of where we're sticking in the sand for now. Certainly, as the year goes on, the comparisons get a little tougher, because the growth that we saw last year was what we've been ramping up since the end of last year. And it's tough to know what currency is going to do. But clearly, their business has been pretty stable on an organic currency neutral in that mid to high single digit area.

Right. And then with -- in this quarter, the revenues were higher than what we were expecting, and then net-net, it flowed through with some operating -- also higher operating margin. Remind us a little bit about what you expect in the back half of the year for spending that would cause the operating margins to decline year over year.

Sure. And I can't say that there's some big event that I know we're going to suddenly spend for in the third or the fourth quarter. But if I look at our historical patterns, our spending does ramp through the year. We start the year with plans for certain projects and investments and hiring. And it takes time to get those started. And as the year goes on, lo and behold, the projects are in place and the people are being hired. And we just tend to see that expense ramp occur.

And then the other thing I would point out is don't forget, as we move toward the end of the year, we see that product mix starts to shift a little bit more towards the instrument side, which tends to have a less favorable gross margin. And that affects the operating margins as well.

Right. And then with respect to DiaMed, I know that you want to wait until it closes before coming up with more granular detail, but where you are today, can you look out to 2008 and just make an overall direction? Is it going to be neutral, accretive, or dilutive to your numbers?

I think what I would say is we don't want to get into the specifics, because we do want to get our arms around the business. I can tell you that historically, DiaMed as a business and certainly the business that we're acquiring has had margins, both gross and operating, that are at least as good if not better than the Bio-Rad margins.

In terms of initial accretiveness or dilution, I want to reserve comment on that until we fully understand the transaction cost and any cost to initially integrate the two businesses.

I appreciate that. And then with the mix of those sales -- because if I'm not mistaken, a lot of those sales are European sales -- do you see your tax rate changing potentially with that?

Now you're really going into an area that's going to take some analysis and research. Because you're right, the majority of their business is based in Europe, and the tax department will be very busy studying that and planning around that business. So it's too early for us to say what the impact on the consolidated tax rate might be.

And then the final question -- you kind of mentioned financing options for this. Could you give a little bit more color on what you meant by that?

Well, primarily, we'd be looking at financing via a debt vehicle. Traditionally, as you know, we've accessed the public high yield market. And that is certainly something we would look at this time as well.

In terms of how much, we're talking about that internally. Clearly, there's a lot of cash on the balance sheet today and we don't need to finance the entire purchase price. But some portion of it, I think, frankly makes good sense for us, given that rates are still fairly attractive and we want to maintain a certain amount of liquidity to continue to be opportunistic.

And actually, one more question, if I may -- Norman, with respect to what you see going on right now in the M&A space, especially in diagnostics, how do you see Bio-Rad positioned now? Do you see the competitive landscape changing for you right now with what's going on in M&A? And how do you feel Bio-Rad strategy going forward?

Boy, you could read that a lot of ways. I think that we don't feel especially disadvantaged or nervous about that. I think that if you look at the prices that some of these people have paid for some of these assets and what they're going to have to do to have a return on that, that gives us some comfort that they're going to be busy with other things.

Well, I tell you what, I will jump back in the queue. And congratulations again for a nice quarter.

Thanks.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of [Ray Garthen] with RBS. Please proceed.

UBS. Thanks.

Actually, a lot of my questions were answered there, but just had one follow-up. I was wondering if you could just maybe give us a little bit more color with respect to the recent agreement with Quest, and specifically if you can just maybe give us a little bit more backdrop on how that relationship's going to be structured. Are you actually going to be selling the instruments into them? And if so, maybe just kind of walk us through when we could expect to see that more pronounced in your financials. Thanks.

Hi, this is John Goetz from the diagnostic side.

With respect to the agreement we have with Quest, it is a multiyear agreement. It covers not only our BioPlex systems, but also HIV test systems going in there as well as quality controls, covering kind of two different agreements. With regard to the BioPlex systems, those will be placed on reagent rental. And those will be sustained in terms of reagents that we'll be selling. It's primarily based on our autoimmune test line. But we have hopes to be able to add additional tests to that system as those come online. So, so far, installations are going quite well.

And in terms of its impact, probably most of that impact will be seen maybe really towards the end of the year or into next.

Okay. Great. And I guess there's several references to the increase in the R&D spend in both businesses and some new product launches you all are anticipating. I'm just wondering if maybe you can give us just a little bit more color in terms of any particular things, either launched end of this year, early next, that we should be kind of watching for with respect to those investments. Thanks.

We're really a company of base hits. So it's across a lot of product areas that we're investing in that. Probably the biggest single thing continues to be the BioPlex 2200 system with new assays for that system. But aside from that, it's across the board.

Okay. Well, great. Thanks.

(OPERATOR INSTRUCTIONS) It appears we have no more audio questions at this time.

Okay. Thank you, Eric. Thank you, everyone, for joining us. Again, Norman and I are always available to answer any further questions you may have. Have a good evening.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. And have a good day.